Friday, March 19, 2010

Greenspan still in denial

Alan Greenspan's slightly updated denial of the ability to prevent the housing bubble:
The former Fed chairman also acknowledged that the central bank failed to grasp the magnitude of the housing bubble but argued, as he has before, that its policy of low interest rates was not to blame. He stood by his conviction that little could be done to identify a bubble before it burst, much less to pop it.
Can't identify a bubble before it burst? Really? This blog was created before the peak of the housing bubble specifically because my cob-logger, David, had identified a housing bubble.

At the time I first created my housing graphs in May 2006, I had already been following the housing bubble for five years. When housing activity had peaked but prices were still rising rapidly, that was the last straw that finally pushed me to warn people publicly.

Robert Shiller published the second edition of Irrational Exuberance in February of 2005, before the housing bubble peaked, specifically warning about the housing bubble. Because research and writing take time, he must have noticed the housing bubble quite a while before his book was published.

The editors of The Economist, after warning of the housing bubble for years, made it a cover story right before the peak in housing activity, a year before the peak in housing prices, and 2-3 years before the Federal Reserve decided to take it seriously.

Finally, economist Dean Baker first noticed the housing bubble in autumn of 2002 and was warning people for years before the peak.

Update: Harvard economics professor Greg Mankiw gives his thoughts.


  1. James - that May 2006 commentary to your graph is interesting.

    I feel sorry for guys like "Surfer X" who "could have bought in 2003 but prices were too high". He assumed, like many of us that prices would come down to 2002 (or earlier) levels.

    While that is true in exurbs and other undesirable places, it never did happen where he is looking in Santa Monica, CA. His choices now are either renting forever or moving to a lower cost area like "Dry Heaves, NM" as he said. Either way, he has been priced out forever.

    Thats what I deem to be a crying shame about this thing. Those that have been patiently waiting as long as him will never see the prices in the desirable areas they did before.

  2. "At the time I first created my housing graphs in May 2006, I had already been following the housing bubble for five years."

    James, please tell me you haven't been waiting since 2001 to buy have you?

  3. Greenspan is a weasel and history will not be kind to him. You need to read between the lines of what he's really saying though. It's not that the Fed can't identify's that they lack the spine to be the adults that call down the rain on the parade. Greenspan is so arrogant that he truly believed he was smarter than all the central bankers that came before him. He thought it was different this time and maybe he'd found the mythical free lunch where everyone could get rich selling houses to each other. We'll all pay the price for his mistakes though.

  4. From Carl Case (of the Case Shiller index)

    “I would bet even odds that we’re at a bottom and that we’re going to see improvement in the coming months,” said Karl Case, co-creator of the S&P/Case-Shiller Home Price Index and a professor of economics at Wellesley College in Wellesley, Massachusetts."

    Uh ohh - if this is the best we can get from the usually bearish Karl Case, the perma-bears here better strap on their flak jackets. The spring selling season is here - its gonna be a looong haul til we get to the winter and another chance for declining CS prices. Suddenly, that "bottom" hit in spring 09 is looking more permanent by the day!!!

  5. The Fed will be pulling out of the MBS arena. Looks like some of you may be in for a surprise so stay tuned!

  6. "James, please tell me you haven't been waiting since 2001 to buy have you?"

    I have. I have accumulated 115k since then. It kind of sucks having all of that money at my disposal. But I'll get along!

  7. Well - I dont see how thats a good thing. I too have been waiting since 2001 and have about the same amount of $$ socked away as you do.

    However, the house I didnt buy back then is now worth 375K more than it was in 2001. I also would be nearly 1/3 done with mortgage payments by now.

    Thats not the worst thing though. The worst thing is that I am nearly 10 years older now. Think about that for a second. Even if by some miracle prices fell another 50% back to 2001 levels, ten years have gone by... 1/5 of my adult lifespan went WOOOOOSH, down the toilet... pining after something I never could afford.

    Pardon my french but FUCK this bubble!

  8. Actually, I look at the last 10 years a little differently than you do. First, unlike many out there who are maxed out in debt because of unaffordable purchases, I have maintained a great balance of pleasure and financial responsibility. I have been to Berlin, London, Paris, Rome and Rio. Wrote a check for each trip and moved onto the next destination. If I purchased something that I could be PROUD to call home, those trips would not have occurred. So, for you, you have been captivated by a toilet. For me, I have seen many cool places in the world. Bonjour!

  9. Whats your point? I have been to all those places you list (save Berlin), but I have also been to Istanbul, Caracas, Dublin, Lyon, Zagreb, Brugges, Valetta, Dar Es Salaam and several other lesser areas. I too paid cash, maxed out my 401Ks, all the responsible things you can think of. I could have done all that even if I bought as the monthly payments were less than 2,000 at the time - 600 less than my rent now.

    Still, what does that have to do with the fact that I am out an extra 375K and 10 years of my life if I would have bought?

  10. Oh, and as I said before - FUCK the bubble.


  11. My point is that it is obviously bothering you more than me!!! Your follow-up confirms that.

  12. Well, as Ive only been waiting since 2006, suddenly, I dont feel so bad anymore.

    As for our 2001 renters, I was trying to figure out some way in which you came out ahead financially, but unfortunaely, I cant. Looks like you both have really been gangraped by the bubble - sorry.

  13. Greenspan cooked the omelette, we all had a good meal. Now we have less eggs and our cholesterol is up.
    Stop crying and remember the great meal we had.

