The Housing Bubble

It’s Friday desk clearing time for this blogger. “Housing clearance rates remained soft across the country over the weekend, particularly in the nation’s biggest markets of Melbourne and Sydney, which showed no signs of recovering from their torpor. The Australian reported many homes continue to sell for well under what their owners had hoped to get. When Melbourne grandmother Jennifer Webbe put her home of 15 years on the market, she thought she would get $740,000 for her house in the city’s sought-after southern suburbs.”

“But reality came crashing down - in concert with the world’s financial markets - and Ms Webbe sold her McKinnon house on the weekend for about $100,000 less than she wanted, one week before her scheduled auction next Sunday. ‘Each week the market has got worse and worse,’ she said. ‘Last week when the stock market crashed, I wasn’t looking good. I felt my timing wasn’t great. I didn’t have a great number of people coming through the house.’”

“Although she didn’t get the price she wanted, Ms Webbe didn’t have to look far to find cautionary tales. Just a few doors down another house was auctioned yesterday. The 40-strong crowd remained silent and the house was passed in without anyone making a single bid.”

“Virginia Washington, a 64-year-old medical secretary from California, bought her retirement home in the town of Tolleson, Arizona, in 1996. ‘It was supposed to be my dream home, but it has turned out to be a nightmare,’ said Washington, who owes $207,000 on a house that is worth about $150,000.”

‘Washington is haunted by the fear of losing the $65,000 in savings she put down as her deposit. ‘Many people did not put any money down on a home and they feel free to walk away. But $65,000, there’s no money tree that grows that kind of money,’ she said.”

“Sisters Annette and Karlene Parker said they broke down when their lender told them last week it was foreclosing on the Miramar home they have shared since 2006. They had been paying $1,800 each month, but an interest rate adjustment raised their payment by almost $400. ‘It was just too much, with everything going on,’ said Annette Parker.”

“Karlene Parker said borrowers needed help hanging on to homes that were ‘overvalued in the first place.’ ‘I don’t think the government needs to pay off our house. They need to come reassess the value of the home and then lower our mortgage and . . . interest rate,’ said Parker.”

“Take a drive around the Hamptons and all the For Sale signs littering the landscaped lawns might suggest that the East End of Long Island is finally joining the rest of the country in a real estate slump. Gerald Madigan, a financial professional, put his five-bedroom East Hampton home on the market for $2 million last spring, when he purchased a house in nearby Water Mill. Late in the summer, he lowered the price to $1.75 million, but he plans to rent the property rather than accept a rock-bottom offer.”

“‘If I wanted to price it at a giveaway price, I could get rid of it,’ he said. ‘My intent right now is to ride it out.’”

“Oliver Fisk and his girlfriend have been hunting for a one-bedroom apartment in London over the last four years and they’re further away than ever from getting onto the property ladder. ‘We’re definitely holding out for a bit longer, especially with the things that are going on with the banks,’ the 28-year- old information-technology specialist said.”

“If the U.K. government’s 500 billion-pound package, presented Oct. 8, fails to revive mortgage-lending in time, Oliver Fisk and his partner may find themselves back where they were a year ago. ‘It got to the point we thought we had to get on the ladder and buy a pokey flat for a ridiculous multiple so we can start thinking about starting a family,’ he said.”

“Home builders hoped for good news from their top economist on Wednesday —- and got nothing. ‘Things are a lot worse than anyone anticipated,’ said David Seiders, chief economist for the National Association of Home Builders. ‘The key word is risk,’ he warned. ‘The momentum is still definitely downward.’”

“He offered chart after chart to back up his pessimism. By last September, the rate had crashed to just 530,000 permits. ‘The numbers go off the edge of the cliff,’ Seiders said. The decline is ‘world-class in terms of the degree of contraction and the speed of contraction.’”

“Once upon a time, the World Economic Forum was the ultimate Wall Street jamboree. Now, in the riptide of the worst financial crisis since the Great Depression, WEF officials and delegates say many of the chief executive officers who gathered in Davos, Switzerland, over the last five years didn’t listen to warnings from their peers.”

“‘The partying crept in,’ says Klaus Schwab, the 70-year- old WEF founder and executive chairman. ‘We let it get out of control, and attention was taken away from the speed and complexity of how the world’s challenges built up.”’

