Tag Archives: housing crisis

It’s not too soon to worry about the US economy. There are things worse than slow growth.

Summary: Here’s another status report on the US economy.. Most economists expect faster growth. Perhaps so, but there are dark spots in the picture. Concerns about unsustainable auto sales, weakening exports, and (the big one) the mini-housing boom rolling over.

Slow Economic Growth

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Expectations run high for the US economy, an acceleration from the 2%/year GDP growth we’ve had since the crash. Surveys record optimism among purchasing managers, builders, and consumers. Manufacturing remains strong, with hints of the long-awaited capital expenditures boom.

There are several engines driving the slow growth of US economy. Large among them are automobile sales, housing (both new and existing home sales), and exports. Export growth might fade as the US dollar rises (decreasing competitiveness of US goods) and the Japanese and European economies slow. Automobile sales are driven by mad long-maturity loans to sub-prime borrowers — a boom almost certain to end badly.

Now perhaps its the turn of housing. Top real estate analyst Mark Hanson has been warning since late last year that the housing markets were rolling over — as described in this post, and at his website. Now a second voice speaks up.

Joshua Pollard was Goldman’s lead US housing analyst from February 2009 to March 2013. He’s written a forecast for the US housing market in the form of a letter to the President. It can be downloaded from his website. He has some disturbing conclusions. It’s deeper and more complex analysis than Hanson’s, but comes to similar conclusions.

Summary

House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession. Since World War II home prices have been tightly correlated to income and mortgage rates (R2 = 96%). Investors/cash purchasers, which make up 50% of home sales, have driven real estate volatility to unrivaled levels in trackable history. As public policy makers debate seminal decisions on “forward guidance” and unconventional monetary stimulus we note that each 1% increase in rates drops home valuations by another 4%; at a 2% fed funds rate, where fed offi­cials and investors expect to be by the end of 2016, the overvaluation equals 20%.

Respectfully, the United States cannot afford another housing driven recession. The facts and correlations – the tenets of probabilities – suggest it is more likely than not that home prices fall 15% in the next three years.

It’s a complex analysis. A top-down view, unlike Hanson’s ground-level perspective. It’s worth reading in full. If Hanson and Pollard are correct, then America might start a downturn from a position of weakness unique since WW2. Now for the bad news…

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Has the Fed blown another housing bubble?

Summary:  Critics and fans alike have speculated about the side-effects of ZIRP and QE (zero-interest rate policy, quantitative easing) run since 2008. One likely effect is blowing asset price bubbles. Today we have an article by Mark Hanson, an expert who believes a new RE bubble has been blown. If so, the effects of it bursting will be different than in 2008. A higher share of mortgages are government-guaranteed; a far smaller share of the non-guaranteed mortgages are subprime. But a bubble represents malinvestment of the nations resources; its bursting destroys wealth — often of people who cannot afford the loss.

Warnings posted on the FM website have received fewer than average hits, despite their good track record. Let’s make this one different. Also, that we need have this discussion — five years after the last RE bubble burst — astonishes me, showing a profound failure to learn by America’s people and leaders.

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Housing Bubble

Note: this article looks reasonable to me, written by an expert with a great record. The subject is important; I recommend that you click through to read the full report.

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Excerpt from “Housing ‘Bubble 2.0′;
Same as ‘Bubble 1.0′, only different actors

By Mark Hanson at his website, 18 December 2013

In this short note, I outline where my research is going at the first of the year supporting ideas about why a “strong economy” is negative for this housing market; houses are far “more expensive” today then from 2003-2007 (i.e., “affordability” much worse); and how everybody has been “fooled by stimulus” and unprecedented monetary policy, yet again.

… This housing market is “resetting” right now; for the third time in 6 years. It might look and feel a little different, but as I detail in this note, it’s not really different this time around.

(1) Overview, Housing Bubble 1.0 vs. Bubble 2.0; Same flicker, different actors

We can all agree that extraordinary monetary policy and excessive speculation can cause price distortions and potential bubbles in almost any asset class. I think we can also agree that in 2006 housing was in a legitimate “bubble”. I contend that this housing market is in a bubble, right here and now.

… In reality, on Main Street – to tens of millions of homeowners – from 2003 to 07 mortgages were much cheaper on a monthly payment basis than ever before in history and ever have been since. This statement is true, even when factoring in the much higher nominal house prices back then, and the recent Fed-induced sub-3.5% that lasted from 2011 through May 2013. This was because the incremental – in fact, the “primary” in many regions around the nation — buyer, refinancer, and HELOC user used “other than” 30-year fixed rate money.

