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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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What is fair value in the stock and housing markets? Which is closer?
Related question: Will the stock market lead the housing market down, or are they “decoupled”?
Perhaps a better explanation is that both the housing and stock markets depend on conditions in the U.S. macroeconomy. When the economy looks on track for a double-dip, stocks and housing both get walloped as a consequence. The results take longer to show up in housing statistics than in stock market indexes, as the housing market is glacially slow compared to the stock market.
Stock markets are walloped by another sell-off as fears of recession build
By Cezary Pokdul and Peter Whoriskey, Published: August 18
Stock prices plunged in a broad sell-off Thursday amid renewed fears about the finances of countries and banks in Europe in a return of the investor skittishness that led to last week’s wild market swings.
While there was no one trigger for the market plunge, a spate of gloomy numbers and the return of panic selling reawakened fears of another recession.
Bleak numbers for U.S. jobs, housing and manufacturing compounded the anxiety over European woes, rattling share prices in every industry, and indicated again that the economic recovery remains fragile.
All three major stock indexes more than wiped out their gains from earlier this week. For the year, the Dow Jones industrial average is down 5 percent, the Standard & Poor’s 500-stock index is down 9 percent and the Nasdaq composite index is down 10 percent.
…
I’d like a better understanding about the historical context of home financing/owning/buying.
1) The evolution of FHA, HUD, VA loans, etc. (And how were homes purchased prior to the invention of the 30 year mortgage?)
2) Historical down payment requirements.
3) Redlining and flight to the suburbs
4) Impact of the change when they allowed exclusion of housing capital gains instead of rollover requirements (late 90’s if I remember correctly). (Did this perhaps begin the ATM mentality?)
5) When did we adopt the “move up the property ladder” mentality instead of aiming for the goal of a lifetime home and a mortgage burning party?
6) The creation of adjustable loans (early 80’s I think).
I’m sure the HBB brain trust will have additional questions and great insights.
Along these lines, someone suggested this week that we have a topic on what readers would like to hear or not hear from presidential candidates.
Similarly, and I know this is slightly OT, how could a sane and responsible “third” political party be created?
I don’t know that a third party could work. The two that currently exist have so much organization, money and whatever that they have to win. With a substantial third party, you are almost always going to split one of the two and throw the election to the one that isn’t split.
What I think you might be able to do in the age of the internet is get a few people to run for office with a pledge to not take any money from PACs, contributions of no more than $200 (or something like that) from any one person, and the staff looking after donations would not communicate to the candidate/person in office any information about you have X number of donors from industry Y so that X percent of your support was from that industry. No one who worked with donations would be allowed to get a regular staffer job. If any person or company came in to give information to the staff or candidate (or office holder) and mentioned contributions or told how much they gave or aggregated in the past, they would be asked to leave and couldn’t come back for 6 months. Every time someone got themselves kicked out, it would be tweeted and put up on the web as well as released as a regular press release. No junkets - if the candidate had to go on a trip for information purposes, he or she would pay for it.
If a candidate could actually get elected under those rules, he or she would have amazing freedom that the money scroungers don’t have. And a few of them just might be able to shame the rest of the Congress into behaving a little better.
The internet could possibly be the tool for undermining the stranglehold that the big financial interests have on our government, because these financial interests also have a large measure of control over the traditional media.
Take RP as an example. His agendas do not support the PTB. The media treats him like Mr. Invisible. The internet gives him exposure.
Take Ben Jones for example!
I am hopeful that we can have an evolution out of this crony political swamp rather than a violent implosion.
It doesn’t matter what the Presidential candidates say. All you need is 40 Senators in the other party and CSPAN turns into Hostage TV.
#4, #5 & #6 would be a good discussion….
Don’t forget the grandaddy even of them all: the invention of the computer. Seriously. When corporations figured out that they could make “money” and hit the numbers for their stockholders by shoving around electrons, that was the beginning of the end of goods and services, and the pesky people that came with them.
whyoung …You can’t have a analysis of the items you mentioned without considering how the repeal of Glass-Steagall Act in 1999 had on the financials markets .
Basically getting rid of Glass-Steagall ( enacted in 1933 ) removed the seperation between Investment Banking and commercial banking .
In the 1930’s after the great stock market crash they figured out there was a conflict of interest between investing and lending and the two worlds should be separated . Basically the investment world will resort to faulty lending because they want the person to make the investment . Lending should be based on qualifying for the loan ,not how attractive the investment is for the future in other words , and the 2 worlds have different principals .
