Case-Shiller: History of Home Values

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Housing Double Dip?

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Greenspan and "The Crisis"

In a detailed review of the causes of the financial crisis, former Federal Reserve Chairman Alan Greenspan acknowledged a range of regulatory failures but strongly disputed the widely held view that the Fed left interest rates too low for too long...

Mr. Greenspan's reputation has been tarnished by the crisis. Widely hailed when he left office in January 2006 as one of the greatest central bankers ever, he is now blamed by many for advocating deregulation and low interest rates during the 1990s and 2000s.

WSJ article

Barry Ritholtz responds:
his incompetence as a regulator made his incompetence as a central banker even worse.

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here is the Greenspan paper: The Crisis

Loan Resets by Type

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Government Mortgage Support

To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

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The Housing Bust is Not Over

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John Taylor v. Ben Bernanke

John Taylor, creator of the so-called Taylor Rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta...

Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006.

“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.

Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

read the article

Bernanke Fails to See the Bubble or Recession Coming

Housing Crisis

If there is a lesson to be learned from the facts of the housing crisis, it is that its cause has been misguided and intrusive regulations and political pressures, and not any inherent weakness or instability in a market economy.

read the essay

Case Shiller Chart Updated

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The Fed and the Bubble

Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed...

The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.

But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.

The price decline started in 2006. Then policies designed to promote the American dream instead produced a nightmare. Trillions of dollars of mortgages, written to buyers with slender equity, started a wave of delinquencies and defaults. Borrowers' losses were limited to their small down payments; hence, the lion's share of the losses was transmitted into the financial system and it collapsed.

read the WSJ article

Falling Home Prices

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Greenspan, the Fed, and the Housing Bubble

In a recent WSJ essay, Greespan denied responsibility for the housing bubble.

Fed Governor Donald Kohn viewed things a little differently.

"Long-term interest rates--the ones most relevant to the borrowing and spending decisions of households and firms--have been held down by easy monetary policy and the expectation that short-term rates will remain low for some time. And these low rates in turn have boosted the prices of houses and the value of corporate equity."

read the full paper

Housing Bubble Explained

Mark Thornton on the Housing Bubble

1. The Federal Reserve cut interest rates to as low as 1% so that after inflation we had negative interest rates.

2. As a result, mortgage rates fell to an all time low.

3. Low rates caused borrowing and lending to explode, particularly in real estate. For example, commercial banks more than doubled the amount of real-estate loans they made.

4. All these low interest loans had to be extended to people with worse credit ratings and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed.

click for the graphs

The Rather Obvious Housing Bubble

Mortgage Bailout

A government bailout of the housing market is both fiscally and morally irresponsible; it is an unfair subsidy being paid to the wealthy (bankers), the greedy (mortgage brokers, flippers, and yes some homeowners), and the incautious (some homeowners), with no benefit to those paying the bill (taypayers).

Why should responsible Americans be forced to pay for the mistakes of others?

from: Stop the Mortgage Bailout

Housing Bubble

April 1st we will be at #16 on the chart. In other words the end is about 4 years away.

More info here: The Data Does Not Lie

Origins of the Housing Crisis

Housing Bubble: The Worst is Far From Over

See here and here.

Dow Hits Record High

U.S. stocks rallied, sending the Dow Jones Industrial Average to a record, as investors speculated the worst may be over for banks and construction companies hurt by subprime mortgage losses.

Lennar Corp. and D.R. Horton Inc., the two biggest U.S. homebuilders, advanced after Citigroup Inc. said the industry's 50 percent decline this year has made the stocks attractive. Citigroup led financial shares higher after the largest U.S. bank said it expects "a normal earnings environment" in the fourth quarter and former Federal Reserve Chairman Alan Greenspan said the credit slump may be ending.

The Dow's record caps a six-week recovery from a slump that helped wipe out almost $2 trillion in U.S. market value. The 30- stock gauge added 191.92, or 1.4 percent, to 14,087.55, above its previous closing high of 14,000.41 set on July 19. The Standard & Poor's 500 Index increased 20.29, or 1.3 percent, to 1,547.04, 0.4 percent shy of a record. The Nasdaq Composite Index gained 39.49, or 1.5 percent, to 2,740.99, the highest in six years.

read the entire article

The worst is far from over.