Before I get to the graphs, let me first cover the credit bubble and how it related to home prices rising:
- Low interest rates, lax lending standards, and credit market innovations helped fuel a boom in credit growth and subsequently home prices.
- Speculators got more and more involved, further pushing up prices to unsustainable levels by buying more houses.
- Builders started building more and more houses because when prices are high so are revenues.
- At these unsustainable levels, individuals and companies took out more and more loans that were exotic, probably unaffordable, and maybe dependent on homes increasing in value.
- Given home prices were unsustainable, as soon as credit was removed from the system market prices started to crash.
So now we have a situation where people who bought homes at a high price can no longer afford or want to pay their mortgage (not to mention high unemployment):
This results in increased foreclosures. Foreclosures prices are usually pretty low as the bank wants to unload those houses off their balance sheet. Thus, you have a situation where there is a large supply of existing homes on the market at depressed prices, which new homes can’t compete with:
In short, until forecloses come down more and the overhang of existing housing is cleared, we probably won’t see too many new homes built.
Go to Calculated Risk for good graphs like the ones above.
