MOLI VIEW™

The impending recession began at home. The credit market is uncertain because the mortgage market is uncertain and the mortgage market is uncertain because home values are uncertain. The stock market is falling because consumer confidence is falling and consumer confidence is falling because home values are falling. Naturally, politicians want to make sure home values stay where they belong.

The question is: Where do they belong? For the past decade, home values have risen as never before, propping up consumer confidence, the stock market, and nearly every other economic indicator. Rather than doubting this rise, pundits rushed to explain it with various theories about the impending retirement of the Baby Boomers, the expansion of the "knowledge economy," and the migration of the "creative class". Eventually, the price of the average American home rose to the point that the average American family couldn't afford it. There's no way that can end well.

This leads to the next question: How did home prices get so high in the first place? In most cases, they inflated as a speculative bubble fueled by cheap credit. As the cost of borrowing money declined, consumers could buy increasingly expensive houses without spending any more money per month. Naturally, this drove up prices. As prices rose, first-time buyers could no longer afford the traditional 20 percent down payment, so they took out mortgages that didn't require it. As prices rose even more, people started feeling confident — overconfident — and started borrowing money from their home equity to spend accordingly.

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