Monday, November 16, 2009

When did the housing bubble begin?

The Wall Street Journal asks when the housing bubble began:
Why should we care when it all began? It’s politics. If the housing bubble began during the Clinton administration, it can be blamed on the Democrats and their efforts to expand homeownership to people who, in some cases, may not have been quite ready for it. If it began under George W. Bush, then it can be imputed to the Republicans’ love of deregulation.

Of course, as we all know, the causes of today’s mess are far more complicated than either of those hypotheses allow. But nuance rarely figures in the debates of our age.

Edward Pinto, a mortgage-industry consultant who was the chief credit officer at Fannie Mae in the late 1980s, argued in a WSJ op-ed essay Friday that “most agree that the housing bubble started in 1997.”

I asked Mr. Pinto why he chose 1997. He pointed to a chart of long-term home prices patched together by Robert Shiller, a Yale economist. The chart shows inflation-adjusted house prices starting to move up sharply in the late 1990s. ...

Tom Lawler, an independent economist who worked at Fannie Mae from 1984 to 2006, says few housing gurus think the bubble began as early as 1997. In his view, the bubble began around 2002. The collapse of the tech-stock bubble in the year 2000 prompted many people, searching for other types of investments, to focus on real estate.
I spotted the housing bubble in spring of 2001, so I think people who claim it began later than that are fools. Anybody who looks at Robert Shiller's graph of house prices can easily see that the uptrend in real housing prices began in 1997-1998. We were in clear bubble territory by the end of 2000. Rather than blaming it on politicians, the strongest argument coming from economists is that the bubble was caused by a global savings glut that began in the late 1990s.

Here's my graph of nominal and inflation-adjusted housing prices since 1970. Look for yourself. When do you think the housing bubble began? (Click on the graph to see the full-sized version.)

Update: I notice that the Edward Pinto article blames the housing bubble on the Community Reinvestment Act (CRA). For Republicans who want to blame the bubble on the CRA and for Democrats who want to blame the bubble on bank deregulation, let me point out that the housing bubble was a global event. There was/is a simultaneous housing bubble in the United States, Australia, Britain, Ireland, and Spain, to name a few countries. The CRA does not explain why there was a bubble in Spain. Also, the November, 1999, passage of the Gramm-Leach-Bliley Act does not explain why real U.S. home prices began their ascent two years earlier.

46 comments:

  1. Greenspan was the Ayn Rand loving Republican steering our economy since Reagan's day. And Clinton was the "Third Way" corporatist Democrat who loved NAFTA, deregulation and cutting welfare. If you're going to blame an ideology it has to be the psuedo-libertarian conservative one.

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  2. I write for the Mortgage Calculator Blog -
    http://news.mortgagecalculator.org/ - and as part of a new series, we
    would like to begin interviewing other bloggers about issues related
    to housing and mortgages. I'm an avid reader of your blog, and think
    you'd make for an excellent interview. I'd be especially interested on
    hearing your thoughts on the apparent recovery in the housing market,
    trends in mortgage lending, rates, etc.

    Please let me know if you're interested, and I'll send over a short
    list of questions.

    Thanks!
    Adam Kritzer
    adamkritzer@gmail.com

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  3. I've mentioned this before, can't remember if it was here or in another site's comment pages, but the bubble, IMHO, started after the Asian currency crisis in 1997. I think we are still reeling from the effects of that disaster. Looking for proof? Got none. But I for one am suspicious of any explanation that doesn't include the crisis and the West's response to it. Which is to say, just about any explanation that's coming from anyone and anywhere.

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  4. Well it isn't unreasonable to distinguish between the interest rate driven price increases from ~2000-2003 and the declining credit quality price increases from ~2003-2006. And yes, when the bubble began is NOT indicative of where prices are heading, because of the huge amount of overbuilding. REAL prices are likely to fall below those pre-bubble prices in may overbuilt markets. --Jim A.

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  5. The seeds were planted in 1987 by the "greed is good" Gordon Gecko concept, which went mainstream when the "free lunch" wealth associated with the inflation of the huge tech bubble spilled over onto the unwashed masses. The steep acceleration of the tech bubble occured in 1997, accompanied by the inflation of the housing bubble. MTV cribs for all!! Granite, pools, huge foyers and his/hers closets!! Greenspan filled the gap after the tech bust better than could ever have been predicted, the banksters opened the casino, and the rest is history as house of cards, built on virtually wealth (i.e. nothing), became complete.

