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President Ray on economy: 'this too shall pass'
Former chair of economics at Ohio State University shares his view on current slump plaguing country, world's markets
Carly Dougher
Issue date: 10/7/08 Section: News
To emphasize this risk, Ray compared mortgage insurance to health insurance. "If they have health insurance on you and me, the likelihood that you and I are going to be sick at the same time, unless there is some type of influenza, is pretty low," Ray said.
"Mortgages are totally different - if the housing market sags as it has, then the likelihood that my mortgage is not what it used to be is very related to what is happening to your mortgage."
At the same time, consumers were taking advantage of the low interest rates and buying/selling houses. As real-estate sales increased, there was a rapid appreciation in housing. During this time, Americans purchased houses that they really could not afford but were able to buy them with low interest loans.
"People felt wealthier because they could see their neighbors' houses going up in value, so they saved less and bought more," Ray said. "Some of them may have spent some of the equity they saw in the housing appreciation."
However, this build up was just a bubble in the housing market, and inevitably it burst.
"As housing prices leveled out and even started to decline there were people who realized that they had bought mortgages for houses that cost them more than the current market of the housing," Ray said. "As the housing market continued to retreat, some people defaulted on their payments, and some people had to go into bankruptcy."
With finances tight, consumerism has slowed. People are no longer as willing to lend money, making difficulties for both businesses and consumers.
As the economy works to recover, Ray said he will not be surprised if the housing market drops 10 or 15 percent below what it should be before it will come back up.
"What history teaches us is that when bubbles occur, prices don't just go down to where they should be, they always go down further," Ray said. "Just as people got too carried away on the upside, they get too scared on the downside."
"Mortgages are totally different - if the housing market sags as it has, then the likelihood that my mortgage is not what it used to be is very related to what is happening to your mortgage."
At the same time, consumers were taking advantage of the low interest rates and buying/selling houses. As real-estate sales increased, there was a rapid appreciation in housing. During this time, Americans purchased houses that they really could not afford but were able to buy them with low interest loans.
"People felt wealthier because they could see their neighbors' houses going up in value, so they saved less and bought more," Ray said. "Some of them may have spent some of the equity they saw in the housing appreciation."
However, this build up was just a bubble in the housing market, and inevitably it burst.
"As housing prices leveled out and even started to decline there were people who realized that they had bought mortgages for houses that cost them more than the current market of the housing," Ray said. "As the housing market continued to retreat, some people defaulted on their payments, and some people had to go into bankruptcy."
With finances tight, consumerism has slowed. People are no longer as willing to lend money, making difficulties for both businesses and consumers.
As the economy works to recover, Ray said he will not be surprised if the housing market drops 10 or 15 percent below what it should be before it will come back up.
"What history teaches us is that when bubbles occur, prices don't just go down to where they should be, they always go down further," Ray said. "Just as people got too carried away on the upside, they get too scared on the downside."
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