"That's why the loose credit policies of the Bush years turned into higher home prices in California than in Texas. To be precise, a Los Angeles home averaged 2.6 times the price of a Dallas home in 2001 and 4.7 times in 2005. Even in 2005, the median Dallas home only cost a sane 2.8 times the local annual income, while the median Los Angeles home cost a ridiculous 12.7 times what the median Angeleno was making."
Typically banks make mortgages at the 3 to one ratio or less (I'd prefer a loan in the neighbourhood of 2-1, but its easy to live a cheap lifestyle and have a nicer home as a result). The basis goes that a person with means/income can afford easily such a loan and will pay it off in a reasonable, predictable fashion. It's possible to still get decent loans above this, if one has collateral, other assets, or partners in the loan itself. But given that most people who are first time home buyers do not have much of anything, this isn't the case for most people. Previously noted there was the accompanying comparison of what a rich actor/athlete might pay for a Beverly Hills mansion versus the insanely jacked up value of a middle class home and the variation between one who has assets and one which does not. Those mansions are about 20 times the price of the average home value in LA, but logically the average person makes far, far, far less than the average entertainer, usually well below 20x. Ergo, what were these banks banking on happening? It would seem they somehow expected to make enough money off of higher interest floating loans than would be humanly possible to expect. Somehow I am not surprised when people who have no money can't pay. Why the banks were suggests a root of the problem.
New issue of Econ Journal Watch
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