  14. Going to Berlin, London, Paris, Rome and Rio is nice.

    Going to Berlin, London, Paris, Rome and Rio, and having an extra 375K in your pocket is nicer.

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

  16. To the gutless commenter who would not put a handle on their post @ March 19, 2010 3:45 PM

    Professor Case is not a bear by any reasonable definition. He did not seem to notice that a bubble existed until 2005, when a blind monkey could have sorted it out.

    And he has called bottom on the fall several times in 2008 which has not worked out very well.

  17. "As for our 2001 renters, I was trying to figure out some way in which you came out ahead financially, but unfortunaely, I cant. Looks like you both have really been gangraped by the bubble - sorry"

    Gangraped by the bubble. Sounds like a good name for a punk band.

  18. As for those who own homes and are on this blog, I guess you have no peace of mind or just enjoy paying taxes, maintenance costs and other fees while the banks collect the interest and principal on your hefty mortgages. The banks love suckers!

  19. haus said...
    "Professor Case is not a bear by any reasonable definition."

    I agree. I've never heard anything from Karl Case to suggest he's a housing bear. Let's not confuse him with Robert Shiller. Case has called the bottom a number of times.

  20. Look at this trend. How much of the S&P 500's market cap constitutes "financial services" over the last 30 years? If you look at the latest trends such as follow the Vanguard Total Stock Market Index Fund (matches the Wilshire 5000),, you will see Financial Services only makes up 15% and about equal to Tech (hardware and software firms). At its peak a couple of years ago, I thought Financial Services made up more than 25%. I remember back in the late 1990's that tech made up roughly 33% of the S&P 500, and the p/e ratio for the S&P 500 was around 43.

  21. Yeah - 115K in the pocket vs owning for the last 10 years and having the 375K in equity is a no brainer - I dont feel sorry for the 2001 renters - they urinated in their own bed, now they must lie in it.

    I do feel more sorry for the 2004-2005 waiting crowd. By then it was a clear bubble and seemed foolish to rush in. They have seen some depreciation in the desirable areas, but not necessarily enough to justify waiting. Tough one for these guys.

  22. $520,000 home purchased at 5% interest rate for 30 years assuming $20,000 down payment.

    30 years later

    $500,000 paid principal
    $466,278 paid interest
    $90,000 paid taxes

    total paid $1,056,278

    Even if you consider the interest deduction at a 30% tax rate ($139,883) you have overpaid $396,395 for the home. Kiss that money goodbye!

    You have graciously given the mortgage holder or bank $466,278 in INTEREST only!!! That's like buying a car for 40k and paying a total of 75k for the car. Look at that mortgage statement and see the portion that goes to interest. That is like throwing money down the drain. OUCH!!!

  23. "That is like throwing money down the drain. OUCH!!!"

    So whats the answer then? Rent for 30 years?

  24. There is no answer. It's what works for you. Either option has its drawbacks. But don't for one minute think the ownership option does not have its costs. They are certainly severe, and depending on how much rent you pay, ownership costs could exceed rental costs. These Kool-Aid drinking homeowners somehow avoid the interest, taxes and maintenance parts of the equation.

  25. Anon - theres more to it, but heres the simple answer that angry math challenged Mo Co anon wont tell you.

    A. Purchase the 520K home, pay 1,056,278 total for it. Yet even assuming zero appreciation (which is absurd), you get back 520K

    A costs you $536,278 - OUCH!

    B. Rent the home for $2,500 a month for 30 years. Assuming zero rent increases (which is absurd), you pay $900,000. At the end you get nothing back.


  26. You are terrible at math pussy.

    - $536,278 (sale of house)

    = -520,000 (loss)

    If home appreciates 100k =
    -420,000 (loss)

    If home appreciates 200k (absurd)=

    -320,000 (loss)

    And let's get back to the point. The costs of owning a home are SEVERE! Oh by the way, where I live in Loudon County, prices are at 2003-2004 level. I made a real good decision not to buy when I moved here in 2005!

  27. OK then lets do it your way.

    After 30 years buying (with no appreciation) = 520K loss OUCH!

    After 30 years renting (with no rent increases = 900K loss OOOOOOUUUUUUCCCCCCHHHH!

  28. I find it very silly to think that you could assume you will be in the same house 30 years from now to recoup all of those expenses.

  29. OK - say you only stay 15 years. Here you would have paid (approx) 161K in principal, 322K in interest and 45K in taxes. Once you get back the 161K in principal, your total loss is 367K.

    Contrast that to someone renting for 15 years at 2500 a month (450K total).

    So here
    owning is a 367K loss - OUCH!
    renting is a 430K loss - OOOOOUUUUUCCCCCHHHHH!

  30. You forgot about the 6% commission for the sale. And don't forget the other expenses you are leaving out too. Let's be fair here.

  31. OK, but if we are gonna be "fair" here, we need to not only account for the commission & expenses, (which hurt the case for buying), but also the general 1-3% annual increase in rents and purchase prices (which are a crippling blow for long term renting).

  32. I'll account for the annaul increase. But I want you to account for my tax deduction on my rental.

  33. And the tax deduction for mortgage interest.

  34. We already accounted for that.

  35. Not in "the pussy's" example. Plus, doesnt it depend upon ones tax bracket?

  36. The Pussy said...
    "OK - say you only stay 15 years."

    On average, people own their homes for seven years.

  37. "On average, people own their homes for seven years."

    Thats the OLD numbers. All the foreclosures, repos, short sales and auctions to flippers will change that number.