Study: Tech, not spec, fueled U.S. housing boom

[Jay_Gatsby]

Interesting article:

http://tinyurl.com/ozwr6

Don't look at me. That is essentially the message of a new Federal Reserve study arguing that productivity--not the central bank's own policy of rock-bottom interest rates--was behind a five-year housing boom that now seems to be ending rather abruptly.

 

[brewer12345]

*sniff* *sniff*

I smell bullsiht...

 

[Jay_Gatsby]

I thought we were in a real economic slump from 2001-2003 or so. As such, how could productivity have caused the housing boom? If we were so productive, why was it necessary to cut interest rates to the bone?

 

[brewer12345]

Real world & our creditors: "You idiots! Negative real interest rates and lax lending standards caused a US housing bubble that threatens to wreck the US economy and take the rest of the world down with it!"

Fed: "It wasn't me. It was the one-armed man..."

 

[danm]

What are the phases of a bubble? Optimism, speculation, greed, blame, or something ...

It's laughable, while the bubble was due to more than low rates, the root cause was certainly low rates. They're just trying to stay clean.

 

[dumpster56]

Real world & our creditors: "You idiots! Negative real interest rates and lax lending standards caused a US housing bubble that threatens to wreck the US economy and take the rest of the world down with it!"

Fed: "It wasn't me. It was the one-armed man..."

I am so glad I have positioned my self to be able to sit back and not worry about how to pay my mortgage.

Getting rid of the house with the 225,000 mtg and cashing in before the housing markets sure sign of hitting the skids getting the builder of my new home to cut the price by 7 K and now only have a 390 dollar a month mtg and paid almost 3 years ahead, being in a place with real estate tax bill at 3K not 9K like NJ.

And to think I have been offered jobs to teach down here in NC and to have a nice pension with medical and cola and to be only 50.

Wow. How did I do something right for a change??

 

[d]

you shouldn't rely on the media interpretation of the research!  here's a link to the original [/url]http://www.chicagofed.org/publications/economicperspectives/ep_3qtr2006_part3_fisher_quayyum.pdf
they state "our findings do suggest that to the extent
that house prices have grown considerably in recent
years, this is not due to unusually excessive speculation
in the housing market, such as would occur in a
bubble. Instead, our findings point toward the high
prices being driven by fundamentals"

BTW, the "wealth creation" referenced was "over the previous
decade", not early this decade.

 

[unclemick]

What are the phases of a bubble? Optimism, speculation, greed, blame, or something ... They're just trying to stay clean.

What's the line in that old Johnny Cash song(A Boy named Sue) - 'the mud, the blood, and the beer.'?

Hopefully - all the adjustments - won't be a replay of our 1966-1981 or the Japanese experience.

We're smarter this time around - Right

Buckle up - it's gonna be fun!

heh heh heh heh heh

 

[Jay_Gatsby]

you shouldn't rely on the media interpretation of the research! here's a link to the original [/url]http://www.chicagofed.org/publications/economicperspectives/ep_3qtr2006_part3_fisher_quayyum.pdf
they state "our findings do suggest that to the extent
that house prices have grown considerably in recent
years, this is not due to unusually excessive speculation
in the housing market, such as would occur in a
bubble. Instead, our findings point toward the high
prices being driven by fundamentals"

BTW, the "wealth creation" referenced was "over the previous
decade", not early this decade.

Not surprising, the report is somewhat contradictory:

"While over the last two years nominal mortgage rates have started creeping up, real rates have continued to fall because inflation expectations have been rising. These considerations suggest that sustained low interest rates, possibly driven by unusually loose monetary policy, could be fueling the housing boom." Page 32.

Strangely enough, they then say in their conclusion section that:

"Our main findings are as follows. First, it appears that the housing boom has not been driven by unusually loose monetary policy. This is not to say the monetary policy has not been unusually loose, but that to the extent it has been loose, this is not what has been driving spending on housing. Second, the current levels of spending on new housing are largely explained by technology-driven wealth creation over the previous decade. Third, changes in the demographic, income, educational, and regional structure of the population account for about one-half of the increase in homeownership. That is, without any other developments, the homeownership rate is likely to have gone up anyway, but not by as much as it has done. The last finding is that substitution away from rental housing made possible by developments in the mortgage market, such as subprime lending, could account for a significant fraction of the increase in residential investment and homeownership." -- Page 43

The last sentence is the real kicker. In other words, "it wasn't us, blame the greedy bankers!"

