Housing Market

Even with the upward revisions to new home sales in October, November and December, 2011 was the worst year for new home sales since the Census Bureau started tracking sales in 1963. The three worst years were 2011, 2010, and 2009 with sales of 304, 323 and 375 thousand respectively.

Sales will probably increase in 2012, and sales will also probably be higher than the 323 thousand in 2010. But I expect this year will still be the third worst on record.

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How the Government Caused the Financial Crisis

Home Sales

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New Construction

The Commerce Department reported(.pdf) that U.S. housing starts jumped 14.6 percent to an annual rate of 629,000 and that permits for new construction rose 2.5 percent to a 624,000 rate. As noted here many times over the last couple years, despite what you’ll read today, this really isn’t a big deal since the housing market is extremely depressed, homebuilder stocks now the equivalent of 2002-era dot.com stocks for reasons made clear below.

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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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Cartoon: Underwater Mortgages

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

The Housing Crisis is Far From Over

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Housing Crisis

Housing Crisis Round 2

These helped frame where we are in the mortgage crisis, which has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry…

Clearly, it is not yet safe to get back in the water: Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.

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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

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

Cartoon: Democrats and Nazis?

Bernanke on the Housing Bailout

Federal Reserve Chairman Ben Bernanke said Wednesday that the embattled housing market has crippled the economy, and at-risk homeowners need a bailout - even if they knew they couldn't afford their home in the first place.

"Some borrowers presumably knew what they were getting into," Bernanke said before the House Financial Services Committee. "But from a public policy point of view, the large amount of foreclosures are detrimental not just to the borrower and lender but to the broader system."

"In many of these situations we have to trade off the moral hazard issue against the greater good," he added.

read the CNN story

My thoughts: Bernake remains a moron.

Cartoon: Saving the Irresponsible

Ed Glaeser on the Housing Plan

The housing plan that President Obama revealed on Wednesday, like the stimulus
package, was presented as a single solution to a potload of problems. The plan is being promoted as a far-reaching intervention that will ease the suffering of delinquent homeowners, keep Fannie Mae and Freddie Mac solvent, bolster declining housing prices and rationalize the mortgage renegotiation process. If the plan were actually a serious attempt to fix every problem in the housing market, it would be much more of a mess. As it is, it certainly has its flaws, but its great virtue is that it doesn’t try to fix everything. Instead, it is aimed at two problems already squarely in the government’s lap...

Many Americans understandably feel that this policy is rewarding people who took too many risks. Still, given the extreme solutions to the housing mess that have recently been put forth, I think that we are getting off cheap...

The plan is moderate, and in today’s atmosphere, I view moderation as a triumph. Yet we should at least be aware of its shortcomings...

Still, by focusing on two problems instead of trying to fix everything, the plan avoided many of the greatest policy pitfalls. It could have been much worse.

read the entire essay

My thoughts: "It could have been much worse." This passes for economic analysis? Has the threshold been lowered that much? Are taxpayers supposed to be relieved? This is insanity.
It a policy is bad, it needs to be opposed. Period. End of discussion. This so-called "housing plan" is rewarding people for making dumb decisions. These people are not homeowners; they are home occupiers. "A family earning less than $44,000 a year has a $213,000 mortgage on a $190,000 house. By any reasonable standard, this family cannot afford that house." Really, why is that the problem of taxpayers? These people, borrowers and lenders, made bad decisions that they should have to bear the financial pain of that bad decision. Government theft is not a solution to economic problems. Ever.

Henry Hazlitt on the Housing Crisis

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in they long run they do not increase overall national production but encourage malinvestment.

~From Chapter VI "Credit Diverts Production" in Henry Hazlitt's "Economics in One Lesson," first published in 1946