About a month ago, my wife and I checked out an open house in Johnston. We're not looking to buy a home immediately, but we will be in the market next spring, so we're keeping tabs on what's available, where, and for how much.
The house we looked at was pretty much perfect for us -- and, judging by comments we heard at the open house, for others as well. It was airy and bright, with three large common areas, good-sized bedrooms, a large, open kitchen, a beautiful master suite, a fully finished basement with wet bar and full bath, an excellent space for a home office, and a large back yard with a two-level deck. The home was impeccably maintained and sharply decorated, and it "showed" extremely well. Had we been ready to buy, we would have put in a contract. We'd have been tempted to offer full price, too. The home was that nice.
Further, the sellers had priced the house aggressively, and I mean that in a good way. From their asking price, it was evident that they wanted this thing to sell quickly, and that they weren't going to make the mistake -- epidemic in the current market -- of trying to squeeze every last nickel out of the property at the expense of thousands of dollars in carrying costs. Here is the sale history of the house, according to the Polk County assessor:
6/11/1998: $211,530
5/5/1999: $205,000
6/28/1999: $208,000
The sellers are asking just a little under $268,000, meaning they hope to realize just a 28% profit on a home they've owned for eight years (just 20%, if they have to pay the 7% commission that crooked Iowa realtors are trying to get). That is such a ridiculously reasonable asking price that these people should have their heads examined. This property is the definition of "priced to sell," and when we walked through the home, we commented to the agent handling the open house that it wouldn't stay on the market long at this price.
A month later, it's still on the market. No contract pending. We're watching to see if the price drops as summer bleeds into autumn and the pool of potential buyers (families with kids) grows shallower for the duration of the school year. I wouldn't be surprised if it does, because that "housing bubble" you've heard so much about over the past year or so is very real and has been punctured -- and the damage will not be confined to Southern California or the Northeast.
To be sure, real estate in Iowa has not seen the kind of appreciation that caused housing prices on the coasts to go berserk, but the psychology behind the bubble has manifested itself here. For example, they're building townhouses in cornfields in Grimes. Townhouses -- so named because they maximize the housing capacity on scarce urban land -- are going up amid acres and acres of farmland, much of which is also for sale. With nearly new single-family houses languishing unsold on the MLS for comparable prices, who thinks it's a good idea to be bringing hundreds of $150,000 townhouse units into the inventory in the middle of nowhere? Today, no one. But two years ago, when these things were being platted out, it seemed like a great idea. When have realtors ever been wrong about anything?
Still, Iowans did a far better job of keeping their heads screwed tight on than did other regions of the country. That's why it's too bad that the bursting of the housing bubble resembles an atomic bomb: Even regions not directly in the blast radius are going to get hit with the fallout. And it's the fallout that is keeping that beautiful house in Johnston from selling. To understand how this all fits together, we need to go back and reconstruct the housing bubble one step at a time. Come along, friends ...
Step 1: Don't trust any loan under 30
For decades, the U.S. housing market was driven by conventional mortgages. A buyer made a down payment, traditionally 20% of the price, and financed the rest with a fixed-rate mortgage. He shopped around for the best interest rate he could find, then locked it in for the duration of the loan -- usually 30 years, sometimes 15. Because the rate was fixed, the buyer's payment remained steady. Each month, he paid a little less in interest and a little more in principal, but the total amount of the payment never changed. It was one thing he could count on in a world full of things he couldn't.
For many people, the biggest obstacle to buying a home was coming up with the money for the down payment. On a $150,000 house, for example, they needed to scrape together $30,000. Lenders required a down payment for three primary reasons:
First, it demonstrated a certain level of financial discipline. Before cutting someone a check for six figures, a bank wanted some kind of assurance that the money would be paid back. Someone who had demonstrated enough self-restraint to save up $30,000 toward a down payment represented a significantly better credit risk than someone who spent all their disposable income on pretty bows and ribbons.
