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October 22, 2007
Housing Bubble Bursts,
So Maybe Growth Isn’t Always Good
This week, the housing mortgage arm of GMAC announced its intentions to
lay off about 25 percent of its workforce, a reflection of the hard
times for the housing industry. The announcement came shortly after
another piece of news related to the downturn that prompted the layoff –
housing construction in September had hit a 14-year low.
That a downturn would happen was inevitable. Everything runs hot and
cold from time to time. But the pop of the housing bubble – as so many
bubbles before it – was as predictable as the rising sun. The signs were
there, and as is typical, ignored.
The most obvious were the new, creative mortgages designed to put people
in homes they couldn’t afford. It was only a matter of time before the
music ended, and those holding the potato would be those least able to
stand the heat. As a result, not only did GMAC’s mortgage unit get
whacked but so did the families who found themselves confronted by
Those people bear some of the responsibility for the mess in which they
find themselves today. It’s unwise to make a major investment without
first researching what you’re getting into. The same can be same of the
lenders, who knew that there are reasons people who make no money and
have streaky credit histories don’t typically get mortgages for
But, the real question isn’t whether the bursting housing bubble could
be avoided, or how far the blame spreads. The real question is whether
this isn’t a sign that our basic assumptions about economy – more, more,
more is better, better, better – are based more on fantasy than on
The real reason for the housing bubble isn’t that a bunch of suckers got
tricked into signing mortgages they had no chance of ever seeing
through. It was because too many homes were built.
Most people would understand this as basic economics – too few customers
or too much product either means falling prices (and profits) or finding
But, there is another, underlying truth there – we didn’t need the
houses. The reason the housing bubble was just that is that we already
had plenty of housing. For those who couldn’t afford big houses, there
were small houses. For those who couldn’t afford small houses, there
were apartments, and building McMansions had nothing to do with
homelessness. The housing market became as hot as it did only because
they found new and creative (and stupid) ways to fill the new houses. It
was doomed to failure from the beginning.
That failure has unfortunately resulted in soaring foreclosures, slashes
in the workforce of the home lending industry and tightened restrictions
on who banks will lend money to buy homes.
This means an apparent shrinkage in the pool of customers the industry
can tap. Under our system, there are some people who will simply never
have the means to own their own homes. They are poor, which means they
are also bigger lending risks. That means any loan they get will always
be accompanied by a higher interest rate, which itself increases the
odds that they’ll eventually find themselves unable to meet their
obligations. So the size of the customer base isn’t so much shrinking as
it is aligning itself with reality.
The problem is that houses built, unsold and unoccupied remain built,
unsold and unoccupied. It doesn’t mean that there are more houses than
there are people, but that there are more houses than there are people
who can afford them. It’s like having a luxury car lot in a town peopled
entirely by fast food service workers too poor to afford cars. In this
case, however, the car lot happens to be spread all over the countryside
on former farmland and in former forests and fields.
It can be expected that news about slow housing construction was
supposed to be taken as bad. Downturn as a word is never used as a
positive. It means a slow in economic activity, and in a sector that in
the last several years has been red hot. But there is desire and there
is reality. In this case, it’s the desire for growth meeting the reality
that building a house on a shaky foundation will eventually lead to the
rafters coming down around your ears.
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