Why The Housing Boom Busted

It seems like a lot of people don't understand the cause of the housing boom, or why it was a bubble, and that the Derivatives arising from that bubble AREN'T fixed. I want to explain that now.

 

(I started into the subject as a scifi author wanting more realistic settings and motivations. Ending up with heavy studies in macroeconomics and law is deeply hilarious. Anyone who wants a setting that's realistic needs to understand what steers societies, and that's geography, law and cash.) 

1. 40 years ago, a nice house in a nice neighborhood was $17K (ie Marin county or Connecticut). That same house at the height of the housing boom in 2006 was $680K. Since the bubble burst, that house has dropped to merely $320K. Using official inflation figures, that house should be $70K. The 4.5x multiplier shows there is still a housing bubble. Get that? The bubble isn't burst yet. Only halfway. Housing prices need to fall a low more.
2. Economic inertia is a serious issue in macroeconomics. That's where things are valuated higher than they are worth because the owners refuse to sell for the new value because they won't take a loss. The market economy is ignored. They would rather wait and see if the market comes back, perhaps for personal pride. And sometimes it does. The govt effectively paused the crash halfway with the "bailout" in 2007 which only helped banks, not people.
3. How did prices get so high? One piece of the puzzle is that cheap gasoline allowed people to commute to higher wages, exchanging the time and money of the drive for a bigger home in a less convenient location. This allowed these commuters to have families but the economics were very delicate, and could not absorb change. Oil prices rose and they couldn't afford the lifestyle AND the cost of the commute on their current jobs. Some people defaulted. This lowered prices in their neighborhoods, putting other houses worth less than their mortgages, causing others to default their mortgage payments, driving the value of other houses lower. Repeat endlessly. The bubble burst.
4. Oil prices went up because Saudi Arabia shifted from Ghawar (Oil) Field to its newer, dirtier one, and refineries around the world had to construct new infrastructure to handle it. The construction required refinery shutdowns because Heavy Sour Crude corrodes pipes, causing leaks and fires. The shutdowns reduced fuel supply and caused a spike in oil prices. Fears over Iran getting nukes kept it going. Eventually, $3.50/gal for gasoline, or $110/bbl crude, became the New Normal. This higher price was not affordable for those long commuters, which drove mortgage defaults.
5. Many people lost their jobs as sectors of industry contracted, and widespread unemployment destroyed incomes beyond a tipping point value. Cost of plane tickets and loss of incomes meant folks stopped taking vacations from England to Spain, or Germany to Greece. Spain and Greece are both vacation driven tourist economies with maladaptive cultures and strategies preventing adaptation to reality (Greeks only speak Greek because Greek is BEST, according to Greeks without jobs). They collapsed.
6. Italy, run by billionaire thief Prime Minister Berlusconi (serving the rest of his life in prison), is bankrupt and following closely in the failures of its neighbors.
7. Southern Europe is a sunny place to be poor, and all investments there failed. The Northern Bankers, who invested there very unwisely in their arrogance and greed, are looking at losing everything, so Chancellor Merkel, whose election was bought and paid for by those very bankers (detailed in German news journals), is very firm in insisting that Greece be sold off to Germany, almost like an invasion, and suggested German NATO peacekeeping troops be sent to insure Greek territory was turned over to the new German owners without damage. Greece responded to this suggestion with riots. Merkel is not welcome in the country anymore.
8. In the Old Days, before Social Security and Public Pensions, when you stopped working you'd better have put away a lot of money or had a bunch of kids such that one of them would give you a comfy room and feed you in exchange for looking after grandkids and doing laundry or some other retirement makework. Then came The Great Society, which was funded by payroll taxes on the youth to pay for the retiring elderly. It was not well thought out and Social Security has been raided by crooks in govt ever since. There is no fund. It fits the definition of a Ponzi Scheme. When the Baby Boom tapered off, the math on the next generation went from one worker taxed for 2 retirees to one worker taxed for 16 retirees. The taxes would go from 11% of gross income to 83% of gross income. Result being, once the Boomers retire, workers will only keep $17 of every $100 earned. Most people won't slave away for that. Most get illegal untaxed jobs or just plain refuse to work. Considering that this dangerous hypothesis has become the vicious reality of all jobs going to Minimum Wage? It explains why 92 million Americans who COULD and WOULD work are unemployed in this "recovery". Another 24 million are part time. And another 28 million are officially "unemployed". That's slightly more than half the population, about 58%. A jobless recovery is not a recovery. It is a collapse. This is what happens before revolutions. 
9. The Derivatives mess is a rather sick creation. When mortgage lenders realized they were giving large sums of money to people with no jobs and no income (Ninjas) and no money down, to buy houses on speculation in hopes the value would rise enough to sell them later for profit, they also learned many of those houses were in stupid places. When the price of oil rose enough that homeowners couldn't afford the mortgage and their commuting costs at the same time, defaults happened. The mortgage lenders bundled mortgages together to spread the risk, and sold future-leases on the values of those mortgages, which were further blended with others, spreading the risk to others. They call this "Contagion". The resulting risk eventually enveloped all mortgage funds, which we call Mortgage Derivative Funds, or Derivatives.
