The Housing Bubble

From Realtor.org, November 2001. “By David Lereah. Before Sept. 11, housing was the only major sector of the economy standing tall, which was the primary reason the U.S. economy didn’t succumb to recession. However, the notion that the housing sector can continue to shoulder the burden of keeping an ailing economy afloat now appears unrealistic. In fact, as we continue to assess the residual economic damage from the attacks—massive layoffs, the crippling of key industries such as air travel, and a rapid deterioration of equity values, to name a few—it appears increasingly likely that the housing sector may also experience the sluggishness that it had adroitly avoided for so long.”

“The economy is in recession, and our financial system is under a great deal of pressure and scrutiny. The Federal Reserve Board is expected to provide monetary accommodation for financial markets by lowering short-term interest rates. The shift in priorities creates a cloudier picture for real estate practitioners looking toward the future. The operating environment may be somewhat different from that of just a month ago.”

“A 5 percent to 10 percent drop-off is likely for the remainder of this year. But compared with the rest of the economy, the housing sector continues to stand tall. Even with a slowing of activity, existing home sales for 2001 are still expected to post the second best level ever.”

September 9, 2006. “The Times Union from New York. ‘The expansion that began in November 1991, when mortgage rates fell into single digits, became a boom following the 9/11 terrorist attacks, when trillions of dollars left the stock market looking for a safe haven in real estate, said David Lereah, chief economist at the National Association of Realtors.”

September 11, 2006. “The Street.com. ‘Could there have been a U.S. housing boom without the events of 9/11? It’s a matter of much debate. Most experts agree that the U.S. housing boom was caused by a confluence of factors set in motion in 2001, including very low mortgage rates and a newfound desire for tangible assets like real estate.”

“Prior to the attacks, the U.S. housing market was floundering with the rest of the economy. It’s hard to imagine a time when housing wasn’t a dominant topic on Americans’ minds. But in 2000 and early 2001, housing sales were flat and residential spending was slow. In summer 2001, the Fed had already cut short-term rates from 6.5% at the beginning of the year to 3%. Sales did not immediately boom, though. Five weeks after the attacks, Jonathan Miller, head of New York City real estate appraisal firm Miller Samuel, thought about changing careers because the market was so slow. But near the end of 2001, Miller began noticing some of the beginnings of the boom.”

“Around this time, Miller witnessed a five-way bidding war for a one-bedroom apartment in a non-doorman building in the East 50s, an unusual phenomenon, since this was not a luxury property but a fairly generic one. This trend began to repeat itself, and bidding wars became the norm in New York City and areas of California in late 2001.”

“By February 2002, the National Association of Realtors was reporting that January’s existing home-sales data had hit a record monthly high. By April 2002, Federal Reserve Chairman Alan Greenspan was already addressing the issue of a possible bubble forming in real estate prices.”

The New York Observer. “One winter evening in 2006, host Martin Bashir’s voice intoned over the opening of Nightline: ‘Meet the brash, young real estate assassin, selling lavish dream apartments to clients with money to burn.’ The TV screen bled to an earnest-looking Michael Shvo. ‘When you see a photo of the New York skyline,’ the 32-year-old informed us, ‘these are buildings I made happen.’”

“And what made Mr. Shvo happen? The New York condo boom, in no small part a product of 9/11. ‘What happened was that it created this unnatural affordability for housing,’ said Jonathan Miller, C.E.O. of New York appraisal firm Miller Samuel. ‘If we did not have 9/11, we would have probably gone into an expanding recession; and the Fed would have probably lowered rates to respond to the recession. But I think the symbolism of getting the economy back on its feet led them to keep rates at 0 for too long.’”

The St. Louis Post Dispatch. “The expansion of Scott Air Force Base, home of the U.S. Transportation Command, represents among the most clear-cut legacies of 9/11 on St. Louis. Many of the lingering effects, here and nationally, remain hard to pin down. Would the Federal Reserve have kept interest rates as low as it did for as long as it did? If not, would we have had a housing price bubble and the Great Recession? Would so many St. Louis homeowners be facing foreclosure now?”

“Such questions have no simple answers. The attacks set huge forces in motion, but many other factors swayed the economy over a decade. Taken alone, the 9/11 loss of people and property was an economic speed bump. The nation was already in a mild recession when the planes struck. The shock slowed sales and frightened travelers initially, but the effect wore off over a few months.”

“‘The impact was certainly far less than our recent Great Recession,’ says Jack Strauss, a St. Louis University economist who studies our region.”

The Record. “It’s 10 years and counting since America suffered a major terrorist attack. Osama bin Laden is dead. A crystal tower that will be the nation’s tallest building is rising at Ground Zero. So why aren’t Americans celebrating more? Why do these victories seem, in some ways, hollow? And why is everyone so testy?”