Second, by requiring borrowers to put up a substantial chunk of their own assets, the bank ensured that those people had some skin in the game. People are surprisingly quick to default on their obligations when the bank is holding the entire bag. But when you have your own money tied up in a house, you will dig deeper, fight harder, work longer to keep it. It's just human nature.
Third, and most important, a down payment is the lender's hedge against depreciation. Say you put down $30,000 and the bank writes you a loan for $120,000. For all intents and purposes, you own 20% of the house and the bank owns 80%. But if the price of the house falls $10,000, you don't share that loss equally. It all comes out of your share. You now own 14.3% ($20K out of $140K in value) of the house, and the bank owns 85.7%. But the important thing is that if you need to sell the house, the bank will still get all its money back. Barring a collapse in housing prices of greater than 20%, the bank is protected. It's using your equity as a cushion. You're protected, too, because if you absolutely have to, you can still sell the house, pay off the loan, avoid foreclosure, and keep your credit rating intact.
Over the past few years, this aspect of the down payment requirement -- the depreciation hedge -- came to be viewed as a quaint relic as the entire real estate market bought into the delusion -- as it periodically does -- that housing prices never do anything but rise. That delusion had taken hold as money began growing on trees.
Step 2: Refi-fo-fum, I smell low rates
Around the turn of the 21st century, interest rates on conventional mortgages were about 8%, close to their historical averages. Over the next few years, though, rates fell through the floor, hitting 5.5% by mid-2003. Money was cheaper than it had ever been, which allowed people to borrow greater amounts that ever before. The homebuyer above who had borrowed $120,000 for 30 years at 8% interest had a monthly principal and interest payment of $880. At 5.5% interest, however, that same buyer could borrow $155,000 for the same monthly payment.
So, because he was able to borrow about 30% more money, he was now able to buy 30% more house, correct? Move up to a bigger slice of the American dream? Not at all, because the cost of money had gone down for everyone else, too. A buyer who could have borrowed $155,000 at 8% could borrow $200,000 at 5.5%; a buyer who qualified for $200,000 at 8% could now get $258,000; and so on all the way up the scale. Everyone had access to more money, which pushed housing prices up. And that inflation started at the very bottom. In any given market, there's a certain threshold price below which you just won't find decent houses for sale. That threshold price defines the entry-level home. When money is cheap, the number of people wanting entry-level homes outpaces the supply of such homes. The threshold price rises -- and the prices of all other houses rise along with it. Where did all the $70,000 houses go? They became $140,000 houses.
At the same time low rates were driving up home prices, tens of millions of people who had taken out mortgages in the 1980s and '90s at significantly higher rates were rushing to use the cheap money to refinance their homes. Doing so allowed some people to cut their payments by as much as half -- provided that they borrowed only enough money to pay off their old loan. That was a big proviso, however, one that too many homeowners never lived up to.
Here's the smart way to refinance: Someone who had borrowed $120,000 at 9.5% interest in 1995 (a typical rate for the time) would have had a monthly principal and interest payment of $1,009. In 2005, after ten years of payments, he would have still owed about $103,000 in principal. Refinancing that remaining principal at 5.5% for 30 years would have dropped his monthly payment to $585. Or he could have refinanced for 15 years at 5.25%, giving him a payment of $827. This simple refinancing would have saved him $2,200 to $5,000 a year in interest payments.
(But, you ask, what about the mortgage interest tax deduction? Yes, what about it? The idea that you should carry a higher debt-service cost just so you can deduct it from your taxable income is one of the more vile canards offered by those with a stake in money-lending. Our borrower above may have lost a $5,000 tax deduction by reducing his interest payments, but that deduction was worth, at most, $1,600 in tax savings. That means he has at least $3,400 more to save, invest, or just spend on other things. People fail to understand that the mortgage interest deduction is not a tax credit; it doesn't offset your tax bill dollar for dollar. It just allows you to reduce the amount of money subject to tax. So which would you rather do? Have an extra $5,000 in taxable income, which would net you at least $3,400? Or pay $5,000 extra in interest just to get $1,600 back at tax time?)
