The Housing Bubble

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It’s Friday desk clearing time for this blogger. “Herbert Crockett, a retired human resources director, said he bought a $904,000 hotel-condominium suite at the Trump International Hotel & Tower, Toronto, attracted by a presentation that showed he could make as much as 27% a year on his investment. Crockett is now suing Trump and the hotel’s developers for $2.6-million, and says he’s losing $7,000 a month because the unit he rents out is occupied on average about a quarter of the time. ‘It turns out that the hotel had nothing to do with him and that it isn’t a good investment after all,’ Crockett said.”

“The brewing legal trouble is the latest sign that the real estate boom in a city with more skyscrapers under construction than any other in the world may be cooling as sales drop and prices climb. ‘When people buy units purely as an investment and not to ever live in, it’s a sign that the Toronto market is on thin ice,’ said John Andrew, a real-estate professor at Queen’s University in Kingston, Ontario. ‘The luxury market always feels the cracks of a housing market first. Here we have the canary in the coal mine.’”

“The average price of a property in Spain fell by 15.2% in the third quarter of the year, compared to the same period of 2011, according to the National Statistics Institute. This is the 18th consecutive quarter in which prices have fallen. ‘There are currently approximately one million newly built homes for sale, in addition to over 200,000 repossessed properties; furthermore, there are an unknown number of exchanges of debt for property agreements in place, as used by financial institutions. It will take many years to absorb the stock of properties, even if sales volumes return to 2003/4 levels of 250,000/300,000 units a year,’ commented Juan David Garcia from global market analysts Fitch.”

“For Irish banks, whose losses forced the government to follow Greece in seeking a bailout, the true cost of the debacle is about to hit. Banks have largely held off on repossessions or debt forgiveness after taxpayers were forced into a €64 billion rescue of the financial industry. While they have set aside about €6.4 billion of provisions for expected bad loans, actual write-offs in the 30 months through June were €250 million, say Goodbody Stockbrokers.”

“‘Banks have been playing a waiting game, hoping things improve,’ Lars Frisell, chief economist at Ireland’s central bank, said in Dublin two weeks ago. ‘That’s not happened. It’s time to stop procrastinating, to find out where the losses are and crystallise them. Take the losses.’”

“More than 40 percent of foreclosures cleared from Florida’s courts in recent months were dismissals, cases that likely will boomerang back into the overloaded judicial system when lenders are better prepared to continue their pursuit. Some homeowner attorneys complain that lenders have gotten used to winning in Miami-Dade’s courts and are heading to trial whether their evidence is admissible or not. When a case goes to trial when the sides say they are not ready, the judgment may be appealed, rejoining the backlog of foreclosure cases to be heard.”

“‘By and large if people are saying they need more time to get ready, and it’s been sitting there for three or four years, three or four years is enough time to get ready,’ said Miami-Dade Circuit Judge Jennifer Bailey, who sat on the state’s foreclosure task force.”

“The Oregon Legislature and Supreme Court have at least one definite topic on their agendas in the new year: finding a solution to the state’s foreclosure standstill. Oregon’s new foreclosure mediation program was supposed to give home­owners one last chance at keeping their homes. Instead, it brought out-of-court foreclosures to a halt. Faced with new requirements and costs, lenders simply stopped filing new foreclosures, the Oregonian reported.”

“By November of this year, preliminary reports showed the number of court foreclosure filings had more than tripled, to 882 in a month. By comparison, more than 22,000 Oregon homes had a foreclosure notice in the out-of-court system in all of 2011, according to Realty­Trac. ‘We still think this is just a fraction of what will be pending out there,’ said Doug Bray, trial court administrator in Multnomah County Circuit Court.”

“Maine home sales increased more than 20 percent in November, the second month the state’s residential real estate market has experienced double-digit growth. The demographics in Washington County are such that 80 percent of Billy Milliken’s clients are people buying second homes, so it’s a market driven by discretionary income. ‘In the economy we have been in that did not exist,’ the owner of Jonesport Realty, told the Bangor Daily News. ‘So much of our real estate sales are contingent on what’s happening in the rest of the world. We’re not building factories, fisheries are closed to new participants … we’re not pulling a lot of working families into Washington County.’”

