Why Did Home Values Plummet?

Discussion in 'Economy' started by TopGunna, Sep 25, 2008.

  1. TopGunna
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    TopGunna Member

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    Serious question for those who know more about the housing market than I do.

    It seems to me that decreasing home values was the most important cause of the subprime mortgage crisis. Cause is probably a bad word though - it's probably more like a "necessary condition." Had home values continued to appreciate in value, borrowers in a bad mortgage (say, an ARM whose fixed-term had expired) could have simply refinanced using the equity gained. Or, if their credit had worsened, they still could have sold the house without assuming outrageous debt (because they would have had the extra equity to cover it).

    As it turned out, expecting home values to continue to appreciate was a systematic error - a bad assumption made by both sides. As it turned out, home values went down. When borrowers saw their interest rates adjust upward, their monthly payments shot up as well. But because home values went down, most of these borrowers had negative equity in their home, leaving them essentially trapped in their situation.

    My question would be - why did home values fall? It would seem to me that the falling value of the dollar would have a net positive effect on home values (since they are a domestic good).

    Were previous home values artificially high? Were they a result of market speculation? We've all heard the old adage that "a home is a great investment" and that most homes double in value every 10 years. Did making subprime mortgages available flood the market with prospective buyers, driving short-term prices up?

    Resident economists, let me know your thoughts.
     
  2. nukeman
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    nukeman Active Member

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    Because EVERY bubble must pop eventually. Do you really think that the housing market could support the increase of home values of $1,000.00 a week in certain areas of California and New York. This is just ridiculous. If yo look at the central US you will note that hose prices have Hardly moved. that is because they were not FALSELY INFLATED.
     
  3. AVG-JOE
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    AVG-JOE American Mutt Staff Member Gold Supporting Member

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    Home prices fell because demand fell and supply was up.

    The value of a property to a home owner is what the home is worth to him and has not changed unless he plans to sell.

    Speculators are part of the problem... panic sellers are another part, some people have to sell now for other reasons and they are victims of bad timing.

    As long as you can afford to keep up with your mortgage payments, you will be cool.

    If you don't have to sell your home, keep it! The price will catch up to its value sooner than you think.

    If you have a mortgage that you can't make the payments on - do the best you can and refinance as soon as possible.

    If you want a home - now is a great time to be looking!

    All prices in the market are 'artificial' and will remain so as long as our money supply is controlled arbitrarily by an entity like The Federal Reserve. For money and market prices to have 'real value', the money must be backed by a hard asset like gold.

    -Joe
     
  4. Paulie
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    Paulie Platinum Member

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    This is not entirely accurate, per se. Sooner than you think is misleading regarding prices coming back up. This is just my opinion, but I'm not sure prices will come back up anytime in the foreseeable future. First of all, they haven't bottomed yet AT ALL. Second of all, the Fed already has the interest rate artificially set quite low as it is. There's not much room left for it to come down much further, so enticing a large sect of potential buyers to raise the demand seems doubtful.

    This is a good reason for not bailing these companies out. If we had the balls to weather the storm, we could simply wait out the price correction, and the market SHOULD just naturally remedy itself. I'm sure there are many who will disagree with that, but the sad thing is, most of those people have never really seen how a TRUE free market could respond, due to all the government intervention over the years.

    There's always going to be people who will suffer. Either they're going to suffer from a credit scarcity by not going through with this bailout, or they will suffer from an inflation/deflation scenario later on down the road which is going to be painful for a lot of people as well. At least with the latter, the excess is naturally cleansed rather than being taken on by our government in the form of more debt and deficits.
     

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