If Bubble Bursts, You’re On Your Own: Poole
A Fed official is speaking today. “The U.S. housing sector may already be cooling but it should maintain its lofty level and not undermine the economic expansion, St. Louis Federal Reserve Bank President William Poole said on Wednesday. Poole did say there was some evidence the housing market might be experiencing some sort of slowdown after its strong gains in recent years. But he explained this was already factored into the U.S. central bank’s thinking.”
“‘As noted in the minutes of the FOMC meeting held on January 31, 2006, policy-makers are expecting some weakening in housing construction,’ Poole said.”
“And he played down worries of wider disruption from the bursting of a housing bubble, which he did not believe existed at a national level, though some markets may have overheated: ‘The conventional view, which I subscribe to, is that a housing price bubble does not exist on a national average basis, but there may be pockets … where prices have risen beyond levels that can be justified by economic fundamentals.’”
“Poole repeated the Fed’s long-standing mantra that it was not possible for policy-makers to identify bubbles in advance, an argument they use to justify not intervening to curb price rises in any asset market. ‘Given that bubbles always burst, if there is no burst, then there was no bubble, clear advance evidence of a bubble can never exist.’”
“‘If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place,’ he said.”
“‘So if you have an academic interest in house prices, I recommend that you wait a few years. If you have a direct financial interest, I can’t help much, you’re on your own,’ he said.”
‘Poole did say there was some evidence the housing market might be experiencing some sort of slowdown after its strong gains in recent years. But he explained this was already factored into the U.S. central bank’s thinking. ‘As noted in the minutes of the FOMC meeting held on January 31, 2006, policy-makers are expecting some weakening in housing construction,’ Poole said.’
I like the point a poster made the other day; this lack of concern from the Fed may well mean they have no intention of acting to prop up the sector, which is the better course of action, IMO.
I’m glad they won’t try to prop it up, but his logic is transparently juvenile. It’s like the old joke about economists: “Hey, there’s a hundred-dollar bill on the pavement!” “Nah, that can’t be a hundred-dollar bill — if it was, somebody would have already picked it up!”
Or… “Hey, is that a stick of dynamite with a burning fuse?”
“Who knows? You can’t say for sure it’s a stick of dynamite until it explodes. Therefore we should do nothing, but stand around and watch. If it blows us to tiny pieces, it’s dynamite.”
If it were a stck of dynamite, then we would not be standing here, because we would have already blown up by now…
No, no, no. If it were a stick of dynamite, you would not be standing here. Since you are standing here, I know it’s not a stick of dynamite, and I can stand here, too. And since I would not be standing here if it were a stick of dynamite, you also know it’s not a stick of dynamite and …
I think Poole is a Chicago-trained economist. It would be sacrilige for him to propose for the govt to prop up the housing market.
“‘If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place,’ he said.”
Rumor has it that Chicago school economists are not granted PhDs until they are completely brainwashed with the doctrine of rational expectations which is embodied in he above remark…
Ben or anybody - I remember reading that the US fed really only influences short term prime rates. It is the global market collectively that actually determines the more key long term rates that effect mortgages and longer term loan interest rates. US began raising rates a year ago and not much happened on the long bond or 30 year loan rate. Now with the Euro countries and Asia finally beginning to tighten, we are seeing a profound and immediate effect on long term rates. It’s always seemed somewhat counterproductive for us to focus so on Bernake, AG or the Fed with respect to housing, but maybe I’m wrong?
“there may be pockets … where prices have risen beyond levels that can be justified by economic fundamentals.”
There are many such “pockets” (such as SF Bay) which house millions if not tens of millions of people each.
Exactly. Much of the population and wealth of this country live in these ‘pockets.’ Places like Seattle, SF, San Diego, LA, Central CA valley, Las Vegas, Phoenix, Reno, Miami, Jacksonville, NYC, Washington DC, Philadelphia, NYC, Boston, Providence, and many other area across the USA.
David
Bubble Meter Blog
and don’t forget the lesser-known suburbs of big cities and the smaller cities in those states.
The people that live in these pockets with wealth aren’t caught up in this. It’s the ones that aspire to be wealthy that are.
The Central Valley of California is not a pocket of wealth!!! LOL
Maybe not wealth, but definitely population.
