Porcupyn's Blog

March 14, 2010

What is wrong with the economy

Filed under: Finance — Porcupyn @ 10:00 pm

Scene 1: At the height of the real estate market:

Prospective Buyer: I want to buy this house; it costs $100,000 to build but is on sale for $200,000. But I have only $5,000 down payment and I don’t know how stable my job is.

Lender (blessed by Wall Street): Don’t you worry. I will put it down that you are making $100,000/year. You don’t need to put any money down, and I can make you an interest only ARM loan that can be easily converted into a Fixed loan. Heck, you can sell the house for $300,000 next year and make $100,000 in one year.
Scene 2: Current real estate market:

Prospective Buyer in Scene 1 is now Prospective Seller.

New Prospective Buyer: I want to buy this house. It costs $150,000 to build, but it is on sale for $100,000. Prospective Seller bought it for $200,000, and is wanting to sell urgently before his loan resets. His lender has approved a Short Sale. I make $100,000/year and have been making it for the last couple of years. I am prepared to put down 20% as a down payment.

Lender (backed by Wall Street, who have been bailed out by the folks on Main Street): Well, as we all know, the property values have been going down recently. We are not sure if the property is going to hold up its value of $100,000 (regardless of how much it costs to build it). I don’t think we can give you a loan unless you come up with $50,000 – banks are refusing to lend in your state.
Scene 3: New Prospective Buyer has given up trying to buy real estate. Prospective Seller is homeless; his lender has foreclosed on his home and has put it up for sale at $75,000 for all-cash offers only.
Guess what is wrong with this picture! First, Wall Street helped the real estate prices spiral out of control, and now, they are helping flush real estate prices down the drain.

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