Unfortunately, for every borrower who refinanced the smart way, there was another who used the process to turn their house into an ATM -- one with tremendous hidden fees. Let's go back to the borrower above. It's 2005, and he owes $103,000 at 9.5% interest. If he put 20% down back when he took out the mortgage, then he now owns $47,000 worth of the $150,000 house. But wait! It's been 10 years, and the house has grown in value. Assuming just a modest 3% annual appreciation, the house is now worth $201,000. So, really, he has $98,000 in equity. If only he could get his hands on some of that money! Think of all the pretty bows and ribbons he could buy! So he finds a lender to write him a new 30-year mortgage for $178,000 at 5.5% interest. Why $178,000? Because that's how much he can borrow at the lower rate without having his $1,009 monthly payment go up. So he uses $103,000 to pay off the original mortgage and walks away with $75,000, all without reducing his monthly cash flow. It's like free money! Except it's not. He now owes more money on the house, has less equity in the house, and is 10 years farther away from paying off the mortgage.
Hundreds of thousands of people refinanced their homes like this -- and not just once. As rates continued to fall, and prices continued to rise, some people refinanced two, three, four, a half-dozen times, each time pulling money out of the property. Occasionally that money went back into the house -- to pay for a new kitchen or bathroom or to update the systems, something that added value. More often, however, the money went into the operating budget rather than the capital budget. People used the equity in their homes to pay for vacations and big-screen TVs and just to pay the bills they racked up by living beyond their means. Their ability to keep the cycle going, however, rested entirely on the assumption that rates would stay low and the house would keep appreciating. What? Interest rate increases? Hey, Jimmy Carter isn't president anymore! And who ever heard of housing prices falling? Cousin Larry, don't be ridiculous!
Meanwhile, one of the little-examined aspects of the refinancing explosion was its tremendous psychological effect on the housing market. "You can always refinance" became a 21st-century mantra, one used to drown out troubling questions such as "How long can I afford these payments?" and "What do I do when the balloon payment comes due?" and "What happens if my adjustable rate mortgage actually, you know, adjusts?" The answer was: "Just refinance!" That was an easy answer when rates had fallen 45% in the past decade; but rates weren't going to fall like that again. They flat-out couldn't.
Low interest rates breathed air into the housing bubble from several directions. First, and most simply, low rates made more money more available to more people. When the supply of money expanded faster than the supply of housing, simple economics dictated that the price of housing must go up. Second, low rates triggered a wave of refinancing, during which people took their single greatest asset (which was not their homes, but rather the equity in their homes), converted it to cash and spent it on gewgaws. Finally, low rates created a false assumption in people's minds that money not only would always be cheap, but would get even cheaper with time ("You can always refinance"). This assumption went hand in hand with the myth that housing values always go up -- a myth that was becoming a religion to the entire U.S. population.
Step 3: Home loans for everybody!
Low interest rates convinced Americans that there was never a better time to be in the housing market. Longtime renters rushed to become buyers, longtime owners rushed to trade up to bigger homes (and bigger mortgages), and competition for housing intensified. The media took notice of the rising prices and began warning their audience that if they didn't buy soon, they'd end up "priced out" of the market. Speculators jumped into the market in hopes of flipping properties for quick profit. Lenders were writing loans right and left, then quickly repackaging the mortgages into securities and selling them to investors. Mortgage brokers were pulling in ever-greater commissions. Realtors were skimming a percentage off increasingly large deals. The money was really flying.
