Subject Line Ideas: This isn’t another bubble
Guide to get out of debt
Always give 100 percent (Funny)
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Feature Article: This isn’t another bubble
Critical Reads: Guide to get out of debt
The Funnies: Always give 100 percent
Every few months or so, it seems that the “B” word comes up again. Somebody, somewhere suggests we’re headed for, or are already experiencing another dreaded housing bubble. It happens when prices rise at a quick pace, which has happened in plenty of U.S. markets. But there are some major differences in housing when you compare current circumstances to those that caused the original bubble.
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This Isn’t another Bubble
If I had to provide one piece of evidence to one of those who asks me “Are we headed for another housing bubble?” I would share with them a very telling statistic on CDO.
CDO stands for “collateralized debt obligations.” The term refers to banks’ practices of borrowing money, then lending that money to other businesses. During the housing bubble, banks made loans to builders and developers, in large part because of the rampant speculative business of housing back then. Banks made money doing this by charging those builders and developers a higher interest rate than they were paying.
And this was a big business – bigger than people realize. In fact, according to Forbes magazine, the CDO business went from being a $30 billion-a-year industry in 2003 to a $225 billion industry from 2003 to 2006. In other words, in just three short years, these ultra-leveraged loans increased by almost 10 times.
The real problem with this skyrocketing CDO loan business, was that banks then sold these often risky loans to investors who thought they were buying not-so-risky loans. When home overinflated home values dropped, everyone was stuck with bad investments, and the whole financial system fell apart.
If you need convincing that we’re not headed for the same fate now, you just have to consider that this financial climate just doesn’t exist right now, and there are several reasons for that.
The biggest reason (probably) is that banks have changed criteria for qualifying for loans. Sure, we hear about how much tougher it is for home buyers to get a mortgage these days, but it’s less-known that banks are also less willing to lend willy-nilly to builders and developers, too. That means that it’s not just the riskiest loans to consumers that aren’t being made as much these days, it’s also the riskiest of these CDOs that are non-existent.
But also missing now are the factors that helped create all those risky loans in the first place.
Back then, homes were overvalued. Part of the reason for that was easy lending helped create an artificial demand, which supply couldn’t meet. It was an unsustainable housing industry.
These days, there are certainly markets in the United States where homes are overvalued. I’d argue that this time around there are more fundamentals involved that make it so – such as a near-dead home building industry that still hasn’t been revived enough to help the supply side – but that’s probably a point best saved for a separate occasion. The relevant fact here is that not nearly as many markets have overvalued homes occupying them as they did in the bubble. In fact, you could probably make an argument that there are more markets across the country in which homes are still undervalued.
The pre-bubble froth of many markets did not truly represent “normal” home valuations, but since the bubble burst, most of the country still has yet to return to even pre-bubble “normal.” It’s much harder to call anything a bubble when the commodity involved is not overvalued. That’s just economics.
And it doesn’t appear there are the conditions present to change that anytime soon. Easy credit helped fuel rampant purchasing, which created a largely artificial “demand.” And the apparent demand is what drove over-speculation, which, as we now know, created a lot of the problems with risky loans and corresponding securities.
Are there markets in which home values are around where they were at the time of the bubble? Sure. But there’s also no speculative over-building going on this time around. There are more fundamental factors at play, such as a lack of for-sale inventory, as well as the fact that buyers at the higher end of the market are the ones best equipped to buy. A part of the rapid price appreciation in many markets is the fact that it’s the expensive homes that are selling.
The bottom line is that there’s a difference between rising prices due to supply and demand and rising prices due to speculation. We’re seeing the former now, whereas the bubble was caused by the latter.
So while you see appreciation rates rising rapidly in some markets – and hear the inevitable corresponding “Bubble!” cries from critics – there’s no real reason to panic.
This isn’t another bubble.
Guide to Get out of Debt
Debt can pile up quickly if you’re not careful, but what to do when it’s too late to prevent it – when you somehow have wound up with a pile of debt? This first-person account from Forbes is an outstanding article, billed in the headline as the “ultimate” guide for getting out of debt. And it just might be.
5 Secret Habits of Self-Made Millionaires
The now-legendary book “The Millionaire Next Door” pulled back the curtain on the behavior of millionaires. We know they live below their means, and save rather than spend. Now, this Credit.com article takes a more recent look at five lesser-known habits of self-made millionaires, and it’s definitely worth the read.
Why Your Rent Check Keeps Going up
The law of supply and demand is an unstoppable force and an immovable object. When supply is low and or demand is high, prices are going up. That’s what’s happening in many rental markets across the United States, including some with long histories of affordable rental housing. This CNNMoney.com article highlights the reasons your rent check keeps going up.
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