“‘I have clients that have been looking for houses for six months because there’s so much demand right now in Phoenix,’ said Bradley Manhoff, Autobahn Mortgage LLC. Meanwhile, the Federal Reserve keeping interest rates artificially low benefits perspective home buyers. ‘Rates are so low people can afford a lot more than they would have been able to afford before,’ said Manhoff. ‘When you can get interest rates in the low 3s on a 30 year fixed, people say that’s almost free money.’”

“Australian mortgage holders have escaped more than $21 billion in extra interest payments this year, according to new Treasury data obtained by Fairfax Media. Since the Reserve Bank started cutting the cash rate over the past 12 months to crisis lows of 3 per cent, new figures show that, in NSW, home owners avoided paying $6.4 billion over the year compared with the two previous years.”

“But the record low interest rates have not benefited all Australians. Self-funded retirees and pensioners who rely on interest payments from savings accounts were the worst hit, the latest rate cut of 0.25 percentage points eating into their incomes. A seniors lobby group, National Seniors, said that the more than 1 million people who rely on savings and term deposits as income could be losing an amount equivalent to 25 per cent of a person’s wages following the series of rate cuts since November last year.”

“The Treasurer, Wayne Swan, who was last week forced to abandon his vow to deliver a surplus next year, was unrepentant, saying his economic settings were helping ‘working families.’”

“At the recent Beijing International Property Expo, Wang Jing’s eyes widened. The island country of Cyprus, which had a booth at the expo, offered a list of properties at steep discounts. She didn’t know much about Cyprus, but that wasn’t important. Wang read about a beachfront apartment on the Mediterranean island. The price was 350,000 euros ($463,000), which is cheaper than many three-bedroom apartments in Haidian district. ‘I am considering purchasing one. If my son cannot enroll in the best primary school in Beijing, I can still send him to study at the top universities in Europe 10 years later,’ the 33-year-old graphic designer said.”

“According to a survey by SouFun International, a real estate platform in China, the United States, Canada and Australia are the priority targets for Chinese overseas property investments. Huang Shucheng, CEO of a real estate website based in Shanghai, said around 40 percent of Chinese investors in the British market are aiming for high returns on their investments. ‘Since last year, when many cities (in China) limited the number of homes one could purchase, many Chinese people went abroad to buy a house. My business in the British market has grown by about 30 percent since 2011, and purchases in Canada have increased even more,’ said.”

“With anti-corruption investigations on the horizon, so many panic-stricken regime officials in China are hurrying to get rid of secret investments that some analysts believe property values in Beijing and Shanghai will drop. The China Times and Oriental Morning Post both reported that officials were rushing to dump property in Jiangsu and Guangdong provinces at fire sale prices this week.”

“A manager of a financial consulting firm in Jiangsu said that about two months ago he began receiving phone calls from a series of heavyweight customers, according to the China Times. ‘All of them were public servants, and strangely enough, every single one of them urgently wanted to sell off some properties,’ he said.”

“‘These four houses must be sold as soon as possible. Don’t sell them any cheaper than two million yuan each,’ one Jiangsu official was overheard saying on the phone in public. According to South China Morning Post, ‘Property agents have reported receiving mass-produced text messages, for example: ‘Eight sets of hard-to-find flats, owner selling all at once.’”

“The rate at which lenders have been doling out foreclosures and other distressed properties has made sense and has had a lot to do — perhaps more than other single component — with rising home prices in many areas. The flow of foreclosures to the market coupled with the managing of the absorption rate is the residential real estate story of the year for 2012.”

“Why? Had the infamous ’shadow inventory’ of distressed homes been dumped on the market all at once, many neighborhoods would still be reeling — not only from a poorly maintained inventory of homes, but also from a larger number of sellers-in-waiting who are current on their loans yet wanting to sell for a figure higher than their purchase price.”

“Two major incidents have analysts scrutinizing the flow of foreclosures to the market more than ever: The detrimental effects of a possible ‘fiscal cliff’ and the upward revision of shadow inventory by a California research firm specializing in distressed properties. Some analysts believe that if lawmakers take a restrained approach — extending the residential mortgage interest deduction and most tax cuts — the impact on housing would be positive. However, other observers believe if lawmakers charge hard and push everything over the edge at the same time — including the once-untouchable mortgage interest deduction — the economy could falter and the housing market could suffer.”

“That would mean more foreclosures, additional shadow inventory and more would-be sellers waiting for things to calm down. Some might not want to wait — again. The last thing we need is another set of sellers tossing house keys to their lender.”

