A housing crisis germinating for decades

by Armstrong Williams - 02/10/11 4:01 PM ET

When will Bernanke and Congress admit that the housing crisis will continue for
the foreseeable future?

Why? American consumers were encouraged to buy homes whether they could afford
them or not. Homeowners were also lulled into believing that homeownership was
an investment and not a housing expense. The annual costs of homeownership with
mortgage payment, property taxes, insurance, utilities and maintenance can be
more than 10 percent of the value of a home. That means a home has to
appreciate more than 10 percent annually in order for it to be a good
investment. These housing policies significantly contributed to driving up the
prices of residential real estate over the past 20 years. They also contributed
to over-leveraged homeowners and more risky mortgage loans held by banks and
investors.

This reduction in capital causes banks to make fewer loans. Fewer loans mean
potential homeowners cannot buy or refinance homes.

Under the economic laws of supply and demand, the reduced purchasing power of
homebuyers means home prices drop to clear the market. When home prices drop,
the collateral supporting loans drops and banks are required to write down
additional loans and further reduce their capital. Reduced capital results in
even fewer loans. The vicious cycle then gets worse for homeowners and the
financial community by further reducing real-estate prices and liquidity. When
liquidity becomes a problem for financial institutions, the run on the bank
begins and a financial meltdown occurs.

This is how a financial meltdown became the unintended consequence of laudable
housing and financial policies. The fault belongs to Republican and Democratic
politicians, financial regulators, Wall Street and, yes, overextended
homeowners. The seeds of this financial crisis have been germinating for
decades.

Armstrong Williams is on Sirius/XM Power 169, 7-8 p.m. and 4-5 a.m., Monday through Friday. Become a fan on Facebook at www.facebook.com/arightside, and follow him on Twitter at www.twitter.com/arightside.