Why The Housing Market Is Not The Best Investment?

For many years, the idea that ones’ home being the largest investment was said as a complete sentence when in fact, it was only an incomplete sentence. Any duly licensed financial planner would finish that sentence by saying all investments are subject to market conditions, the value that investment could increase or decrease and other similar cautionary statements that their attorneys wrote to protect them. The American public only heard that their home was the largest investment and had never experienced, nor had their parents seen the value of their personal homes drop like they did in the past few years. They had never experienced the financial pain and although only a few years have passed, many have forgotten and are ready to jump right back into homeownership.

The housing crisis of the late 2000s rocked the economy and changed the landscape of the real estate business for years to come. Decades of people purchasing houses unfordable houses and properties with lenient loans policies led to a collective housing bubble. When the banking system faltered and the economy wilted, interest rates were raised, mortgages increased, and people lost their jobs amidst the chaos. This all culminated in tens of thousands of American losing their houses to foreclosures and short sales, as they could no longer afford the mortgage payments on their homes. The United States entered a recession and homeownership no longer appeared to be a feasible goal as many questioned whether the country could continue to support a middle-class. Former home owners became renters and in some cases homeless as the American Dream was delayed with no foreseeable return. While the future of the economy looked bleak, conditions gradually improved. American citizens regained their jobs, the United States government bailed out the banking industry, and regulations were put in place to deter such events as the mortgage crash from ever taking place again. The path to homeowner ship has been forever altered, as loans in general are now more difficult to acquire and can be accompanied by a substantial down payment.

As we now know, the U.S. economy, the middle class, and its job growth was damaged by the overwhelming collapse of Wall Street, which was triggered by the downfall of the housing market and sub-prime loan defaults. One of the main things that need to be addressed in our economy today is the housing market and making sure that our banks and credit unions are not allowing people who do not have the necessary income to pay their mortgage disbursements. In an article entitled Thinking outside the Housing Bubble, the author John Vogel remarks how the economy is generally supported by the housing market. Vogel states:

In the 1980s, investments banks such as Goldman Sachs, Merrill Lynch, Bear Stearns, JP Morgan, and Morgan Stanley started selling mortgage bonds. Mortgage bonds were a collection of thousands of home mortgages, purchased from lenders, and their associated income streams (monthly payment). To address the fact that some homeowners often refinance their debt when interest rates are low which prematurely pays off the debt, mortgage bonds were stacked into layers called ‘tranches’. The lowest tranche represented mortgages to be paid off early, and the highest layer was the last mortgages to be paid off.

The housing crisis in America is a major problem plaguing the United States' economy. Before a solution is formulated, one must consider the history of the market and the causes of the problem. And after a solution is formulated, one must present an idea for prevention of the problem for the future.

Simply put, it all commenced within the United States housing market. In the years leading up to 2008, buying and selling mortgages became a very popular way for lenders to make money. While housing prices continued to increase, lenders found themselves in a win-win situation. If homeowners paid their mortgages, the lenders made money. If homeowners could not pay their mortgages, they would

In the lead up to the current recession, when the real estate market began to fall, there were so many investors shorting stocks and securitized mortgage packages that were already falling, that the market simply fell further. There were no buyers at the bottom, and the professional investors made millions off of the losses of others. Beyond this, there was no real federal regulation for securitized mortgages, since there was no real way to gauge the mathematical risk of any given package. This allowed the investors to take advantage of the system and to short loans on real people’s homes. Once these securities were worthless, many of the homebuyer’s defaulted on their mortgages and were left penniless. No matter from which angle this crisis is looked at, the blame rests squarely with the managers who began the entire cycle, the ones who pursued the securitization of mortgages. Their incompetence not only led to the losses of Americans who have never invested in the stock market, but to losses for their shareholders.

The economic decline has possible home buyers, especially first time home buyers, scared to invest anything into the housing market. With the fear of another depression in the back of everyone's minds, some businesses are attempting to clarify the pros of home ownership.

