Housing Bubble Going Down, and will Drag the Economy Down with It (210 words)
The decline of the housing bubble will have major effects on Americans spending habits in general. Since general savings rates have been going down for a long time, what will replace the housing bubble? Essentially nothing, it is irreplaceable. Housing prices, until the mid-1990s generally followed the Consumer Price Index. Then huge amounts of cheap credit were pumped into the housing market. This was done by the Federal Reserve through federally sponsored companies like Fannie Mae and Freddie Mac. They in turn bought the mortgage paper that was sold by the local bank.
Fannie Mae, etc. repackaged the mortgages as Mortgage Backed Securities (MBSs) and sold them all over the world. Homeowners were able to refinance their home at a lower mortgage rate and get extra cash. They could even refinance with cash back, turning their home into a giant ATM machine. With the decline in real estate prices, this will no longer be possible, since this is based in huge increases in home equity. This will affect consumer spending, driving it downward. Establishment commentators at Forbes Magazine, Business Week, Barrons, etc. have been looking for a replacement bubble, but haven’t been able to find it.
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