Placing Blame for the Housing Bubble Where it Belongs
If you want to test someone’s political orientation, ask what caused the housing bubble and subsequent crash (yes, we know, there is no housing crash in the Real Bay Area).
Conservatives blame the federal government (although I repeat myself). In this case it’s a confluence of the GSEs, Freddie Mac and Fannie Mae, and both Congress and the Executive for pushing homeownership on people who weren’t ready for the responsibility and couldn’t afford it anyway. In particular, the guilty parties are Barney Frank and poor people.
Liberals blame Wall Street for blowing up the economy by securitizing mortgages and creating more and more leveraged and abstract financial instruments using them. The products required a steady stream of mortgages, so brokers had every incentive to approve everything. There was no risk to them because they weren’t keeping the loans. Also, since Goldman Sachs ultimately shorted the entire market, they’re doubly responsible for talking it up to customers while doing their best to crater it.
A new Federal report points the finger elsewhere. They blame a different kind of speculator.
Federal report: Home flipping drove housing bubble
Associated Press
Posted: 12/13/2011 06:33:47 AM PST, Updated: 12/13/2011 10:31:40 AM PSTLAS VEGAS — A new federal report shows that speculative real estate investors played a larger role than originally thought in driving the housing bubble that led to record foreclosures and sent economies plummeting in Nevada, California, Arizona, Florida and other states.
Researchers with the Federal Reserve Bank of New York found that investors who used low down payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an "undocumented" dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.
More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.
"This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family," the researchers noted.
This report won’t satisfy either of the above groups, because it fails to place the blame where it belongs: on either Big Government, Big Business, or Big Poverty. How could a bunch of onesie twosie speculators drive up home prices as much as they did? That’s like blaming high coffee prices on just Seattle residents.
Please identify and complain about your favorite party to blame for the rest of the country’s housing market imploding while our home prices remain insanely delightfully high robust.
This is an Open Thread.
December 18th, 2011 at 8:16 am
I’ll never forget what the realtor that sold my house in 2005 said to me when I asked him about the housing bubble: “The bubble doesn’t exist if people don’t believe in it”. I just stared at him and didn’t say anything. How can you respond to that kind of stupidity?
He’s still in business, but selling 1/5 the number of homes he once was. I wonder if he believes in the housing bubble now?
I also asked my former financial planner in 2005 if he thought housing prices would keep going up. He replied, “I think housing prices will go up 10% a year forever”.
December 18th, 2011 at 9:08 am
And unlike the Redfin forums, you won’t delete or lock our posts for discussing politics! I believe it’s a combination of Wall Street and Government, what does that make me, Mitt Romney?
December 18th, 2011 at 10:19 am
The person I blame: The guy who suggested it was always cheaper to buy than rent (and the people who believed him). You know, when you have a purchase price to an annual rent ratio of 40 to 25, buying that $1M property is such a great deal over renting the same place for a few bucks per month. Yup, that’s right, it’s cheaper to buy, so if you don’t have any money, you’d better spend $1M to save. Paying rent is just tossing money away…
December 18th, 2011 at 11:52 am
That’s spave, SEA.
I wouldn’t expect anyone in the government to be capable of root cause analysis, but how about the training wheels version, the “5 whys?” Why were speculators able to obtain easy credit to buy multiple houses? Hmm, just one why and we’re already looking elsewhere. Or why was anyone able to buy with zero down?
December 18th, 2011 at 1:30 pm
I have had a number of my comments deleted from Redfin forums. The new moderators are not only going wildly overboard, they won’t even own that they removed anything with the usual [Removed] or [Excessive personal attack] or [Please avoid political discussions] type reminders.
Into the memory hole with you all! Maybe we need a thread on moderation on other sites, with invitations (that will be removed immediately) encouraging them to come here and whine.
Then again, there’s one particular user over there who whines every time I post a link from Burbed because he thinks I’m making a fortune from this site. Redfin usefully removed my response saying I don’t get paid anything from the site because I don’t own it. To be fair, they removed his complaint I was responding to as well.
Yeah, they got this same article over there. Good luck discussing it without any politics.
December 18th, 2011 at 3:21 pm
#4- Root cause of the problem: We have not been spaving enough.
December 18th, 2011 at 4:40 pm
For those of you who actually care what the report says, it’s here.
December 18th, 2011 at 5:33 pm
In the City of Chicago, lenders are really owners:
“Lenders are liable for daily fines of as much as $1,000 if they don’t mow lawns and provide basic maintenance on vacant buildings under an ordinance signed into law by Mayor Rahm Emanuel. Lenders especially opposed the requirement they maintain properties they hadn’t yet taken back through foreclosure.”
