Tag Archives: housing bubble

The view from ten years after the last Big Meltdown

Today’s credit card debt is over a trillion dollars, student loan debt is at 1.5 trillion dollars, there is a bubble in auto loans, and there is even a new housing bubble. But the biggest part of the everything bubble is the government bubble. Federal debt is over 21 trillion dollars and expanding by tens of thousands of dollars per second.

 

September marked a decade since the bursting of the housing bubble, which was followed by the stock market meltdown and the government bailout of the big banks and Wall Street. Last week’s frantic stock market sell-off indicates the failure to learn the lesson of 2008 makes another meltdown inevitable.

In 2001-2002 the Federal Reserve responded to the economic downturn caused by the bursting of the technology bubble by pumping money into the economy. This new money ended up in the housing market. This was because the so-called conservative Bush administration, like the “liberal” Clinton administration before it, was using the Community Reinvestment Act and government-sponsored enterprises Fannie Mae and Freddie Mac to make mortgages available to anyone who wanted one — regardless of income or credit history.

Banks and other lenders eagerly embraced this “ownership society”’ agenda with a “lend first, ask questions when foreclosing” policy. The result was the growth of subprime mortgages, the rush to invest in housing, and millions of Americans finding themselves in homes they could not afford.

When the housing bubble burst, the government should have let the downturn run its course in order to correct the malinvestments made during the phony, Fed-created boom. This may have caused some short-term pain, but it would have ensured the recovery would be based on a solid foundation rather than a bubble of fiat currency.

Of course Congress did exactly the opposite, bailing out Wall Street and the big banks. The Federal Reserve cut interest rates to historic lows and embarked on a desperate attempt to inflate the economy via QE 1, 2, and 3.

Low interest rates and quantitative easing have left the Fed with a dilemma. In order to avoid a return to 1970s-era inflation — or worse, it must raise interest rates and draw down its balance sheet. However, raising rates too much risks popping what financial writer Graham Summers calls the “everything bubble.”

The Fed is unlikely to significantly raise interest rates because doing so would cause large increases in federal government debt interest payments. Instead, the Fed will continue making small increases while moving slowly to unwind its balance sheet, hoping to gradually return to a “normal” monetary policy without bursting the “everything bubble.”

The Fed will be unsuccessful in keeping the everything bubble from exploding. When the bubble bursts, America will experience an economic crisis much greater than the 2008 meltdown or the Great Depression.

This crisis is rooted in the failure to learn the lessons of 2008 and of every other recession since the Fed’s creation: A secretive central bank should not be allowed to manipulate interest rates and distort economic signals regarding market conditions. Such action leads to malinvestment and an explosion of individual, business, and government debt. This may cause a temporary boom, but the boom soon will be followed by a bust. The only way this cycle can be broken without a major crisis is for Congress both to restore people’s right to use the currency of their choice and to audit and then end the Fed.

 

[From an article by Ron Paul, published by LEW ROCKWELL]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

 

 

 

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Suddenly-motivated sellers push US housing bubble into Stage Two

Housing bubbles proceed in fairly predictable stages. Stage One is long and usually slow, at least initially, fueled by excess central bank money creation or foreign demand or some other source of liquidity that encourages large numbers of people to buy houses. At first, sellers remember the peak prices from the previous bubble and aren’t willing to sell at anything less than that (in finance-speak, they’re “anchored” at the highest price they could have gotten last time around). So demand initially outstrips supply, causing home prices to rise, slowly at first and then explosively as increasingly-desperate buyers become willing to pay any price while mortgage lenders, seduced by fat fees and confident that they can securitize and offload any kind of dicey mortgage, lower their standards to include pretty much the whole of society.

Stage One usually ends with price spikes in the hottest markets so extreme that they generate headlines. Like these:

San Diego home prices spike

Home Prices Spike Near Murrieta, SoCal Median Hits Record Level

Orlando Home Prices Spike 10 Percent Annually in April

Another month, another record for Denver home prices

Phase Two of the US housing bubble begins when sellers read these headlines and note that prices are now above what they could have gotten in the last bubble. With the memory of how badly, during the subsequent bust, they’d wished they’d sold at the peak still reasonably fresh, they realize that they’ve been given a second chance to cash out, move to a cheaper, less-frenetic place, and coast on their real estate riches. So they call a realtor and list their house. As do a bunch of their neighbors. Supply, out of the blue, jumps.

That may be what’s happening now:

The housing shortage may be turning, warning of a price bubble

The most competitive, tightest housing market in decades may finally be loosening its grip, and that could put pressure on overheated home prices. The supply of homes for sale in the second quarter of 2018, the all-important spring market, rose at three times the rate of the same period in 2017, according to Trulia, a real estate listing and research company.

The inventory jump was the largest quarterly improvement in three years and could be signaling a slight thaw in today’s housing market. But it is just a start.

“This seasonal inventory jump wasn’t enough to offset the historical year-over-year downward trend that has continued over 14 consecutive quarters,” according to Alexandra Lee, a housing data analyst for Trulia’s economics research team.