If by “pocket” Poole means that the total square mile area suffering high real estate prices is a tiny fraction of the total square mile area of the U.S. then he is right. However there are more relevant measures.
He said “pocket poole” heh heh.
Shut up, Beavis! Huh-huh! Huh-huh!
I guess if you don’t live in a “pocket” you won’t be affected because there will be all those folks from the “pockets” cashing out their equity and keep the local “non-pocket” market afloat. Unless, um, the folks in the “pockets” don’t have much equity to cash out…
Could Japan cause a US house price crash?
YUP……
The article takes the position of housing prices going flat, not declining….hmm.
Plateau — permanently — high …
Sorry to have to bring this up yet again, but I feel compelled to do so every time a leading expert reiterates this tired prediction, which left a permanent egg stain on Irving Fisher’s face when he first made it with reference to the stock market back in 1929.
New article from VoiceOfSanDiego
Even the realtors aren’t denying it anymore. I hate to see what’s going to become of this sunny town.
WOW, real estate can go down in price!
and apparently realtors are surprised that horror stories like these can happen in real life
I say: “San Diego condos for everyone!”
This is completely wrong.
Because if he were correct, then Ponzi/Pyramid schemes would not exist. Everyone knows a Pyramid scheme is a bubble, but (some) people go ahead and play it anyway, because they’re counting on a Greater Fool to join in and pay more.
Same thing in real estate. Even if a flipper knows it’s a bubble, he’ll go ahead and buy into it anyway, because he believes a Greater Fool will come along to pay even higher prices. The flipper will take the gamble that he can find a Greater Fool.
The early flippers will win on that gamble, and the late-arriving floppers will lose.
It’s sad to see a Federal Reserve official so locked away in his ivory tower of “academic” thinking that he can’t see something as elementary as this at work.
It doesn’t give me any confidence in the rest of what he said.
Well said Charles M.
Flippers do become FLOPPERS if they believe this rhetoric.
I really can’t believe that quote. He either lacks intelligence or honesty.
Why not both?
What’s amazing is he’s not some joe in the cafetria spouting idiotic ramblings. He’s a powerful leader of the financial world! Un-freakin-believable!
There was a great quote on one of these blogs last year.
Student: What is the secret to making money.
Teacher: Buy Low. Sell High.
Stutent: But everyone knows that.
Teacher: Yes, but what everyone tries to do is buy lowest, sell highest.
CTX now down 3.7% for the day.
Following the script from 1989, HBs are first to tank, mortgage firms not far behind. Look out, WAMu, New Century & Countrywide.
Mortgage lenders have learned from the past. Wamu, Countrywide and Wells own a very tiny portion of the loans they originate and service.
Orginations will slow down, but they’ll pick it up through REO, charging the investors to foreclose
That’s not true. I’ve read WaMu’s 10Q. They have tens of billions worth of risky loans in their portfolio — much of it I/O, subprime, and neg-am. They can’t sell the neg-am stuff to anybody. Furthermore, some of the loans that do get sold off are “with recourse”, meaning that the originator has to buy them back if they don’t perform.
What a coincidence — HBs have also learned from the past!
“‘If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place,’ he said.”
That, from a man in a position of public trust, is an infuriating statement. It is patently dishonest. Or, rather than being a lyer, perhaps Poole is merely an idiot. Maybe both?
Whatever happened to the mantra that the central banks JOB was to “take away the puch bowl once the party gets going?”
this is what happens if you leave banksters like Greenspan at the helm for too long. Blowing bubbles and profiting from it has become the FEDs main business; if somebody gets hurt they are on their own.
Click your red sequinned slippers together 3 times, and simply repeat, “There is no bubble, there is no bubble, there is no bubble.”
That comment is eerily reminiscent of Greenspan’s comment about the stock bubble in 1998. Scary…
The evidence is clear that David Copperfield can’t really make a jumbo jet disappear but that doesn’t stop everyone from thinking he did when it isn’t there anymore.
Reality constantly gets distorted, which is precisely why most people continue to debate its existence. Sooner or later economic fundamental are going to come along and whack the naysayers upside the head, and, even then, they’ll find a reason to keep believing what they want.
Exhibit A: Robert Troll…
some of my favorite links.
