Wednesday, March 29, 2006

Who is to Blame?

One of the big questions is who is to blame for the housing bubble. Here is my list:

  • Greenspan & The Fed Reserve Board for the cheap money supply (low interest rates) for such a long time

  • Parts of the Real Estate Industry for cheerleading the bubble

  • Irresponsible Lenders for predatory lending. If you make 40K and have no savings you should not be able to get a 325K loan.

  • Fannie Mae & Freddie Mac

  • Asian Central Banks, hedge funds & others for buying all these risky bundled loans

  • Speculators & Flippers ( for being greedy and fueling this mania)

  • Some homebuyers for buying beyond their means and being ill informed.

  • Parts of the Media for not informing the public about this issue sooner (finally they are communicating this)

  • Others (yet to be determined, please discuss)

This list is NOT in any particular order. Enjoy.


  1. How about the Bush administration for a general lack of leadership especially regarding fiscal responsibility?

  2. Here are a few more:

    Stock speculators for building the stock bubble who's crash necessitated the lowering of interest rates.

    9/11, which meant that rates really got pushed down

    Our culture for pushing absolute greed at any "price"

  3. I agree with both bubble-x and also renting in ma. :-)

  4. "And I would have gotten away with it too if it weren't for you meddling kids!"

    I blame you meddling kids (bloggers).

  5. Congress for favoring Real Estate over other forms of investment and savings through the tax code and other legislation.

  6. My .02 is lenders as well as appraisers. I think these appraisers who were blindly valuing these homes at whatever the asking price was were not doing their jobs and turned into the b****** of the agents and sellers. Them validating these outrageously inflated prices for so long allowed the bubble to grow this large.

    What I don't understand is you'd think that these syrocketing gas and energy prices would reduce the demand for these McMansions 30 miles from the city where you may work. Maybe now an extra $40 or so a week won't hurt, but if gas gets to $4 (unlikely but not impossible, it will cost a bundle to get to and from your huge house that costs $500 a month to heat.

    And as much as I hope for a hard landing here so those who facilitated this can get what's coming to them, I just can't get on board with all the doomsdayers. I want to believe, but what I see in Baltimore is that although sales are slowing and homes are sitting (mostly those at or above $400K), the prices people are paying ar still going up in relation to recent comps. I just made an offer of $318K on a house that was listed at $343K, when a home 5 doors down that is identical except it had a deck, walkout basement, firplace, and extra full bath, among other anemities, sold for $316K in Nov. They had 3 offers at or above list. Are buyers still not getting it? Our market, while in the "extremely overvalued" segment, seems to still be appreciating.Unfortunately, our paper, the Baltimore Sun, no longer has an editorial RE section, so numbers for MD areas not near DC are hard to come by.

  7. i blame all those on your list as well. similar events are happening in vancouver canada.

    detached starterhomes are 400-500k...the madness has to stop.

    some people here in the great white north are blaming the pending 2010 olympics, some are blaming asian investors...regardless - i look forward to the 'correction'.


    *nice blog.


  8. Somehow I knew this post would generate lots of comments. We bloggers love comments.

    1) We learn so much for comment
    2) It tells us people are interested in the post.


  9. I'd like to make a distinction between all of the things that "caused" the bubble versus the smaller subset of those things that I consider "blameworthy." For instance, low interest rates certainly contributed to higher real estate prices, but there were very good reasons for interest rates to be low. I don't really blame flippers either. They are/were a byproduct of the run-up and contributed to it, but were not the cause. I do think banks are going to be in for a reckoning in the near future. They loosened their lending standards to an irresponsible degree during the run-up. The loosening was greatly facilitated by Fannie Mae and Freddie Mac, which continued to buy up a huge portion of these not so solid mortgages - thus removing the incentive for the lenders to play it safe. If the whole thing goes to heck, I'll be casting my first stones at lenders and the too credulous secondary market for mortgages.

  10. Here are my additions to your list.

    a. The Japanese central bank for keeping 0% interest rates.
    This anabled a huge "carry trade" that is still going on.

    b. China for keeping their currency arteficially low, and recycling their earned $s back into the US.

    c. Congress and the US president for going on a bing spending.

    d. The American public for thinking that their houses are magic ATM machines that dispense free money.

    e. The American public for thinking that houses are great (can't lose) investment. That their houses are going up in value forever. Thinking that it doesn't matter what prices they pay for a house, eventually the price increase is going to bale them out.

    f. The American public for thinking that the world owes them a good living, so they can live beyond their means and not suffer for it. In the end they can always blame someone else. Unfortunatly, that does not help.....