    The big question: Can the unwashed masses accept that greed may actually be not very good, that credit is debt, and debt really really sucks? Can they realize and truly accept that there is no such thing as a free lunch? IF this major shift in consumer philosophy occurs, then the blue line on the above chart will return to where it started. Bell curve complete.

    Of course, Barney Frank and his fellow puppets are accepting large bribes to try and convince the Ameridebticans that greed is still very very good. Will greed prevail? Stock up on popcorn...

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  6. "Savings glut" seems somewhat inaccurate. My layperson's understanding of this mess is based on a credit glut -- more people had access to bigger loans.

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  7. Aug. 5, 1997

    Do I need to explain?

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  8. dogeatery said...
    "Savings glut" seems somewhat inaccurate. My layperson's understanding of this mess is based on a credit glut -- more people had access to bigger loans.

    Yeah, but where does the money for the loans come from?

    Savings = Investment

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  9. 2002 LOL! My ass it started in 2002. That's the year I bought my first condo, for 80% more than was paid for it five years before. To claim that this period was bubble-devoid is ludicrous.

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  10. Aug. 5, 1997

    Do I need to explain?


    Yes, please. I assume you're referring to the "Taxpayer Relief Act of 1997" which exempted many more home sales from the capital gains tax in the US. How is a tax law which is limited to the US responsible for a global bubble, as James very insightfully pointed out?

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  11. We manage properties in Barcelona, Spain, and prices began to increase in the late 1990s

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  12. This is a minor point but I wanted to say that Greenspan ceased being Ayn Randian the second he became chairman of the federal reserve. Ayn Randians don't believe in that institution. We can get into that but it's not really worth it.

    As for me, finding out when it began so we can find a party to blame is kinda retarded. I think that there's plenty of blame to go around. What's more important is that finding out when it started could tell us what housing prices should be right now.. so if 2001, then prices should be 2001 prices adjusted for inflation.

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  13. Rob Dawg said...
    "Aug. 5, 1997

    Do I need to explain?"


    I assume you're referring to the Asian Financial Crisis, but I can't find what happened on August 5th.

    Although Asian countries generally have a high savings rate, the general thinking is that the 1997-1998 Asian Financial Crisis caused a jump in Asian savings, just as this financial crisis has caused a jump in American (private) savings.

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  14. I was wrong. BostonBubble was right. Rob Dawg is referring to the Taxpayer Relief Act of 1997 which was signed into law by President Bill Clinton on August 5, 1997.

    If Rob Dawg is right (I'm not necessarily saying he is) do we blame the Republicans in Congress or the Democrat in the White House?

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  15. The Taxpayer Relief Act still doesn't explain the bubble in Spain.

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  16. First as Mish has pointed out several times it is near impossible to quantify what inflation is so it is near impossible to adjust assets for inflation. Credit and monetary expansion causes inflation and due to various policies this inflation was forced into assets which is not properly measured. Accordingly, housing adjusted for inflation is by definition in accurate.

    In 1987 after the stock market drop, Greenspan turned on the liquidity which started flooding into assets including housing. He did the same in 1999 due to year 2000 issues. All of this started housing prices climbing. Then after the dot.com collapse the spicket was really turned on which caused the final blow off top.

    Accordingly, the start of the bubble was probably around 1987 but it was imperceptible. It started to slowly ramp up and built speed in 1999. In 2001 the liquidity was poured on which caused the final blow off top which had to come and what most people think of as the bubble.

    Once the ramp up started it was inevitable that it would end as it did. No politician would want the party to end on their watch so they came up with more and more ways to keep it going. Greenspan being totally clueless but knowing he had a good gig was more than happy to oblige. It took more and more juice to keep the party going until it required an unsustainable level of energy and started to collapse on itself.

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  17. 1. It's a mistake to argue as if there was *one* cause.

    It was a "perfect storm" of factors. From low interest rates, to global increase in standards of living, social engineering to increase home ownership, and Wall St's excessive use of opaque derivatives (CDOs, CDSs, etc.) which led to Agency problems throughout the supply chain.