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The Los Angeles Times reports from California. “The California housing recovery boomed forward in November, with home prices reaching levels high enough to trigger questions about whether speculators are overdoing a spending spree. The run-up in prices caught the attention of Dean Baker, co-director of the Center for Economic Policy and Research in Washington, who regarded the trend as ’serious grounds for concern that these markets are being driven by speculation. While some speculators buying up homes at a bottom can be positive, the sort of price rises that you are seeing there may be excessive,’ Baker said in an email to The Times. ‘The speculators likely have pushed prices above where the market would put them in some markets,’ he said.”

“Ed Leamer, director of the UCLA Anderson Forecast of the economy, had a more sanguine take on the trend than Baker. ‘I am inclined to think that what he calls speculators know more about the market than he does,’ Leamer said. ‘It’s a good thing for professionals to be putting a floor under home prices.’”

The Ventura County Star. “One of the world’s largest private-equity firms is making a $34 million bet on residential real estate in Ventura County, buying up homes at a pace of nearly one a day for the past three months. Ventura County is one of 10 markets nationwide in which Invitation Homes, an arm of the New York-based Blackstone Group. Invitation Homes, through a corporation called THR California, has purchased 101 homes in the county since Aug. 3, with the frequency picking up in September and peaking with 26 transactions in the first 17 days of December.”

“The homes it has targeted in Ventura County are all modestly sized, post-foreclosure properties. County records show it has paid an average of price of $336,670. THR pays cash for the homes, and company officials say it typically pays a 10 percent to 15 premium to acquire targeted properties. Because investors are purchasing many distressed properties before they come to market, said Thousand Oaks agent Brian Graver, those properties are not being factored into sales prices considered by real estate appraisers. As a result, ‘houses are being appraised at higher levels.’”

“For those who maintain the traditional American dream of homeownership, however, institutional investors such as Invitation Homes are making that dream very difficult to realize, said Graver, the Thousand Oaks realty agent. ‘For homes under $500,000, it’s incredible how many buyers there are,’ he said.”

“Representing a seller, B.J. Ward, a Ventura County Realtor, recently closed a sale with THR after the company made a cash offer on an Oxnard home $11,000 higher than the asking price. There were about 12 offers on the home — half were investors, the other half were families or couples hoping to move into the house, Ward said. ‘They’re sending in offers that no one else can compete with,’ Ward said.”

“Brandie Gaines and her husband, Fred competed directly against THR on the sixth house they put a bid on in Oxnard. The bids were the same — $385,000 — but THR offered cash. After months without success, the Gaineses took Ward’s advice and started increasing their starting bids over the listed price to make their offers more competitive. The couple’s luck finally turned with the eighth house they had bid on since August. After making an initial offer slightly higher than the list price, Gaines and her husband increased their offer by $17,000 over the asking price.”

“‘It wasn’t my No. 1 location, but it had some other things that made it worth it,’ Gaines said. ‘It didn’t matter where it was; we were ready to go to battle for it.’”

The Orange County Register. “In Orange County and Southern California, Chinese and other Asian buyers – many paying all cash – have snatched up properties as investments, as vacation or retirement homes or as a residence for children studying at local schools or universities, local agents say. Local agents specialized in working with foreign buyers say they see strong interest among affluent shoppers in China, Taiwan, India and other Asian countries.”

“‘I think they’ll keep coming as long as the Chinese government allows them to wire the money out because people there have so much money,’ said Cayenne Kuang, broker and owner of Spectrum Realty in Irvine.”

“About 20 percent of the buyers at Irvine’s Lambert Ranch development – which caters to Asian buyers – are from abroad, said Joan Marcus-Colvin, senior VP at the New Home Co. Luxury home agent Rex McKown said foreign shoppers account for 80 percent of the viewings, up from 20 percent eight months ago. Jacqueline Thompson, also of Surterre, says Chinese make up about half of the buyers at home showings. ‘I think the Chinese realized the urgency to buy up homes in the U.S. because they see that prices will increase,’ Thompson said.”

“A Tustin couple says their house was foreclosed last month and sold to an investor while the pair was in the process of seeking a loan modification – just one month after major U.S. banks were to stop the practice known as ‘dual tracking.’ Wells Fargo foreclosed on the home owned by Keith and Susan Robishaw on Nov. 28. The couple are still living in the house and fighting to rescind the foreclosure, though they have received an eviction notice.”