In contrast to the revisionist history being peddled today, the 2003-2007 era was all about introducing extreme leverage-in-finance — incrementally increasing each year — through exotic lending. This made it so people could keep buying more expensive houses and refinancing at higher loan amounts on income that didn’t support it.

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Deflating the housing bubble – an update

Summary:  Since the first post here about the housing crisis in December 2007, it’s been described here as not just a central piece of the economic weakness but a illustration of our political dysfunctionality — our inability to use a crisis to identify structural weaknesses and generate the pressure for their reform. Here’s an update about the core element of the problem: the excess supply of housing built during the bubble.

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Contents

  1. All those empty homes
  2. Absorbing the excess homes
  3. Demographic headwinds
  4. Leave a comment
  5. For More Information

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(1)  All those empty homes

The Federal government has applied a fantastic array of programs to stimulate housing demand. A tax credit for first-time home buyers. Rates have been forced down to absurd levels. The Federal Reserve has purchased almost a trillion dollars of mortgage-backed securities. The Housing Finance Agency has become the nation’s largest subprime lender. And the Federal government in some form backs aprox 90% of all new mortgages (source here).

As a result some of the excess housing stock has been worked off during the past four years — used or destroyed. Today’s Census Housing Vacancy Survey for Q4 of 2012 shows us how far we’ve come. And how much remains.

Percent of housing units vacant (looking at Q4 numbers)

  • Trough: 10.7% in 1993
  • Average 1987 – 2006: 11.5%
  • Peak: 14.5% in 2008 &  2009
  • 2012: 13.5%

The vacancy rate peaked at aprox 3% above the long-term average, and after four years is still 2% above the average. When vacancies drop below the average then prices rise and construction booms — in a free-market economy.

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An important article to read about another example of the fading rule of law in America

Summary:  An important article at Harper’s, one every American should read, about the Mortgage Electronic Registration Systems (MERS), created in 1995 by the banks to circumvent property and mortgage laws in the US.

“What’s happened is  that, almost overnight, we’ve switched from democracy in real-property  recording to oligarchy in real-property recording. There was no court  case behind  this, no statute from Congress or the state legislatures.  It was accomplished in a private corporate decision. The banks just did  it.”
— Christopher Peterson (Prof Law,  U Utah)

Stop Payment! – A Homeowners’ Revolt Against the Banks“, Christopher Ketcham, Harper’s, January 2012 — Open PDF’s are online at Scribd (until it’s taken down). Hat tip to Barry Ritholtz.

Other posts about the housing bubble

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More use of the big lie: shifting the blame for the housing crisis

Summary: Weakness always produces aggression by the strong, and we have chosen to be weak.  In America the mode of conflict is information.  Conservatives have worked long and hard on their information programs (aka propaganda).   Their decades of skillfully conducted work have earned large rewards, advancement of their policies to the benefit our ruling elites.  This is another chapter in a series about the origins of the housing crisis (links to the others appear at the end).

“Facts are stubborn things,” said he, “and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.”
— John Adams argument in defense of the British soldiers accused in the Boston Massacre, 4 December 1770

Propaganda works through many channels. New viewpoints seep into people’s minds through repetition. Large scale lying saturates our mindspace, and keeps the opponents playing defense — the hopeless game of responding to the latest lies. Today we examine a few of a thousand examples seen during 2012.  Other posts in this series:

  1. Facts are an obstacle to the reform of America, 20 October 2011
  2. Our minds are addled, the result of skillful and expensive propaganda, 28 December 2011

Contents

  1. Paul Krugman sets the stage
  2. Joe Nocera dares to explain the big lie
  3. Other posts about the origin of the housing crisis
  4. Other posts about propaganda

(1)  Paul Krugman sets the stage

Joe Nocera Gets Mad“, Paul Krugman, New York Times, 24 December 2011 — Excerpt:

Today Joe once again goes after the Big Lie — the claim that Fannie and Freddie caused the crisis — and drives home the point that the people advancing this story aren’t just wrong but are acting with intent, engaged in deliberate deception …

Basically, Joe is arriving where I’ve been since 2000: what’s going on in the discussion of economic affairs (and other matters, like justifications for war) isn’t just a case where different people look at the same facts but reach different conclusions. Instead, we’re looking at a situation in which one side of the debate just isn’t interested in the truth, in which alleged scholarship is actually just propaganda.

