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What is causing the mortgage crisis?

Adam R.'s picture

Posted October 16, 2008

A lot of people are trying to find a solution for our financial crisis.  It might be several crises by now, actually, as we are seeing problems in derivatives, in insurance, and bond markets, as well as in mortgages.

It is hard to go forward fixing the problem if we cannot figure out how we got to where we are, though.  I like this housing research paper on the roots of the problem on mortgages in the United States.  The main culprits:

  • excess housing supply
  • buyers were allow to purchase homes with no equity, or negative equity
  • easy lending standards
  • lack of regulatory safeguards

This is not a surprise to a lot of people.  The warnings bells, well, they were rung.  Its just a matter of listening.

Oddly, these very problems all existed, for better or worse, in the manufactured housing market at the end of the 90s.  There were too many homes available.  Buyers definitely had negative equity, especially if they got financing on furniture and other add-ons.  Lending was not very tough.  The point was to get people in homes and move on.  And, of course, there were hardly any regulatory safeguards at all.

What is odd is how much of a cautionary tale it appears to have been.  No one drew the lessons from the meltdown that took place in 01 and 02 in manufactured housing.  I guess, again, that people had begun to assume that stick built housing was a magic asset class (like Dutch tulips) that can never go down in value.  Well, it did.

The cautionary tale doesn't portend much for the future of the US economy.  Manufactured housing shipments have never really recovered from the go-go days.  US homebuilders like Hovnavian and K-B Homes don't want to witness that same trajectory on their future.  Credit is very tight, now.  About half of all applications for credit on manufactured housing are denied.