    2. The CRA reform that Conservatives often point to is the 1995 regulatory changes ordered by Clinton through Rubin. Not the 1999 legislative changes.

    However, Conservatives conveniently omit that Republicans held control of Congress from Jan. 1995 to Jan. 2001. They could have undone the 1995 reform in their 1999 legislation.

    Furthermore, Republicans controlled Congress *and* the White House from Jan. 2003 to Jan. 2007. Nothing stopped them from reforming the CRA during that time. They controlled the committes, the agenda, and the process of bringing a bill to the floor! They didn't even try. Blaming it on only a fear that Dems would filibuster in the Senate.

    Finally, in 2004 President Bush's HUD ratcheted up its affordable-housing goal over the next four years, from 50% to 56%.

    3. For liberals who complain that it was Republican deregulation, it was President Clinton who kept the libertarian Greenspan at the Fed. And, Clinton who signed legislation to repeal Glass-Steagall. And, to prohibit states from regulating Credit Default Swaps as insurance (essentially repealing the prohibition of so-called "bucket shops" enacted after the 1907 Panic.).

    Finally, it was Clinton who stood idly buy as Brooksley Born (chairperson of the CFTC) was squashed by Greenspan, Rubin and Summers because she wanted to bring *transparency* to the derivative market. He did this even *after* the 1998 LTCM crisis, largely a result of opaque derivatives.

    This Frontline piece about Brooksley Born is a real eye-opener for anyone who believes Dems were trying to stop the effects of deregulation.

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  18. Georgetowner said...
    >>>This is a minor point but I wanted to say that Greenspan ceased being Ayn Randian the second he became chairman of the federal reserve. Ayn Randians don't believe in that institution.<<<

    I think you're being factitious. We could also say that participants in the Libertarian Party cease being "Ayn Randians" because Ayn Rand didn't approve the 1972 creation of that political party, and the core of her ideology does not approve of the "social contract" (a coercive device to extract compliance from individuals who didn't consent to be parties of that contract). Elections (and majority rule) derive from the consent of the governed to the Social Contract, and almost always involves a minority who are negatively affected (against their will).

    That's the reason why Libertarianism hasn't gained more than 2% of the vote since 1972. Libertarians can't figure out a way to give "less government" practical effect.

    Some, like Greenspan, choose to change the system from within. They're castigated by the purists for supporting coercion (or, how "less coercion" is still coercion), and no "true" Objectivist can support coercion in any form (except in defense against coercion, or retaliation/punishment for coercion.).

    The purists withdraw into what can only be described as a religion. One grand thought experiment about how the world should be, with no explanation for why it never has been, nor how to get there.

    So, it seems like picking a nit to say pragmatic libertarians aren't "Ayn Randians." They're definitely inconsistent as they sling around high-sounding rhetoric about coercion -- while recognizing the impracticality of the pure belief system.

    I've posted this a couple times: This Frontline PBS show (about how Washington was warned of the opaque derivative market between 1996 and 1998) discusses Greenspan's adherence to Rand's beliefs, and Rand's apparent approval (as she was present at his swearing in under President Ford).

    He didn't believe in regulation, or even trying to pre-emptively catching acts of fraud(!).

    If you watch the last few minutes of that documentary, you'll see Greenspan appearing before Congress, looking like a broken man, admitting that the ideology which he clung to as a religion for most of his life was wrong.

    He was a nut like most "true believer" libertarians who've turned "free markets" into a Theory of Everything.

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  19. This is totally person anecdote, but maybe it will help. My theory is that pre-2000, the stock market wealth effect was what started pushing up housing. I don't know what kind of loans the lenders were pushing in the 90s, but my guess based on the price and volume statistics, along with the economy doing "very well", they still were enforcing some lending standards. But then again, thinking back to that time, it's also quite possible that lending has already caught the fever.

    What I do know is that I was window shopping for houses in 2001 and prices were already taking off and stories of 20+ buyers having bidding wars on houses were common. We bought in 2002 with a self-documented, interest-only ARM, so clearly the lenders had already tossed standards out the window by that point.