  11. My question is once real estate begins to tank, what do Americans have left?

    Stocks aren't the big growth investment vehicles anymore.

    Bonds...are you kidding me?

    How are going to invest for retirement, our children's education, and our general welfare if the three main investment vehicles: real estate, stocks, and bonds take a tumble or stagnate over the long term? What are we going to do?

  12. The only one to "blame" is the Fed, because they are the only one charged with making sure that financial markets are stable. By not clamping down harder on exotic mortgages, they have allowed demand to balloon. I think they are trying their best to curb mortgage lending, but it may be too late.

    I DON'T think that low interest rates are really the cause. It was mortgage innovation that got a whole lot more people into buying houses (or multiple houses) than should have been.

    I would also add one other group that desrves mention--the RE "get rich quick" industry, like Carleton Sheet, programs like "flip this house" and all others that promoted this "new" way to make money.

  13. Freddie and Fannie deserve to be on the list but not for any reason that anyone here seems to grasp...

    The success and growth of the secondary market is largely due to their success.

    As other players entered the market they had to beef up their portfolio's to get their piece.

    Doing it removed risk for the originators, (the lenders for those not in the industry) so they created products, (liberal ARM's, interest only loans) to allow the greatest number of possible candidates qualify for loans regardless of income or credit worthiness. And why not? An Underwriter would just purchase it to bundle and sell on the secondary market. It was win-win for them.

    Fannie and Freddie have had to restate, and now GMAC is doing it so the secondary market is retrenching.

    Crackdown on non-traditional mortgages are next.

    And non-traditional mortgages are as responsible as anything for the bubble as they allow people to buy home they can't afford, which read another way means they can spend more on a home than they should.

    More money in the market ='s higher prices.

  14. Blaming the listed groups/people is convenient, but the blame rests with the individuals who joined the herd mentallity.

    Having just seen the Disney movie Chicken Little and having been called a Chicken Little because of my views on housing, the scene where all the lemmings jump off of the park bench because they can't find a cliff is somewhat appropriate to this discussion.

    Now comes the blame game. No personal respsonibility just blame others.

  15. hemorrhoidforhousing said...

    "Blaming the listed groups/people is convenient, but the blame rests with the individuals who joined the herd mentallity."

    I believe in personal responsibility. Notice how I included in my list:

    "Some homebuyers for buying beyond their means and being ill informed."

    "Speculators & Flippers ( for being greedy and fueling this mania) "

  16. This comment has been removed by a blog administrator.

  17. I saw those and I agree. For me it is about greed, greed and more greed.

    Sellers selling houses where they weren't willing to fix the things they broke or wore out. Buyers buying houses because they think it is their road to riches instead of the roof over their heads.

    Alan Greenspan, the Chinese government, the Real Estate and Mortgage people and everyone else all helped put the bullets in the gun, but it has the been the individuals who put it to their heads and pulled the trigger.

    In the end to me it is all about personal responsibility. I accept responsibility I chickened out of buying back in 2002, but it is hindsight with 20/20 prespective. Now I plan on buying in a year after the market has been flat and somebody is really motivated to sell.

    I really like your blog. It is the forum where we bubble believers can discuss the issues without somebody rolling their eyes. Thanks!

  18. Hem... I agree that it is about personal responsibility but I doubt most people will accept their portion of the blame.

    Some like you, stayed out in 2002 out of fear, others jumped in in 2005 out of fear. Hindsight is always 20/20 unfortunately for both situations.

    Lower interest rates had much to do with fueling demand, thereby causing prices to climb and fueling speculative fever.

    I don't blame sellers for taking top dollar - you would too. I do blame naive buyers for overextending themselves and dishonest mortgage brokers for pushing I/O arms on stupid borrowers. These lenders make alot more commission on these "risky" loan products.

    I blame Freddie and Fannie for sanctioning (buying) these risky, foolish products that allowed demand to soar by making millions of additional borrowers "qualified" for higher loan amounts.

    There's my 2 cents. VA_Investor

  19. How about the people that purchased houses they coudn't afford? Just because someone will sell you a piece of rope, doesn't mean you need to hang yourself with it. I only frame it that way, because if someone else is to blame, doesn't that mean the f'ed are entitled to a bailout? Everyone loves the free market on the way up!

  20. Oh, my. Quite the philosophical post, David. I think it depends on one's point of view, really. At the end of the day, it is our fault. Who bought all these houses? Who bid, who borrowed? We did.

    To blame anybody else is like blaming Hollywood for dirty movies. They get made because we stampede to see them. All of us.

    And who was it that brought the crack pipe to his lips? Us. All of us, who participated in the Great Crack Epidemic of the '80's and '90's. I never saw Greenspan in my neighborhood peddling crack, did you see him in yours?

