Housing bubble poetry

Now we know what Prof. Karl Case (of S&P/Case-Shiller) is doing with his free time since he retired.

Hat tip: Greg Mankiw.

January 2010 employment data

The official unemployment rate declined in January. It's still too early to tell for sure, but so far it looks like we're seeing the declining unemployment that occurs after a typical recession, rather than the "jobless recovery" of the previous two recessions. (The typical pattern after a recession is for the unemployment rate to decline. That pattern was broken by the previous two recessions when the unemployment rate rose for quite a while after the recession had ended.)


Payroll numbers suggest we lost 20,000 jobs in January. That's far better than the pace a year ago, but we need 100,000-200,000 job gains just to keep up with population growth. This graph shows the month-over-month change in payrolls as measured by the U.S. Bureau of Labor Statistics:


Here is the month-over-month change in payrolls as measured by Automatic Data Processing, a private payroll-processing company. I'm starting to favor the ADP data over the BLS data due to lower month-to-month volatility. As a reminder for conspiracy theorists, the ADP data does not come from the government.


Some economists consider aggregate weekly hours worked as the best measure of both unemployment and underemployment. For those of you who favor the U6 measure of the unemployment rate over the official rate because it takes underemployment into account, you should love the Aggregate Weekly Hours Index. Here we see that the pace of average weekly hours worked is showing continuing improvement, but it's still below zero:


Finally, some economists like to look at weekly initial unemployment claims because it is updated more frequently than the monthly statistics above. This graph shows the year-over-year percentage change. Notice it's currently below zero, which is a good sign.


For those of you on the east coast, enjoy the snow this weekend.

The danger of walking away

Apparently, thirty states—including Virginia—are recourse states. CNN Money has an interesting article about banks pursuing people who have lost their homes. If you walk away from your home, you better be poor:

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."

And:

What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

Again, there's a big difference between a strategic defaulter and someone in actual financial trouble. Because they have jobs, decent salaries, and personal savings, strategic defaulters are ideal targets for banks to go after in order to get their money back.

Dean Baker's take on walking away

Economist Dean Baker, one of the first people to publicly warn of the housing bubble, disagrees with me on ethics:

Walking away from an underwater mortgage is one way in which normal homeowners may be able to both help themselves and the economy.

The logic is straightforward. As many as 20 million people owe more than the current value of their homes. In most cases they have little hope of ever accruing equity in their home. There continues to be an enormous glut of housing. Nationwide, vacancy rates are at record highs. Rents are actually falling for the first time since we have reliable data.

Also, temporary government supports in the form of extraordinarily low interest rates and the first time buyers' tax credit are about to end. It is virtually certain that house prices will soon resume their decline and will remain low for many years to come. This means that people who are underwater today are likely to be even further underwater five or 10 years from now when they plan to sell their homes.

Not only will people end up losing money when they sell their home, but many underwater homeowners are likely to pay far more on their mortgage and other ownership costs than they would to rent the same unit. We did calculations recently that showed that homeowners who bought near the peak in many bubble markets could easily save themselves more than $1,000 a month by renting equivalent units. This means that these underwater homeowners could be throwing out more than $12,000 a year in a desperate effort to keep up on their mortgages. Since most of these homeowners will never have any equity in their home, the mortgage check they send to the bank is money thrown in the garbage. ...

Not only would it benefit millions of homeowners to send the keys back to the bank, it would also benefit the economy. The money that homeowners save by not paying their mortgage is money that could instead be used to support consumption and boost the economy. ...

Unfortunately, the current policy from the Obama administration goes in the opposite direction. Rather than realistically assessing what is best for homeowners, the policy seems intended to do everything possible to persuade people to keep sending checks to the banks, even using taxpayer dollars as an inducement. ...

Walking away from a home may well be the best economic choice, and in such cases, it is also likely to be the best choice from the standpoint of the economy as a whole. This may not be advancing God's work, but if millions of people walked away it might educate Goldman Sachs and the rest of Wall Street bankers about what happens when everyone plays by their rules.

Although I still disagree about the ethics, I'm starting to warm up to this type of argument.

FHA to encourage flipping

The Federal Housing Administration is behaving more and more like the financial institutions that got us into this mess:

Starting today home "Flippers" are now welcome at the FHA.

That's right, with a glut of foreclosures plaguing the nation's neighborhoods, the FHA is temporarily removing restrictions on investors who buy and sell homes within 90 days.

It's just for one year, but Flippers are no longer persona non-grata with the government.

"FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," FHA Commissioner David Stevens wrote in a statement last month. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

So the FHA wants to encourage flipping and turn first-time buyers, who are already getting a tax break, into new real estate speculators? Nope, they just want to get as many foreclosed properties as possible off the market. This opens up a whole new bundle of buyers to current real estate investors who previously couldn't flip the home to a low-income borrower.

