The Problem Was the Housing Bubble, not Subprime Loans

The Post had a major front page article about how subprime loans threaten to undermine the prospects of African Americans for a decade. While African Americans do face discrimination in lending and are more likely to be given a subprime loan than whites with comparable credit and employment history, the real problem stemmed from the fact that so many bought homes in the middle of a housing bubble.

If someone bought a home at a bubble-inflated price that could be twice as much as its trend level, it would have a devastating impact on their finances, regardless of what type of mortgage they had. The big problem was that just about everyone in a position of authority was denying that there was a bubble and in fact helping to promote it.

For example, the Washington Post's main, and often only, source in articles on the housing market was David Lereah, the chief economist at the National Association of Realtors and the author of the 2006 best seller, Why the Housing Boom Will not Bust and How You Can Profit from It.

Another popular source for major media outlets was the Joint Center for Housing Studies at Harvard University which felt the need to dismiss evidence of a housing bubble in its 2003 report on the state of the housing market. While many homeowners may have suffered as a result of taking the Harvard Center's advice seriously, unfortunately the media does not consider its track record important. It continues to be used as a main source of expertise on the state of the housing market by major news outlets such as National Public Radio.

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written by Luke Lea, July 08, 2012 10:47

Remind us, how much was the bubble caused by our trade deficit with China and its impact on (lowering of) interest rates?

Too Poor To Fail: You Too Can Be a Millionaire and Join the Upper 10%
written by Last Mover, July 09, 2012 6:02

If someone bought a home at a bubble-inflated price that could be twice as much as its trend level, it would have a devastating impact on their finances, regardless of what type of mortgage they had.

Devasting only after the bubble pops and only for those who had something to lose. Meanwhile the 90% had a chance to live in one way like the other 10% do except the 90% is never too big to fail.

The normal admonition as painted by WAPO is the usual one of personal responsibility, don't risk what you can't afford to lose presented in a misleading context on subprime discrimination.

At some tipping point it didn't matter anymore what one had to lose. The price to loan values were so far off the chart they created their own momentum and swamped all other considerations like terms and conditions of subprime loans.

Those at the bottom of the economic food chain who jumped at the chance to live in what effectively was a mansion were acting the most rational since they had nothing to lose anyway. For them it was a rare circumstance in which the finance sharks had nothing directly to extract so all the risks were born by others driven by ultra leveraged rising house prices.

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written by Kat, July 09, 2012 6:59

That was an incredibly irresponsible article if it did not mention the scores of individuals who qualified for a prime loan who were steered into subprime loans. It could also mention that there were community development banks offering subprime loans that performed well (but were of course hit by the popping of the housing bubble.)

Subprime was critical
written by Kosta, July 09, 2012 8:56

It's true that without the housing bust, the problems listed by the WaPo article would not have occurred. But without subprime only a small portion of the African Americans described in the WaPo article would have been affected by the housing bust. Finally, without subprime, and crucially the decrease in lending standards, the housing boom may not have led to a bust and the bust would not have led to the near-collapse of the US financial system.

It is a mistake to take subprime out of the picture as subprime was the root cause of the housing bust, the disintegration of the financial system, and the depth of the Great Recession.

-1

bets on housing, nasdaq, etc...
written by pete, July 09, 2012 9:12

Suppose someone put all their savings in Nasdaq stocks in January 2000. They lost half their money. Now suppose somebody borrows $600,000 to buy a house worth $300,000. They walk away, the bank loses $300,000. Quite a different outcome. Suppose somebody bought a house in 2001 when Baker and Schiller said there was a housing bubble, long before Krugman jokingly asked for one. Then they sold it in 2006. Made a good profit. Bottom line, market timing is a dangerous game...should be avoided.

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written by Sara, July 09, 2012 10:18

In Texas there was no bubble but the people who had ARM's got killed by the spike in LIBOR rates resulting from the bust--especially if they were self-employed and already had reduced business income. Double whammy.

The Problem Was the Housing Bubble, not Subprime Loans

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