The US Housing bubble: how did it happen? Where is it going?

Most of us have been taught that owning your own home is the only way to go. Someone who I respect very much recently gave me 4 reason for owning a home:
1. Appreciation
2. Depreciation (owning saves you on taxes)
3. Cash Flow (mortgage payments - assuming you don't have an ARM or something of that nature - are consistent while rent payments will fluctuate.
4. Principal reduction (as you pay off your mortgage).

In theory, those four reasons sound like a pretty solid argument for owning a home. However, markets change - they always have. I believe this market is changing. I have been doing A LOT of research on this topic as I believe it is a HUGE element in the downfall of the US Economy.

WHERE THE CHANGE BEGAN:
I think the change started not in the housing sector specifically, but in our society as a whole. Once upon a time, we were a nation of savers. At one point in time in the mid 1950's, the average US home saved 17% of their annual income. Now we are at less then 3% with 48% of Americans having less then $10,000 saved for retirement. At some point, we converted from a Nation of savers to a nation of Takers. Did you know that 42% of Americans are receiving some sort of Federal Assistance? 42%!!! Did you know the US spends more on its national education then ANY of the other 20 world powers - yet ranks 18th and 19th in math and writing. Did you also know that we spend more on Federal assistance for our citizens? We have become LAZY, but honestly, who in our position wouldn't? Our government has enabled our society as a whole to become complacent in the past 4 decades and because of that, the rest of the world is passing us by. Anyways, I don't want to get too far off track. I give you those stats so you can think about the psychology of things. The US housing bubble is a several part problem.

The psychological and sociological perspective of our country is the first place to look. Our government has taken all self accountability away from us. Unemployment used to be 180 days. However, people we struggling to find jobs so they upped it to a year. When the unemployment rate kept growing they upped unemployment benefits to 2 YEARS! People are able to live off the government for up to 2 years because they "can't find work". The bottom line is that we are a country of entitlement. People are turning jobs down because they don't feel they are up to their standard. History says that our system does not work. The Netherlands went through the same thing about a decade ago. When unemployment rates hit record highs, they kept extending the period in which people could obtain federal assistance for unemployment. You know what happened? The longer they extended the period, the higher the percentage of unemployment grew. Ironic the majority of people found jobs on average of 2-4 weeks before their unemployment benefits were about to end (whether it was a 1 or 4 years of compensation). I tell you this because I want to stress the fact that the easier you make it on people, the worse it makes the situation. These sorts of benefits are burying our country economically.

Most people feel like houses are supposed to appreciate. That is what we have been taught as a nation. When told that Appreciation was the #1 reason to buy a house, I thought about it. I guess in theory he is right. The problem is most people in the country don't take advantage of the appreciation of their house the way they should.

once upon a time (about a decade ago), the banking institution of our great nation required you to have 20% down-payment to buy a home. They also would only lend you about twice your annual income pre-tax (if you made $100,000 the most they would lend you is $200,000 on a home). Another rule of thumb was that the total mortgage payments, interest and taxes should not amount to no more than a third of pretax income. When the dot-com bubble burst at the beginning of the century we were heading for a major recession and major correction in the dollar. However, the government would not have that. What did they do? They lowered interest rates and created newer creative financing options for homebuyers. The result? Lending standards were dropped to a point so pretty much anyone could buy a home - creating a new bubble. Millions of people obtained ARM's, interest only mortgages and other creative financing that put people into homes they really could not afford. It used to be buying a house was a good idea because you would buy it, live in it, and pay it off so you could retire rent/mortgage-free (that is #4 on the list - principal reduction). However, owning a home became more of a speculative investment and people got burned for it.

Prior to the end of the Gold Standard by Richard Nixon in 1971 (more on that later), housing rates did not appreciate like they have in the past 40 years. Prior to the elimination of the Gold Standard, housing only appreciated by an average of 2.53% annually. Compare that with an average appreciation of 6.52% annually since the elimination of the Gold Standard and new economic policy. coincidence? I think not.

With the end of the dot-com bubble the US needed a new bubble to take its place to keep the economy "thriving". With the new creative financing programs in place for the people of the US to buy homes, the bubble was about to inflate. What if I told you you could buy a house for $500,000 without putting any money down. You can live in it paying only interest, and when it goes up in value 6-8 months later you can borrow (tax free) in a cash-out refinancing. So you have all the upside and no downside. If it doesn't work, you can just walk away...after all, you didn't put any of your own money into it! What do you have to lose? NOTHING! This is what an enormous amount of people were doing.

People have been refinancing their houses for ages. However, they used to refinance to make home improvements because common sense back in the day said that your house was not going to just appreciate because of time. Now people were living off the equity that grew in their home over a very short period of time. Millions of people refinanced their homes and lived off that money as income. The concept of owning a home was now flawed (and is to this day). Speculation played a huge roll in the inflation of the housing bubble. However, it was just speculation and people got way in over their heads as homes were overvalued and now 27% of all houses in the US have negative equity with another 24% having 5% equity or less. That means 51% of the homeowners in this country would lose money on their homes after real estate commissions and other fees if they were to sell their houses today.

