Housing prices are falling and will continue to decline as cash-strapped homeowners deleverage. A good number of homeowners bought houses that were well beyond their means. Now, with ongoing high unemployment and stagnant wages, they have no prospects of increasing their incomes and keeping up their mortgage payments. Houses were and are over-valued, and there is an extreme surplus. The Federal Reserve appears oblivious to the fact that the real estate cycle has not yet reached bottom.
Homeowners across the United States face similar issues; they bought houses with an extreme amount of leverage, or debt. Many bought houses at the peak of the real estate bubble, when prices were highest, and are still feeling the repercussions of the crash of prices in 2008. Although house prices have risen modestly, more recently they are headed back down. How are you supposed to sell your house when the value of your house is below what you owe in debt? Hundreds of thousands of homeowners have no prospect of selling and are slaves to their debt, largely thanks to low-interest rates.
As appealing as low interest rates sound, in an economy with over-priced homes they are extremely dangerous. Ridiculously low interest rates, no-down-payment loans and other recently invented loan instruments succeeded in luring unsuspecting buyers into mortgages they could not afford but which generated profits for banks, mortgage brokers and securities brokers. The result: Waves of defaults that triggered the Global Financial Crisis and continue to cripple the economy.
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