 

[dumpster56]

I just got off the phone with the realtor who listed my house she didn't sell it someone else did , BUT she told me NOT 1 house in the 1000 home neighborhood has sold in the past 6 weeks. There are 57 listed.

Said mine was the last to sell !

I looked at the realtor site and sure enough the same houses are listed with lower listing prices. Some substantially lower. In fact a house that was listed at 600,000 in Jan is now listed at 525,000. A house listed in may at 634,000 is now listed at 579,000. Kinda looks like the number of homes that are on the market might still in buyers eyes be over priced.

We bought ours for 230,000 sold it for 513,000. 10 years old we bought it new, Toll Brothers house. It is common knowledge what people paid for these homes in the neighborhood, it looks as though buyers are saying we will wait em out. 400,000-465,000 range ? Maybe??

Heck it still would be a good profit for many except I know how many people refinanced and used the equity as a cash cow only to see that they now have little equity!

Dummies!

 

[youbet]

you shouldn't rely on the media interpretation of the research!  here's a link to the original [/url]http://www.chicagofed.org/publications/economicperspectives/ep_3qtr2006_part3_fisher_quayyum.pdf

Thanks d!  You are sooooo right!  Writers and editors who claim to be giving us an easy path to knowledge by interpreting studies and reports for us always wind up twisting the facts and sensationalizing.  

 

[brewer12345]

The last sentence is the real kicker.  In other words, "it wasn't us, blame the greedy bankers!"

Uhuh, but who regulates the banks?

 

[Texas Proud]

I just got off the phone with the realtor who listed my house she didn't sell it someone else did , BUT she told me NOT 1 house in the 1000 home neighborhood has sold in the past 6 weeks. There are 57 listed.

Said mine was the last to sell !

I looked at the realtor site and sure enough the same houses are listed with lower listing prices. Some substantially lower. In fact a house that was listed at 600,000 in Jan is now listed at 525,000. A house listed in may at 634,000 is now listed at 579,000. Kinda looks like the number of homes that are on the market might still in buyers eyes be over priced.

We bought ours for 230,000 sold it for 513,000. 10 years old we bought it new, Toll Brothers house. It is common knowledge what people paid for these homes in the neighborhood, it looks as though buyers are saying we will wait em out. 400,000-465,000 range ? Maybe??

Heck it still would be a good profit for many except I know how many people refinanced and used the equity as a cash cow only to see that they now have little equity!

Dummies!

Hmmm.. so, you sold a house that would SEEM to be about the same as the ones listed for $513K... but the people are listing them for $600K and now have brought them down to $525... yes, seems like they have a ways to go before they can sell.. and it looks like it will be lower than what you got for yours... so, congratulations!!

 

[youbet]

Uhuh, but who regulates the banks?

Are banks actually making more profit on subprime loans?  Or do they wish more borrowers qualified for standard loans and are only offering subprime because demand for standard loans has decreased?  I haven't seen any numbers on this.

I find it interesting how individual Americans, the borrowers, seem to be skating free of responsibility for their own predicaments.  Of course, how could the Fed, or anyone else, make a statement that would place the blame for people's situations squarely in their own laps?  That would be way too unpopular.............  

I wonder today, who would get the blame for the bubble in tulip prices in the prior century.......the famous "tulipmania" scenario.  What government agency is actually responsible for people's stupidity and greed?

 

[dumpster56]

Hmmm.. so, you sold a house that would SEEM to be about the same as the ones listed for $513K... but the people are listing them for $600K and now have brought them down to $525... yes, seems like they have a ways to go before they can sell.. and it looks like it will be lower than what you got for yours... so, congratulations!!

They were bigger homes but very similar, if you have ever seen a toll brothers development they are all 4 bedroom 2.5 bath centerhall colonials, these two I listed have an extra room downstairs but if you were to look at them next to my old house they look similar.

We priced the place to sell, never had any home equity lines of credit never refied and took cash out.

