A simple explanation of the housing market crash

by James Simpson

So many people go into detailed explanations about the housing market crash and what caused it. The simple truth is, it's our own government that caused the crash, and here's how. A generation or two ago, it only took a single income from a middle-class American to afford to buy a home as they started a family.

Due to the fact that our government had removed the pesky gold standard, the government could just print money instead of develop sound economic policy. As it did this, the value of the dollar decrease as a result (aka inflation) and homes became less affordable.

Lower income people were upset and demanded that the government (you know - the geniuses who broke our sound economic system in the first place) anyway ... they demanded the government do something to make home ownership more affordable. So the brilliant minds in our government decided that rather than fix what they broke in the first place, they would forge ahead down a disastrous path and lower the standards that have always been required for people to afford the mortgage on a home, so they created a law called the Community Reinvestment Act.

Unfortunately, the first iteration of this law still maintained a relatively high threshold for the financial stability of those who wanted to borrow. Using race as a factor rather than the ability to afford a home, this law was modified so that virtually anyone who was breathing could get a home – the era of “no doc” loans and “interest only loans” was born.

Well, when this artificially created ‘buyers market’ occurred, the massive number of home seekers caused an imbalance in the free market. This, in short time, created a bubble where demand inflated the value of homes to twice what the market had naturally set them at only a few years earlier.

As for the actual instrument that popped the bubble? Probably a combination of things – short term low rate loans with balloon payments coming due, a natural and regular market correction, who knows exactly. It really doesn’t matter as the fact is that as soon as the people who wouldn't have been able to buy homes before the CRA had a financial hiccup – foreclosures started. Then a snowball effect occurred resulting in the collapse of the mortgage industry. Home prices sank faster than a lead anchor.

What is truly repulsive is that this “compassionate” maneuver to garner votes by our irresponsible politicians ended up harming the economic underclass by yanking the dream of home ownership from under their feet and ruining their credit.

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