Ripples In A Pond

Just like the pebble tossed in a pond, a seemingly small event can have catastrophic consequences. The small ripple created when the pebble hits the water can be a wave by the time it reaches the opposite shore. Our current economic state of affairs can be traced back to a few small ripples as well.

In the beginning a handful of investors were turning some nice profits in real estate. Other people took notice and before long you had a lot of amateurs entering the market because it looked so easy. At first they were making money and the ripples grew larger. More and more wanna-be investors jumped on the bandwagon. The market was off and running.

The lenders took notice and sought out opportunities to lend money and drive their profits higher. The easy money resulted in a slew of creative mortgage products. In addition to the typical adjustable rate loans (ARMs), there were interest-only loans and Pay-Option ARM loans. The latter allowed for negative amortization, which resulted in a growing loan balance. Not only were there a bevy of new products, the qualifying was easier than ever. Can’t qualify? No problem we’ll just give you a “liar loan” and you’re on your way. No down payment? No problem, we’ll do zero down!

The Bubble Bursts

Hindsight being 20/20, we can see that this situation was unsustainable. When prices stopped soaring into the stratosphere investors could not refinance their way out of the ARM loans before they adjusted. The combination of loan values being higher than property value and payments reaching unaffordable levels caused borrowers to fall into foreclosure. The ripple has grown into a wave of bank-owned properties (REO) flooding the market. All of these REOs have caused the market to fall even further as banks are forced to slash prices in order to sell them. .

The Fed To The Rescue

One of the all-time great lies is “I’m from the Government and I’m here to help.” In an effort to stimulate the economy and slow down the growth of foreclosures, the Federal Reserve has drastically reduced interest rates. While this doesn’t directly impact mortgage rates, it does affect the indexes that are used to calculate the adjustment of ARM loans. While the rate of growth in the number of foreclosures has slowed, there are other consequences of the rate cuts.

You may have notice a “slight” increase in the price of gasoline. A large portion of this price increase can be attributed to the falling value of the dollar in relation to other currencies around the world. When the dollar falls, the cost of imported goods rises. One of our largest imports is oil. The ripple caused by the interest rate cuts has led, in part, to the dramatic rise in the price of gas.

The increase in fuel cost has its own ripple effect. Have you been to the grocery store lately? Rising fuel costs have led to increased transportation costs. Since the majority of goods in this country move by truck, the cost of just about everything is impacted. There has also been an increase in the production of ethanol for use as fuel. This has caused the price of grain to rise, yet another ripple in the pond.

The Tsunami

The small pebbles have turned into a tidal wave of trouble for our economy. Being an election year, everyone is so concerned with pointing fingers and looking for someone to blame. The truth is that we all played a part in the drama. It is also up to us to play a role in the recovery. Our economy is very resilient and our people have a way of bouncing back. Let’s do our part by getting our own financial house in order and making sound financial decisions.

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a nail.

Benjamin Franklin (In Poor Richard’s Almanac)

About Author


  1. KC Investments on

    I get mad when I go to the grocery store for my family of 6 because the falling dollar has led to higher costs. And why? To protect those that were not making sound financial decisions. Spreading the burden to everyone instead of using “natural selection” to punish the folks who were taking the chances doesn’t make any sense to me. I could go deeper here but then people always say I’m insensitve or don’t understand economic policy.

    I understand plenty. And those that preached and practiced fiscal conservancy are helping to pay those that ran wild.

  2. Mark McGlothlin on

    Well said Richard. Your closing paragraph is particularly good – I agree that the economy has proved amazingly resilient historically. Making thoughtful decisions today based on careful due diligence and research is more important than ever. Those with their house in order will find some of the greatest real estate opportunities in a lifetime to come.

  3. Wendy Polisi on

    This is a great article and a good reminder to us all! It is a great time for oportunity for those who can take advantage of it but the key is making smart decisions and not having a get rich quick strategy!

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here