The supply of homes for sale is still down 5.3 percent compared with a year ago. Still, all real estate is local, and some markets are seeing greater relief. Thirty of the nation’s 100 largest cities, including New York City, Miami and Los Angeles, now have more supply than a year ago.

Of course, the increase is a double-edged sword. Supplies are increasing because sales are slowing, and sales are slowing because prices are so high. In New York City, the median household must spend 65 percent of its income to buy a home, according to Trulia. In Los Angeles, it takes 59 percent.

“Among these unaffordable metros, San Diego posted the largest inventory growth—22 percent year-over-year,” wrote Lee. “Compare that with the same quarter last year, when that Southern California metro registered a 28 percent inventory decrease.”

Mortgage applications to purchase a newly built home plummeted nearly 9 percent in June compared with June 2017, according to the Mortgage Bankers Association. This suggests lower new home sales going forward.

Stage Two’s deluge of supply sets the table for US housing bubble Stage Three by soaking up the remaining demand and changing the tenor of the market. Deals get done at the asking price instead of way above, then at a little below, then a lot below. Instead of being snapped up the day they’re listed, houses begin to languish on the market for weeks, then months. Would-be sellers, who have already mentally cashed their monster peak-bubble proceeds checks, start to panic. They cut their asking prices preemptively, trying to get ahead of the decline, which causes “comps” to plunge, forcing subsequent sellers to cut even further.

Sales volumes contract, and mortgage bankers and realtors get laid off. Then the last year’s (in retrospect) really crappy mortgages start defaulting, the mortgage-backed bonds that contain their paper plunge in price, and voila, we’re back in 2008.

How far away is the climax of Stage Three? It’s too soon to tell, with just one quarter of trend-reversal data on-hand. But if you’re thinking of selling (or if you own a lot of bank stocks or are thinking of shorting such stocks), now might be a good time to start paying close attention to your local housing market.

 

[From an article published by DOLLAR COLLAPSE.com]

 

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

 

 

 

 

 

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What we know — and think we know — about the late, great housing bubble…

We are constantly learning new stuff about the housing bubble — and some of the new stuff contradicts the old. This is obviously important, because the bubble led to the 2008-2009 financial crisis and Great Recession. What we don’t understand may one day come back to bite us.

There’s a standard and widely shared explanation of what caused the bubble. The villains were greed, dishonesty and (at times) criminality, the story goes. Wall Street, through a maze of mortgage brokers and securitizations, channeled too much money into home buying and building. Credit standards fell. Loan applications often overstated incomes or lacked proper documentation of creditworthiness (so-called no-doc loans).

The poor were the main victims of this campaign. Scholars who studied the geography of mortgage lending found loans skewed toward low-income neighborhoods. Subprime borrowers were plied with too much debt. All this fattened the revenue of Wall Street firms or Fannie Mae and Freddie Mac, the government-sponsored housing finance enterprises. When home prices reached unsustainable levels, the bubble did what bubbles do. It burst.

Now comes a study that rejects or qualifies much of this received wisdom. Conducted by economists Manuel Adelino of Duke University, Antoinette Schoar of the Massachusetts Institute of Technology and Felipe Severino of Dartmouth College, the study — recently published by the National Bureau of Economic Research — reached three central conclusions.

First, mortgage lending wasn’t aimed mainly at the poor. Earlier research studied lending by Zip codes and found sharp growth in poorer neighborhoods. Borrowers were assumed to reflect the average characteristics of residents in these neighborhoods. But the new study examined the actual borrowers and found this wasn’t true. They were much richer than average residents. In 2002, home buyers in these poor neighborhoods had average incomes of $63,000, double the neighborhoods’ average of $31,000.

Bigger home, bigger mortgage.

 Second, borrowers were not saddled with progressively larger mortgage debt burdens. One way of measuring this is the debt-to-income ratio: Someone with a $100,000 mortgage and $50,000 of income has a debt-to-income ratio of 2. In 2002, the mortgage-debt-to-income ratio of the poorest borrowers was 2; in 2006, it was still 2. Ratios for wealthier borrowers also remained stable during the housing boom. The essence of the boom was not that typical debt burdens shot through the roof; it was that more and more people were borrowing.

Third, the bulk of mortgage lending and losses — measured by dollar volume — occurred among middle-class and high-income borrowers. In 2006, the wealthiest 40 percent of borrowers represented 55 percent of new loans and nearly 60 percent of delinquencies (defined as payments at least 90 days overdue) in the next three years.

If these findings hold up to scrutiny by other scholars, they alter our picture of the housing bubble. Specifically, they question the notion that the main engine of the bubble was the abusive peddling of mortgages to the uninformed poor. In 2006, the poorest 30 percent of borrowers accounted for only 17 percent of new mortgage debt. This seems too small to explain the financial crisis that actually happened.

It is not that shoddy, misleading and fraudulent merchandising didn’t occur. It did. But it wasn’t confined to the poor and was caused, at least in part, by a larger delusion that was the bubble’s root source.