Also allowing up to 500 k of capital gains free real estate investment every 2 years no doubt played into the real estate bubble .
Wall street financial sector was making a lot of money from this faulty lending ,that was misrated ,and they were relying on the piece of real estate going up in value for the security for the loan ,rather than the ability for the borrower to make good on the loan based on long term qualifying . They produced a risk factor that was off the charts ,and than they went to short that bet ,or they had credit default swaps based on insurance companies that couldn’t cover the bet .
Wall street financial sector doesn’t want any regulation on the Casino games they play ,or the reserves they should have ,or the leverage they employ in the shadow world of banking.
Of course this all blew up because of the faulty lending because value was created in real estate that normally would not of taken place because of the limitation of people really qualifying for loans . 15 dollar a hour cherry pickers were able to get 700 k loans for real estate, hit the mark appraisals became standard practice ,and fraud became rampant without normal principals of lending applied or normal down payments to offset risk .
The misrating of this high risk paper was a factor because they would of not been able to pass this high risk paper on to the secondary market had it been assessed at its true risk .
It didn’t take them more than 7 years from the repeal of Glass-Steagal to screw up the entire financial markets when the crash of real estate gained speed .
Investments are viewed in terms of their future value and lending should be viewed in terms of the borrowers ability to pay the loan based on qualifying for the loan and ability to pay long term ,and the value of the real estate in the now ,not its future value or a bubble price created based on faulty lending .
So people went into debt based on the wealth effect of fake real estate prices ( destined to crash ) . De-coupling debt from ability to pay is crazy .
They should of never messed with real estate .
De-coupling debt from ability to pay is crazy
The idea was home prices would go up 15% a year (in the bag) and ability to pay was irrelevant. Sort of reminds me of Wiley Coyote running off the cliff and continuing to run in place until he realized there was nothing under him. OOPS!
What I am trying more seriously to figure out is how to either make the debts go away gracefully or inflate the money supply to cover the debts. Once people realize that the debts, at least the real component of the debts is largely held by pension funds, governments etc will allowing debt failure remain an option. If not an option, so far efforts to print money have not made it down the chain where they can do any good…
so far efforts to print money have not made it down the chain where they can do any good ??
What, if Freddie & Fannie with the fed’s backing offered 80% financing, on a owner occupied SFR, @ 0% interest rate for 30 years…Would the market clear ?? Just wondering…
Actually I have thought of them giving zero percent loans to
the FB’s instead of the current ways they are passing out
stimulation .
So far i think that bad paper has just been dumped on F&F to put on the taxpayers dime .Everything was bad paper in the last 5 years because of the potential for RE prices to continue falling along with the forclosure supply .
I think the only way that debt goes away is if it’s in line with wages and remains in line with wages ,or default is a
way of it going away while somebody is the loser .
They don’t want to increase wages ,they don’t want to increase jobs ,they want to continue with outsourcing and
outmanufacturing ,they want faulty tariffs and trade balances ,they don’t want to increase taxes and actually decrease the tax base often times to the benefit of the rich . They don’t want to tackle the Health Care Costs being unsustainable and the fact that its affecting every other industry and the majority can’t afford the costs anymore ,and no doubt it makes medicare unsustainable .They want to price fix and have monopolies
do away with any benefits for the worker ( putting the burden for heath care costs on the people when it’s not even affordable to begin with . They want to raise the price of new cars ,when average incomes can’t pay the toll any more . They want a stock market based on Companies
making more money based on screwing the worker bees .
They want short term gains and bubbles and casino games
designed to make the rich richer ,never mind the flows of money are being misallocated .
They want to throw the older people under the bus and attack unions ,government jobs, and anything that does not
contribute directly to the Money Power Brokers idea of
Governments role that it should be a pawn for big business and billionaires ,not a government for the people .
They want to tranfer loss to the Majority and the culprits want to tranfer gain to themselves or the investment class . They want to destroy long term structures and obligations associated with those long term structures ,such as entitlements in spite of taking their payment up front and
all along until it was time to pay the worker .
They want you not to think about the Mortgage Backed securities ,or the wrongful bail outs ,and the fact that they belong in jail ,or they need to be stripped of their power and put back in their proper place .
