OK, this is a really scary fact:
"11 million, or 23 percent, of all residential properties with mortgages [are] in negative equity"
Wow. That's bad. Really really bad. What it means, to me, is that this whole recession thing is going to get a lot worse (or take a lot of time) before it starts to get better.
I have one friend (sadly getting divorced) who paid about $900K for his house three years ago. Comparable units are now selling for $550K. They have to sell, obviously, and the tragedy of their divorce is going to be compounded by financial ruin. I could criticize them for buying too much house, but when they moved to Seattle they paid what simply was the going rate, on the expectation that it would be sustainable.
For that matter, I suspect that we are in the 5% of families with less than 5% of equity in our home. When we bought this house, we were cautious and brought some $400,000 from our old house into the current mortgage. Were we to have to move today, I am quite certain the selling price would be so low as to wipe out almost all or all of that equity. Fortunately for us, I do not anticipate such a move, but that is just good fortune for us, not evidence of personal virtue. If my group lost its contract, or if I were to take a position in public service, or if I were to get divorced, we too would be in foreclosure or a short sell quickly enough. Scary.
How sad is it that one of my hobbies is reading economics blogs, by the way? The authors conclude:
A lot of attention has been focused on the Glass-Steagall Act (oh yeah, I'm an politics AND economics nerd!) and the loophole created by the Gramm amendment in 1999. And it is correct that amendment weakened the banking sector by permitting risky ventures which caused the instability in Lehman and AIG which sent such shock waves through the market. But for all the attention paid to those guys and CDOs and Subprime lending, the real cause seems to be largely ignored by the commentariat: housing was grossly overvalued. Subprime mortgages only turned out to be bad investments because when prices went down, homeowners started defaulting on their mortgages. And it's not actually clear that subprime mortgages have been worse affected then so-called "prime" borrowers. Both groups were buying overpriced properties, and both are defaulting at record rates.
I would like to blame Gramm-Rubin-Clinton for deregulating the banks. I'd like to blame AIG et al for being blind to risk. I'd like to blame Bush-Greenspan for being asleep at the switch and failing to foresee the apocalypse. But that's just not fair. It was a collective failure of vision. I'm as guilty as they were, and I'm a high-information person. I read economics blogs, for Christ's sake! I remember in 2006 looking at some real estate investments, which I ultimately did not pursue. But at that time I was 100% certain that housing prices had only one trajectory: upwards. In fact I remember in 2007 Carlos sent me a little video which illustrated the housing bubble in fairly graphic terms. I simply chose not to believe it. As, I'm sure, did many others at the time.
It's kind of fascinating how assiduously the media tries to ignore the fact the US families have abruptly lost several trillion dollars in collective wealth. They talk about jobs, because jobs are easy to measure and easy to craft a story around. And they talk about the stimulus, as if any stimulus could offset the loss in real estate equity. And they talk about the "recession" abstractly. But I never hear the serious business and market commentators make any note of the fact that all of our homes have lost all or most of their value in terms of accessible equity as the ultimate driver behind the shitstorm we are now in.
Which is a pity because it allows lazy democrats to blame it all on Bush, and it allows opportunistic republicans to scream about taxes, and I suspect that come November we will all wind up worse off for the national failure to understand the root cause of our ills.
"11 million, or 23 percent, of all residential properties with mortgages [are] in negative equity"
Wow. That's bad. Really really bad. What it means, to me, is that this whole recession thing is going to get a lot worse (or take a lot of time) before it starts to get better.
I have one friend (sadly getting divorced) who paid about $900K for his house three years ago. Comparable units are now selling for $550K. They have to sell, obviously, and the tragedy of their divorce is going to be compounded by financial ruin. I could criticize them for buying too much house, but when they moved to Seattle they paid what simply was the going rate, on the expectation that it would be sustainable.
For that matter, I suspect that we are in the 5% of families with less than 5% of equity in our home. When we bought this house, we were cautious and brought some $400,000 from our old house into the current mortgage. Were we to have to move today, I am quite certain the selling price would be so low as to wipe out almost all or all of that equity. Fortunately for us, I do not anticipate such a move, but that is just good fortune for us, not evidence of personal virtue. If my group lost its contract, or if I were to take a position in public service, or if I were to get divorced, we too would be in foreclosure or a short sell quickly enough. Scary.
How sad is it that one of my hobbies is reading economics blogs, by the way? The authors conclude:
It is important to note that falling house prices helps clear the excess supply, although more jobs and more households is the preferred solution. However falling prices makes the negative equity problem worse.OK, as much as I want to blame Bush for all this, I can't. Yes, Bush is completely responsible for our structural budget deficit and the ballooning national debt. And he's responsible for the Iraq War, Gitmo, and the heartbreak of psoriasis. But as much as Obama et al may claim Bush drove our economy into the ditch, it's just not true. We all rode this bubble because it wasn't apparent it was a bubble at the time. Just as in 1998 we really thought the tech sector might have broken the rules of market economics, in 2007 we all thought that housing prices could never go down. The fact that the delusion was collective makes it very difficult to pin the blame on any one actor or any one policy.
