Friday, April 30, 2010

Russell Roberts on the housing bubble and financial crisis

Here's a new paper on the housing bubble by GMU economics professor Russell Roberts.

Here's a summary of the paper by GMU economics professor Tyler Cowen:
1. It isn't "too big to fail" that's the problem, it's the rescue of creditors going back to 1984, encouraged imprudent lending and allowed large financial institutions to become highly leveraged.

2. Shareholder losses do not reduce the problem even when shareholders are the executives making the decisions

3. These incentives allowed execs to justify and fund enormous bonuses until they blew up their firms. Whether they planned on that or not doesn't matter. The incentives remain as long as creditors get bailed out.

4. Changes in regulations encouraged risk-taking by artificially encouraging the attractiveness of AAA-rated securities.

5. Changes in US housing policy helped inflate the housing bubble, particularly the expansion of Fannie and Freddie into low downpayment loans.

6. The increased demand for housing resulting from Fanne and Freddie's expansion pushed up the price of housing and helped make subprime attractive to banks. But the ultimate driver of destruction was leverage. Either lenders were irrationally exuberant or were lulled into that exuberance by the persistent rescues of the previous three decades.
Skimming the paper, it looks like it may have interesting points, but I worry that it's a case of a researcher finding what he wanted to find.


  1. Kiss that tax credit goodbye and all of the foward demand. Slowly we will get back to ordinary market conditions. Smooch!

  2. In Canada demand is being helped along by the CMHC which is a taxpayer backed mortgage insurer. They pumped up the money available during the recent recession and house prices quickly began to rise again.

    The bubbliest market is Vancouver BC, where we've been stealing demand from the future for a while now, but it's not the first time. Here's a roller coaster view of that market for the last 35 years:

  3. Kiss that tax credit goodbye and all of the foward demand. Slowly we will get back to ordinary market conditions. Smooch!

    Actually, now that its over, we bears need to come up with another good redherring to delude ourselves into thinking this correction is "nowhere near over"

    What should our next red herring be? First it was the "MASSIVE Option Arm resets" and then, when that petered out, it was the "HUGE Shadow inventory" and then it was the "UNSUSTAINABLE government manipulation".

    We need a good one because phase 1 of the govt intervention ended last month when QE ended. Contrary to our calls that the end of QE pushing "mortgage rates into the STRATOSPHERE", they havent done jackshit. The bulls are on to us, we cannot let this happen if phase II (expiring tax credit) also does jackshit.

    So whats it gonna be bears? What sort of theory can we cook up to convince the bulls that this is nowhere near over? Lets put on our tinfoil hats and see what we can come up with!!!

  4. Shadow inventory is at 13 months in DC area...the Shadow knows. But we insecure homeowners need not to be afraid. We need to keep blogging on this blog telling everyone that 100% appreciation in five years is really based on fundamentals that are different this time.

  5. "We need to keep blogging on this blog telling everyone that 100% appreciation in five years is really based on fundamentals that are different this time."

    And therein lies the problem. In case you havent noticed prices havent gone up at all in the last 5 years. Meanwile, time keeps tic tic tickin away, and in the blink of an eye, 100% appreciation over 5 years has become 100% appreciation over 10 years.

    The 100% appreciation over 5 years which was "completely unsustainable" has now become 100% appreciation over 10 years which is "somewhat unsustainable". Soon enough, its gonna be 11, 12, 13 - 15 years, and suddenly, that 100% apprecation will just seem "sustainable".

    Time keeps its relentless march forward, putting the squeeze on you and other renters hoping for a "CRASH". Slowly, but surely, you are being smoked out and now buyers in the DC area are abandoning the "hold out for lower prices" cause in droves.

    As more and more buyers capitulate, they will continue to put pressure on prices which, as of today are up 5-15% YOY (depending on the specific area and the measurement method). Eventually, all that will be left on the sidelines are the bitter renters who truly were "priced out forever", because they refused to buy at the bottom when the bottom was right there in front of them.

  6. Once the priced out renter moves, (or realizes they are priced out and rent forever) the bubble blogs die, leaving me with no one to taunt.

    A sad day indeed!