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  20. As for the politics, there is plenty of blame to go around, though I think I would start with Greenspan. Anyone in his position should have been able to look at what was going on in terms of prices and other data that was available. Forgetting about the issue of derivatives regulation, Glass-Stegal, CRA, Fannie, Freddy, etc. etc., the most obvious thing was that there was this heavy usage of exotic loans to stretch buyers way beyond their limits. There should have been red flags flying everywhere when you've got prices at an all-time unaffordable level yet volume is also at an all-time high. It just seems that somebody with some kind of authority to do something could have thought this scenario ahead a few steps into the future and come up with a plan to slow things down before it got out of hand.

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  21. The assassination of Archduke Ferdinand wasn't the sole cause of WW-I either. The Tax exemption let loose a speculative aspect to homeownership that made the investment component as close to a sure thing as is possible. Sure we can talk about a carry trade and flight to quality of liquidity chasing return and shortly thereafter loose lending standrds but Aug 5, 1997 is a close to a birthday as i can determine.

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  22. Anonymous said...
    >>>Forgetting about the issue of derivatives regulation, Glass-Stegal, CRA, Fannie, Freddy, etc. etc., the most obvious thing was that there was this heavy usage of exotic loans to stretch buyers way beyond their limits.<<<

    It's incorrect forget the role derivatives played. That was the way Wall St. sliced and diced mortgages into tradeable securities, hiding the risk of the underlying assets, causing greater investor demand for what appeared to be AAA-rated bonds paying far higher returns than one would expect.

    The reason those bonds paid far higher returns was because the CDOs contained sub-prime mortgages. But, that toxic waste was lost within the mix, and rated higher by the ratings agencies (who used the going price of Credit Default Swaps) to gauge the prevailing risk (in the absence of actual historic data).

    The more investor money which poured in (demanding higher-than-average returns from AAA bonds), the more money which flowed to mortgage brokers, eager to make any loan just to get the fees (because nobody further upstream cared. Not the Wall St. bank. Not the CDS underwriter. Not the ratings agencies. And not the investors who were begging for more MBS bonds to buy.).

    That's the problem with focusing on one aspect of the "bubble." There were many factors. We can't isolate one factor. Other factors amplified it.

    For example, the Japanese Yen Carry Trade contributed heavily. You could borrow Yen for 0%, and invest it in seemingly AAA-rated bonds paying 8%. That contributed greatly to the money sloshing around in the economy back them.

    But, there's no ignoring how sub-prime junk mortgages were trading in bonds rated AA and AAA.

    Just one example: According to the British Bankers Association, the CDS market expanded from just $180 billion in 1996 to a stunning $20 trillion a decade later. That’s a 111-fold expansion in this esoteric, opaque market. And by all accounts, it continued to grow in 1997 as well -— to a whopping $57.9 TRILLION, according to the Bank for International Settlements.

    According to the U.S. Comptroller of the Currency (OCC), on June 30, 2008, U.S. commercial banks held $182.1 trillion in notional value (face value) derivatives (not just Credit Default Swaps, but Debt Obligations, etc.). And, according to the Bank of International Settlements (BIS), which produced a tally six months earlier for the entire world, the global pile-up of derivatives, including institutions in the U.S., Europe and Asia, was more than three times larger — $596 trillion.

    That was ten times the gross domestic product of the entire planet.

    A good (and fairly balanced) book is The Two Trillion Dollar Meltdown. I highly recommend it. It discusses the early attempts to collateralize mortgages, and all the ins-and-outs of modern derivatives.

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  23. James said...
    >>>The Taxpayer Relief Act still doesn't explain the bubble in Spain.<<<

    The use of derivatives (CDOs, CDSs, synthetic CDOs made up of tranches of CDSs, and the ratings "quant" magic) weren't limited to the US. Their use grew around the world.

    Wall St. execs believed their new instruments were the new global Gold Standard.

    Also, another point in favor of the opaque over-the-counter derivatives as a major contributor to the "bubble," it was common for banks to conduct round-trip trades at an agreed-upon price just so they could generate a "market" price for the toxic waste, and then use Mark-To-Market rules to value it.

    That was another factor which kept the charade going, bringing in investor dollars (fueled by low interest rates; Yen Carry Trade; emerging middle class in developing countries, with cash seeking to be invested in more mature, stable markets.).