Warren Buffect doesn’t want you to look at the fact that he got 60 billion by a system that was rigged in his favor ,and only now is he saying ” tax me tax me ‘,after the heist and tranfer of weath has already occurred in the last 15 years ,
Just like they are going back and getting back the money from the funds that benefited from Madoff in that they had profit above principal and had cashed out before Madoffs
Ponzi scheme blew up ,same principal should be applied
regarding figuring out who should pay what .
I think this would have to be in the form of income. More debt to put off the inevitable is a nice gesture, but facing lower incomes and higher everything else would seem to me to be counterproductive if you want folks paying down debts like Credit Cards, Mortgages and car loans.
I have noticed in So Cal repos are up in a big way over the last couple of months. I see those big car carriers loaded with late model cars all over the place.
I still want to talk about the craziness going on in Australia right now. I posted about it a few days back but the comment was lost in the flow of time :).
Pure hilarity down there. I’ve been entertaining myself watching “The Renovators”, a show currently on TV down under. The market down there is insanely deluded, to an extreme that I think easily meets or exceeds anything we had going on here (except in perhaps the most insane markets like Manhattan or san fran).
I know in today’s world the “huge housing bubble” is a bit played out and well understood, but it’s amazing to watch a country STILL taking it to this extreme while watching the whole world crumble.
For those who haven’t seen it - the show revolves around a group of individuals (Australia’s top renovators) who win keys to one of 6 “houses” and have to renovate and sell them. The team who makes the largest percentage of profit wins the profit of all 6 houses.
Where it gets hilarious is when they reveal the homes.
Like this one: The Inner City Terrace
http://therenovatorstv.com.au/the-inner-city-terrace.htm
It’s a 2 bedroom townhouse that’s completely eaten by termites and literally falling down (no updates since the 1950’s). No indoor toilet, It has an “outdoor bathroom” in the garden under a piece of corrugated metal. Purchased for only 750,000$ (AUS - and remember, AUS/US dollars are basically 1:1 today).
Or this one: The Half-Done House
http://therenovatorstv.com.au/the-half-done-house.htm
668,000$ (AUS) for some silly looking thing that -may- be for human habitation. When the renovators first visit it, a freaking jet aircraft sounds like it’s making a landing inside the living room (it’s RIGHT below a landing path of a nearby major airport).
Moving on: The Weatherboard, a 1930’s 1 bedroom shack that they purchased for - wait for it - half a million dollars!?!?!?!
http://therenovatorstv.com.au/the-weatherboard.htm
Or how about this gem? The “Fibro Cottage”, a POS from the 1950’s with the curb appeal of a skull (no, seriously, it looks like a skull). Purchased for the low low price of only 309,000$!
http://therenovatorstv.com.au/the-fibro-cottage.htm
Maybe you’d rather move “upscale” with the “60’s Suburban”, an absolute travesty of a home that hasn’t seen an update -since- the 60’s. One of the contestants casually remarked “ooh, that’s nice, thats a great middle class neighborhood, lots of christian schools”. Only 631,000$! Certainly any middle class christian family in AUS would absolutely die to live in such a place (or die trying to make the first mortgage payment at the very least).
http://therenovatorstv.com.au/the-sixties-suburban.htm
How about you move into urban style with your own fancy abandoned commercial building ready to be converted into a pseudo-home? “The Shop”, a blank vacant building complete with it’s own handicap parking space comes in at a mere 594,730$. No kitchen, no real rooms to speak of, it’s a blank slate!
http://therenovatorstv.com.au/the-shop.htm
These people keep talking about how excited they are at the potential profits and how much money they are going to make on these homes. One insane challenge after another exemplifies the hilarity. One such challenge put both teams in side-by-side townhomes to “renovate” for one day and see who could add the most value to their auction price in a SINGLE day.
One team added some paint, ripped out a beautiful quirky kitchen to replace it with an ugly squared-off “thing” from ikea, put grass-matting down over the kitchen tiles, and supposedly added over 60,000$ to the value (which put the total value of the home at 1,030,000$ - for a tiny two story townhouse).
I’m certain it’s a sign of their coming bubblepocolypse but damn if it’s not the funniest thing I’ve seen on TV in a long time.
What is the median salary down under?
There are still houses without indoor plumbing? Somalia yes, Thailand yes, but Australia, home of the whopper creepy crawlies? You go out at night to take care of some business and the next thing you know, you’re the subject of a nature documentary on American TV.