“The Robishaws have lived in their Tustin home for 15 years. The couple took out several loans since they purchased the home in 1997 for $255,000 and got a mortgage for $242,250. Public records show that between 2003 and 2005, they refinanced their mortgage twice – once for $356,250 and the second time for $434,000 – and took out two home equity lines of credit. The Robishaws said they used the money to buy cars, make repairs and pay taxes, as well as remodel the house.”

“Then the recession hit. Keith Robishaw was laid off in April 2009 and remained out of work for 21/2 years. The couple made their final monthly payment of $2,992 in March 2010. ‘This is the only home we’ve ever bought,’ said Susan Robishaw, while sitting at her kitchen table beside a stack of paperwork documenting her efforts to keep the four-bedroom house. ‘We planned on living here for the rest of our lives.’”

The Glendale News Press. “The number of foreclosed homes that sold in the Glendale region plummeted in November to only a handful, according to the latest real estate figures. Four bank-owned properties sold last month, a dramatic decline from 23 in November 2011, according to statistics compiled by Realtor Keith Sorem with Keller Williams in Glendale. In the La Crescenta-Montrose area, only one bank-owned property sold in November, compared to six the same month last year.”

“Broker Hamlet Nersesian, who owns Armex Realty in Glendale, said the drop in bank-owned properties for sale is a mystery. ‘I don’t know why the banks aren’t putting those properties on the open market to sell,’ said Nersesian, a board member for the Glendale Assn. of Realtors.”

The North County Times. “The San Diego Association of Realtors pinpointed one of the factors in the market upswing — falling inventory of homes for sale. San Diego State University economist Michael Lea said the decline of distressed property as a market factor bodes well for other housing to be bought and sold. ‘All signals are pretty favorable for next year to continue the recent pace,’ Lea said.”

“Richard Wyllie, a Chula Vista real estate agent, said there are only 1.3 months of inventory available in the East Lake area, partly because bank-foreclosed properties have declined. But conventional listings of nondistressed properties are rising. He said of the 29 properties for sale, about 19 are standard homes that did not go through foreclosure. ‘I just don’t know why all of sudden,’ he said. ‘The market hasn’t gone up that much, but it’s enough for some people to see a little bit of profit in the sale.’”

The Friday Flyer. “Well, the train has left the station. The longer you wait now, the further away that train will get and the harder it will be to catch. That was the prevailing sentiment expressed by many at the National Association of Realtors’ recently concluded annual fall meetings in Orlando. Housing affordability is at an all-time high while interest rates and inventory are at an all-time low. That train is picking up speed and people who don’t catch it today will have an increasingly difficult time in future years as both prices and interest rates inevitably tick up.”

“A shortage of homes for sale will continue across the country, California in particular. Rising prices means fewer homeowners underwater and fewer distressed sales, but prices will not rise fast enough to incent many homeowners with equity positions to sell immediately as they wait for increased profit margins. Builders are also stepping up but in a limited way.”

“Lawrence Yun , chief economist of the National Association of Realtors® said that four years from now there will be an even greater disparity in wealth distribution. ‘People who purchased homes at low prices in the past couple years, including many investors, can expect healthy growth in home equity over the next four years, while renters who were unable to get into the market will be in a weaker position because they are unable to accumulate wealth,’ he said. ‘Not only will renters miss out on the price gains, but they’ll also face rents rising at faster rates.’”

From CBS Los Angeles. “California has one of the highest foreclosure rates in the nation but overall filings in November reached a low not seen in six years, according to Realty Trac. However, short sales reportedly increased 31 percent in the Inland Empire in the third quarter of the year. Darren Bloomquist, of Reality Trac said that having short sales on the rise while foreclosures are down indicates the real estate market is still distressed.”

“Bank of America has reduced its foreclosure filings by 59 percent, said Bloomquist, adding that the Inland Empire has the third highest foreclosure rate in the country, only lower than two areas in Florida. Dan Tovar, a long-time Riverside realtor and Bloomquist agree there’s pressure on banks to prevent foreclosures.”

“‘For us realtors, we’re super excited,’ said Tovar. ‘The sales price goes up, guess what, our commission goes up, too.’”

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Readers suggested a topic on policy responses to recessions. “It seems to be an article of faith amongst many that if we had just ‘let it all fall’, then we’d be done with this economic crisis, or at least a lot further along, with less money spent, and moving on in a better direction. I’m curious what they base this on, since GD1 was essentially ‘allowed to happen’ at first, and it became a cascading worldwide crisis that seemed to never have an end until we had a devastating world war. I assume people will say the New Deal caused the crisis to continue, but how, specifically, which programs, and why?”

