There's more to choose from, but buying a home is going to cost more in financing. Countrywide, the nation's largest mortgage lender is replacing selling its loans as securities with borrowing money from other banks -- 11.5 billion's worth. And that's sent the stock market into a deepening panic. Will the flight to quality benefit housing?

"The stunning flight to quality in financial markets drove Treasury securities rates downward and drove rates on lower-quality debt instruments upward," said David Seiders, chief economist of the National Association of Home Builders in his latest market report. "The net impacts on home mortgage rates differed considerably across market components: rates fell slightly in the FHA/VA/Ginnie Mae market, rose modestly in the prime conventional conforming market (served by Fannie Mae and Freddie Mac) and rose considerably in the nonprime (subprime and Alt-A) and jumbo loan markets. We expect these adjustments to prevail for some time."

In other words, the stock market is crashing because lenders are going back to qualifying and approving borrowers for what they can actually afford.

Have we all lost our minds?

What's so bad about buyers actually being able to afford the homes they're buying?

A lot of blame is being thrown around for the housing mess, but here's what really happened in a nutshell.

1. The Tax Relief Act of 1997 changed everything by turning the one-time, lifetime capital gains exemption into an every two-years windfall for sellers whose homes accrued equity.

2. Suddenly, buyers and sellers had liquidity they had never had before, and that turned into mobility.

3. The average occupancy for homeowners dropped from around 10 years to six years by 2006.

4. The aging baby boomers and status-driven GenXers bought homes and second homes like never before.

5. Interest rates had drifted downward since an all-time high in the early 1980s, making adjustable rate loans increasingly popular.

6. The stock market and tech crash of 2001 showed everyone that there's no place like home to stash your money.

7. A desperate Fed infused cash into banks by lowering short-term interest rates to historical lows.

8. Lenders piled on by creating exotic loans that enabled short-occupancy or non-occupying homeowners even cheaper ways to finance.

9. American mortgage money became so cheap, banking investors couldn't make money, causing the value of the dollar to fall

10. In 2005, the party ended when inflation began to push the Fed into raising short-term interest rates.

11. Lots of not-so-innocent borrowers, who were betting on the come, found their reset mortgages too expensive

12. Those loans should never have been made because the borrower could not afford the reset prices

13. Now, everybody's paying, just so a few publicly-held companies including builders and banks could jack up their stock prices with sales.

14. Overbuilding and overly generous loans go against reasonable fundamentals.

15. Anytime you ignore fundamentals you're going to get hurt.

Let's put this into perspective. With the exception of outright mortgage fraud, most people who took out exotic loans were gambling. They knew it, and so did the markets, regardless of who did a sales number on them. Common sense tells you that when loans are at four percent, they have nowhere to go but up.

Builders who built homes faster than households were being formed and existing housing stock was being torn down also knew they were gambling.

Banks, who loaned the money, did it because they could. Their loans were being bought right and left by investors.

The truth is that the banks, the builders, and the borrowers were all hoping to cash out big.

Now there's a different opportunity, but the game's still the same. New buyers can become the masters of the universe:

• Today's buyers can choose from more homes than during the 2001-2005 boom.
• The NAHB says that housing starts is at the slowest pace since 1997. Maybe it's only coincidence -- that's the year that the Tax Relief Act went into effect. But the upshot is buyers won't have so many new homes competing making what they buy depreciate as fast as a new car being driven off the lot.
• Interest rates will improve for those who meet conventional standards (FHA, Ginnie Mae to Fannie Mae, Freddie Mac.) which should improve sales for existing homes, most of which are in the conventional market range.
• Market volatility shows there's nowhere safe to put your money, so you might as well borrow someone else's while they're still willing to lend.

Published: August 17, 2007

Use of this article without permission is a violation of federal copyright laws.