Krugman: "Too big to fail" is not the problem

Paul Krugman argues that the Fed didn't cause the housing bubble and "too big to fail" isn't responsible for the financial crisis.

Assuming Canada doesn't have a housing bubble, it would also invalidate Ben Bernanke's argument that the housing bubble was caused by a global savings glut. Of course, if the U.S. (and global) housing bubble was caused by a combination of factors, then low interest rates and high global savings could be necessary but not sufficient causes of the bubble.

Spammy spam spam

Note to readers: Due to intensified link spamming recently, I have turned on full comment moderation. Sorry, I hate comment moderation as much as you do.

The greater consequences of ignoring the housing bubble

Here's a look at the greater consequences of the Fed's decision to ignore the growing housing bubble in the early part of the previous decade.

Identifying stock bubbles

Columbia University economics professor Rajiv Sethi discusses identifying stock market bubbles in real time.

The effects of easy money on mortgage lending

Simon Constable of Dow Jones Newswires points out the harmful side-effects of easy money on mortgage lending:

When Bernanke says low interest rates weren't the cause of the housing bubble, he is at best being disingenuous. Instead, he points to lax lending standards as the key fuel for inflating home prices.

But the truth is rather different.

His assertion is similar to claiming that it isn't the fall from a skyscraper that breaks your bones, but the sharp stop when your body reaches the street.

Low interest rates and lax lending standards are also closely related. They are just two symptoms of loose money. Lax lending standards were the response to healthy banks being awash with cash and most creditworthy borrowers already fat with debt.

So to put more money to work, bankers lent to increasingly dodgy borrowers. Indeed, that is what you would expect during a period of loose monetary policy.

Actually, Bernanke's position is that the loose money was coming from a global savings glut, a position I agree with. The effect on lending would be the same, though. My complaint is that the Fed's low interest rates exacerbated the problem when the Fed should have been trying to counteract the problem.

By the way, Bernanke's reappointment has been confirmed by the senate.

Yes, Virginia, there is still a housing bubble

Dean Baker, the first economist I'm aware of to spot the housing bubble (although he was still a year-and-a-half behind me), says we've still got a housing bubble and the government isn't helping people by encouraging mortgage lending:

Housing economist Dean Baker, the co-director of the Center for Economic and Policy Research, laid out his case at a risk conference last week for why we still have a housing bubble. Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s. “There’s no plausible fundamental explanation for that,” he says.

Why? Simple, he says: Economic fundamentals are all going in the other direction. Rental apartment vacancies are reaching record highs. Many segments of the housing market are still oversupplied. And the core demographic in the country—the baby boomers—are reaching the age where they’re more likely to downsize, buying less house in the years to come. ...

“As a matter of policy I can’t see that we want people to buy a house in 2009 that’s 10-20% higher than it would sell for in 2011,” he says. “In so far as the FHA was encouraging people to buy homes in bubble markets that were not deflated, that’s not good for the FHA and you didn’t help the homeowner. We didn’t do those people a favor.”

Again, encouraging people to buy houses at inflated prices is harmful to home buyers. It's harmful when banks do it and it's harmful when the government does it. When it's done with low down payments (such as the FHA's 3.5%), it's risky to the entire economy because many people can easily end up underwater.

CNN cheerleads the home buyer tax credit

CNN staff writer Les Christie acts as a cheerleader for the home buyer tax credit:

There is some hope that this good thing could live on after June 30. If the housing market and the economy is not in full recovery mode by late spring, there is already discussion about Congress extending the tax credit again, according to Jaret Seiberg of Concept Capital, a Washington-based research group.

In the article, CNN tells happy stories about people who receive the money, but completely ignores the fact that other people have to pay for it eventually, plus interest.

All our problems would go away if everybody just received free money from the government, wouldn't they?

I support stimulus spending. All I ask is that the spending add to our country's physical or human capital stock (i.e. useful infrastructure or knowledge), because those contribute to economic growth. Spending taxpayer money to transfer pre-existing houses from one person to another doesn't do that.

More bubbles?

Fortune magazine sees four new asset bubbles. Also, the European Central Bank sees bubbles in emerging markets and some commodities. Jim Chanos sees a bubble in Chinese real estate.

Paul Volcker for Fed chairman!

I keep hearing people arguing for the renomination of Ben Bernanke by claiming that there's no one else who can do the job. That's status quo bias taken to an extreme. (Four years ago, many people thought no one could replace the Maestro.)

Ben Bernanke was on the Federal Reserve Board of Governors from 2002-2005, when it willfully ignored the growth of the housing bubble. Thus Bernanke is like an arsonist firefighter, who creates a crisis and then gets treated like a hero because he resolved it. We need a Fed chairman who will act to prevent problems in the first place.

