The Federal Reserve 1% interest rate experiment made homes unaffordable. Before this low interest rate, which stimulated demand and raised prices, young people were buying homes with 20% down.
The problem with the assumption of the 1% rate being the cause, is that it ignores the greed aspect. The real jump in exotic financing occurred after the run-up in prices which occurred after the drop in financing costs. What actually drove the overshoot was the gotta-get-in-too group and ‘banks’ allowing questionable financing. This occured after the price of housing climbed because financing it became cheaper (at 20% down, but lower interest rate).
Before the interest rate drop, how many people could apply and obtain financing of > 100%? The availability of this type of financing is not because of the interest rate drop. It is because of mortgage brokers who still want to find a way to churn the market and get their origination fees. It used to be; you don’t qualify, tough.
I don’t think the Federal Reserve can control the financing overhang that banks are willing to finance to. FDIC is more along these lines. This is a different branch of gov. Just like how margin overhang % on stock accounts is not handled by the Federal Reserve. My understanding is that it is handled by the SEC.
One thing I have been curious in all of this; where is the money comming from for these other lenders? I don’t think some of them are typical ‘banks’ or ‘savings and loans’? Are they regulated as banks? I don’t think they draw on intrabank and federal reserve loans.
reading through at least half way, you might begin to wonder if the same will happen to the real estate industry. Past half way, it gets a little esoteric.