It used to be you could only get a loan based on credit worthiness. However, after the dot-com bubble and 9/11 Uncle Sam wanted economic growth. By allowing Fannie Mae and Freddie Mac to relieve banks of credit risk they created an environment of moral hazard and conflict of interest.

Here is an excerpt from Peter Schiff's book, Crash Proof 2.0;
Securitization, when housing demand is abnormally high, creates a conflict of interest. On one side are the mortgage originators, the banks and mortgage brokers that represent 80 percent of them. They do the marketing and the paperwork and collect hefty commissions and fees. With no risk of default, they want mortgages. On the other side are mortgage-buying entities that take on the risk, package loans, and issue mortgage-backed securities. They want prime loans that won't default.
The result: collusion between originators and appraisers resulting in faulty documentation, phony appraisals, and lax credit screening practices that have gotten many people in over their heads, caused speculative home buying to be rampant, and discouraged the kind of saving that an economy needs to be productive and healthy.

So much of the appreciation obtained in the housing market was speculative to a fault and has yet to be corrected. People have been basically living off debt for the past decade, refinancing their home. However, the market is tapped out. Housing prices need to come down by some economists estimations as much as 70-80% to show true value. Remember, housing prices have been appreciating by about 4% annually higher then they should be in a free market. However, lowering the values of the housing market by even as much as 20% at this point would crush this country economically. Another reason housing values have been increasing is the federal interest rate. It has been at all time lows, getting lower and lower for pretty much the entire first decade of the 21st century. The interest rate has been artificially low for too long to prop up our unhealthy economy. Anytime there is a potential recession in site, what's the FED's answer? Lower the interest rates! Well, guess what, we have been at 0% since the end of 2008. We have nowhere to go. When interest payments rise, people with the ARM's and other creative financing are going to be way in over their heads increasing the amount of foreclosures on the market to as many as 19 million homes. In addition, when interest rates go up, we all know mortgage payments go up, so the total value of a home new "qualified" buyers will actually qualify for will be much much less - which will also force a correction in home values.

#3 on the list at the beginning was "cash flow". I don't know about you, but I would rather not have a 30 year fixed mortgage on a $250,000 house at 5% for $1,600 per month when the house drops to $100,000-125,00. Now you are stuck in that location with no options.

Where does that leave us now?

What have our leaders done? Well, we can't lower the interest rate anymore, so what should we do? Stimulate the economy! Ah yes, the $847 Billion dollar economic stimulus in 2009 was their answer. Let's "print" money and give it to people to spend so we can keep our economy going. The Obama administration has a national debt higher then all other administrations in the history of the US COMBINED!!! They have increased the national money supply by 120% in the past two years by simply printing monopoly money. You can't increase the cash supply by that amount and expect every dollar to be worth what it was before. Our economy is over inflated and needs a major correction. The US Government is not going to allow this to happen. They will keep printing money to prop us up until inevitably hyperinflation hits us and the US Currency is worth nothing in this world. Back in the 1970's there was a major inflation issue. A couple years after we first got off the Gold Standard, President Carter increased the Cash Supply by 13%. That 13% increase created such an inflation issue that the interest rate needed to be raised to an all-time high of 20% just to get the inflated money off the streets to avoid hyperinflation. What will the interest rates need to be to correct a 120% increase in the cash supply for our country? That doesn't include more potential money they will be printing in the near future...

The fact is, this country has been bankrupt since Richard Nixon got rid of the Gold Standard in 1971 - that's the reason he got rid of it in the first place! In 1944 the United States currency was made the world currency in accordance to the Bretton Woods act. We were the only country in the world with enough gold and silver reserves to back our currency. Therefore, all international disputes would be settled in US dollars. It is because of Bretton Woods that we have held our status as the dominant world power for 70 years. However, when Nixon axed the Gold Standard (an act which was unconstitutional on its own - Article I, section 10 of the US Constitution says, "No state shall make anything but gold and silver coin a tender in payment of debts.) it was the beginning of a drawn out end that has been taking its course over 40 years. The US has been a house of cards since that time, surviving off the manipulative monetary and political policies of the Federal Reserve and allowing inflation to eat us up in the process.

The world is going through a shift right now and at the end, the United States is going to get the boot from the throne. They may be able to save our so-called "to-big-to-fail" corporations by bailing them out with printed money, but in the process, it devalues everything it's countries citizens have worked their entire life for and will ultimately fail itself. The national banking system is essentially saving its peers at the expense of YOU. EVERY paper currency in the history of man-kind has eventually been worth nothing. Because of economic and political policy, along with assistance from the Federal Reserve (our central bank), our historic run of 40 years as a fiat currency has outlasted the longest run of 17 years of longevity any country has lasted with a fiat currency before a major correction had to be made.

Let me end with a quote from Thomas Jefferson (1743-1826):
"I believe that banking institutions are more dangerous than standing armies... If the American people ever allow private banks to control the issue of currency...the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their father conquered".

That quote was made as he eliminated equivalent of the Federal Reserve in 1817. Knowing that it was UNCONSTITUTIONAL to have such an organization.

I know this wasn't the most organized piece of literature, but my head is bouncing all over the place. I tried to stay on point as much as I could... It is virtually impossible to put all my thoughts in here as I wanted without writing a novel, so if you have any questions or feel I was unclear about something, please let me know!

What can you do now? Recommendations to come!!!