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.
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.
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.
The advent and increasingly exotic nature of mortgage loans from 2003 to 2007 enabled the greatest “greater fool” trade of all time. Despite “rates being higher” from 2003 to 2007, everybody always earned the amount necessary to qualify for a loan; it turned virtually every homeowner in America into a Real Estate speculator driving the market with reckless abandon. Then, in 2008, when all the high-leverage loans went away at the same time, housing “reset” to what the fundamental, “organic” demand cohort could really “afford” using 30-year fixed rate, fully-amortizing financing and when made to prove their income and assets.
Today, those looking at 2006 house prices as a benchmark for where house prices are headed — or assuming house prices are ‘safe’ or not back in a ‘bubble’ because they haven’t regained those prices – are looking at the wrong thing. That’s because house prices never can get back there unless employment surges and incomes rise double-digit percentage points with a respectable number in front. Or, unless all the exotic, high-leverage, no documentation loans come back.
In other words, for house prices to get back where they once were, something has to be introduced that brings back the leverage-in-finance lost when exotic loans went away and everybody suddenly went from earning $20k a month to their real incomes when qualify for a mortgage loan. …
(4B) The Smoking Gun
The red line in the chart represents the mortgage payment needed for the median priced CA house (black bar) from 2000 to 2013. This chart assumes that from 2003 to 2007 the primary purchase/refi/price pusher cohort used the popular loan programs of the time, “other than” 30-year fixed-rate fully-documented loans. …
About the author
Mark Hanson is a seasoned mortgage banking veteran that specialized in wholesale and correspondent sales, operations management, and bringing financial institutions into new lending markets. His primary focus was on residential mortgages working closely with most mortgage and Wall Street investors.
Since 2006, he has worked as an independent real estate, finance, and related sectors analyst, consultant, strategist, and risk ‘enlightener’ to the financial services sector with a focus on housing, mortgage, and mortgage credit.
… His years of real-life experience, extensive on-the-ground research, and passion for real estate, mortgage & related sector data mining and aggregation has led to an extraordinarily large number of early and accurate predictions about the ‘great mortgage and housing meltdown’ and company-specific events.
From his About Page.
For More Information
Other posts about the housing bubble:
- Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
- “Idiots Fiddle While Rome Burns” – comforting and facile rhetoric, 24 July 2008
- A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
- Knocking down houses in order to save the village, 20 October 2008
- Destroying houses in order to boost home prices, 16 December 2008
- The housing crisis allows America to look in the mirror. What do we see?, 9 March 2009
- Another step to solving the housing crisis: downsize cities by destroying neighborhoods, 2 April 2009
- Cutting through the fog to clearly understand the housing crisis, 8 July 2010
- Housing Update – dynamite to blast us out of our lethargy?, 27 July 2010
- Deflating the housing bubble – an update, 30 January 2013