The truth is that there are many good economists who could take Bernanke's place. Although old, Paul Volcker is in good health and is widely considered to have been the best Fed chairman. He could do the job again. Another option would be Stanford economics professor John B. Taylor, inventor of the Taylor Rule. Got any suggestions? Leave them in the comments.

Update: Calculated Risk suggests Janet Yellen for the job. Also, Paul Krugman says appointing himself to the job would be crazy. I oppose Krugman because he favors a version of the Taylor Rule that mimics the bubble-blowing Greenspan Fed's interest rate policies.

Bernanke out as Fed chairman?

The New York Times reports bad news for Ben Bernanke. He may not have the votes to be confirmed:

The confirmation of Ben S. Bernanke to a second four-year term as chairman of the Federal Reserve ran into further trouble on Friday, as two more Democratic senators said they would vote against him.

The White House came to Mr. Bernanke’s defense Friday, but the Senate majority leader, Harry Reid, is believed to be struggling to come up with the 60 votes necessary to confirm Mr. Bernanke before his term as chairman expires on Jan. 31.

In a statement Friday morning, Senator Barbara Boxer, Democrat of California, came out against Mr. Bernanke, who was named to his post during the Bush administration. She said she had “a lot of respect” for him and praised him for preventing the economic crisis from getting even worse. “However, it is time for a change,” she said. “It is time for Main Street to have a champion at the Fed.”

“Our next Federal Reserve chairman must represent a clean break from the failed policies of the past,” Ms. Boxer said.

Another Democratic senator, Russell D. Feingold of Wisconsin, also announced Friday that he would vote against Mr. Bernanke.

“Under the watch of Ben Bernanke, the Federal Reserve permitted grossly irresponsible financial activities that led to the worst financial crisis since the Great Depression,” Mr. Feingold said in a statement.

Because several senators are using procedural methods to try to block Mr. Bernanke from serving another term, it will require 60 votes for him to be confirmed. Congressional Democrats said they do not have a firm sense of how many votes Mr. Bernanke can count on, and Mr. Reid has not scheduled a vote.

Russ Feingold's reasoning is far better than Barbara Boxer's. Her reasoning is populist and naive. I am glad they both oppose Bernanke's reappointment, however.

If President Obama needs a last minute replacement, I hear former Fed chairman Paul Volcker is still alive and kicking.

Mortgage terms in plain English

New rules this year clarifies mortgage terms for borrowers:

Shopping for a mortgage has just gotten simpler.

Lenders are now required to use easy-to-understand forms providing basic loan terms and good-faith estimates of closing costs. And closing agents are required to provide a settlement statement that clearly compares borrowers' final and estimated closing costs, according to the U.S. Department of Housing and Urban Development.

The new rules, added to the Real Estate Settlement Procedures Act, went into effect Jan. 1.

The new, simplified documentation is aimed at helping consumers fully understand the terms of a mortgage and more easily compare loans from different lenders. It also reminds consumers that they can shop around for the various required closing services, instead of simply accepting their lender's suggestions.

The fed funds rate: Too low for too long?

Here's an interesting graph. It shows the fraction of the time in each decade that the real fed funds rate was negative, i.e. the nominal fed funds rate was below the inflation rate. In the 1970s, we had significant consumer price inflation. In the 2000s, we had a credit bubble.

Option ARM resets

Looking at this graph, it looks like Option ARM resets begin to become a problem in about the mid-point of this year, and really shoot up around mid-2011. According to Calculated Risk, most Option ARMs are negative equity. The prevailing interest rate will not likely be a problem, since mortgage interest rates are lower now than they were five years ago. The problem is that many Option ARM borrowers have probably not been paying much of their principal yet.

Notice that at its peak, the Option ARM wave will be slightly smaller than the subprime wave of 2007-2008. The subprime problem has past.

CNBC discusses the problem:

Thousands of American homeowners are starting to see their monthly mortgage payments skyrocket, dealing a fresh blow to the already shaky housing recovery.

The widely feared reset of thousands of option adjustable-rate mortgages—where both interest and principal payments rise sharply—is already leaving many homeowners struggling to keep a roof over their head. ...

Terms of the loan usually allowed the borrower to make low monthly payments initially—sometimes by just paying interest only.

But as the terms of those mortgages now readjust, homeowners are facing much higher mortgage payments at a time when the value of their house has plummeted and many are out of work. In some cases, homeowners who chose a very low starting interest rate have actually seen the overall amount of their mortgage increase—known as negative amoritization—putting them even deeper in debt.

The question is how many of these Option ARM mortgages have already defaulted?