But something was threatening to halt the carousel: The supply of buyers was dwindling. Regardless of how easy financing is to obtain, there comes a point where just about everyone who can buy a house has bought a house and isn't looking to move again (especially when prices are so high). If the housing market was to keep expanding -- if realtors were to keep pulling in commissions, if lenders were to keep bundling mortgages into securities, if builders were to keep cranking out shoddily constructed $850,000 McMansions -- then it was going to need a new pool of buyers. Like maybe ... people who heretofore had not been able to get financing. People who were less than prime credit risks. "Subprime," you might even call these people. But let's not get ahead of ourselves.
The first group the real estate industry looked to were those who had reasonably good credit but couldn't (or wouldn't) meet strict documentation requirements for income and assets. For these folks, lenders offered "stated-income" loans. Such loans had long been available to people who, for one reason or another, refused to open their books to underwriters. (Take a wild guess.) They tended to be high rollers -- folks with significant means but not the right kind of paper. In lieu of providing documentation, these people swore out a statement of their income and/or assets, and the lender vouched for them to the underwriters.
Stated-income loans are known in the financial world as "Alt-A" loans because the statement is an alternative to traditional documentation. Stated-income loans are also known in the financial world as "liar loans" because the statement is often pure fiction. Guess which was the more accurate description of the loans issued over the past five years?
Once these liars (figuratively speaking, of course) had gotten their fill of loans, mortgage lenders cast about for yet another pool to drop their hooks into. At this point, there was really only one group of people left who had yet to buy homes: those with bad credit histories or no credit histories. These people had long been unable to buy a house because their credit reports were stacked with question marks, overdrafts, defaults, late payments, nonpayments, and maxed-out instruments. This was the now-famous -- nay, infamous -- subprime market.
Anyone who tells you that there was no way to predict the current disaster in the subprime sector is lying, stupid, or both. (And to tell this lie with a straight face, you'd have to be stupid. Or evil.) By definition, subprime borrowers are people who can't be trusted to pay back the money you lend them. The hadn't been able to buy because they shouldn't have been able to buy. And yet as the bubble grew and grew and grew, lenders, needing ever more loans to bundle, lent them hundreds of billions of dollars -- and they did it on outrageous terms that diminished their chances of repayment even further.
Lenders, it turns out, were getting exotic.
Step 4. It'll cost you an ARM and a leg
As lenders made their way toward the bottom of the barrel, they were creating millions of additional buyers. As a result, the demand for housing to purchase skyrocketed much faster than the supply of housing for sale. That was pushing prices further upward -- to the point where they were beyond the means of the subprime buyers. In more rational times, these people would have been told that it just wasn't in their best interest to buy. They'd be better off renting. These were not rational times, however.
(This is a good place to stress that when we talk about skyrocketing demand, we are only talking about the demand to buy houses. That demand was soaring, especially at the entry level, but the overall need for housing was not. All through the bubble and up to today, the United States had more homes than it had people to live in them. This is true in all markets, and particularly so in a place like Iowa. People did not have to buy houses. They could have gotten more space for less money by renting. They chose to buy houses. They made this choice because they were being told over and over that they had to buy now or get "priced out" and forfeit their chances of ever owning a home. They were told over and over that they were "throwing their money away" by renting, which was a stone-cold lie. They were getting shelter in return for their money. You don't "throw away" rent money any more than you "throw away" the money you spend on food that you can eat only once. Here's how you really "throw away" money on housing: By buying a house as an "investment property," trying to flip it, then spending $3,000 a month on carrying costs as you wait in vain for a buyer.)
Anyway, back to all those subprime buyers who were watching prices escalate beyond their means. All but the craziest lenders will insist that borrowers be able to at least make the payments at the beginning of the loan. (You want to get a least a couple payments out of somebody before they go deadbeat on you.) But a conventional mortgage for $400,000 -- a fairly typical house price in many markets -- at 6.5% interest carries a monthly payment of $2,528. Subprime borrowers, of course, are charged even higher rates because, well, they're subprime. At 8%, the payment would be $2,935. And if they had the kind of cash flow needed to make those payments, they wouldn't be subprime now, would they?