#11 Analysts eye Miami’s condo boom, raise a ‘more risk’ sign
#12 Attention, Speculators: Here’s a Lesson from Hong Kong’s Housing Bubble
#13 Rich House, Poor House
Financial guru Robert Kiyosaki has turned bearish on the boom he helped create
#14 Real estate: When booms go bust…
Home prices can and do go down. Here’s what declines have looked like in the past.
#15 Real estate clubs ride the housing boom
#16 Global credit ocean dries up
#17 Understand risks of ‘creative’ loans
#18 Renting versus buying
#19 Real Estate Rebound
After a long, painful slide, housing prices around the Bay Area — especially in certain zip codes — are finally heading back up
Jonathan Marshall, Chronicle Economics Editor
Sunday, April 9, 1995
#20 Pension funds play catch-up with high rise of real estate
#21 As real estate market cools, ‘buys’ return
Title
quote from link #19:
“In the 1970s and 1980s, people were looking at housing as an investment, a place to make money. Now [in 1995] they look at it as a place to live and raise a family, not as part of their portfolio.”
Deja vu all over again!
amen to that.
Interesting factoid, though. In the late 70s, when I first bought, I knew nothing about booms, busts, or bubbles. We were just looking for a small home to buy….and found it, Berkeley, CA. And none of the people I knew at the time were talking about these kinds of things either. MY housing education actually didn’t begin until ‘89, when I had to use my 1031 gains. I had to learn REAL fast what was going on, what to do and how to do it so that I wouldn’t lose that money to Uncle Sam. Since then, and 2 purchases later, I’ve been keeping with the market, reading everything I can find.
My point? That there were “pockets” of people like me…John and Jane Public looking for a home to live in for their growing family. We could have cared less what the house was “worth” at the time we bought. We just wanted to live in it. Had that first house for 10 yrs.
BayQT~
In the 1970s, people were looking at housing as an inflation hedge — a way to protect ones’ assets against the ravages of rampant gold and consumer price inflation. In the 2000s, ?????
The wisdom of Sunday, April 9, 1995:
“One reason housing prices fell so much in
the Bay Area after 1989 was precisely because
speculative excesses drove them to fanciful and
unaffordable levels.
“The inflation of housing prices was just
something we couldn’t economically sustain,” said
Jim Hines, manager of Gibson Properties in San
Jose. “Prices were going up 10 to 15 percent a
year. When you have three or four years of that,
somewhere it’s got to stop.”
Good info, John. Thanks for the links.
Saying the bubble does not exist unless it busrts is stupid. It is like saying their is no top to a mountain until you get to it.
It’s more like saying there is no top to a mountain until you’ve reached the pinnacle, slipped, and are plummeting to a certain death….
… and say to yourself as you go down “Gee, I guess that was the top. What do you kknnnnnooooooooww?!”
The first rule of housing bubble is you do not talk about housing bubble.
“Do not try and burst the housing bubble - that’s impossible. Instead… only try to realize the truth.”
(What truth?)
“There IS no housing bubble.”
(There is no housing bubble?)
“Then you’ll see, that it is not the bubble that bursts, it is only yourself.” And your retirement. And your children’s college fund. And your dreams. And your freedom…
The second rule of Housing Bubble is YOU DO NOT TALK ABOUT HOUSING BUBBLE!
The third rule of the Housing Bubble is that if you do talk about it, you deny the possibility of its existence, for in order for it to exist, everyone would need to be aware of its existence, which would make everyone sufficiently precautious to preclude them from buying a home, which would make the Housing Bubble’s existence impossible…
Do not taunt housing bubble.
No user servicable parts inside.
Ben,
Isn’t this the same guy that in 2003 WARNED of a fiscal calamity about to happen because of the out of control GSE’S and their poor accounting and risk taking?
Glad to see that sure was proved wrong and the fed put forth strong policies to thwart that from happening. Oh wait. They cooked the books by a few billion and have spent the last 3 year trying to figure out the real earnings. Nevermind.
Poole said: “The conventional view, which I subscribe to, is that a housing price bubble does not exist on a national average basis, but there may be pockets … where prices have risen beyond levels that can be justified by economic fundamentals.’”
“POCKETS” being the entire EAST and WEST COASTS…
CLEARLY, thin strips of land DO NOT qualify as a nationwide bubble zone.
