Threats chill home security
The old adage that “a man's home is his castle” was based on the belief that if anything was secure in life, it was that each person's home was free from threat or invasion.
Indeed, for most homeowners in the United States, their home has been their single most important asset. The real estate crisis has proved that very few homes are safe from economic invasion.
In 2007, real estate prices began to collapse. Soon, home values in many parts of the nation became top heavy as mortgage debt exceeded their owners' equity. In addition, many homeowners borrowed with adjustable rate mortgages, or ARMs. Under the terms of an ARM, low initial “teaser” rates adjusted over time to higher rates. The combination of lower value and higher interest rates drove many into foreclosure.
Recently, the Federal Reserve's efforts to stimulate the economy, known as quantitative easing or QE, has lowered interest rates, curing the problem for some. Economic conditions this summer brought evidence of an improvement in home prices. The combination may restore confidence in homeownership and boost consumer demand generally.
How did the real estate crisis come about? Before 2007, then-Fed Chairman Alan Greenspan, along with Ben Bernanke (a Fed board member from 2002 to 2005), dramatically increased the money supply with stimulus efforts. In response, home prices rose in an unprecedented manner. According the Standard & Poors/Case-Shiller Index, by 2007, average home prices exceeded, by 50 percent, their established, 100-year-old trend of increasing at 3 percent a year.
This gave homeowners an almost euphoric feeling of wealth. Homeowners became aggressive consumers, boosting growth, particularly in the United States. This unleashed a speculative fever that tempted banks to make increasingly imprudent and liberal mortgage loans and to pass on those loans — by packaging them into securities — to unwitting investors, such as institutions and other banks.
This bubble burst in 2007, a major price correction occurred, and almost all favorable financing conditions reversed. Regulators allowed banks to hide these mortgage assets, now toxic, on their books at full value. As prices fell, the Fed created trillions of dollars with which to buy these toxic assets from banks. Future generations were left to salvage the liabilities.
The Fed's quantitative easing has enabled many consumers to deleverage and even to accumulate cash. Some families are tempted to buy, but lending restrictions have tightened, making mortgages difficult to obtain.
Recession threatens still. Professor Robert J. Shiller cautioned against concluding that home price increases have signaled a convincing market turn.
When the economy recovers once more, the vast cash deposits held at banks — created by the Fed and its quantitative easing — will be leveraged up as loans, increasing the money supply even more and igniting inflation.
Increased investing in housing is likely to return. But the safety and security of homeownership is not in the offing anytime soon.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Penn State rallies past Akron behind Newbill’s 26 points
- Mo. governor adds guardsmen as protests continue
- Household debt on the rise after 5-year decline
- Protest in Cleveland over 12-year-old’s shooting death chokes off traffic
- Daily Courier roundup: Penn State Fayette women fall to Slippery Rock
- Ferguson grand jury focused on fatal ‘tussle’
- Ferguson protesters march on Pittsburgh streets
- Penguins notebook: Bennett status remains fluid
- Bars bulge at the seams night before Thanksgiving
- Steelers notebook: Defense tasked with stopping Graham
- Premiums to rise for Obamacare’s most popular plans