So lenders offered these people adjustable-rate mortgages, in which the interest rate periodically resets. Sometimes ARMs are a good idea. When rates began to fall from the stratospheric highs of the early 1980s, homeowners with ARMs saw their rates -- and thus their monthly payments -- decline fairly steadily; every reset period left them with more disposable income to spend on Rubik's Cubes and Chipwiches. When interest rates are already low, however, ARMs are just dumb. And to refresh your memory: During the housing bubble, rates were at historic lows.
The ARMs peddled to subprime borrowers typically started with a low introductory rate -- a "teaser" -- that reset after a while. Perhaps the most popular breed of these mortgages was the "2/28": The teaser rate was guaranteed for two years, then the loan would reset to (obviously) higher rates for the next twenty-eight years. Other ARM varieties included 3/27, 5/25 and 7/23. They worked in similar fashion.
So our subprime buyer applies for a loan (Over the phone! No SSN needed!), and the lender writes him a 2/28 mortgage for $400,000. He gets a nice, low teaser rate -- say 2.5%. For the first two years, his monthly payment is $1,580. That's pretty pricey for a family making only $50,000, because it eats up 38% of their gross income. (Personal finance experts say you should keep it under 28%.) However, if they scrimp here and save there, they can manage it. But then, two years in, the loan resets. To 9%. Overnight, their monthly payment nearly doubles to $3,115, or 75% of their gross income. They cannot make the payments.
In the industry, the 2/28 is known as a "suicide loan."
Why would someone take out a loan like this? Several reasons. First, some people are simply delusional. Two years is way in the future! Who knows what will happen by then! I could get a $50,000 raise! Second, some people are easily fooled. Their commission-seeking mortgage broker, perhaps in cahoots with an unscrupulous realtor, kept talking about $1,580. If he mentioned $3,115 at all, he didn't do so very loudly. And third: You can always refinance! Housing prices always go up! Didn't you notice? Rates have been falling! By the time this thing resets, why, I bet you'll have 30% eguity and be able to get a conventional mortgage at 2%! Don't worry about it! It's the American dream! Just sign the papers! Sign, goddammit!
Step 5. One hundred percent, pure love
Weak credit or nonverifiable income doesn't necessarily spike your chances of obtaining a conventional mortgage. The greater your assets, the greater the willingness of lenders to work with you. It goes back to the down payment psychology we discussed earlier: If you have $80,000 in cash to put into a deal, you'll probably find someone to float you four times that, provided your credit report isn't completely radioactive. Your $80K drastically reduces their exposure.
As housing prices climbed, it became essentially impossible to pull together a 20% down payment. Lenders recognized this, and they eased the requirements: 15%, then 10%, then 5%. Some lenders were accepting down payments of 3% for a conventional mortgage. When you're buying a $750,000 house, though, 3% is $22,500. That's real money, not a token payment, not something you easily walk away from.
Of course, subprime borrowers usually don't have those kinds of assets. It's yet another thing that defines them as subprime. A lender could drop its down payment requirement to 1%, and many subprimers would still struggle to pull together $3,000 to buy a $300,000 house -- and you can forget about the $10,000 to $15,000 for closing costs. If lenders were going to get these people into houses, they were going to have to do something that had been utterly anathema to generations of mortgage bankers: They were going to have to front 100% of the purchase price.
Like ARMs and stated-income loans, 100% financing had been around for years, but it was only available -- or advisable -- for a certain kind of borrower: a very experienced, very knowledgeable, very trustworthy real estate investor with good credit and a good relationship with the lender. When a bank loans 100% on a real estate transaction, it is assuming all the risk. If the property doesn't appreciate immediately, the borrower will be "underwater," owing more than the property is worth. If he can't make the payments, the bank can foreclose and sell the house at auction or put it on the market. But if the house has gone down in value, then there is no way for the lender to recoup the money it loaned on the property. One hundred percent financing is a dangerous game, because the lender is running the risk that, if the property declines in value or the payments become to difficult to make, the borrower will simply walk away.
