At a time of global economic crisis, in all of the talk of a subset of that crisis, the housing boom and bust, it is easy to lose sight of the fact that the cause of that bust is so very simple. “Behind all the esoteric securities and sophisticated financial dealings are simple, monthly mortgage payments from millions of home buyers across the country.” When the housing payments slowed or stopped, sometimes by necessity and sometimes by choice, the boom turned to a bust. Real estate markets that had seen an unparalleled explosion of growth suddenly saw a catastrophic fall. Behind all the talk of stimulus and bailouts and increasing billions and trillions of dollars is normal people unable to make their $1000 or $2000 monthly mortgage payments.
In The Housing Boom and Bust, conservative economist Thomas Sowell looks to the housing bust and asks the simple, bedrock question: Why did so many monthly mortgage payments stop coming? His answer is as simple as it is lucid. The mortgage payments stopped coming in because during the housing boom, a time where interest rates were at historic lows, mortgages had been given to people whose prospects of repaying them were, at best, very poor. While the banks deserve some of the blame, they were in fact forced to hand out risky loans by government policies that imposed arbitrary quotas set by people whose concern was far more political than economic. These people, in the name of affordable housing and under the banner of political correctness, demanded that loans be provided to people who, under normal circumstances, could not afford them. This pressure caused financial institutions to hand increasingly “creative” (read: risky) mortgages to increasingly risky (read: poor) clients. When normal times resumed and interest rates rose, so too did payments. When payments rose, they became unaffordable and millions of people simply walked away, unable or unwilling to cover the new costs. “Why pay a $500,000 mortgage on a $300,000 home?”, they reasoned. Faced with a glut of foreclosures, banks began to offer homes at fire-sale prices, driving down costs across the market. The bubble burst, the banks began to fail and the government began printing vast quantities of money to stimulate the economy and to bail out the banks. The story continues.
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