I mean it seems houses couldn’t go over the cost to build a new one because why buy an old house, when you could have a new house cheaper?
The nearest I can figure it’s more about location. I mean you could build lots and lots of houses out in the country, on $500 an acre land if you know where to look, but you can only fit just so many houses right near that particular school you wanna send your kids to.
My opinion only:
People have always treated houses as investments. That’s fine. Too many people started treating houses as SHORT TERM investments - buy one, do a couple of quick fixes, throw it back on the market.
The same reason why every bubble happens.
Something is seen as a great investment. People start buying. They make a profit. Others see the people making a profit and get in. Prices go up. More people see the prices going up, and start putting their money there. More money, higher prices, more profit for those who get in on the ground floor.
But people start realizing that the paper value of the item is really less than its actual value. Some get out and profit. Others try to sell, but have trouble finding buyers (more a problem with a house than, say, tulips, but still an issue). Buyers begin to realize that they’re paying waaaay too much for the item. Now there are fewer buyers. Prices drop. Everyone who holds the investment wants to get out before prices drop further. Some do get out – but prices drop further. Finally, it reaches the point where the price of an item is less than what people pay for it. You’re losing money on your investment and even more desperate to sell.
The history of financial bubbles goes way back to things like the South Sea Bubble, the Mississippi Bubble, and tulipmania (I was using an actual historical case when I mentioned tulips). It’s part of human nature and any financial market.
You might want to read the classic book on the subject, Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds. Over 150 years old, and still relevant today.
Along with the bubble behavior mentioned earlier, there were also several elements that exacerbated the problem:
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The availability of low interest mortgages, exotic mortgages, the willingness of lenders to approve mortgages for outrageously high amounts, and easy credit.
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The rapid reversal of a decades-long exodus to suburbia. Walkable urban neighborhoods with some “character” became very desirable, and prices began to swell. Even in some metropolitan areas that didn’t experience the bubble to the extent that places like Seattle and Miami, decent urban neighborhoods and quaint suburban villages with a walkable core became very hot commodities. Of course, young professionals that couldn’t get into the neighborhood they quite desired moved to the next neighborhood over, driving up property values there, forcing the next wave of homebuyers to look at the next neighborhood over, and so on.
Chicago is a perfect example of this phenomenon. Couldn’t afford Lincoln Park? Check out Ukrainian Village. A couple of years later, prices in Ukrainian Village skyrocket beyond affordability, so Bucktown becomes the next destination. Bucktown becomes unaffordable, so homebuyers settle for Logan Square. And then Avondale. And then Irving Park. And then … well, this phenomenon had a major role in driving up home prices in Chicagoland from affordable in the late 1990s to California-like levels today.
I saw the same thing happen when I lived in Denver in the late 1990s. Home prices were slowly rising throughout the region, but every year another city neighborhood would jump from affordability to oh-my-god-you-paid-WHAT? levels. You could get a small bungalow in the West Highlands neighborhood for about $130K in 1998. A year later. forget about paying less than $200K. Prices throughout the entire neighborhood literally shot up like that (snaps fingers). The year before, it was Park Hill. The year after, it was Berkeley and Sloan Lake – one year cheap, the next HOLY SHIT WHAT JUST HAPPENED? Even after the bubble burst, urban neighborhoods in Denver are still very, very expensive compared to the rest of the region.
I recall a really revealing story on NPR some while ago - could have been as much as a year, but probably more like 6 months - when they did a story about how an assessor blew the whistle. Banks were pressuring assessors to turn in inflated values for houses. Go through a few rounds of this, and before you know it, everybody’s house is on paper as worth more than it really is.
It’s kinda like the grade inflation that happens at universities sometimes, except that there are always a few ornery professors who are determined not to give high grades for poor performance. I guess there just weren’t any (or at least not enough) honest bankers left.
So it probably started when Congress overturned the laws that let a lot more banks grow across state lines. That’s a few years ago now. And a bank I’d been dealing with since I’d moved where I am now (8 years), and had originally been strictly inside Mississippi, was bought out by a regional bank before I moved here, was bought out earlier this year by a bank that covers nearly all the southeast. This was not the first local bank they’d bought. They now own two branches nearly across the street from each other, in this small town with a population of just over 20,000. Crazy, IMO.
Sorry to hijack, but suppose there are X number of bad loans out there that are going to cause all those companies in the bailout plan to lose money. The banks aren’t going to lose every penny of that loan because they will foreclose on the house and sell it, gaining back Y dollars. So, in dollar figures, are there estimates as to what X and Y equal? Is there a $700 billion difference or does X equal $700B? If the latter, will the government be the one to repossess and sell the houses?
Good point
Also these loans are ‘packaged’ up in bundles, and a lot of them are guaranteed/insured - one of the major insurers is supposed to be AIG, which curiously now belongs to the US Govt.
For the Govt to buy these packages from the banks makes some sense, a fire sale would realize a lot less than they are probably worth.
I saw something about CDOs (packages) trading at 22c in the $ which strikes me as a very good deal.
No, and that’s essentially the problem. It’s not that the package of mortgages is worthless, it’s that no one has a reasonable idea of what they might be worth.