  7. So Pussy, you expect 100% appreciation over 5 years to become 100% appreciation over 15 years, thus being a reasonable and sustainable increase. But you also expect renters to be "priced out forever" because of 5-15% appreciation YOY. Do you see how that makes no sense at all? No one is going to be priced out forever, and if people are for some period "priced out" then the price of housing is too high and will eventually go down until it is affordable.

  8. It is very simple folks!

    You have the means to buy a home ... then buy it!!!

    You can't afford to buy .... then keep renting!!

    Take down the blog and go home!

  9. Actually Pussy, I take that back. I was sorry I wrote that as soon as it was on the screen, but since I post anon, I cant delete it.

    I dont know why I say things like that. This bubble has me so frustrated. Maybe I should go look for some professional help.

  10. Prices haven't dropped inside the Beltway? How about this one?

    - $126,000 from 2005

  11. Here's another one Pussy. You see, you are WRONG! This house is located in a very nice "immune" section inside the Beltway and sold in 2005 for $926,000 and now valued at $797,00. Poor chap probably was in a fantasy world like you Pussy. Probably was told home prices never go down and the increase in population will keep pushing prices up. So much for those thoughts--value down more than $100k. Oh boy....

  12. ANother one down more than $100k. There must be a sick feeling in your stomach when you plug your home into Zillow to see it down more than $100k. I mean, your certainly cannot think that you could recover that kind of money in a few years. Negative equity is a real bitch. But when you are a bitter renter, you don't have to worry about that!

  13. What's a matter Pussy? No retort? It's hard to argue facts now isn't it?

    "And therein lies the problem. In case you havent noticed prices havent gone up at all in the last 5 years."

    No kidding Pussy, the above examples show that prices have gone down!!! Fool!

  14. Sorry Pussy - I dont know what happened to me. I just cant help it but go into these multi post binges against you. I probably have been priced out, and it sucks. Still, Im such a loser, I dont know why I cant stop.

    Somebody please help me.

  15. - $126,000 from 2005

    Well, don't know much about that neighborhood, but you're using a Zillow Zestimate, so let's not get too cocky.

    They claim the "Range" for that house is "$405-$549". So it's either lost $100k in value, or gained $13k.

    It's rather charming that you think a single house that's not on the market, much less recently sold is evidence of a total collapse, though.

    There must be a sick feeling in your stomach when you plug your home into Zillow to see it down more than $100k

    Heck, if he needs to buck himself up, he should just look at the houses that've sold in the last few months:

    Zing! Better than Alka-Seltzer!

  16. Just what I thought, realtors/sharks coming on this blog trying the influence the minds of potential buyers. Realtors are nothing but hired whores. You people are worse than used car salesmen. Look how geedy you were in your initial listings. You tried to sell it for $615k. And I see you pulled it from the listing service in November. Did you do that so it didn't look stale? You sneaky skumbag!

    Price History

    02/05/2010 Sold $587,000 -2.2% Public Record

    01/22/2010 Listing removed* -- -- --
    11/25/2009 Price change* $600,000
    11/07/2009 Listed for sale* $615,000
    12/15/2004 Sold $520,000 89.1% Public Record

  17. Great article in the Washingtonian magazine about the boom and bust of the DC area real estate market. It cites our old buddy David Jackson who no longer blogs, or maybe he does under a different name. But if you are a potential buyer, don't read it because it may scare the daylights out of you!

    One section of the article talks about a couple who bought a 3 bedroom home in Silver Spring for $455k in 2007 using a five-year adjustable mortgage. They said that right now their house is worth about $350k (loss of $100k in value) and they are going to walk and rent a friend's home for 5 years at $700 a month less than their current mortgage. I say WALK!

  18. Our old, 1963 2BR condo in Fairfax VA peaked at 280K, now they is selling for 115K. But nearbye single family homes are still 400K and above (3 BR tract home from 1965).

    My wife started telecommuting and I will be elligible in a few years... I was born in the Washington area but there is no point in staying here anymore. Only an hour and a half away in Richmond comparable homes in comparable neighborhoods with comnparable schools cost LITERALLY HALF as much, and our incomes will not take a hit.

    If we want the kids to see a museum or a show at the Kenneddy Center we can drive up for the day easily from Richmond. There is NO WAY I will buy a home in this over-priced, traffic-infested , soul-sucking haides. Leaving this hellhole in a couple years.