Mortgage Bubble Started Crisis, Isn’t Getting Better

By | October 21, 2009

Last year the economy crashed.  Now, the stimulus has stimulated, the Federal Reserve has eased, Geihtner has.. well done whatever he does, and Obama has spoken (certainly that should have fixed everything).  So how did we hit 9.8% unemployment since the stimulus was an emergency action that would keep unemployment from going over 8%, pumping massive amounts of liquidity into the economy should have loosened credit, little Timmy G. and Obama bought GM, AIG and Chrysler and they helped everyone buy a new car that wanted one?  It must be that G.W. Bush must still be affecting the economy from his ranch in Texas…

Today, the Mortgage Bankers Association published it’s index of applications.  The measure of home mortgage applications dropped 14% last week.  When broken-down, the measurement of refinancing applications decreased 17% and new home purchases declined 7.6%.  When combined with  yesterday’s less-than-stellar housing starts report, it’s apparent that between TARP, ARRA (stimulus), the Fed, government buyouts, the first-time buyers credit, and a truck-load of printed money.. the housing crisis is still glaring us in the face.

The trouble isn’t that the government isn’t doing enough – thankfully.  The trouble is that due to too much federal meddling, we never let the bubble fully burst.  Economies go through boom-and-bust cycles.  Even socialist countries deal with economic cycles that go up and down.  By propping up a bursting housing market we end up with artificially high housing prices and no one that can afford them.  Mortgage rates can’t get any lower and demand still isn’t there.  If you have too many goods (houses) being chased by too few dollars… that’s deflationary to that market.   Our dollar is weakening due to the government’s reckless printing.

A Yahoo! Finance article states that economists expect home sales prices to decline more than 11% by June of 2010.  That’s fairly rapid and could trigger the second half of a double-dip recession when combined with the commercial loan crisis about to hit the financial industry.

So now those few dollars chasing mortgages aren’t worth as much (notice your gas prices the last seven days or so – welcome to inflation).  The Fed has kept rates near zero so now they can only go up – and they are.  All this means those houses have got to get cheaper to get sold.  Meaning destroyed wealth for millions of Americans as their house values plummet.  The housing bubble will certainly bust and the more the government props it up, the worse that crash will be.

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