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The Poor are to Blame for the Housing/Financial Crisis – Not

Much of the focus of the country’s economic problems has been on the burst of the housing market’s bubble and the related credit crisis. While this focus is appropriate, the foreclosure rate has hit a record level and these problems are frequently blamed on “the poor.” However, much of the data shows that this is not the case.

It is often assumed that those with lower income levels are a bad credit risk in the first place. In fact, foreclosure rates are comparable across all income levels. High foreclosure rates are found in many communities across the country. There are, however, significant and surprising exceptions. The current national foreclosure rate is approximately 1 in 450. However, states that are frequently regarded as more affluent, California, Nevada, Arizona and Florida, are all facing foreclosure rates of more than 1 in 200. Conversely, Mississippi, the poorest state in the US, has a statewide rate of approximately 1 in 5,000 and West Virginia, another less affluent state, has a rate of approximately 1 in 20,000.

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While income level has been an easy scapegoat, a more likely culprit is bad subprime mortgages. The subprime mortgages that were so common allowed individuals of all income levels to purchase homes at what amounted to a misleading rate. It wasn’t that these individuals were “poor” rather; they simply were a poor credit risk to begin with due to poor financial management or a lack of credit history. In past markets, these individuals likely wouldn’t have even been given a loan.

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Investors who had hoped to make a profit on flipping a home as well as those who were purchasing a second home and then proceeded to walk away from it also contributed greatly to the housing bubble. There was much speculation and the assumption that home values would continue to appreciate. Had this occurred, the number of potential buyers would have been plentiful as they had been in recent years. However, that is not what happened. The credit market froze and the housing speculators found they were stuck with a house or even multiple houses that they could not sell for a profit. Many of the housing speculators found themselves unable to carry the payments on both their “investment” and their primary home. The speculators faced a decision to ride it out or walk away and many just simply walked away adding one more foreclosure to the tally. And so, the vicious cycle continued.

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Unfortunately, the outlook for 2009 doesn’t appear to be much better than 2008. It is easy to blame what, or who, seems be the obvious cause in situations like our current economic crisis and there certainly is more than enough blame to go around. Hopefully our government, creditors, housing industry and individuals have all learned some valuable lessons in order to prevent a situation like this in the future and to remember that the responsible party isn’t always who it seems.

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When the stock market becomes volatile, like currently, stock options can provide a way to calm the volatility of your stock investing. Investors can use stock options to generate monthly income, covered call investing, for example. Investors can also use stock options to protect their investments, put options and married puts, for example. Investors can think of put options as “stock insurance“. Investors can also use stock options to aid in prolonging paying the tax man by not having to liquidate their positions to prevent further losses.

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[tags] housing, bubble, credit crisis, foreclosure, California, Nevada, Arizona, Florida, Mississippi, West Virginia, subprime, mortgages, credit, risk, speculators, covered call investing, covered call investment strategy, investment strategy, iron condor, poweroptions, stock insurance, stock investing, stock option trading, stock options [/tags]

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