Saying this, of course, gets you declared “shrill”, denounced as partisan; you’re supposed to pretend that we’re having a civilized discussion between people with good intentions. And you’re supposed to match each attack on Republicans with an attack on Democrats, as if the mendacity were equal on both sides. Sorry, but it isn’t. Democrats aren’t angels; they’re human and sometimes corrupt — but they don’t operate a lie machine 24/7 the way modern Republicans do.

(2)  Nocera dares to speak the truth about the big lie

The Big Lie“, Joe Nocera, op-ed in the New York Times, 23 December 2011 — Excerpt:

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Who caused the housing crisis? Why do people not believe all the studies?

Summary:  Among our most serious problems is the success of well-funded engines of propaganda at manipulating public opinion, making effective public policy reforms almost impossible.  Here we examine one example, convincing Americans that the government caused the housing bubble.  This is a follow-up to Facts are an obstacle to the reform of America and Who should we blame for the mortgage crisis?

People become easily led once they are trained to believe appealing lies.   Not just the occasional myths in the belief structure of every political movement, such as the Left’s doomster exaggerations about global warming, and their faith in the phantasm of the Social Security Trust Fund.  Sometimes a movement’s leaders find that their followers have abandoned their skepticism, lost confidence in society’s experts, and become credulous about stories that confirm their biases.

It’s a national tragedy that this has happened to America’s conservatives.  Their leaders investment large sums wisely and patiently, building a structure of plausible-sounding institutions to propagate well-constructed propaganda.  After years of indoctrination, gradually they’ve spun increasingly wilder falsehoods.  From misrepresentations about the adequacy of western europe’s healthcare to outright lies about Obama’s religion and citizenship.

So most discussions about public policy, especially economics, devolve into a debate about interlocking layers of falsehoods, exaggerations, and misrepresentations.  Worse, conservative positions have become solidified — immune to facts.  Obama’s citizenship is the extreme example.  Here we look at another:  the government’s role in the housing bubble and collapse.

Below are links to reports that examine the role of the and the 1977 Community Reinvestment Act (CRA) and Government-sponsored enterprises (GSE).  I am aware of no analytical works coming to conclusions other than those shown.  There are many books and articles blaming the government, mostly anecdotal in nature — and not remotely similar in depth of data and analysis to these studies.  Yet to no effect, as faith-based conservatives hold to comforting stories told them by well-funded engines of disinformation.

Introduction to the subject

(1)  An excellent introduction to the subject: “Did Fannie Cause the Disaster?” Frank Partnoy (Professor of Law and Finance at the U of San Diego) and Jeff Madrick, New York Review of Books, 27 October 2011

(2)  One of the two most extensive studies done today: Report of the Financial Crisis Inquiry Commission, a bi-partisan inquiry, January 2011 — Excerpt:

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A briefing about the foreclosure fraud crisis: its origin and impacts

Summary:  An introduction to the mortgage foreclosure fraud crisis.  At this time its size and importance remain unclear, but its evolution and resolution will tell us much about the state of America’s political and judicial systems.  Esp see the links to more information at the end.

The story is complex, and well covered elsewhere (see links at the end).  This is a brief, with emphasis on the wider implications of the crisis.  In a few words, it could have serious effects.  Probably more than Wall Street expects, but less than mega-crisis predicted by the crowd.

  1. Background
  2. The problem first emerges
  3. Scope
  4. Beneficial effects?
  5. Ill effects?
  6. Possible solutions?
  7. Forecasts
  8. For more information (updated)

(1)  Background

The real estate title system in the US is complex, with safeguards protecting debtor and creditor (for details see this by Barry Ritholz).  It’s also local (rules and data are not national).  This system worked well for generations, but collapsed during the housing boom.

  • Loan volume accelerated, overloading key parts of the system.  Appraisals were often corrupted, as loan originators routed business to compliant appraisers.
  • Massive securitization of mortgages ignored these constraints, and erected a pseudosystem on top of it that cheaply processed the high volume of both mortgage origination and securitization (e.g., the Mortgage Electronic Registration System — a faux version of security clearing corporations; see this explanation).  Securitization also broke the link between the originator and end owner, with many ill consequences.  Among other things, this put great pressures on the servicing firms to lower costs.
  • During the RE boom years recoveries on foreclosed mortgages were zero or positive, which meant a low rate of foreclosures (homes could be sold by the owner rather than default on the mortgage).  So the institutional apparatus for foreclosures atrophied.

The the default bust hit.  Massive flow, overwhelming the system — which was never configured for such an event.  Remember, experts believed home prices never decline for more than a calendar year.  The worst scenario considered by the most experts was flat prices for 3 years.

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