During the housing boom, there was a widespread belief that home prices could go in only one direction: up. If this were so, the risks of borrowing and lending against housing were negligible. Home buyers could enjoy spacious new digs as their wealth grew. Lenders were protected. The collateral would always be worth more tomorrow than today. Borrowers who couldn’t make their payments could refinance on better terms or sell.

This mind-set fanned the demand for ever bigger homes, creating a permissive mortgage market that — for some — crossed the line into unethical or illegal behavior. Countless mistakes followed. One example: The Washington Post recently reported that, in the early 2000s, many middle-class black families took out huge mortgages, sometimes of $1 million, to buy homes now worth much less. These are upper-middle-class households, not the poor.

It’s tempting to blame misfortune on someone else’s greed or dishonesty. If Wall Street’s bad behavior was the only problem, the cure would be stricter regulatory policing that would catch dangerous characters and practices before they do too much damage. This seems to be the view of the public and many “experts.”

But the matter is harder if the deeper cause was bubble psychology. It arose from years of economic expansion, beginning in the 1980s, that lulled people into faith in a placid future. They imagined what they wanted: perpetual prosperity. After the brutal Great Recession, this won’t soon repeat itself. But are we now forever insulated from bubble psychology? Extremely doubtful.

[by Robert J. Samuelson, writing for The Washington Post]

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

 

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Obama’s strange choice to direct US mortgage giants…

One of Obama’s most controversial appointees yet was sworn in as director of the Federal Housing Financial Agency last month. Democratic representative Mel Watt now oversees Freddie Mac and Fannie Mae, the two giant government-owned mortgage companies.

Ironically, he was also one of the chief architects of the housing bubble that popped in 2007, sending the US economy and much of the rest of the world into a major recession.

Watt was chairman of the Congressional Black Caucus and is perhaps best known for pushing banks to give risky loans to blacks and other minorities who could not afford them. In the lead-up to the housing bubble, he drafted legislation that would have pushed banks even to give mortgages to people on welfare as long as they could come up with $1000. To placate the banks, which rightly resisted his plan, Watt called on the government to cover any losses incurred by banks by guaranteeing the mortgages.

In October of 2002 Watt announced the public-private partnership called “Pathways to Home Ownership.” This was a plan designed to coerce banks to give mortgages to people even if they could not scrape together a down payment.

Watt’s main approach to the mortgage market always seems to be to get people to buy homes whether they can afford them or not. He worked to expand government mortgage insurance programs, government handouts, and generous tax credits. Even in 2007, when the housing market was imploding from all these subprime loans, Watt encouraged passage of a bill to force Fannie and Freddie to make even more loans to non-creditworthy minorities in inner cities.

Watt fought vehemently against any efforts to reduce subprime lending. He and former Rep. Barney Frank led the successful effort to block the 2003 Fannie and Freddie reform effort.

Watt has already told us, in fact, what his new agenda will include: He STILL wants to reinflate the housing bubble by helping voters to buy houses they cannot afford.

Even before he was confirmed, Watt pledged to stop the planned increases in government-backed mortgage fees — increases that were designed to wean the mortgage market off government subsidies. He also put his name on a letter calling on Fannie and Freddie to forgive the debts of underwater homeowners who speculated on houses at the height of the bubble.

NORM ‘n’ AL Note: Mel Watt sounds like he fits right in around the Obama administration, doesn’t he? Just one more Democrat who thinks the US government, which is already printing money as fast as the presses will run, has all the answers in addition to having all the money. How do we manage to find all these idiots…and then actually get other people to believe in them enough to put them in a position to cause more havoc? Did Mr. Watt learn nothing at all from the past six or seven years?

Mel Watt’s record is public knowledge. So why didn’t Republicans challenge him on it, rather than criticizing his lack of business experience? Here’s one reason: Everybody is afraid, in Washington DC today, of being called a racist. No one wants to be associated with anything that can be twisted or perceived to be against minorities. The race card is a powerful motivator in today’s political climate.

Additionally, Republicans were complicit themselves in the housing bubble and in pushing banks to issue risky loans to people who could not afford them.

But there is a bigger reason.

Big banks and real estate groups are some of the biggest donors to BOTH political parties. As the Center for Responsive Politics points out, players in the financial industry (commercial banks, investment banks, and insurance companies) are three of the top five contributors to Watt’s past election coffers.

That makes Mel Watt just the right man for Wall Street. He said he wants to reinflate housing prices, and he is all for lowering the lending standards again. The big banks couldn’t be happier. They love giving subprime loans to those who can’t afford them, because now they know the government will subsidize them and bail them out when things go wrong.

By appointing Watt as the mortgage market regulator, Obama has signaled that government-backed loans are here to stay.

So brace yourself. Housing Bubble 2.0 appears to be right around the corner.

[from an article published in the current issue of THE TRUMPET]

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As always, posted for your edification and enlightenment by

NORM ‘n’ AL, Minneapolis
normal@usa1usa.com
612.239.0970

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