“In short, why would it be ‘different this time’? Because the last time we ‘let it all fall’ it turned into an unimaginable disaster.”

A reply, “That premise might have to be drilled into a bit. Leveraged high rollers got taken to the cleaners, and farmers in the midwest got busted by a weather event. I don’t think any of my family called it an unimaginable disaster. Half of them farmers and half steel mill workers. The horrors of WWI/WWII, that they called unimaginable. 25% unemployment, we’ve had that for six years now if taken by the same measure.”

“The problem I see with how we have responded so far to the economic problem, is that we have not made any progress at correcting the causes. If too much credit was a primary cause, we are only encouraging more credit. If banking rules was a primary cause, we have not reformed the banking rules. If globalization was a major cause, we are still pushing the globalization thing. If legislative capture by big money was a cause, we are further along down that path.”

“No one should wish for catastrophic crash, but continuing along the paths away from sustainability is going to make the payback only worse.”

One said, “The problem here is too much debt in the hands of too few people. The solution is to inflate the currency (more available dollars to pay the debt) and get that debt spread around across more people. I’m also not blind to the fact that with currency that has no backing value (gold), there’s no real ‘debt crisis’ possible on a national level. We can print as much as we want/need to pay off debts. The only question is how much pain will that cause the country/world and, right now, the answer is ‘more than letting the debt default.’”

A reply, “Well…. not really. When you hear some loon yammer ‘they’re printing money!’ the follow up question should always be, what are they doing with it??? What if they were stockpiling it in Fort Knox? Would there be any inflation? Not really. Inflation requires the $$$ get in the hands of people to spend and that’s not happening. Granted, it is clear the fed is targeting various commodities in order to support prices (housing and oil), presumably to continue chasing the fantasy of ‘jump starting the economy’. It might have worked if their media machine were able to convince the public to become debt junkies again but I don’t see the public buying into that lie again.”

“And always remember, when the Fed’s media machine invokes the word ‘confidence,’ they’re talking about the public ignoring risk and jumping on the debt train to hell.”

And I say, “The only ‘article of faith’ I see is the faulty recall of what happened in the 20’s and 30’s. Start from an imaginary point and recreate history to support a political policy. But all this talk about ‘what would have happened if we let it fail’ is just a set up to excuse the current economic disaster, and the sh*t-storm that’s coming. Because we went down the Keynesian road on this one, just like we did in the Great Depression. The United States and 14 other countries, at the same time. And we know who to blame for where we are and what’s to come.”

From Mises.org. “It has today been completely forgotten, even among economists, that the Misesian explanation and analysis of the depression gained great headway precisely during the Great Depression of the 1930s — the very depression that is always held up to advocates of the free-market economy as the greatest single and catastrophic failure of laissez-faire capitalism. It was no such thing. Nineteen twenty-nine was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s: a policy deliberately adopted by the Western governments, and most importantly by the Federal Reserve System in the United States.”

“It was made possible by the failure of the Western world to return to a genuine gold standard after World War I, and thus allowing more room for inflationary policies by government. Everyone now thinks of President Coolidge as a believer in laissez-faire and an unhampered market economy; he was not, and tragically, nowhere less so than in the field of money and credit. Unfortunately, the sins and errors of the Coolidge intervention were laid to the door of a nonexistent free-market economy.”

“If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the depression, transforming it from a typically sharp but swiftly disappearing depression into a lingering and near-fatal malady, a malady ‘cured’ only by the holocaust of World War II. Hoover, not Franklin Roosevelt, was the founder of the policy of the ‘New Deal’: essentially the massive use of the State to do exactly what Misesian theory would most warn against — to prop up wage rates above their free-market levels, prop up prices, inflate credit, and lend money to shaky business positions. Roosevelt only advanced, to a greater degree, what Hoover had pioneered. The result for the first time in American history, was a nearly perpetual depression and nearly permanent mass unemployment. The Coolidge crisis had become the unprecedentedly prolonged Hoover-Roosevelt depression.”

“Ludwig von Mises had predicted the depression during the heyday of the great boom of the 1920s — a time, just like today, when economists and politicians, armed with a ‘new economics’ of perpetual inflation, and with new ‘tools’ provided by the Federal Reserve System, proclaimed a perpetual ‘New Era’ of permanent prosperity guaranteed by our wise economic doctors in Washington.”

