[quote=AN]Yes, price would still bubble if we still have neg am, no doc, io,etc loans. We heard plenty of stories of people who make $50k a year buying million dollar houses.
Let’s put this another way, even if there are 10x more flippers, if rates are high, lending standard is tight, I don’t think the bubble would form.[/quote]
If there were 10X more flippers, that would mean 10X the existing demand from flippers. Buyers (demand) are always competing against the pool of other buyers at any given point in time. If you increase the demand for a given commodity at a specific point in time, the price of that object will rise to the level that the most foolish or richest person is willing to pay (leverage/cheap money plays an exceedinly important role here, too). It’s all about the competitive “bidding wars” when resources are tight, and supply is constrained.
Loose lending increases prices because it introduces additional demand (other buyers who would not qualify to buy under “normal” circumstances). Speculation, by its very nature also increases demand as people buy (multiple) homes that they never intend to occupy as a primary residence. They create a false demand/constrained supply ratio **at a specific point in time** that affects prices and the behavior of other buyers (both speculators and organic buyers).
People were willing to take on debt they couldn’t afford because they were competing with other buyers. At the peak of the mania, speculators comprised over 40% of the market. They sucked up all the inventory and reintroduced it at much higher listing prices. The buyers at the time felt they had to use toxic mortgages because they believed those list/sales prices were “real” (caused by organic buyers), when they were really caused by the (temporary) increased demand of speculators.
Again, the easy money facilitated the speculation and the speculation facilitated the easy money because the lenders could show the loans were well collateralized, and there were few/no loan losses during the mania — they could convince bondholders that these mortgages were “safe”. You cannot think of speculation and easy money separately; they are closely linked.
BTW, right now, we are right back to easy money, high leverage, and intense speculation.
My bet is that speculators once again comprise about 40% of the market or greater, especially when one considers all the deals that are being done off the open market, like bulk sales and MBS investments that we are not privy to. They are setting up the next collapse, IMHO.