    Oh, David, revisit Galbraith on this subject. He will explain there is ALWAYS a search for the villain when the bubble bursts. There are still a few trials going on over the stock bubble. But we know who's really to blame, don't we?

  21. I blame the love triangle between the Lenders, the Appraisers and the Real Estate Brokers. They are all working together instead of as a form of checks and balances.

  22. "How about the people that purchased houses they coudn't afford? "

    Excatly. There isn't anybody to blame except those who bought a home or investment property they could not afford. I know people love to blame everybody else, especially the usual suspects (Bush-haters blame Bush et cetera).

    Where is the personal responsibility?

  23. Totally agree with non 7:21. Did anyone put a gun to the head of the homebuyer? If you can't affors, don't buyb - RENT. If you are so stupid to buy overinflated asset than don't blame Bush, FOX, Bank of Japan or whatever.

  24. Who's to blame?

    Greenspan, fliipers, developers, a lack of a coherent energy and environment policy letting builder to just build, my mother (please dont ask me to explain!)

  25. bartenders and ups drivers who lined up to be the next get rich quick realtor... adding to the borg reciting the mantra, of it only goes up... they're not making any more land... blah blah blah....

  26. I actually place most the blame on individuals who purchased homes. If they were 1st time home buyers or flippers, it doesn't matter. This country has a serious problem with more and more younger folks coming out of high school and college with no life skills, no real street smarts. While they learn about interest in college, they never apply that knowledge to buying a home.

    Second, too many younger familes went into a home for 'me, myself, and I' attitude, getting what _they_ wanted. Too many just had to have: 1. A _new_ home (built within the last five years) 2. Extra money to spend on over priced movies and eating out. 3. Top of the line 'stuff' for the home (we have to make sure we give that "Look, they are rich and hip." image.

    Obviously this caused folks to buy interest only ARMs, choose buy down options, etc. etc.. They choose, they will lose. The 'I didn't know what I was doing' crying doesn't make it ok. Any idiot with a brain should have seen this coming. Those with college degrees have NO excuse as far as I am concerned...have fun renting or living in the trailer for the next 10 years.

    As for flippers, most of them have higher education. They flipped, they lost. The sad thing is both groups are likely to demand some sort of bailouts: Cries for the government to "DO SOMETHING!", begging lenders to go with a 50 year fixed rate mortgage, etc. etc. etc.

  27. Ultimately, you can only blame the individuals who bought the homes. There are certainly unscrupulous lenders, realtors, etc., but I'm 99% sure we'd still have this giant run-up without them.

  28. Who's to blame for what?

    My condo in Georgetown has tripled in value since I bought it in May 1999, and I'm not planning on selling it. I have a thirty-year fixed interest rate (6.125%) mortgage.

    People are responsible or their own actions. If I want to take out an interest only ARM, then I don't want someone else saying I can't because there are so many other people who aren't bright enough to accurately judge their own circumstances. Socialist nonsense.

    Mark Twain said "Nothing needs reform like other people's behavior."

    There is a possibility that housing prices could fall, but we haven't seen that yet. Inventories have grown, and time on the market has grown. Unemployment is at record lows, interest rates are at almost record lows despite 15 quarter point increases in the last couple years.

    Housing bubbles are forecast against a background of sharply rising mortgage interest rates, and yet rates have fallen the last couple of weeks. My condo could fall in value by two thirds and I'm still in profit.

    Who's to blame? How about who's to credit with making sure the post crash and post 9/11 shock weren't more distruptive to the economy? Can you remember 18% inflation and 22% mortgages. I remember it like it was yesterday.

    Who's to blame?

  29. Primary blame goes to the Fed., which seems to have forgotten its purpose over the past 10 years. They kept rates too low for too long, while disregarding the incipient housing bubble. I recall Easy Al's Congressional tesitmony, where he actually encouraged home buyers to use adjustable financing.

    Why blame private companies (banks, realtors) for earning money for their shareholders? Isn't that why we put monetary policy in the hands of the Fed, whose mission is not to make a profit? Similarly, laying blame at the feet of Joe Sixpack is also somewhat misplaced. The creation of the Fed is predicated on the notion that "experts" are needed to establish monetary policy because the public lacks the sophistication to set interest rates and borrow responsibly by themselves.

  30. I feel like your criticism of the Fed for keeping interest rates low is misplaced. The Fed kept short-term rates low, which essentially injected liquidity/cash into the system (mostly helpful for businesses), but had no control over mortgage rates.