“Ten years ago, America was coming off the longest and most-lucrative economic expansion in its history. Real wages were rising. Unemployment was 5 percent. Oil sold around $30 a barrel, and the national debt was $5.8 trillion. Today, unemployment is at 9.1 percent and approaching 50 percent for some segments of the black community. Median household wages have actually decreased over the past decade. Oil topped $110 earlier this year.”

“More than one in three U.S. homes sold in the second quarter — one in seven in New Jersey — is now owned by a bank or is in some stage of foreclosure. By some estimates, the housing collapse sucked up $6 trillion in wealth. The national debt, meanwhile, is at $14.6 trillion and climbing.”

“‘I’m afraid to say there appears to be a new normal out there,’” said James Hughes, head of the Bloustein School of Economics at Rutgers. ‘The great American job-producing machine has faltered. We entered the new millennium with great optimism. Is anyone optimistic now?’”

The hamilton Spectator. “In the photograph, the one that hangs on the wall of Mark Standish’s office in lower Manhattan, the co-CEO of RBC Capital Markets Corp. is seen walking away from downtown, across the Brooklyn Bridge. Resolute. Standish, in the company of coworkers, evacuated to RBCCM’s backup facility that September morning, the morning that broke bright blue until Osama bin Laden shook the ‘throne of America’ and ‘hit hard the American economy at its heart and at its core.’

“It wasn’t true. Nor was it true, as then president George Bush would proclaim in a budget speech, that the terrorist attacks pushed America over the economic brink. Nor was it true that the financial district would be abandoned, the evidence to the contrary presenting itself in RBCCM’s move to larger downtown premises at 3 World Financial Center, just to the west of Ground Zero, a perch that gives Standish command over a 72,000-square-foot trading floor, a staff that has grown close to fivefold, and a daily view of all that did not come true.”

“‘I could have guessed at a lot of different things,’ he reflects, noting the arrival of new condominiums and the conversion of older commercial buildings to residential in a part of town where the sidewalks traditionally rolled up at 9. ‘But I would not have guessed that the financial district, downtown Manhattan, would be a phenomenal place to live 10 years ago . . . I would have said forget it.’”

“It takes an awfully long time to truly see what there is to see. Only last month did the U.S. Bureau of Economic Analysis release its revised GDP data for 2001. ‘These data are the ones that will be likely to enter history,’ says economist Gail Makinen, who penned a one-year economic retrospective for Congress during his tenure as a co-ordinator for the Congressional Research Service. Only now do we learn that what was reported to be U.S. GDP growth of 1.3 per cent in the first quarter of 2001 was, in fact, a contraction of 1.3 per cent. As Makinen notes dryly, a change of 2.6 per cent ‘is a pretty large revision.’”

“‘The United States economy was struggling to find a footing after the tech bubble collapsed,’ says Avery Shenfeld, chief economist for CIBC World Markets Inc. ‘9/11 didn’t cause a recession. It did cause a major disruption in economic data over a very short period of time.’”

“Writing in The New York Times two days before the terrorist attacks, James Grant examined the weak economy and the multi-trillion-dollar drop in stock values that had been pegged to shares in companies that, as Grant wrote, had no visible means of support. ‘Were investors out of their minds?’ was the question he posed, one that students of fantasy stock inflation and historic bubbles didn’t need answering. The NASDAQ, which poked above 5,000 in March 2000, closed on Sept. 10, 2001 at 1,695. Grant called the ’90s boom ‘the gaudiest on record.’ The unprecedented, decade-long expansionary cycle enjoyed in the U.S. had already come to an end.”

“Federal Reserve Board chair Alan Greenspan spent the waning days of August 2001 at a Reserve Board getaway in Jackson Hole, Wy. A series of interest rate cuts were already in play, cuts that would make it ‘easier for people to borrow and spend,’ Greenspan later trumpeted. The rate-cutting strategy became more aggressive post 9/11. The Reserve Board chair was fixated: broad home ownership was the goal, and ‘wealth,’ and thus consumer spending, would thenceforth be measured not by household income but by inflated household asset valuation.”

“It was a phantom prosperity, as was painfully learned. In his 2007 biography, Greenspan too politely acknowledged the role that the ‘loosening’ of mortgage credit terms for subprime borrowers played in heightening financial risk.”

“‘9/11 to me was a very significant social event,’ says Mark Standish. ‘In hindsight, it was not a significant financial event.’ Standish grows introspective. Of course the world has changed. ‘The last 10 years have really been America waking up from essentially a dream,’ he says, ‘a lovely dream.’”