Well, a quick search turned this up:
http://www.simplesustainable.com/topic/2463-melbournes-median-house-prices-vs-wages-1965-2010/
A fairly compelling graph, to say the least. Not sure about it’s accuracy, and it’s from 2010 so I’d be curious to see what things look like today. Basically puts current housing costs at 85%+ of household income. Yeah, that’s sustainable.
As for the outdoor plumbing - the creepy crawlers were the -first- thing I thought of. If you click on the link, picture 8 shows you the mythical outdoor bathroom on the 3 quarters of a million dollar house. The path to it is nicely lined with tall overgrown plants just waiting to hide a nasty poisonous Australian monster. Absolutely insane that a completely rotten practically tear-down townhouse with an outhouse would be 750,000$.
Strangely enough that looks like water-fed flush toilet, not a plain pit outhouse. So it must empty into a sewer system or septic. Why not move it into the house and dig a trench?
And what is this business with the “separate toilet” in the shop? The toilet is right next to the regulat bath! They can’t move a wall?
Also, if you really want to laugh at some voodoo economics talk, check out this article written this month:
http://www.abc.net.au/unleashed/2840224.html
Apparently it’s “different” down under, and Australian’s have the most disposable income ever while staring down MONSTER mortgages. Yeah….
The comments section is hilarious. Seriously, everyone should see this.
There is a joke in Europe that if newlyweds want to test their marriage, they should buy a kitchen from IKEA. If they can assemble the kitchen correctly without killing each other in the process, then then the marriage will likely survive.
Where does unemployment money come from? Do we just issue more checks or direct deposits?
What is the impact on our economy of a company like, say , B of A if they lay off a few thousand employees before Christmas?
Dwight D. Eisenhower for president in 2012. Oh, wait…he’s not available.
Is there anyone out there that can break toward the center with the voice of reason and act in the best interests of the republic?
Note that I said republic, not the GOP. We really need some statesmen (or stateswomen) in Washington.
Eisenhower was GOP. And you harken to him, but wait, you don’t want GOP.
That discounts Ron Paul for you. Old man, but he was always right. Too bad for you.
I would love some research about the source of cash being used by “investors” to buy distressed properties and also how many of these sales represent investor to investor churn activity. How many of these sales end up as owner occupied housing and how many end up otherwise.
I have a hunch the figures would be sobering…..
I find in my travels many people have dreams of sugarplums dancing in their heads, not solvent and savy business people, but rank amateurs who have little to no background and who imagine they can just jump in and generate positive cash flow buying rental houses, duplexes, and quadraplexes. The greater fool game hasn’t vanished, just become a bit less popular.
No FB dollar - present or future - shall be allowed to escape.
For decades lemmings have been conditioned by liquidity crisises to believe that dips are temporary and they should plunge right in - over their heads even - whenever these dips occur.
Dips are excellent buying opportunities - until they aren’t. And right now they aren’t because the liquidity crisises of the past were all fixed by the Fed dropping the interest rates. But this time dropping interest rates does not fix the crisis because the crisis is not a liquidity crisis at all. It is something else, some other type of crisis, something to do with insolvency, as in there isn’t enough solvency to go around.
In this type of crisis the need for cash intensifies because as this insolvency relentlessly takes its toll it takes a lot of cash with it.
So cash is the place to be until it isn’t, and after “it isn’t” then cash should be swapped for something else - probably stocks. Or maybe even real estate.
Remember: It’s the price you pay that determines your rate of return. Buy low, sell high and all that.
Most people think that “solvency” is having a line of credit.
Or having some checks left in their checkbooks.
Have you been saying this about gold since 2004, and therefore stayed out of gold?
I am not into gold because I do not know how to value gold.
If anyone else knows how to value gold then please post whatever method it is that you use.
But please do not use “price” as the method; Price and value are two different things.
“since 2004″
Anyone calling the top of the generational credit expansion in 2004 was practically a genius. Anyone sure now that we are at a new sustainable plateau in commodity prices may get T-boned. Just a possibility!
Let’s discuss the meaning of life. **
Let’s get real, this is a MASSIVE, WORLDWIDE, wake up call. A once in a lifetime, “Dude, you have it all wrong,” moment.
