So, lets see how it worked.
We live in a capitalist economy. And home ownership is one of the few ways for people to store the value of their hard work and see that it continues to retain that value.
The value of property has a history of continuing to retain value and the expectation of the future is based on past experience
But, there is a crap load of money in it, in an economy that is so efficient that people are fighting to make sure they have a job. And everyone wants to get rich.
Being able to leverage off of one home, to purchase a second, third and fourth becomes a method of making money. There was a lot of flipping. And flipping has no vested long term interest.
Of course, when a piece of property turns over, there is an industry called real estate agents that benefit at 6% total for each sale. They have no long term vested interest.
Mortgage companies, that put the purchaser together with the lender, make a commission off the transaction. The more transactions, the more money. So they have no long term vested interest.
Our capitalist economy has a history of successfully aiding growth and new home purchases by reselling mortgages to businesses for the purpose of freeing up the capital of the originator.
The lender then gets rid of the loan and has no long term vested interest.
These mortgages are packaged and resold, becoming an investment opportunity for others. At that level, they become just another security. They are no different than any other stock, just another investment with little long term vested interest.
And, of course, a whole market exists for day trading, trying to catch those day to day fluctuations, buying low and selling high
In order to mitigate risk, credit default swaps were created that provided insurance against the possibility of the original loan defaulting.
Then the market began to saturate and values didn't climb as history suggested. The flippers, having no long term interest and no downside on default, began walking away from those second and third mortages.
This began to cascade as defaulting mortgages began to cut of credit and supply of credit shut down demand for properties.
People, who were in it for the long haul, had taken out seconds to pay of credit card bills. Now saturated with payment, unable to either flip themselves, not a short term plan, but the typical moving up sort of thing, were stuck. So they quite purchasing.
And demand fell for consumer products. Unemployment rose, people with mortgages they couldn't get out of lost their jobs and defaulted.
Just like the fractional reserve banking system relies on the money multiplier to increase the flow of money, the process reversed, now it became a defaulting on credit multiplier.
And as all those repackaged and resold mortgage backed securities lost value.
But that's okay, after all, they were protected by the credit default swaps.
Except, gosh darn it, only a few very big, to big to fail, banks owed on all of them.
Oh, and don't forget, on the way up credit card companies were thrilled to hand out revolving credit to happy little home owners. But as they began to default, the credit card companies raised rates on "similar" demographics, or anyone they could justify. And seeing as our entire economy depends on the accumulation of revolving credit, demand fell for consumer product.
And in a perfect storm of defaults, freezing credit markets, falling demand, rising unemployment, valueless securities, and all that, basically insurance policies due all at once, the entire thing just tanked together.
An economy that relies on the accumulation of credit to fuel the economy is primed to collapse when accumulation of credit shuts down.
Something like that.
But hey, that is how capitalism works. It has worked like this since before the U.S. was ever created. When fewer people got to be part of the game, it wasn't quite so susceptible. But life wasn't any better then either. Now, every one can be a capitalist. You to can own a home, you to can be a landlord. At least you can hope. With a hard work, a little luck, and the willingness to spend less than anyone else, the fortitude to not be part of the herd and have a credit card, the smarts to pick up food at the food bank (it's free you know) rather than waste your money at Food max, over the decades you can accumulate enough capital to buy that first piece of property.
With a little luck, you will be ready to purchase when home prices tank again. It'll happen. That is how capitalism works. And if you do it right, you buy a house, you put your wife as the owner of the second one, you put the third under the name of your kid. And now you have a property management business. And, as prices rise again, you leverage off the first mortgages to get that fourth, fifth and sixth piece of property. Some you rent out rooms in. It's a pain because you have to do the upkeep, but you get a shit load. Others you rent out the whole thing to some couple unfortunate to end up with a girl and a boy (gotta have a room for each and a two bedroom apartment won't cut it.)
And now your set. Your kids collect the rent, you do the management, and your set for retirement.
Something like that, eh?
