Marketblog.com

By Jessica Hagy over at Indexed.

This makes a nice lead in for a realization I’ve had about the sub-prime fiasco and the housing markets, adding to what The New Yorker had to say in Home Economics back in March.

A few years ago a lot of economists and financial experts, including Alan Greenspan were warning that sub-prime loans were going to be a problem. They were right in that the mortgage market is now a mess. But they were almost unanimously wrong in their reasoning why. Everyone then thought the nail in the coffin would be variable interest rates, that less qualified home buyers would not be able to afford an increase in interest rates, which may be true, but interest rates haven’t been a problem.

What really happened was quite unexpected both in how it happened and to whom it happened. I don’t believe sub-prime is entirely to blame for the problems we’re seeing now, rather it’s much broader than that. Simply put, people, lots of people, not just poor people, got upside down on their mortgages. This wasn’t just recent home buyers, but long-time home owners. They watched thousands of home shows on cable television, sponsored by big box home improvement centers, telling them how to increase the value of their home and they went out and got second and third mortgages to finance home remodels.

They just had to have granite countertops. Now those same shows are already telling people that those granite countertops, they just spent thousands of dollars to have installed and haven’t even finished paying off yet, are on their way out. Home Depot and HGTV have taken a page from the fashion world and worked to accelerate the interior design cycle.

Home owners falling for this marketing tactic have effectively started over as first-time home buyers. Everyone who could buy a home, bought one, and everyone who had any equity in their home tapped it out to improve their homes and make it worth more. They went from bad bets on dot coms to bad bets on their homes.

Now there’s no one left to sell their homes to. So home prices fall and since no one has any equity everyone is upside down on their mortgages, owing more to the banks than they can get for their home.

The nail in the coffin is the job market. There’s no permanency in jobs any longer. Jobs generally don’t last more than a couple of years. People job hop first and worry about selling their house later. Now they’ve got themselves in a situation were they’ve moved to another city, and their stuck with their old house because they can’t sell it for enough to pay off the mortgage and they don’t have any savings left to pay off the difference since they gave it all to Home Depot, ironically to increase the value of their home.