You know, since it’s taking lenders so long to foreclose, and some have decided it’s not worth the cost on specific properties, why not just consider lenders to be owners? It’s so much simpler that way. And did the so-called owner ever really own anything?
December 18th, 2011 at 6:43 pm
I blame everyone.
2002:
Barney, Maxine are whining about how everybody has the riiiight to own a hooome and forcing CRA standards.
2004:
DLJ, BofA, Deut (among others) see big profit, especially by hedging their risks with margin, non bank brokers like Ameriquest, and with CDS from AIG.
Billboards sprout like death-cap mushrooms in Tracy, Antioch, Stockton. Homes from the $700,000s! In EPA, prices doubled, tripled. Easy, when everyone could get a loan for $500K that could easily be refinanced.
2008:
Margin calls fail, the government bails the banks out. Americans feel that since they have voted for hope and change that they have done their part.
2010:
Banks don’t want to remove the $800K “asset” from their books and replace it with the $350K in cash it really is worth. County assessors don’t want that either.The loanowner hasn’t made a payment since late 2008, has moved a senior citizen into a room before the NOD, nad is posting on the Hampster Wheel thread.
2011:
Mortgage brokers have gone into life coaching. Loanowners are going into year 4 of no payments.
The banks and realtors are playing the Hampster wheel that made this all possible through the government.
I believe everyone is responsible.
A house isn’t yours until you’ve paid for it.
December 18th, 2011 at 7:11 pm
Banks are walking away too.
60 minutes, on now in Pacific Time.
December 18th, 2011 at 7:26 pm
#8:
The loanowners owned nothing but a loan.
Having watched this 60 Minutes segment with people trying to hang on to a 50 percent LTV? With breast cancer? WTF? Just walk away.
Walk away. Don’t squat. Don’t rip off shit that came with the house. Don’t demand CFK. Don’t profit off renters you stick in there once you know you’re in trouble.
Just walk away. It’s the honorable thing.
No one is doing it that way, but oh well.
December 18th, 2011 at 8:12 pm
I blame Casey Serin.
December 18th, 2011 at 9:11 pm
#5,yeah, madhaus, I see those posts too, thinking you are trying to steal Redfin forum readers for profit. But I get the feeling some of their regulars are a bit new to the whole internet forum thing. Maybe I should drive them over to somewhere really vicious, like the World of Warcraft forums, that will show ‘em.
December 18th, 2011 at 11:40 pm
#13,
No, first you have to hear that “I feel you are ignorant on RE and need to take a class. RE not just a bazaar in Egypt, you know”?
After being talked down to constantly, eventually you find other forums that provide more meaningful information.
What happened to Madhaus is especially infurating. It’s not like like Madhaus was robo-posting links to buy generic Viagra or fake Gucci purses.
His site is on topic and frankly has better information than Redfin forums.
Maybe that’s why he got deleted.
December 19th, 2011 at 12:05 am
I have never had my links back here deleted. What they yanked was the other poster claiming I was getting rich on ads and link-spamming the site, and I replied that I don’t own this site and I’m not paid for writing content, it’s a labor of love. Or maybe it’s a labor of complete disdain, not saying for whom, ya know? For some reason when they pull something they don’t like, they trash anything that replied to it, too.
It’s their site, they can run it as they wish, but not even showing there were missing posts is kind of creepy.
December 19th, 2011 at 9:42 am
#14- What would the class teach them?
Let me guess: There is no risk buying million dollar properties.
December 19th, 2011 at 10:09 am
I didn’t see the 60 minutes program, but my grandmother and banking work very differently. My grandmother suggests that if there is one bad apple in the bushel, then consider the whole bushel to be bad. In banking it is just the opposite: mix a few ‘toxic assets’ with some perfectly good assets, and sell the bundle as all good.
December 19th, 2011 at 11:07 am
#17, that’s not quite right. In banking mix in nothing but toxic assets and the whole bundle is AAA.
December 19th, 2011 at 11:14 am
#18- Now is the right time to buy.
December 19th, 2011 at 4:25 pm
“With Netflix (NASDAQ: NFLX) stock dropping from a high above $300 in June to its closing price on Dec 16 of $69.82, the streets of Los Gatos run so red with blood, employees have to come to work in canoes. It does not take a rocket scientist to know that after a company’s stock price hemorrhages $230 dollars, it is time to buy.”
source
lol
I’m so looking forward to the annual report; NFLX’s fiscal year ends December 31…
December 19th, 2011 at 5:14 pm
Bear argument #3 is pretty funny in its complete ignorance of the marketplace and licensing agreements.
December 19th, 2011 at 5:15 pm
(or rather, the refutation of the argument is meaningless)
December 19th, 2011 at 11:32 pm
Say, #3 and #21,
If one pays cash and has a 2050 time horizon, owning is cheaper than renting.