    Most mortgage interest rates are tied to the going 10-year T-bill rate, which has been kept artificially low because the Chinese and other foreign investors keep buying US government bonds (higher demand for bonds raises their price, which lowers their effective interest rate). So our government deficit has played a significant role in creating the asset bubble.

    If the Chinese really wanted to screw us, they could dump all the bonds, flood the market, watch interest rates go through the roof, and make it impossible for anyone to buy a house even at the prices of 10 years ago. Fortunately for us (at least for the homeowners among us), the Chinese and everyone else have very little incentive to ruin the economy of their biggest customer.

  31. Buyers drove the market up. Buyers are going to have to take it down.

    Yeah yeah, lots of outside circumstances and conditions promoted buyers to do stupid things with their money over the past several years vi a vis housing. But they are the ones who are ultimately responsible for their own individual choices.

    Nobody held a gun to their head and said "You HAVE to buy this house for twice it's value"

  32. Bravo! Indeed, it's the buyers who drove the prices up. Honestly, if someone approached you and offered twice as much money as something was worth, would you turn them down?

    I think the original post, blaming all kinds of third parties, and then the first comment (blame GW, he causes hurricaines after all), kind of sums up nicely the smug, chicken-little mindset of the leftists I see on so many bubble blogs (surprisingly.)

    What is it? Are so many leftists renters? Or maybe so many live in overpriced metro areas? Now THAT would be an interesting thread!

  33. "I think the original post, blaming all kinds of third parties, and then the first comment (blame GW, he causes hurricaines after all), kind of sums up nicely the smug, chicken-little mindset of the leftists I see on so many bubble blogs (surprisingly.)"

    The government should not allow lenders be able to loan 350K to people making 40K.

    The lenders are being irresponsible.

    I do believe in personal responsibility.

    Just like a drug dealer is partly responsible for problems caused by drug use so too are lenders who make toxic irresponsible loans they make. It is time lender take some personal responsibility for pushing toxic mortgages.

  34. Jason,

    Thanks for your comments. You correctly recognize our current account problem.

    With regard to the Fed., however, please recall that short-term interest rates established by the Fed. directly affect the interest rates applicable to HELOCs and ARMs. According to the MBA, ARMs comprise nearly 30% of current mortgage applications, and comprise a much higher in high-cost housing areas, e.g., nearly 50% in the DC area where I live. It is the marginal or speculative buyer who is most likely to depend upon adjustable-rate financing to purchase the house that he cannot otherwise afford. The weakness we now see in the market, I believe, is directly attributable to the Fed.'s recent decision to tighten, which has made adjustable products more expensive over the past year.

  35. Ryan made a comment above that made me laugh...

    "...have fun renting or living in the trailer for the next 10 years."

    I *do* live in a trailer, in the heart of the economic engine of the DC metro area. My friends thought I was nuts, and now they are finally seeing the genius of only paying $400 per month in rent for my own place.

    side note: my yuppie friends (including my girlfriend) love my trailer.

  36. $400 WOW. :-) I pay 625 for rent sharing a townhouse with some friends.

  37. I'm a lefty. Lefties tend to live in blue states. It just happens that blue states have the biggest real estate bubbles in the country. Thus, many lefties like me are bitter renters who hate yuppies for driving up the cost of living in the first place.

    I am currently exploring relocating to a blue or purplish state in the Midwest because of the insane RE market in the DC area.

  38. The government should not allow lenders be able to loan 350K to people making 40K.

    The lenders are being irresponsible.

    I do believe in personal responsibility.

    As I said, I find such notions rather interesting coming from blogs with so many leftists on them whose philosophy is about blaming white males and big business for all the problems in the universe and wanting the government to blow trillions to solve all their problems (but don't ask them to pay taxes. Get the "rich" to do it. You know, the same rich that they say run everything.) Gee, such insanity makes someone getting a $350K loan on $40K a year make sense!

    Don't get me wrong. You're absolutely right: such loans are grossly irresponsible.

    Just like a drug dealer is partly responsible for problems caused by drug use


    Are gas stations responsible if you drive recklessly?

    so too are lenders who make toxic irresponsible loans they make. It is time lender take some personal responsibility for pushing toxic mortgages.

    If people are so weak willed as to be at the mercy of all the forces making them buy overpriced crap real estate, why do we let them vote (outside of Florida?)

    Granted, there is a lot of pressure to buy from both the bubble forces and traditional B.S. about real estate "never going down". But still, when rents became disconnected from cost of ownership, that's when these people should have woken up.

  39. ihateyuppies,

    Be careful what you ask for. As you can no doubt tell, I'm not a hippie but I had problems trying to relocate to the midwest. It can be a very different lifestyle than what many metro types are used to including myself.

