Don't Blame Subprimes; Those Bad Loans Were Just a Response to Our Real Problem
I am sick of everyone blaming the breakdown in the credit and housing markets on subprime loans. Subprime loans were certainly part of the problem, but they are a symptom of a deeper issue. What's happening in the market today is not the bursting of a five-year bubble but the bursting of a 40-year bubble and the failure of the mortgage loan system to meet the needs of the marketplace.</br></br>The truth is that subprime lenders, by responding to demand, were the finger in the dike for the whole housing market. The real problem is affordability and the incongruity between incomes and home pricing.</br></br>Forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.</br></br>But in most major economic centers, typical families haven't been able to buy a home for anything near the national median price for decades. Try to find a single-family home in the D.C. area for the national median of $221,900. In the major markets, there is tremendous dependency on alternatives to the standard 30-year fixed-rate mortgage, which in turn has created a dependency on the least scrupulous mortgage companies and lenders.</br></br>The issue of affordability is not news to the major players in real estate. Each month, lenders, developers and government agencies study the National Association of Realtors' Housing Affordability Index. This index provides a way to track whether housing is becoming more or less affordable for typical households nationwide; it incorporates changes in key variables such as home prices, interest rates and incomes.