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sossij

Taking Stock.

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Hi all,

Ok, we are all aware that house prices in the US are now falling and there is a huge meltdown in the subprime mortgage area etc. A quick question: can someone briefly summarise why US house prices went into decline in the first place? Was it due simply to over supply or a knock on effect from people going into default on their payments causing repossessions to be sold off at ever decreasing values?

Thanks in advance.

Edited by sossij

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There are several key reasons, and the US is not homogenous. Generally speaking, the fly-over states have seen far less run-up. That being said, the reasons are;

Speculative development being bought by investor speculators who are not buying to occupy or let out, just simply to capture capital growth, so that when the music stopped, alot of idiots were holding alot of supply.

Lax lending standards, with massive proportions of new mortgages not requiring evidence of income leading to high foreclosure levels

"Creative" mortgages involving rolling-up interest, discount starts, which are now resetting to levels which cannot be afforded by the owners

Extensive use of HELOCs (their version of MEW, but more flexible and accessible) which erodes equity, and is expensive due to second lien.

If you want more detail, have a look at www.patrick.net, which is a good resource and has an excellent set of graphs at www.patrick.net/wp which provide a quick and easy understanding of the breadth and scale of the problem

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There are several key reasons, and the US is not homogenous. Generally speaking, the fly-over states have seen far less run-up. That being said, the reasons are;

Speculative development being bought by investor speculators who are not buying to occupy or let out, just simply to capture capital growth, so that when the music stopped, alot of idiots were holding alot of supply.

Lax lending standards, with massive proportions of new mortgages not requiring evidence of income leading to high foreclosure levels

"Creative" mortgages involving rolling-up interest, discount starts, which are now resetting to levels which cannot be afforded by the owners

Extensive use of HELOCs (their version of MEW, but more flexible and accessible) which erodes equity, and is expensive due to second lien.

If you want more detail, have a look at www.patrick.net, which is a good resource and has an excellent set of graphs at www.patrick.net/wp which provide a quick and easy understanding of the breadth and scale of the problem

Thanks loafer, nice and succint - cheers mate!

Edited by sossij

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