Spring Break
Pop! goes the housing bubble, part 2
John Jose, Columnist, jjose@smu.edu
Issue date: 12/5/08 Section: Opinion
The following excerpts came from an article I wrote for The Daily Campus in September of 2006; though it's really just thinly veiled self-aggrandizement, I'd like to revisit a few comments and evaluate them in light of today's economic situation.
"America is heading for an abrupt and rather unpleasant crash into a financial brick wall; in fact, it is already feeling the crunch. The housing bubble has been pricked and everyone is running for cover from the hissing sound. … But why is this of any concern to anyone other than those who invest in real estate? If a homeowner is not considering selling their house in the near future, why should they be concerned about falling house prices?"
We were headed for a crash, all right, but it turns out falling house prices were only the beginning of the problem. Financial firms' vulnerability to these toxic securities was exposed once a few (thousand) went bad, counter-party risk went through the roof, Bear Stearns and Lehman tanked and here we are today. The worst part is that this won't be the last time the complexity of modern finance will be underestimated.
"A tight financial spot is exactly where many of these homeowners now find themselves, but the homes that many thought would be their saviors are now the culprits. Rising house prices and subsequent spending cushioned the blow from the 2000 recession; in fact, American spending kept the world economy fairly buoyant after the economic downturn. According to The Economist, 'The boom has lifted the economy in three ways: it has boosted residential construction; it has made people feel wealthier and so encouraged them to spend more and it has allowed homeowners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America's total GDP growth last year . . . The housing boom has also been responsible for one-third of all jobs created since 2001."
"America is heading for an abrupt and rather unpleasant crash into a financial brick wall; in fact, it is already feeling the crunch. The housing bubble has been pricked and everyone is running for cover from the hissing sound. … But why is this of any concern to anyone other than those who invest in real estate? If a homeowner is not considering selling their house in the near future, why should they be concerned about falling house prices?"
We were headed for a crash, all right, but it turns out falling house prices were only the beginning of the problem. Financial firms' vulnerability to these toxic securities was exposed once a few (thousand) went bad, counter-party risk went through the roof, Bear Stearns and Lehman tanked and here we are today. The worst part is that this won't be the last time the complexity of modern finance will be underestimated.
"A tight financial spot is exactly where many of these homeowners now find themselves, but the homes that many thought would be their saviors are now the culprits. Rising house prices and subsequent spending cushioned the blow from the 2000 recession; in fact, American spending kept the world economy fairly buoyant after the economic downturn. According to The Economist, 'The boom has lifted the economy in three ways: it has boosted residential construction; it has made people feel wealthier and so encouraged them to spend more and it has allowed homeowners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains. Merrill Lynch estimates that the three together accounted for more than half of America's total GDP growth last year . . . The housing boom has also been responsible for one-third of all jobs created since 2001."
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