    I don't know if the "yuppies" are driving up the cost unless we say that it's only "yuppies" able to afford such overpriced housing. I think a lot of it is due to speculators.

    I just drove by a condo development in Reston with a sign claiming "only 3 homes left". I joked with a co-worker: A 1 bedroom condo is a home? Those MUST have been bought up by flippers and they are NOT in a position to hold onto them when the market goes sour.

    And yes, if a bank made loans to someone who clearly cannot pay them off on their actual income, someone should go to jail.

  40. No Doc Loans don't mean no income. They mean the buyer can lie on the loan app. It is called Bank Fraud and is a felony.

    BTW Polish - which reston condo has only 3 unita left? The resale inventory has gone thru the roof. I know of several people who have "bailed" on their contracts for Reston condos.

  41. These screwed and soon to be Bankrupt borrowers SHOULD SUE their High Schools for NOT Forcing them to take and Pass Business Math and Finance for DUMMIES. Hey, this IS America, and WE have to BLAME someone other than ourselves!

  42. I grew up in the Midwest. While I lived in Washington, DC I never visited an opera or ballet. I rarely attend art gallery shows unless there is an artist I particulary admire. I don't attend embassy parties or rub elbows with big-shot government officials or lobbyists.

    I like sports. I like beer. I like food with lots of carbs. I enjoy the simple things in life. And I can't stand bitchy East Coast women.

    I will fit into the Midwest lifestyle very well.

  43. Let's try another take on this. Imagine that the condo market craters in DC and outlying areas, say a 50% decline in values. Every flipper holding a condo is trying desperately to find a buyer. We won't imagine that the banks are going to try to work with people so they don't have to repossess these POS and hold them themselves, but instead just force anyone delinquent into bankruptcy. So, all the "lefties" will be poised to act by swooping in and purchasing someplace that will make the rent/buy equation a lot better, secure in the knowledge that buying at the bottome means they can't every lose on this one. So what we should be hearing is all the renters calculating what the bottom might be, and what interest rates might be, and where the best intersection point on those two lines on the graph will occur so they can finally purchase their own place.

    Or, if none of that makes any sense at all, they can just continue to predict a massive collapse in prices (news flash: ain't going to happen girls) as some sort of anti-capitalist, money earning is bad, all property is evil, socialist encounter session.

    Reminds me of how the real hard core DailyKossacks felt the morning after, as they watched in disbelief that just wishing something enough didn't make it real. Its a cross between Dorothy's mantra to get home and the Little Engine That Could.

    Me, I'm just waiting with some nice equity investments ready to jump back in when we've cleared out the suckers, and if the correction is only 5%, well, that's OK to I guess as my propery is all rented at a monthly profit with 30 year fixed rates.

    Soon there will be blogs bemoaning the increases in property values again. How it works in America in case you hadn't figured it out is:

    Smart and Hard Working = Rich

    Smart and Lazy = Get by

    Dumb and Hard Working = Get by

    Dumb and Lazy = A long painful life

    Large inheritance or win lottery = no rich person I've ever met.

  44. Anon 6:54,

    Could not agree with you more. Odd, isn't it that only those who have made money in Real Estate (as opposed to more noble pursuits) are "greedy pigs".

    BTW, I think you and I may be at "fault" for this housing situation. You see, we have been "enabling" the renters to continue their ruinous path because of all the rentals we own.

    Something to consider.

  45. The "3 units left!" sign was on a sprawlish condo development on the busy NE corner of Reston Pkwy and Sunset Hills. I don't know the name. Maybe the Savoy?

    I don't know if that was a particular honest claim, however. My wife and I toured a set of converted Motel type shacks in Arlington near the Pentagon and they claimed that they didn't have ANY units left in the lower priced category. (We were shown around by a cute salesgirl in designer clothes with 9 inch nails. OK, they weren't that long.)

    About 6 months later, we got a call from someone there conducting a "survey" to ensure we were treated well. I said she did a great job. He then asked, in a lower tone, if we were interested in buying. I said we were going to wait the market out as renters and I got a "click".

  46. i dont get why 103% loans are never mentioned...when a buyer has no money to put down and cant even afford closing costs, so they get a 103% loan and the seller just raises the price 3%, then, that comp is really 3% higher, so the next house to get put up on the block thinks hey i should get that price per sqft, their buyer needs 103%, etc. it exponentially artifically raises prices.

    it's the same thing as what else is happening now, instead of sellers lowering the price, they pay closing costs or something, that way the prices in the neighborhood dont go down...

    quite clever scheme they got going on...