    Also, regarding the 1995 changes to the CRA (inducing more loans to bad borrowers by regulated banks), that may have been a significant spark. But, by 2008, the vast majority of sub-prime mortgages had been written by unregulated institutions.

    Nobody was holding a gun to the head of private investors who were literally throwing money at mortgage-backed securities (constructed into unintelligible bonds with no apparent risk).

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  24. It's incorrect forget the role derivatives played.

    Perhaps I phrased that badly. I wasn't trying to suggest that those factors be ignored, as obviously they were a significant factor and made it all possible. My point was more that you didn't even have to dig in that deep to recognize that something wasn't right, and that it should have been obvious that it would all end badly just based on the simple fact that there just wasn't enough people making enough money to afford houses that cost half a million on up.

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  25. James said...
    >>>The Taxpayer Relief Act still doesn't explain the bubble in Spain.<<<

    One other data point about how Wall St. banks (with their derivatives) were involved in foreign real estate markets. In 2006, Hank Paulson, then-CEO of Goldman Sachs donated hundreds of thousands of acres of land in Tierra Del Fuego (Chile) to a nature conservancy. The land had been obtained by Goldman as part of a portfolio of mortgage defaults.

    This is documented in Too Big To Fail, p. 43. That's another book I highly recommend. It's not raw, mind-numbing facts. It's written like a novel based upon hundreds of hours of interviews with the various leaders of financial institutions. You get a sense of each player's background, how they all knew each other. How they interacted as the meltdown unfolded.

    If you add "Two Trillion Dollar Meltdown" (mentioned earlier) and "When Genius Failed," (about Greenspan and the LTCM collapse) you come out to $25 and free shipping. Three excellent references.

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  26. "Nonpartisan said...

    The big question: Can the unwashed masses accept that greed may actually be not very good, that credit is debt, and debt really really sucks? Can they realize and truly accept that there is no such thing as a free lunch? IF this major shift in consumer philosophy occurs, then the blue line on the above chart will return to where it started. Bell curve complete."

    Heres the REAL question -- as we retest the CS lows and then likely bounce back up next year, far far above the 115 nonpartisan predicted, will he eat his crow baked, steamed or fricaseed?

    CAW CAW CAW!!!!

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  27. "Nonpartisan said...

    The big question: Can the unwashed masses accept that greed may actually be not very good, that credit is debt, and debt really really sucks? Can they realize and truly accept that there is no such thing as a free lunch? IF this major shift in consumer philosophy occurs, then the blue line on the above chart will return to where it started. Bell curve complete."

    Heres the REAL question -- as we retest the CS lows and then likely bounce back up next year, far far above the 115 nonpartisan predicted, will he eat his crow baked, steamed or fricaseed?

    CAW CAW CAW!!!!

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  28. Here is the REALLY REAL question -- as prices fall and fall and fall and fall, with a single month or two uptick thats so microscopic on that blue line that it is barely visible to the naked eye, do you TRUELY believe the fall is over? I think you are just trolling.

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  29. >>>do you TRULY believe the fall is over?<<<

    I do.

    When I take a chart of historic prices for one of the more volatile "bubble" cities (e.g., Phoenix) and draw a straight line representing the general trend over the prior 20 years, prices are below where they would have been if the trend had continued without a "bubble."

    It doesn't appear like James has updated the city charts since mid-2009.

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  30. try DC or NY and tell me where the lines are again.

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  31. Here is the REALLY REAL question -- as prices fall and fall and fall and fall, with a single month or two uptick thats so microscopic on that blue line that it is barely visible to the naked eye, do you TRUELY believe the fall is over? I think you are just trolling."

    I believe it. Contrary to your microscopic comment, the futures chart saw this coming for well over a year now (long before the stimulus was enacted, and long before everyone here said it wouldnt happen)....

    That doesnt mean prices will rise. As the futures suggest, get ready for years upon years of stagnation....


    http://www.recharts.com/cme.html

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  32. Anonymous said...
    >>>try DC or NY and tell me where the lines are again.<<<

    It's hard to say considering the charts are over 6 months out of date.

    All I can say is that places like Phoenix and Las Vegas look like they're below the non-bubble trend even six months ago.

