Paul Krugman Predicted The Burst of The Housing Bubble And The Recession (Ron Paul, unemployment)
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says Paul Krugman was one of the few economists who predicted a housing bubble and correction to prices back in 2006. Ron Paul beat him by 4 years. Austrian economics.
Ron Paul July 2002 introduced the Free Market Enhancement Act
" Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions.
When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss."
That was not hard for any one to predict. Fannie and Freddie were not buyer's friends as some thought. Those in the loan industry who approved loans to those who never should of received them some with questionable credit historys. I know i was in real eastate for 15 years, i saw it all. Some couples like getting in over their heads, some had terrible credit, but still these loans went thru. Why. Those who approved the loans know what they were doing. Those who should not buy something more then they can afford, had no business looking at homes, that were way more then they could afford, i saw this happen time and time again.
Fannie and Freedie, Bad Loans and people buying over their heads, have not helped this situation.
Now we are at a time when most people's home value have fallen so low, some will have to go into foreclosure, for some they owe so much more then their home value is worth. I know a couple who recently walked away from their mortgage, their home value was lower then what they owe on their home, it was beautiful, in a nice area, upgrades galore, and they just walked away. Cannot afford a home, look for a less expensive one, any home can be made to be beautiful by upgrading it if you can afford to do so.
He knew of this and warned that the housing bubble was unprecedented.
uhm was warned about in 2000
Housing in the New Millennium: A Home Without Equity is Just a Rental with Debt
Joshua Rosner
Graham Fisher & Co.
June 29, 2000
Abstract:
This report assesses the prospects of the U.S. housing/mortgage sector over the next several years. Based on our analysis, we believe there are elements in place for the housing sector to continue to experience growth well above GDP. However, we believe there are risks that can materially distort the growth prospects of the sector. Specifically, it appears that a large portion of the housing sector's growth in the 1990's came from the easing of the credit underwriting process. Such easing includes:
* The drastic reduction of minimum down payment levels from 20% to 0%
* A focused effort to target the "low income" borrower
* The reduction in private mortgage insurance requirements on high loan to value mortgages
* The increasing use of software to streamline the origination process and modify/recast delinquent loans in order to keep them classified as "current"
* Changes in the appraisal process which has led to widespread overappraisal/over-valuation problems
If these trends remain in place, it is likely that the home purchase boom of the past decade will continue unabated. Despite the increasingly more difficult economic environment, it may be possible for lenders to further ease credit standards and more fully exploit less penetrated markets. Recently targeted populations that have historically been denied homeownership opportunities have offered the mortgage industry novel hurdles to overcome. Industry participants in combination with eased regulatory standards and the support of the GSEs (Government Sponsored Enterprises) have overcome many of them.
If there is an economic disruption that causes a marked rise in unemployment, the negative impact on the housing market could be quite large. These impacts come in several forms. They include a reduction in the demand for homeownership, a decline in real estate prices and increased foreclosure expenses.
These impacts would be exacerbated by the increasing debt burden of the U.S. consumer and the reduction of home equity available in the home. Although we have yet to see any materially negative consequences of the relaxation of credit standards, we believe the risk of credit relaxation and leverage can't be ignored. Importantly, a relatively new method of loan forgiveness can temporarily alter the perception of credit health in the housing sector. In an effort to keep homeowners in the home and reduce foreclosure expenses, holders of mortgage assets are currently recasting or modifying troubled loans. Such policy initiatives may for a time distort the relevancy of delinquency and foreclosure statistics. However, a protracted housing slowdown could eventually cause modifications to become uneconomic and, thus, credit quality statistics would likely become relevant once again. The virtuous circle of increasing homeownership due to greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures.
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