A lot of attention has been focused on the Glass-Steagall Act (oh yeah, I'm an politics AND economics nerd!) and the loophole created by the Gramm amendment in 1999. And it is correct that amendment weakened the banking sector by permitting risky ventures which caused the instability in Lehman and AIG which sent such shock waves through the market. But for all the attention paid to those guys and CDOs and Subprime lending, the real cause seems to be largely ignored by the commentariat: housing was grossly overvalued. Subprime mortgages only turned out to be bad investments because when prices went down, homeowners started defaulting on their mortgages. And it's not actually clear that subprime mortgages have been worse affected then so-called "prime" borrowers. Both groups were buying overpriced properties, and both are defaulting at record rates.
I would like to blame Gramm-Rubin-Clinton for deregulating the banks. I'd like to blame AIG et al for being blind to risk. I'd like to blame Bush-Greenspan for being asleep at the switch and failing to foresee the apocalypse. But that's just not fair. It was a collective failure of vision. I'm as guilty as they were, and I'm a high-information person. I read economics blogs, for Christ's sake! I remember in 2006 looking at some real estate investments, which I ultimately did not pursue. But at that time I was 100% certain that housing prices had only one trajectory: upwards. In fact I remember in 2007 Carlos sent me a little video which illustrated the housing bubble in fairly graphic terms. I simply chose not to believe it. As, I'm sure, did many others at the time.
It's kind of fascinating how assiduously the media tries to ignore the fact the US families have abruptly lost several trillion dollars in collective wealth. They talk about jobs, because jobs are easy to measure and easy to craft a story around. And they talk about the stimulus, as if any stimulus could offset the loss in real estate equity. And they talk about the "recession" abstractly. But I never hear the serious business and market commentators make any note of the fact that all of our homes have lost all or most of their value in terms of accessible equity as the ultimate driver behind the shitstorm we are now in.
Which is a pity because it allows lazy democrats to blame it all on Bush, and it allows opportunistic republicans to scream about taxes, and I suspect that come November we will all wind up worse off for the national failure to understand the root cause of our ills.
5 comments:
It is also true that the Securities Modernization Act of 1996 is directly a Clinton policy and allowed unprecedented leverage *and* allowed insurance companies to be mortgage companies and to bet on their own mortgage failures.
Yes -- that's the one I was referring to (I thought it was in 1999). But I'm uncomfortable with calling it a "Clinton policy." That's accurate in the strictest sense of the term, and indeed it was strongly supported by Rubin (Treasury/Goldman), but it was a bipartisan act initially proposed and written by Gramm and the GOPers in charge of Congress at that time. Does Clinton share some of the blame in this? Yup, and the corporatist bent democrats had in the nineties was (is) one of their bigger failings.
But it's like calling the Social Security Reform Act of 1983 a "Reagan Policy." Well, yes, Reagan signed the bill, and brokered the compromise with Tip O'Neill, so I suppose it's accurate. But it doesn't seem to convey the true sense of reality. If Reagan had been given his druthers, he would have been gutting Social Security, not saving it. And if Clinton had been allowed to set the congressional agenda, it's equally doubtful that securities reform would have been at the top of his priority list. This isn't a perfect analogy, of course, since in 1983 Reagan was forced to do something quite opposed to his stated policy preferences, whereas in 1996 acquiesced to the corporatists both within and without his own party in a way that was mostly consistent with the rest of his adminstration's general approach to regulation.
I'm not sure I understand the thrust of the post. It seems that you are interested in assigning blame. Is that for the purpose of determining moral culpability--as in who should be punished--or for figuring out sound policy going forward?
If it is the latter, I am not sure what I think the non-professional can bring to the table. If it is the former, I feel content that we are not "all to blame." People who bought more expensive houses with larger loans are much less culpable than those profiting from the larger loans and the inflated house prices. As banks became more anxious to lend, home prices started climbing, and home buyers could not have taken a hard line to turn those prices backward. There isn't a home buyers union that is on even footing with the lenders.
As for the government's role, is it possible that it is a response to rather than a cause of the problem? Planet Money (I think) suggested that the cause of teh bubble was Chinese cash looking for a place to go, which sparked the pressure from banks to loosen rules to allow more lending.
Jim,
I'm mostly having an argument in my own head. It's absolute gospel in Left Blogistan that the shitty economy is Bush's fault. Nobody bothers to say it any more; it's accepted as simply a given.
But I was musing on the economic situation and its underlying causes and it suddenly occurred to me that there is this disconnect between the CW on the left and the actual reality. So I wrote about it -- it seemed worthy of pointing out since it's kind of contrarian.
There were plenty of signs that it was a real estate bubble. The real questions are why were the signs ingored, and what caused the bubble in the first place.
As for the signs, I am far from any kind of expert, but the Economist was publishing graphs like this I think every week for at least a year or two before the bubble burst.
http://mysite.verizon.net/vzeqrguz/housingbubble/
There were long established metrics, like the relationship of rents to selling prices, that indicated things were historically out of whack. People didn't want to recognise there was a bubble, probably for many complicated reasons.
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