There are signs that we are in recovery after two years of recession and a lot of moments when we thought the worse case scenario became a reality. How did it happened that we were in the brink of a global depression and if not for the innovative and creative actions set by the Federal Reserve in line with the Department of the Treasury, we were saved from such a catastrophe. Looking at its main cause, the housing sector, like anything else, it all started with good intentions. Wishing that everyone could afford housing, guidelines were made in the Clinton Administration to facilitate housing loans for those who could not afford to obtain loans under the normal circumstances. This led to a housing boom from the rapid rise of construction of homes, to banks and other facilities lending without any sense of collateral and security. This also led to the rise in real estate prices. Since no collateral was needed, there were a lot of speculators, and those who purchased 2nd, 3rd and even 4th homes for investment purposes, and were using floating interest rates to pay off their mortgages. This scenario would have been alright if the floating interest rates were single digits maybe in the 4 to 7% interest, with the latter being a bit high but still controllable. And financial institutions were buying up these IOU notes from housing financial companies and then combining such notes to use as collateral for other investments. During that time, the current stock prices were on the rise and things were robust. Something had to give and it did.
When default payments started happening due in part to housing speculators not seeing their houses rented or sold, then the snowball effect had begun. Banks began to see the trend of default payments and started calling on the loans, thereby increasing the percentage of interest payment on floats. And when banks started defaulting on their obligations, this worried investment houses who had used such instruments as collateral. Like a house of cards, things came tumbling down. It had to be the government that had to bail out some of these companies, but there was a price to be paid and perhaps our grandchildren’s grandchildren will be still paying off the loans needed to keep our economy alive.
These days, recovery is on the way. People are starting to invest in the stock market as the current stock prices show good activity and volume trading is almost close to normal sizes. In a twist of fate, if you are liquid, the housing sector is now a good place to invest since homes and property are perhaps undervalued and if you are patient, you will make money. In every crisis, as one Chinese philosopher stated rightly so, there is opportunity.