So what happens if the home "owner" simply walks away from the house and allows it to be foreclosed? Well, it goes on his credit report. That can have terrible consequences. Unless you already have bad credit. Like a subprime borrower.
It will come as no surprise by now that 100% financing swept through the mortgage industry like a virus. Bad credit? No credit? No down payment? No problem! Sign here! No money for closing? No problem, either! Just roll the closing costs into the loan itself! By writing loans for the entire purchase price -- more than the price, if closing costs were included -- lenders were not just betting that the bubble would continue inflating. They were staking absolutely everything on it ... at least until they could get the loan bundled and sold to some fool as a "mortgage-backed security." (Sounds safe, doesn't it? Mortgages are the bedrock of the American dream! If this security is backed by mortgages, it must be safe! People wouldn't just walk away from their obligations, right? They'd ruin their credit!)
And lenders had people lined up around the block to sign up for these ridiculous mortgages. As the air comes out of the bubble, and the horror stories roll in, people ask how a guy with a $14,000 yearly income could buy a $720,000 house. This is how. Buyers didn't have to provide proof of income, they didn't have to put up any money of their own, they got payments they could only make for a brief period (long enough for the broker and the realtor to cash in their commissions), and if anyone asked any questions (which no one did), the answer was always: Don't worry about it. Prices always rise. You can always refinance.
One would think that 100% financing was the height of the insanity, that there was no possible way for lenders and borrowers alike to act more irresponsibly than they already were. You'd think that 100% financing, stated-income suicide loans were the last damned straw. But as Yoda told his realtor: No, there is another.
Step 6. This will hold your interest
On a typical loan, a certain portion of the payment goes to pay off the principal -- the actual amount of the loan -- and a certain portion pays the interest. At the beginning of the loan term, the largest chunk of the payment is interest. This sucks for you, but it's fair. If you had $150,000, you could have bought that house outright, but you didn't, so you asked the bank for it. The bank is going to make sure it gets paid (in interest) before you do (in principal, which becomes equity in the house). As mentioned above, with each payment, you pay more in principal and less in interest, a process known as amortization.
But what if you never paid anything on the principal? What if you just paid the interest every month? First and foremost, you could borrow a lot more money. Let's go back to that $150,000 house we were talking about before. If we're considering an interest-only loan, obviously we don't have any money to put down on the house, so we'll be borrowing the whole pot. For simplicity's sake, let's say we can get the same rate for a conventional mortgage and an interest-only mortgage. To finance $150,000 at 6.5% conventionally, your monthly principal and interest payment would be $948. On an interest-only mortgage, just $812.
Let's say $950 is a reasonable monthly payment for you. For that amount you can get a conventional mortgage of $150,000 -- or an interest-only mortgage of $175,000. By going interest-only, you instantly boost your borrowing power by 17%, which means you have 17% more money to bid on houses. When the number of people with interest-only mortgages hits a tipping point, that $150,000 house simply becomes a $175,000 house, because the amount of money available to people in the $150K market has now become $175K.
But wait, there's more. What if you not only didn't pay any principal, you also didn't even pay the whole interest bill every month? Then you'd have what's called a "negative-amortization loan," which is a fancy name for a hole that you simultaneously dig deeper and bury yourself in. In a NegAm loan, you pay less than the stated interest rate, with the difference tacked onto the principal. These loans allow you to borrow even more money for the same payment, which forces prices even higher.
With both interest-only and NegAm loans, the principal does (theoretically) have to be paid back. Usually, at five years into the loan, the terms are recast to a fully amortizing schedule of payments. The payments, of course, explode at this point, but as with all the other batshit-crazy loan products, the assumption is that the borrower will have refinanced or sold the house or done something else to pay the piper before the piper sends the sheriff over to his house with a set of padlocks, a box of nails and a roll of yellow tape.