“The fallout has left the WEF riddled in buyer’s remorse, with officials throughout the organization asking what they have wrought and, like Wall Street, whether they offered too much of a good thing. Schwab says the delegates treated him like ‘Cassandra’ whenever he questioned the logic of their wisdom on asset-price bubbles in housing, stocks and other financial instruments.”

“The moment the credit crisis claimed an entire country, even if it was Iceland, which is smaller than Canberra and I daresay colder, we were in trouble. Stone the krona, as one headline put it. What next? Well, there’s a recession in the US that could turn nasty and commodity prices are plunging.”

“But getting back to Iceland for a moment. Its banks collapsed because they borrowed too much from the rest of the world to lend on inflated housing prices and finished up owing more than the country’s GDP. Um, sound familiar?”

“U.S. lawmakers have accused major credit rating agencies of serious failures in how they assessed mortgage-backed securities and other investments. Executives of major firms, and former employees testified at a congressional hearing. Sean Egan, Managing Director of the Egan-Jones credit ranging agency, asserts that major credit agencies knowingly issued grossly inflated and possibly fraudulent ratings.”

“‘Issuers paid huge amounts to these rating companies for not just significant rating fees, but in many cases very significant consulting fees for advising the issuers on how to structure the bonds to achieve maximum AAA ratings. This egregious conflict of interest may be the single greatest cause of the present global economic crisis,’ he said.”

“Richard J. Rosen, a senior economist and economic adviser at the Chicago Federal Reserve: ‘Mortgage-backed securities had historically been a fairly safe investment offering a better return than even safer U.S. Treasury debt. With interest rates near historic lows from 2001 to 2004, investors around the world were trying to earn more on their investments. At the time, mortgage-backed securities, which had been heavily promoted abroad by the U.S. government, seemed like a fairly safe option.’”

“‘As global investors demanded more mortgage-backed securities, banks began looking for more mortgages to buy, repackage and resell. This was one of the reasons lending standards loosened. By the time it became clear that many home loans had gone to people who wouldn’t be able to repay them, the market had grown large enough to shake investors all over the world - from community banks in California to multi-billion-dollar banks in Germany.’”

“Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted yesterday that he ‘made a mistake’ in trusting that free markets could regulate themselves without government oversight.”

“Greenspan, who stepped down in 2006, denied that the nation’s economic crisis was his fault but he conceded that the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a ’state of shocked disbelief.’”

“Greenspan acknowledged under questioning that he had made a ‘mistake’ in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan said, ‘I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.’”

“Greenspan was asked to defend a variety of actions he took as Federal Reserve chairman — resisting recommendations to use the Fed’s powers to crack down on subprime mortgages, for one. And opposing efforts to impose regulations on derivatives.”

“As for firms that package mortgages into securities, he said, ‘As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue.’”

“He acknowledged that he had also been wrong in rejecting fears that the five-year housing boom was turning into an unsustainable speculative bubble that could harm the economy when it burst. Greenspan maintained during that period that home prices were unlikely to post a significant decline nationally because housing was a local market.”

“He said yesterday that he held to that belief because until the current housing slump there had never been such a significant decline in prices nationwide. He said the current financial crisis had ‘turned out to be much broader than anything that I could have imagined.’”

“Recessions come around at a pace of a little more than once a decade, and there is little that government can do or should try to do to prevent them. Recessions are as necessary to prosperity as are recoveries.”

“That might seem like a harsh thing to say. Recessions extract their own degree of pain. The reality is, however, that they are medicine required to purge the economy of excesses and to lay the groundwork for future robust growth.”

“The excesses go way beyond subprime housing. At all levels and in all ways, the U.S. economy is built on borrowing and consuming. American households are $14 trillion in debt, up from $680 billion in 1974. The U.S. government is nearly $10 trillion in debt, up from $5.7 trillion at the beginning of the Bush presidency.”

“The question isn’t whether the nation is going to pay for all the years of excess, but how. Not only do home prices need to bottom out, but America needs to focus more on investing and producing, and less on borrowing and consuming. That won’t be easy. There is, however, one tool for accomplishing this, and it’s called a recession.”