“‘If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place,’ he said.”
KINDA LIKE: the irrational exuberance of mass sheople runnin’ to Google stock, the Dot BOMB demise, etc????
“‘So if you have an academic interest in house prices, I recommend that you wait a few years. If you have a direct financial interest, I can’t help much, you’re on your own,’ he said.”
PROBABLY the only SENSIBLE thing this SON OF A FEMALE DOG said!
Did someone say pocket pool?
Now that’s downsizing!
POLE star,
True, but the realtors and economists still seem to have the Cajones to still talk SMACK.
get your hands outa yo pockets
New realtor tactics in a slowing market?
Just got an email from a realtor that demonstrated a new tactic I have never seen. Have any one of you seen this tactic?
Back in January, I received an email about a particular condo unit in DC that was listed for $344,900. Today, I received another email about the same unit, but now the price had been INCREASED to $349,900 a $5K increase. But here’s the kicker - at the bottom of the email it said that I had a right to the previous lower price because I was on a special list. Nice.
1. List a property for $x
2. Two months later, INCREASE the price to $x+$y
3. Send emails to everyone saying that they are on a special list to receive price $x.
4. Create sense of exclusivity and that you are getting a “deal”!
Better hurry!
LMAO.
Almost the same thing happen to me looked at nice brand new 2 bed / 2 bath for $480K. It had been sitting for months. Noticed it this week for $500K. Thought it was the higher level unit. Agent told that they’ve taken that one off the market until this one sells. Indicated that she was not happy with the price hike but everyone - guess she meant the broker or maybe developer was “smarter” or at least thought they were smarter.
Must be that 20K a year raise everyone’s getting this year.
Never EVER forget that it was Greenspan in early 2004 who said:
“American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”
That was Uncle Al’s way of telling the lenders “lighten up” — we need the housing bubble to inflate because job creation, the overall economy, etc. are weak. Soon thereafter, the Fed started raising rates and totally screwed anyone who followed that “sage” advice. Greenspan was also the one praising the “new economy” in early 2000.
The Fed has proven time and again that it’s clueless. Policymakers cut rates AND raise them for far too long. They ignore real-world problems for too long, choosing to study them to death. They ignore inflating bubbles, then ride to the rescue too quickly when they burst, thereby creating more bubbles. It’s ridiculous, but it’s life. Sad.
Actually Mr Greenspan was right - ARM’s actually work out better in over the first 12 years or so even in a worst case rising rates scenario - most mortgages don’t make it to year 10 (something like 80%) so the smart move may well be an ARM. But you need to buy what you can afford - and ensure you have the cashflow to handle the higher potential back end payments when rates rise…
What Mr Greenspan didn’t say is buy far more house than you can afford even at the teaser rates and don’t plan for the future when rates rise and blindly rely on historic high appreciation to bail you out of trouble,
It’s not only possible but likely that after the dust from the market collapse settles, demand for loans will be so low that those who survive to that point will find their ARM rates very manageable. But prices will have dropped so much that anyone who is forced to move by external factors such as job loss or divorce will be ruined — and the general decline in consumption will lead to a lot of job loss (which also tends to cause divorce …).
If housing prices fall, the refinancing/HELOC ATM will dry up, and a significant fraction of those who have not been saving will realize that they’d better start. If the saving rate goes back to its historical average around 8%, the drop in consumption will be severe.
“‘If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place,’ he said.”
Excuse me, but there are people who like to play in bubbles, they’re called speculators. Given the recent inventory levels however, the speculators look like rats jumping off a sinking ship.
Sounds like a permanently high plateau…
Ladies and gentlemen, the clown will be here all week. Don’t forget to tip your waitress.
This is reassuring. I was afraid that we might return to affordability levels above ten percent in my area. Phew!
LOL!
“Poole said his forecast was based on the expectation that the Federal Reserve “will keep underlying inflation low and stable.”
I don’t understand this comment and expect a lot more from someone at the federal reserve level. I thought the Fed was keeping inflation low by raising interest rates. What does this do to the housing market, am I wrong?
OT -
Heads up Northern VA/DC watchers, February statistics hot off the press (haven’t had time to look at them yet)
http://www.nvar.com/market/marketstats/feb06/index.html
Fairfax County, VA - February 2006
New listings +52%
Total active listings +200%
Contracts -14.3%
YTD contracts -12.8%
Settlements -12.2%
YTD settlements -22%
I can’t determine price change but will get those numbers from MRIS when they come out.