The Wilson Quarterly. “The great economic and financial crisis that began in 2007 has stimulated an outpouring of books, articles, and studies that describe what happened. What it hasn’t done is explain why all this happened.”

“People were conditioned by a quarter-century of good economic times to believe that we had moved into a new era of reliable economic growth. Homeowners, investors, bankers, and economists all suspended disbelief. Their heady assumptions fostered a get-rich-quick climate in which wishful thinking, exploitation, and illegality flourished. People took shortcuts and thought they would get away with them.”

“The most obvious explanation of why so many people did not see what was coming is that they’d lived through several decades of good economic times that made them optimistic. Prolonged prosperity seemed to signal that the economic world had become less risky. Of course, there were interruptions to prosperity. Indeed, for much of this period, Americans groused about the economy’s shortcomings. Incomes weren’t rising fast enough; there was too much inequality; unemployment was a shade too high. These were common complaints. Prosperity didn’t seem exceptional. It seemed flawed and imperfect.”

“That’s the point. Beneath the grumbling, people of all walks were coming to take a basic stability and state of well-being for granted. Though business cycles endured, the expectation was that recessions would be infrequent and mild. When large crises loomed, governments—mainly through their central banks, such as the Federal Reserve—seemed capable of preventing calamities. Economists generally concurred that the economy had entered a new era of relative calm. A whole generation of portfolio managers, investors, and financial strategists had profited from decades of exceptional returns on stocks and bonds. But what people didn’t realize then—and still don’t—is that almost all these favorable trends flowed in one way or another from the suppression of high inflation.”

“From 1981 to 1999, interest rates on 10-year Treasury bonds fell from almost 14 percent to less than six percent. Lower rates boosted stocks, which became more attractive compared with bonds or money market funds. Greater economic stability helped by making future profits more certain. Lower interest rates increased housing prices by enabling buyers to pay more for homes.”

“Millions of Americans grew richer. From 1980 to 2000, households’ mutual funds and stocks rose in value from $1.1 trillion to $10.9 trillion. The 10-fold increase outpaced that of median income, which roughly doubled during the same period, reaching $42,000. Over the same years, households’ real estate wealth jumped from $2.9 trillion to $12.2 trillion. Feeling richer and less vulnerable to recessions, Americans borrowed more (often against their higher home values). This borrowing helped fuel a consumption boom that sustained economic expansion. Disinflation had, it seemed, triggered a virtuous circle of steady economic and wealth growth.”

“Finally, government economic management seemed more skillful. The gravest threats to stability never materialized. Faith in the Fed grew; Greenspan was dubbed the ‘maestro.’ Well, if the real economy and financial markets were more stable and the government more adept, then once risky private behaviors would be perceived as less hazardous. People could assume larger debts, because their job and repayment prospects were better and their personal wealth was steadily increasing. Lenders could liberalize credit standards, because borrowers were more reliable. Investors could adopt riskier strategies, because markets were less frenetic. In particular, they could add ‘leverage’—i.e., borrow more—which, on any given trade, might enhance profits.”

“Bear Stearns, Lehman Brothers, and other financial institutions became heavily dependent on short-term loans (In effect, firms had $30 of loans for every $1 of shareholder capital.) Economists and government regulators became complacent and permissive. Optimism became self-fulfilling and self-reinforcing. Americans didn’t think they were behaving foolishly because so many people were doing the same thing.”

“What now seems unwise could be rationalized then. Although households borrowed more, their wealth expanded so rapidly that their net worth—the difference between what they owned and what they owed—increased. Their financial positions looked stronger. From 1982 to 2004, households’ net worth jumped from $11 trillion to $53 trillion. Ascending home prices justified easier credit standards, because if (heaven forbid) borrowers defaulted, loans could be recouped from higher home values. Because the rating agencies adopted similarly favorable price assumptions, their models concluded that the risks of mortgage-backed securities were low.”

“No less a figure than Greenspan himself dismissed the possibility of a nationwide housing collapse. People who sold a house usually had to buy another. They had to live somewhere. That process would sustain demand. ‘While local economies may experience significant speculative price imbalances,’ he said in 2004, ‘a national severe price distortion seems most unlikely.’”

“The great delusion of the boom was that we mistook the one-time benefits of disinflation for a permanent advance in the art of economic stabilization. We did so because it fulfilled our political wish. Ironically, the impulse to improve economic performance degraded economic performance.”