Mortgages, inflation, deflation, CPI. REIC, PMI, APR, HAMP, etc…
None of these things make spending time with a friend better, making love better, enjoying a swim in a lake, etc. better.
All of the things that make you feel alive, have nothing to do with housing. FPSS: collect experiences.
How long are you going to wait to buy a house? What are you going to do until then? I like the Blue plan: drink beer and boat around. When was the last time you sat around a campfire on a cool night with someone you love?
I’m approaching Zen and the Art of Motorcycle Maintenance levels here… housing means NOTHING. And yet, here I am. ***
** Box wine is to blame.
*** Box wine still to blame.
Box wine is to blame.
*** Box wine still to blame.
The horror… the horror.
Life is going to happen one way or another. If one arms himself with knowledge and understanding then he maybe will be able to cope with and roll with Life’s happenings. If not then he is at the total mercy of whatever it is that Life decides to impose upon him.
But as for the MEANING OF LIFE, well, IMO, that is another issue altogether.
I’ve been following HBB not because I want to buy a house, but because I have had a fascination with the bubble, the madness of crowds, and that I had associates who ridiculed me for renting an apartment like a college student, although I was in my 40s (now 50s).
The meaning of life is to “cultivate your own garden,” so to speak!
Those things you enjoy give value to your life. They may not give value to someone else’s life. Some people are obsessed with mundane things such as model railroads. Others live for mountain biking.
I had that mountain biking stage in my late 30s. Sometimes as a way to get away from my girlfriend and get out with the boys. My current passion is contract engineering and that’s what I live for - for now. Will go back to mountain biking at some point later (I still maintain fitness training to prepare for biking).
Some just like to learn from other people’s mistakes. I think most of us here on HBB are grateful for Ben Jones to bring us together and have us learn. We are as much a support group, although some of us clash. We still learn.
Box wine is to blame
Try malbec - Ruta22 2010 Patagonia Argentina.
Do you feel like you have lost control of your financial life? I certainly tend to feel this way at points…burgeoning inflation and shrinking income and economic opportunities have a way of driving home that feeling!
THE INTELLIGENT INVESTOR
AUGUST 20, 2011
Too Flustered to Trade: A Portrait of the Angry Investor
By JASON ZWEIG
They’re mad as hell, and they aren’t going to buy the dips anymore.
Much has been made of the billions of dollars that small investors have been pulling out of stock funds. However, some $4 trillion sits there—and most people still aren’t selling. Too frightened and angry to buy, they are simply watching with a sense of helpless horror.
Greed may be good, but these days, investors are more likely to be consumed by another emotion: rage. Jason Zweig explains on The News Hub.
In an online survey conducted between Aug. 9 and 15, a team of psychologists led by Paul Slovic of Decision Research in Eugene, Ore., probed how the latest financial turmoil has affected the mindset of Americans. The survey has been conducted eight times since the fall of 2008 among hundreds of people nationwide, asking the same questions of many of the same investors.
Americans are afraid not just of today’s terrible markets but of a worse tomorrow. The survey asks whether the latest “financial challenges will limit your future opportunities to pursue your objectives in life.” This month, 58% of investors said they believed that their future would be “moderately” or “greatly” limited, up from 56% in March 2009.
Asked how angry they felt “about the financial challenges facing our country now,” 59% said they were “moderately” or “very” angry; 52% said they were moderately or very fearful. The proportion who felt at least some anger and fear hasn’t fallen at all since the depths of the financial crisis in March 2009. When asked this month if they worried “about money yesterday,” 73% said yes—up from 56% 2½ years ago.
In March 2009, 17% of investors in the survey felt they had a strong or very strong degree of “influence or control” over their financial lives. This month, only 11% felt they did.
The mood of investors is at least as bad as in the darkest days of early 2009, when the financial world itself seemed about to end.
The old Wall Street cliché that “money chases performance” may need to be revised. Individual investors didn’t pile into the stock market even as it roughly doubled in the 12 months after March 2009; nor, in this slump, are most investors abandoning stocks or making major portfolio changes. Scott Salaske, a financial adviser at Portfolio Solutions in Troy, Mich., says that Thursday morning, even as the Dow was dropping 500 points, not a single one of the firm’s 530 clients called or emailed to get advice or request a trade.
People seem to feel like bystanders in their own financial lives—almost as if they were spectators at a racetrack equally incapable of stopping an impending car crash and of tearing their eyes away from it.
…