The housing market crisis (collapse):

Let’s just decipher for a moment what happened to the housing market. Like the guy who keeps on drinking not know if he is drunk or not, the whole nation went on a credit binge without realizing what will happen in the future. First of all I refuse to believe that people did not know that the bill will come due when they will buy the house.

People bought the houses with less than 5.00 percent interest rate and some times less than two percent with adjustable rate mortgages. Now hear this if I am buying a house and I know that my interest rate will adjust in five years, would I be rational enough to buy the house and stretch myself thin. The problem here is that everybody said that historically the price of the house have not come down. So the people thought what the heck we buy the expensive house, pay less interest now and when the interest rate jumps in a few years we will sell the house for a higher amount. But when this interest rate got adjusted people found out that they did not have enough money in their kitty to pay for the higher rates. So they started to dump their houses.

But if everybody starts to dump their houses there will be more supply than demand and the classic economic situation will come to prevail. There will be an imbalance of supply and demand. Furthermore people kept on refinancing their houses and going on vacations and buying cars like it was just free money. As some economists have pointed out people used their houses as ATM. Instead of investing that money that they took out of house equity, most of the people splurged. Now when they interest rates reset they could not be able to afford the payments which they did not to begin with since the most mortgages were not conventional (with 10 to 20 percent down payment). When this ATM machine stopped, people started to cut back on their purchases but now they were stuck with their houses since the economy went south with the stoppage of American consumer binge and businesses started to cut back and the banks and financial institutions who abetted and were culpable ( I believe) in giving all kinds of loans they could devise started reporting losses by people who could ill afford to pay their mortgages, that’s when this trouble all started.