Before I go to explanation of why housing prices sky rocketed from 2000 to 2006, I think it’s a good idea to give a little history of what the housing market or the mortgage market used to be like before things got out of control. So let’s go back to the late 70s, maybe the mid 70s actually. I remember my parents they bought a house we lived in New Orleans. And the house, if I remember correctly, it cost roughly $60,000. And back then to buy a house and actually for while until recently, you got to put 25% down. So 25% of $60,000 is the fourth of, $15,000 down. So you have to save up $15,000 and then you’re going to take on to mortgage on $45,000, right. $45,000 you’re going to borrow. I forgot the exact interest rate then but I'm just going to throw out a number for constructive purposes. Let’s say the interest rate back then, they were higher, they were like 9% I think. So 9% on 45,000, how much interest am I going to pay, so I'm going to pay a little over $4,000 a year in interest. Or if I divide it by 12, about $340 a month in interest.
And I remember at the time, we actually moved out of our house and we rented out because we needed cash. And we rented out that exact same house, this was in the late 70s or early 80s, we rented out that exact same house for $900. The rent was $900. So this raise I guess a couple of questions. First of all, the big question is why did those people who rented our house, I mean they paid $900 a month. They must have a good income for that time. Why were they willing to pay rent when they could have bought a house with the mortgage would have been, you know a bit interest plus a little principal, it would have been no more than $400 a month. So why would you just throw away, this is the classic, rent versus bargain. Why would you throw away $900 where you can actually build equity being $400 a month for the exact same place. And you can think about that a little bit.
But there's a bunch of reasons. What was necessary to buy a house that well one, you needed a $15,000 down payment. Maybe this people, they have really good cash flow every month but it just never had the circumstances or maybe even the discipline to save up $15,000. You also needed a very steady job. So you needed, this is the down payment, this is one thing. You also need a steady job. Maybe the people who are renting had, they were working odd jobs or they didn’t have a steady income although I doubt it. I don’t think we would have actually leased the house to them had that the case. But they probably had that. And so the last thing you need to get a mortgage, you needed a good credit. And maybe these people didn’t had that. Maybe they just they didn’t pay some bills from the past and they couldn’t find a bank those willing to give them a loan despite having a steady job and a $15,000 down.
If you had to ask me, I think the biggest barrier for this family at that time was probably the $15,000 down payment. And frankly, they probably had trouble saving $15,000 because they're paying, they were busy paying $900 a rent. So that was a circumstance throughout actually most of modern history. That you had this barrier towards buying a house that it did make sense that the conventional wisdom that it is better to buy the rent held. Its just everyone knew that but a lot of people just couldn’t buy even though they wanted to because they didn’t have a down payment, they didn’t have a steady job, or they didn’t have a good credit. That was a circumstance and that lasted for some time.
What happened in the early 2000 and it actually happened in California, the mid 90s but it got more and more I guess we could say flagrant as we went to the decade is that people start lowering these standards. And I’ll do a whole other video on possibly why those standards were lowered. But let say that in 1980, you needed 25% down. Let me just switch colors, that color is kind of ugly. You needed a steady job and you needed a 700 credit score. And that was true from 1980 to lets say 2000. I'm exaggerating a bit. But this is just to give you the broad sense of what actually happened.
Let’s say in 2001 and I’ll explain later why this might have happened, the standards were lowered. That if you wanted to buy a house, all of a sudden, you can actually find someone who’s willing to give you a house for 10% down, maybe kind of steady job, maybe you just need a job, and maybe you had a 600 credit rating. So what happens when the standards on the mortgage go from this to this? Let’s go back to this people who used to rent that house from us for $900. Maybe they didn’t have $15,000 right that would have 25% down payment but maybe back then they had 10%, maybe they had $6,000. They just couldn’t get up to $15,000 in savings. So back when they were doing this, back in the 80s, if the standards got a little bit freer like they did in the early 2000s, those people could have bought a house. They would have said, men we don’t have to rent anymore. We saved up a 10% down payment, its got a little easier, our job, now this requirement are credit now this requirement, now we can go buy that house. So that would have increased the aggregate demand for housing even if no one’s income increased, even if the population did increase. All of a sudden there's a new person who could get financing to buy a house.
And then if we go to 2003, they say you know what, you don’t need any down payment, no down, no money down. So you can imagine, there's a whole set of people who maybe had a decent income but they couldn’t save any money. Now all of a sudden there's no down payment barrier buying a house. Maybe you still needed a job and maybe you just need a 500 credit. So all of a sudden, without people’s incomes going up, without more jobs being available, without the population increase, there were more people who could get financing or more people who could build up homes. And this situation actually got pretty bad.
By 2004, 2005, and this isn’t exact, but it give you a sense of what happened. By 2004, 2005, you had a situation where they had this steady income, they had these things called liar loans, maybe I’ll do a video on each of this. But these were essentially no down payment. If you had a job, you could kind of make it up. You said I have job they wouldn’t validate it, these were stated income then you could just say what you made. So even though the mortgage might require income of $10,000 a month and your income is only $2,000 a month, you could say your income is $10,000 a month. So stated income, no down, maybe a job, it didn’t even do a credit check.
So what happened from 2000 to 2004 is that credit just got easier and easier and easier. And every time credit got easier, there were more people who despite the fact they weren’t making anymore money, they were able to get financing. And so the pool of people who were able to bid on homes or the demand for homes, because now there was this financing, became larger and larger. And that’s what increased the prices of homes. And now you know the obvious question is why did this happen? First of all, why did they get easier in 2001 get easier and easier in 2004 and why did they get this unbelievable absurd level where by 2004, 2005 you hear stories especially in California, Florida, people who are making maybe $40,000 a year, they were able to buy a houses with no money down. Some of these people were migrant laborers and they were able to buy houses for million dollars.
And so the next video, I will tell you why it happened. Why were people willing to give their cash to people to buy a house that had a very low likelihood of getting paid back and for a house that had a very low likelihood of being able to retain its value. I’ll see you in the next video.
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