If the YTD contracts are down 12.8% but settlements are down -22%, does that mean about 9.2% of the contracts are falling apart and never get to settlement?
There should be about a two month lag between contracts and settlements (escrowed). Newer Condos shouldn’t involve too much inspecting or repair delay, unless it’s new construction? So in Nov-Dec we saw 653 total going into contract , versus 464 total closed in Jan-Feb. Something seems amiss, so perhaps a large % dropping out of escrow?
Went though the prices for the large Fairfax condo resales, and they are basically flat going back to last summer. That despite the rising inventory (about 4 months sales) and slowing sales.
With the charts it looks like a bad business report; inventory up, sales down.
Good news for us savers ! Let the games begin! I love it “you are on your own”.
What is the difference between academic interest and financial interest?
One interpretation…
academic interest = looking
financial interest = selling
On the one hand Poole’s comments about not knowing about a bubble in advance infuriate me.
But on the other hand purportedly clear-thinking adults made their decisions to participate in this real estate market. Nobody held a gun to anybody’s head and said “Buy a house/townhouse/condo or else!” The people who ultimately drove prices up are the ones who bought the homes - not the ones who built them or the ones who sold them. So I can see why Poole might say something like “We don’t know if there was a bubble but if there was you homeowners are responsible!”
Well, we could attribute some of this speculative bubble to monetary policy.
Precisely REskeptic. The FRB held real rates negative. By doing so, they encouraged financial speculation vis a vie the carry trade. The mortgage market was just a way to obtain long rates for this. Banks were making money hand over fist by borrowing short and lending long. Unfortunately, the loose credit will probably be the downfall of the system. No worries for the bankers though, they probably already have their lobbyists working on the bale out plan. The tax payer will end up with the bill just like the S&L mess.
Sorry, but I still believe the ultimate responsibility lies in the individual. It seems to be now ingrained in the American culture to fault everybody else except ourselves for our own bad decisions.
Sure, the Feds can be blamed for encouraging speculation, but they offered me the same box of sweets they were offering every other American, and I chose not to eat them.
His statement reminds me of the 1970’s Jimmy Carter famous “malaise” speech. Glad to know that the Chairman of the Federal Reserve is telling the millions of ptotential home buyers to buy a vowel.
If Poole is right, and all bubbles are local, it’s not going to be one POP sound we hear, it’s going to sound more like machine gun fire.
POP-POP-POP-POP-POP-POP-POP-POP-POP-POP-POP-POP-POP-POP!!!
There was no bubble in tech either, it was just hundreds of individual companies that happened to be trading at bubble prices.
Who do these jokers think they’re kidding?
Who do these jokers think they’re kidding?
Their employers, maybe?
More like “Plop Plop, Fizz, Fizz”.
Oh what a relief it is?
Greenspan’s book advance among the richest–8.5 million. To make up for the low pay at the central bank.
http://www.nytimes.com/2006/03/08/business/media/08book.html
“The U.S. housing sector may already be cooling but it should maintain its lofty level and not undermine the economic expansion, St. Louis Federal Reserve Bank President William Poole said on Wednesday.”
At least not while the Fed is busy tightening the noose around the loose money floating around…
“Poole repeated the Fed’s long-standing mantra that it was not possible for policy-makers to identify bubbles in advance, an argument they use to justify not intervening to curb price rises in any asset market. ‘Given that bubbles always burst, if there is no burst, then there was no bubble, clear advance evidence of a bubble can never exist.’”
If they can’t recognize a bubble, how can they recognize a bust?
“Poole repeated the Fed’s long-standing mantra that iit was not possible for policy-makers to identify bubbles in advance”
I suspect that’s only so they can deny any responsibility for this monetary mess.
The poor fools that find themselves upside down will look for someone to blame. Nobody in our society anymore wants to take responsibility for their own actions. They will expect us taxpayers to bail them out. I hope that somehow that will not happen. But I am just one person, hoping to do my part to bring the insane prices in bubbles down. SF was so ridiculous that it chased me out of there. I hope it goes to hell. And, no sympathy for the flippers, and other FBers