Can you hear the bubble bursting?

We are learning that the housing market is in trouble. Many people took out ARM (adjustable mortgage rate) loans. This seemed fine at the time. The monthly payments were low and they could borrow up to many times their yearly income. Now that the market is slowing, the lenders are cashing in their chips. Those extremely low monthly payments are beginning to double, triple and in some cases, quadruple. I remember a Michigan based company advertising on the radio. They promised that you could make monthly payments towards the principle and the interest payments would kick in later. How many people, dreaming of owning their first home, jumped on the wagon? These are the people I feel sorry for. This is their dream being foreclosed upon.

Now, there is another type of person in peril. These people saw the low interest rates, found houses in upscale locations, and planned on how they would take out these ARM loans and flip (resell) the house before they would have any interest payments. These are the people who drove up the costs in the housing market. They created the overpriced bubble to begin with. These people will have to lose their condo in Naples and retreat to their overpriced homes up north. These people will never have my sympathy. They deserve to fail.

The last type of person is the lender. I’m not talking about any of the honest lenders that are out there. No, I’m talking about the predatory lender. This person seeks those who have questionable credit histories, and promises them they can afford a home way beyond their means. This is the lender that seeks out someone with a McJob, earning McWages, and shows them they can get a $300,000 home for only $700 a month. Mr and Mrs. McWage Earner believed the lender. They didn’t question the details, and were just happy to finally get out of that bad neighborhood and into a great home. This type of lender should be brought up on charges.

Well, there we have it. The housing market in a nutshell. Homes worth $100,000 being sold for $500,000. People on the west coast were driven out of the major cities due to the obscene costs of housing. In my area of the Midwest, homes that normally sold for $80,000 went for $200,000. The realestate agent I was working with kept trying to get me to buy. She restated that the interest rates were are their lowest point, and the housing prices were sure to only go up… I knew better. How? I remember lessons my grandpa told me while growing up. We were farmers, and I had no intention on staying on the farm when I grew up. Grandpa knew this and he tried to impart his wisdom upon me. You know you’ve all heard the sayings; If it’s too good to be true , or You can’t get something for nothing… these were drilled into my head. (along with “If it’s fun… it’s not work“, but that’s for another therapy session.)

I read the reports, did my homework, and followed the housing market everyday. I could see that it was way over inflated. When prices rise that much, that quickly, they cannot sustain… it a fact of economics. I knew that people weren’t reading the fine print that told them while they may not have interest payments for the first year, the interest would fester and expand each month they paid only on the principle. I told my agent that I was going to wait it out for awhile. While she wasn’t happy with my gloom and doom assessment, I knew I was making the right decision.

Last fall, I found the house. Normally, this house would have gone for nearly 100K but due to the slump in the market, being in a financially challenged area of MI, and the sellers nasty divorce, it was valued at $70,000. it’s a 3bd/2bth, 1586 sq’ 2 car garage on a city sized lot but out in the country. Built in 2000, it also has 2 decks and all appliances included. Not bad I thought to myself. I could talk them down to $55k or $60k I thought. After sitting for a couple months, this divorcing couple needed to unload it ASAP. As a joke, I offered $15k. After a week, I got a call saying that they could only go as low as $19,875. You can guess I was at the bank that morning filling out the loan application. Now had this couple been in foreclosure, I would have felt bad. That may have even ended the sale for me right there. But how many others are going to look for these deals, not the divorce sales but the foreclosures, and rip them out from families?

I want you to know that I hold no ill-will towards those who make a profit from the sale of property. Truth be told, we did the same on a property. But there is a difference on a 10%- 15% gain verses an over inflated 30% - 70% gain like what happened a couple years ago. Flippers are getting what they deserve, and the rest of us will pay for it for years to come.
Now there’s talk about some sort of bail out due to the bursting market. I would agree to this on certain terms.

1, First time home buyers who were fooled into the ARMs should get a reprieve on interest rates.
2, Flippers should be exempt from any help.
3, Any company found guilty of predatory lending should be forced to liquidate all assets and pay into a fund for those in item 1.
4, Any financial help is a one time deal. No repeats.
5, If you are an item 1 person, you must take classes on basic economics to prepare yourselves for the next time you try to get something for nothing.

That's my take on this. Help those who need it, and make sure no help goes to those who caused it.