    See: http://mysite.verizon.net/vzeqrguz/housingbubble/phoenix.html

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  33. The possibility exists that the bubble in Spain exists for reasons that are independent from the bubble in the U.S. I am not trying to argue that they are independent events, but I am merely pointing out the possibility exists.

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  34. The 1997 start of the housing bubble coincides with the new economy tech bubble. Easy money was the cause and we know the effect. The Fed never turned down the heat on the boiling economy and here we are today. Throw in a dash of deregulation and we are cooked.
    The CRA is a great right winger smoke screen, straight from the Reagan playbook...Blame black people(without actually blaming black people).

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  35. If the argument about it being a savings problem is correct then one has to ask if the US is saving too much. If the issue is a global savings problem then the conclusion is one country can take another's housing market if they just save.

    Assuming a global issue what is the global view of housing? Clearly the Shiller index will not provide a clue as it only measures a subset of the US market. There are countries (Canada being a close example) that did not see a crash in house prices so was there a bubble globally?

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  36. In my above comment 'take' should be tank.

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  37. For liberals who complain that it was Republican deregulation, it was President Clinton who kept the libertarian Greenspan at the Fed...

    Why would liberals complain about that assertion? Clinton had some good points, but the idea that he was any kind of "liberal" president is laughable.

    Perhaps, rather than pointing to an example of Clinton acting as a corporatist center-right politician, and saying, "See Liberals! Even *your* man Clinton was not above blame!" you could point to an example of Clinton actually, you know, being a liberal.

    Ideologically, Clinton was GHW Bush with pro-choice tendencies.

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  38. Georgetowner said...
    Greenspan ceased being Ayn Randian the second he became chairman of the federal reserve. Ayn Randians don't believe in that institution.
    .....
    As for me, finding out when it began so we can find a party to blame is kinda retarded. I think that there's plenty of blame to go around.


    On the first point, saying greenspan ceased being Randian because he became chairman is silly. He was an adherent to a broad set of ultra-libertarian principals espoused by Rand. Taking a job does not erase that magically. He may not like the power structure that exists, but that doesn't mean he'll refuse control of it and bend policy as much as possible to his world view.

    On your second point that finding out when the bubble began is retarded, you're partially correct. If the goal is to blame a political party its foolish because the situation is far too complex to blame one party. But the correct goal is to identify the set of public policies, business/finance actions, consumer behaviors and economic conditions that cause the bubble. That is very much not retarded. Its called learning.

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  39. oboe said...
    >>Why would liberals complain about that [Republican deregulation]?
    ...
    Perhaps, ... you could point to an example of Clinton actually, you know, being a liberal.<<<

    I understand your point. But, that's not the way Dems and Reps view it. The so-called "Republican Revolution" of 1994 was a reaction to Clinton's excessive liberal agenda (gun banning, etc.). I remember how popular Rush Limbaugh was, fomenting a belief that Clinton and his cronies were ultra liberal.

    And, I don't have to listen very long before I hear the common liberal refrain about how it was Republicans responsible for an era of deregulation.

    Those were the two groups I was addressing when I gave examples of

    1) Rs did nothing to repeal the 1995 CRA regulatory changes even though Rs held control of government for the vast majority of time.

    2) Clinton did little to oppose deregulation, signing the '99 repeal of legislation and being a big fan of Greenspan (while watching his CFTC chairperson pushed out because she advocated regulation).

    I agree with you that the political parties have more in common than differences, despite what the polarizing ideologues want us to believe. They both pander to the moderate majority, who's principles are often contradictory and self-serving.

    I was addressing those who believe the polarizing ideological rhetoric.

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  40. "It's hard to say considering the charts are over 6 months out of date.

    All I can say is that places like Phoenix and Las Vegas look like they're below the non-bubble trend even six months ago."

    Yeah I will give you that the prices in places with no jobs, such as the desert are down below bubble prices....but this is a DC area blog, with a DC area graph posted in the original topic, I kinda only care about DC and that graph.

    And as it stands as of the outdated graph posted in this thread, we are about a little less than mid way from the peak to the trough with a laughable microscopic blip going up.

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  41. if you ask me, it started in 1977, not 1997.

    1. nixon took us off the gold standard in 71. burns then began priming the pump to get tricky dicky re-elected in 72. that exacerbated the inflation that had been building since the 60's.