Step 7. The overvalued house of cards tumbles down
One hundred percent financing, interest-only and NegAm loans all fall into the category of "exotic loans," a term used to describe species of mortgages that mutated in the unnatural environment of the housing market. But one of the most common assumptions about these loans -- an assumption repeated daily in the media throughout the inflation of the bubble -- is dead wrong. That assumption: Exotic loans became necessary because demand was so high and prices were rising so fast that it was the only way for many people to buy houses.
No, no, no. The truth is: Prices were rising so fast because exotic loans, loose credit, and subprime lending created artificial demand. People who had no business buying homes were allowed to borrow vast sums of money that they had no hope of repaying, on terms they had no chance of meeting. They used that money to bid the prices of homes far beyond their value. Then there was a domino effect. When the guy who qualified for a $150,000 conventional mortgage instead got himself a $175,000 interest-only loan, that forced the guy with $175,000 to get a suicide loan for $250,000 to compete for the same house. The family who could have gotten a conventional mortgage for $250,000 then needed a 3/27 ARM for $315,000. A buyer who could have gotten $315,000 then had to take out an exotic mortgage for $400,000. And the daisy chain just got longer and longer and longer. As the prices got higher, in came the speculators and flippers and panicked renters, who inflated demand further and committed to even sketchier mortgages, and the carousel spun faster and faster and faster.
Until ...
Until a lot of things started happening at once. Until the first ARMs began to reset, and people couldn't make the payments, and they began putting their houses on the market. (It's happening in the subprime market now, but Alt-A and prime borrowers' ARMs will be triggering over the next few years, and it will be bloody.) Until interest rates couldn't fall any further, and the refinance ATM suddenly was out of order, and people began putting their houses on the market. Until people who hadn't intended to sell their homes started seeing for-sale signs pop up and decided they'd better get out now. Until all the flippers and speculators saw what was happening and decided to unload their investment properties. Until builders recognized that the resale market was stagnating and began slashing prices and upping incentives, undercutting the very people they'd sold to just months earlier. Until the MLS was bloated with inventory, and homes stopped selling for inflated prices, and then homes stopped selling for any price, and people who could have bought decided to rent and wait to see how far prices fell. Until the subprime market began to collapse entirely, and lenders began tightening credit, and word got out that because of the lending mistakes of the past decade, some 20% of the buying market -- one-fifth of all buyers -- would not be able to obtain mortgages of any kind in the future. No huge irresponsible mortgages, no huge irresponsible bidding wars.
But, really, what put the brakes on the carousel, what popped the bubble, was the simple fact of supply and demand. Financial chicanery had goosed the demand, and herd psychology had created a false belief that supply was short.
Epilogue
So here we are in Iowa. Drive through Beaverdale, Urbandale or Clive, and count the for-sale signs. Stand at the corner of Merle Hay Road and Northwest 70th Avenue, and look at the valley filling with empty houses. Go to Grimes and watch the townhouses grow in the rich Iowa soil. Watch as the supply of housing grows faster than the population. Listen to the Iowa Association of Realtors stress the relatively steady raw number of sales but softpedal the growth in the inventory. See the real estate industry point to still-high median sales prices while neglecting the fact that the median has only remained high because sales at the low end of the market (the subprime end) have dried up.
No, Iowa didn't see the kind of appreciation they saw on the coasts, but in today's world, you can still suffer the symptoms even if you don't have the disease. Too many houses are waiting for too few buyers. Too many ugly, characterless, cheaply built houses are crowding ugly, characterless, cheaply devised developments. Too many overpriced houses are filling the listings.
And, sadly for their owners but perhaps happily for my family, too many beautiful houses that should have been snapped up are languishing on the market for months and months.
I'll give you $240K for it. And I expect help with the closing costs.
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