10. When the number of mortgage defaults got big enough to be daily story, in 2007, the govt decided to "fix it" with a bailout. This bailout was a pony show. It was not real. It was all about restoring confidence through illusion, about denying reality. The debt of those properties dropping in value is still there. The debt was NOT paid off. The Derivatives debt still exists. It is still growing. Allowing banks to not complete the evictions and not show the losses on their books, and spread the cost was simple (criminal) dishonesty. It is the govt telling them to lie to us for everybody's good, in hopes that the country will dig itself out. This is corruption. The dollar will collapse. The debt from Derivatives is the largest on earth, but it is hard to measure, and that unquotable value is its best protection from being mentioned by major news outlets during the current president's term. The next president will have to deal with it. We distract with nonsense while it grows.
11. Houses are still massively overvalued when they SHOULD meet the market. And when everybody is making minimum wage, new houses should be sold to everyone with a day job because they are the market. Those houses should have a mortgage about 1/3 of gross income. If your gross income is minimum wage, that means the mortgage should be very small, no more than 30 years term and probably 20, and that means the house price should be too. Like $50K. Our parents got way more than minimum wage. Wages have fallen in the modern age. House prices should too. Without that, there are no traditional families and without the basic unit of our civilization, there is no civilization for long. House prices must meet the market or our nation is dead, economic and social collapse will overtake it, and our currency and borders cease to exist. It really is that serious.
12. There is now popular support for the dissolution of the EU in the latest elections this week, a serious rebellion because it would end support of the Euro and potentially return trade barriers, which seems to be no bad thing for European citizens, since like Americans, their jobs got outsourced to foreign workers under the claim that locals won't do the job for the wage they are willing to pay. Greed at work.
13. Considering that real inflation has been happening for some time now, it may not be avoidable. With the debts associated with bad loans by sleazy German bankers, and idiots from banks in France and UK investing in those German banks, the entire EU is a house of cards. Greece wasn't allowed to Default, though they wanted to. They even printed new money, currently stored in warehouses. If the Greeks overturn the EU plan at any point, they withdraw and default on their debts, which opens the doors for Italy and Spain to withdraw as well. Which then bankrupts Germany, which then bankrupts France and the UK and the USA, all heavily invested in those banks, buying each other's treasury bills, all of which are backed by nothing but threats of violence. And that's no way to run an economy. It is a house of cards. It will fail.
14. Apply similar pressures to the USA. Too much unemployment, too much refusal by crooked corporations for max profit over the corpses of anybody handy and closing borders, getting a new currency, trade barriers, and renegotiated contracts and tax liabilities is needed. Regulations help corporations because above a certain size they can afford to hire specialists to comply, while smaller competitors cannot and get closed by accidentally violating the law. It is in the best interests of the big corporations to crush their competition, and smaller and more agile firms can't deal with the regulations and laws. The situation is out of balance. We have to start over.
15. Forcing banks to complete mortgage defaults gets those properties into their debt books, which makes them look bad due to the accumulated debts. They are then motivated to sell the homes at the market price. This drives down the value of neighboring homes, causing more of them to go underwater (mortgage worth more than the house is), causing more owners to choose to default rather than pay uselessly. This accelerates abandonment and you get Brentwood or Detroit or Riverside, long stretches of empty homes with default-sale signs out front. The upside is, once the housing market bottoms out, people can buy them for what they are really worth, and lower priced homes can have a lot more of a down payment applied from savings, and also allows much shorter terms until payoff. Instead of 30 years, 15 or 10 year mortgages means you only need to work that long before your living expenses drop to food and taxes. People can retire earlier if their mortgage is paid off earlier. This is valuable.
16. The reason this won't happen is because the Baby Boomers have most of their retirement savings tied up in the inflated house value, and they won't sell for less than $350K for a house currently worth $320K in a market that nobody with a job can afford anymore and would be a fool to buy because the inflation adjusted value is $80K. And if you wait long enough, either it will go to that or inflation will get so bad that the dollar collapses anyway. The Boomers are delusional. They have crapped in the nest one time too many and are hip deep in sh17.

So that's the short version of why our economy won't recover. The current president halted a correction that would have fixed what was wrong, and we can't invest in homes until their value matches reality again.