    2. it took a few years for the inflation to show up in home prices, because the bond market reacted to the obvious pump priming by driving up interest rates. this initially drove down demand for housing, as consumers reacted to the increase in nominal prices.

    3. as consumers began to realize that the real rate of interest was low/negative, they began buying homes in droves. prices leapt in the late 70's in response to this.

    4. also, around this same time the initial baby boomers entered the prime home buying years (30's). this boosted demand above the previous run rate at the same time that inflation and low real interest rates lowered the "cost" of housing.

    5. the pattern of higher highs and higher lows in real home prices is a classic bull market pattern. in this case, it was driven by declining interest rates, rising population, urbanization and a wholesale change in the consumer attitude towards housing (investment vs consumption) and leverage (more is better).

    6. the fascinating question is whether or not all the money printing going on today can stop the real price adjustment that is unfolding before our eyes.

    my suspicion is that it cannot, and this cycle won't end until real prices reach the historical floor ($125,000 in 2009 dollars) and/or consumers swear off real estate as an investment..

    interestingly, at $125k homes finally start to look like reasonable cash flow investments. at an $1000/month average rent (which is reasonable with $50K of per capita income), the cash on cash yield before property taxes and maintenance would be around 10%. not a great investment, but a reasonable one.

    there are folks who believe that home prices can never reach that level. i disagree. people who buy real estate at cap rates < 10% are speculators. it's a depreciating asset that is expensive to operate. a 10% cash yield is more like 6-7% when the total cost of ownership is taken into consideration.

    people have confused a bull market driven by excess liquidity with investment acumen. the only reason the myth of real estate as a can't miss investment has persisted for so long is that greenspan refused to harden the money supply throughout his 18 year tenure as the Fed Chairman.

    he will go down as the worst Fed Chairman in the history of the US. the institution will be lucky to survive the long term damage he inflicted on it through his weak money policies.

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  42. Anonymous said...
    "this is a DC area blog, with a DC area graph posted in the original topic, I kinda only care about DC and that graph.

    And as it stands as of the outdated graph posted in this thread, we are about a little less than mid way from the peak to the trough with a laughable microscopic blip going up."


    Back when David was the solo Bubble Meter blogger, he posted a mix of national and local housing info. Since I took over as the primary blogger a year-and-a-half ago (due to his blogging fatigue), I have shifted the mix more heavily toward national housing info, because that's where my interest lies. If you want more local coverage, convince David to blog more.

    As for the graph I posted in this blog entry, it clearly states that it shows "United States House Prices", and is thus a graph of national house prices. While the local graphs on my web site are several months out-of-date due to my laziness, the national graph reflects the latest data available. The national S&P/Case-Shiller index has a two month time lag when released and is updated quarterly. This gives it an overall lag of 2-5 months.

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  43. You misread the chart. You can only cal it a bublew when it rises above the last highest price and that would be 1990. That means the rise above average prices didn't start till 2000. The CRA was in place through Carter , Reagan , Bush Sr , two terms of Clinton ( so 20 years ) and all a sudden it goes up in 2000 ? There is no question it was Gramms 1999 bill.

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  44. James, I am a bit confused by the way you construct the house price index for your calculations. I am currently doing a similar thing for my research, but I used the house price indices from FHFA. With their data, the fall from the peak in 1996/97 is not as hard as with your data. It would be great if you could contact me concerning your methodology, i.e. how you construct the index with the various sources you describe. Thanks, Joerg

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  45. Joerg,

    My data sources and methodology are listed at the bottom of my web page. For the period 1997-present, I use the S&P/Case-Shiller National Home Price Index. The S&P/Case-Shiller index is widely considered to be more accurate than the FHFA House Price Index. The S&P/Case-Shiller Home Price Index was constructed by Yale University economics professor Robert Shiller and Wellesley College economics professor Karl Case. The methodology for the S&P/Case-Shiller index is listed here.

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  46. James,

    thanks a lot for yor help. I misunderstood your methodology and thought you constructed the index from 1997-present from various sources. Anyway, your graph helped me a lot as I am not an expert in US house price indices (but I will, I my spreadsheets expand even more...). Joerg

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