If a mortgage is required and/or the expected occupancy will end before 2035, perhaps renting is better.
December 20th, 2011 at 9:03 am
“If one pays cash and has a 2050 time horizon, owning is cheaper than renting.”
It appears you’ve made an assumption about not being able to switch. It might be better to rent for the first 5 years, buy and hold for the next 6, sell and rent for the next 10…
From your claims, it’s clear that one should buy around 2035 and hold until at least 2050, since that’s a period where ownership is made favorable. So rent until 2035 and buy and hold until 2050.
The big problem for some people is actually selling before the market goes south. There seems to be a “well if I don’t sell I didn’t lose anything attitude.” That’s fine, if one really expects prices to go higher soon enough, but do you think I feel bad about dumping NFLX before the peak? Do you think I have any hope that the price will go significantly higher versus the risk of gone down? If I did, I’d be going back in near $70, so my ownership position would be about four times as large, for the same cash, or the cost of the same number of shares is about 25%.
I know a guy who wanted to sell back when his property was actually worth something. Guess what I heard, “But my wife, blah, blah, blah.” After the foreclosure he doesn’t have a wife. He should have pushed the sale when the selling prices were high enough to pay the debt off, and maybe they’d still be married.
So often people are unwilling to sell when it is financially favorable. Possibly she didn’t want to be a ‘rentard,’ even if it meant having cash in bank instead of a foreclosure. Maybe she thought she lived in the RBA?
I’ll leave the capital structuring/cost of capital discussion for another day.
December 20th, 2011 at 11:14 am
From Bloomberg Businessweek:
December 8, 2011- “Before the market crashed and home prices tumbled, before federal investigators showed up and hauled away the community records, before her property managers pled guilty for conspiring to rig neighborhood elections, and before her real estate lawyer allegedly tried to commit suicide by overdosing on drugs and setting fire to her home, Wanda Murray thought that buying a condominium in Las Vegas was a pretty good idea.”
source
December 20th, 2011 at 11:58 am
That is an absolutely jaw-droppingly amazing story.
December 20th, 2011 at 2:16 pm
Your federal money at work:
“Neighborhood Stabilization”
“We can’t keep renovating houses that we’re spending five times the amount we can get for them and using federal money,” said Jackson Deputy City Manager Patrick Burtch. “It’s an incredible waste of taxpayer money.”
…
“We have houses that are selling for two to five thousand dollars, like this house right here,” Burtch said, talking about a home being knocked down Tuesday morning. “It has a negative value because the cost of tearing it down outweighs its value.”
But then that razed home must be replaced:
“The city is trying to get HUD approval to tear down homes without replacing them one for one. This program is paid for by federal community block grants.”
So the options are:
1. Use federal money to repair at 5x the end value (i.e. spend $50k to get $10k in added value)
2. Raze and use federal money to replace one for one (and hope for approval to just raze without replacement)
Hopefully the value on any replacement is better than 20 cents on each construction dollar spent.
source
December 21st, 2011 at 5:49 pm
SEA, if one will reach rental parity by 2035 including maintenance, buying can be worth the hassle.
Put another way: Living under/above/next to multiple DHO humping GFs, or getting kicked out of some place because LL wants a relative to live there becomes less hassle-worthy, and more so the later in life that one goes.
December 21st, 2011 at 9:46 pm
#28- Comparing a non-RBA rental to RBA? Not allowed.
We must compare the same property, or what could be considered essentially the same property.
From your post, owning to 2035 is too short, but owning until 2050 is ok. So let’s rent until 2035 (a bad time to own), and buy and hold from 2036 to 2050 (the time when owning is favorable). So rental parity is achieved somewhere between 2035 and 2050.
December 22nd, 2011 at 9:38 am
Remember all the claims that interest rates were going to go higher, so housing would simply cost more for those who purchase in the future?
Today’s news: “Freddie Mac said Thursday that the average on the 30-year home loan fell from 3.94 percent the previous week. The 3.91 percent rate is the lowest average for long-term fixed mortgages on records dating to the 1950s”
Hopefully it does not take too much computational power to figure out that buying at lower prices and lower interest rates results in a lower payment than refinancing that high principal balance.
In other words, when you go buy that property that’s 50% off what others in the neighborhood paid, and you’re financing it at the lowest rates on records dating to the 1950s, your payment is roughly 50% of those who recently refinanced their rather large principal balance.
Which way are rates going next year? Which way are housing prices going next year? Is now the right time to buy?
December 22nd, 2011 at 11:18 am
News from the non-RBA: “Obama said more than 30,000 people have responded to the White House’s “What 40 Dollars a Paycheck Means to American Families” campaign on Twitter, Facebook and whitehouse.gov”
$40 a paycheck? He should be discussing what a million dollar RBA home could do for the average American.