All the economy’s parts seem to be working together for a change: joblessness is under 5% - a 24 year low – yet inflation is holding steady at 3%, a combination that economists thought impossible” (Pooley). This article placed the economy in very favorable position, but the economy collapsed back in 2008 when Wall Street folded. In a video published by Johnathan Jarvis titled “The Cause and Effects of the 2008 Financial Crisis,” the video explains how the economy went from being healthy and vibrant, to desperate and helpless because investors were creating mortgages with people who were not financially stable, and those mortgagors were more than likely struggling to pay their debts prior to attaining a sub-prime mortgage loan. When these sub-prime mortgages defaulted, the house was reposed by the mortgagee and put on the market to sell. When the house went up for sale because of the default, the

Big banks in the middle 2000s were flourishing of the money made from selling the mortgages to big investors. While this was great when the banks were giving money to people who were reliable and were going to pay their mortgages every month. And when the investors were making such a hefty profit they wanted more. This is when Subprime mortgages were widely used, giving less reliable lower credit scores the opportunity to get homes. The banks knew that these people would not necessarily always be able to pay, which was the one of many mistakes (Crash Course.) The banks learned that while it did sometimes work out, the consequences of giving out too many unreliable mortgages can bring the whole nations economy down for the housing market has always been the pillar of the economy. The greed of the extremely wealthy continued to overpower the common sense of the

The demand for houses, along with a belief that home values would continually soar, fueled the building boom that would eventually result in our demise. Once the grace period on mortgage loans ended, and house prices began to decline, many people found themselves unable to escape the high monthly payments and began to default. Increasing foreclosures continued to lower the prices of homes, by 2008 it was estimated that 23% of all homes were worth less than their mortgages. 2.9 million vacant homes later, it is safe to say the consequences of short-sighted expenditures were severe. Since then, more than 6 million Americans have lost their homes to foreclosure. Much of the blame for the housing crisis can be traced back to rumor in the stock market. While homes are not typically viewed as investments under speculation, statistics show that this was not the case during the mortgage crisis. 22% of homes purchased in 2006 were for investment purposes.

Before the 1970s the banking was not a business that you went into to make money. That was until Louis Ranieri came around. Louis Ranieri had one idea that changed the housing market forever. His plan was to have a mortgage back security. A mortgage back security is an assist based security backed by a mortgage. For example, if you use your mortgage to start a business, your business is backed by that mortgage. The average mortgage loan has a fixed rate loan and takes thirty years to pay off, but then he thought to bundle them all together. They thought these would still be less risky because who would not pay their mortgage. They were doing hundreds of million dollars in mortgage bonds a year, but that all changed when they ran out of mortgages to put into the bonds. If there were no bonds then there was nothing left to make money, and the banking world was going to back to the way it was. Rather than letting that happen, the banks made a loan called a subprime loan.

For the past several years, the housing market has been mutually beneficial for both buyer and seller. The cost of real estate has risen but has maintained or gained value. People who have owned their home for quite awhile are seeing astronomical amounts of money to be made off the sale of their home, and so the market has been inundated with housing for sale. It leads us to wonder whether this boom is heading for the crash. Is now still a good time to buy? If so, what type of property will continue to gain value? Will new buyers end up stuck in their home as the value drops? As a homeowner, I am nervous about the state of the real estate market. This is not the house my family wants to call its home forever, but could we get stuck here? Yes, we could. If the housing market drops, then so will the amount of money we could potentially make off the sale of this house. If it drops enough then it would be possible to end up owing money upon the sale. Unless you are independently wealthy, you hope to make money off the sale of the home to help finance the purchase of the next home. Real estate agents will tell you that now is still a good time to buy. While it is speculated that the market will drop within the next year or two, if you are willing to sit on your new purchase for several years, an upswing will occur again. There is never any guarantee that you will recoup the money paid for and put into a home. If you intend to purchase a home soon, it would be a good idea to

Around 2006 the price of houses began to fall substantially fast. “The oversupply of houses and lack of buyers pushed the house prices down until they really plunged in the late 2006 and early 2007” (The Subprime Mortgage Crisis Explained). These actions threw investors into a big dilemma. In the beginning they believed buying the mortgages would bring them a profit, but quickly realized that the mortgages would cost them more financial damage than reselling the homes. “Nationwide, home vales have declined about 16% since the summer of 2006 and experts project that the drop will continue until homes have lost about 25% of their value” (Biroonak, 2008). In other words mortgage homes are “underwater”, that is, the mortgage owed equals or exceeds the value of the house (Biroonak, 2008). Investors and homeowners started to go more in debt trying to pay off their original debts.

Establish Credibility: According to US News, the great American dream of owning a home appears poised for a comeback. Real estate company Trulia reports that in many parts of the country, rents are rising while housing prices are falling, making buying a home more affordable. Trulia found that in 98 out of 100 major metropolitan areas, including Detroit, Atlanta, and Cleveland, buying has become more affordable than renting.” I think the mortgage catastrophe of 2001 left prospective home buyers afraid of buying a house without being extremely certain that is the right decision.