We sold they have not, I know what that 525 guy paid for his house 331. He also bought two fancy cars in the last 4 years.

 

[Jay_Gatsby]

Heck it still would be a good profit for many except I know how many people refinanced and used the equity as a cash cow only to see that they now have little equity!

Dummies!

This is one of the major problems associated with a housing bubble burst. Significant appreciation led to significant paper equity, which then led to people using their houses as piggy banks.

 

[dumpster56]

Are banks actually making more profit on subprime loans? Or do they wish more borrowers qualified for standard loans and are only offering subprime because demand for standard loans has decreased? I haven't seen any numbers on this.

I find it interesting how individual Americans, the borrowers, seem to be skating free of responsibility for their own predicaments. Of course, how could the Fed, or anyone else, make a statement that would place the blame for people's situations squarely in their own laps? That would be way too unpopular.............

I wonder today, who would get the blame for the bubble in tulip prices in the prior century.......the famous "tulipmania" scenario. What government agency is actually responsible for people's stupidity and greed?

I saw the mortgage that the people who bought my house have. They bought my place at 513,000 put 135,000 down he sold his place she is trying to sell her place below what she owes. A 387,000 mtg with a HELOC and some other new fangled things. I just shook my head and quickly signed the papers gavem the keys and said adios!

 

[brewer12345]

Are banks actually making more profit on subprime loans?  Or do they wish more borrowers qualified for standard loans and are only offering subprime because demand for standard loans has decreased?  I haven't seen any numbers on this.

Much of the activity in this market is driven by the securitization markets.  Banks make the subprime loans, package them up, and sell bonds backed by the loans.  The difference between what it costs them to make the loans and what they can sell the bonds for is the profit.  Margins on subprime deals are far higher than on prime mortgage deals.  Since the banks keep little of the credit exposure to these loans, they are happy to do as much lending as they possibly can to feed the securitization machine.

 

[youbet]

I just shook my head and quickly signed the papers gavem the keys and said adios!

That's right.  Your attorney at the closing is to ensure you get paid in full and their attorney is to see that they, and their financers, get clear title.  After that, their details of financing are not your worry.  I wouldn't even want to know where the money is coming from.........as long as it is indisputably turned over to me!   

 

[youbet]

Much of the activity in this market is driven by the securitization markets.  Banks make the subprime loans, package them up, and sell bonds backed by the loans.  The difference between what it costs them to make the loans and what they can sell the bonds for is the profit.  Margins on subprime deals are far higher than on prime mortgage deals.  Since the banks keep little of the credit exposure to these loans, they are happy to do as much lending as they possibly can to feed the securitization machine.

Thanks Brewer, nice explanation.  Still, I'm curious, is the banking industry actually experiencing higher profitability due to all these subprime loans?  Are subprime loans actually "bringing home the bacon" to their stockholders?  If so, it implies that the higher rates charged for subprime loans are more than making up for the higher risk, that the market is not efficient for these products. Interesting.....

Anyway, my main point is still my surprise at how individual Americans seem to be dodging blame and responsibility in the media for their own self-induced predicaments.  Blame the banks, blame the Fed, blame the gummint, etc.  I'd like to see the media nail the borrowing public.  Maybe that would help the public "get it."  What's the point of telling them that they're OK, it was those big, bad businesses and government policy that did it to them?

 

[Nords]

I don't know if this was a local phenomenon or nationwide, but the Hawaii housing market started to take off as the tech wreck tanked.

When we bought our house (17 June 2000) the sellers had first listed it in February.  It was a pigsty and in poor material condition so it languished and they pulled it off the market for "improvements".  When they put it back on the market (13 June) their first Open House was on Father's Day so their traffic was non-existent.  Spouse saw the property at 2 PM Sunday and we had our offer in by 9 AM Monday.

The property had been listed on the MLS website but I don't know how quickly the posting went up.  The realtor told us later that later Monday morning they received a hailstorm of e-mails & phone calls from Silicon Valley that continued for two weeks.  Our $405K offer was accepted on their $425K listing by then but we had to vacate all our usual contingencies and the sellers had backup cash offers of over $500K.  

I think all the Silicon Valley workers came to work that Monday, looked at the value of their stock options and the market trend, and started converting their company equity to another type of equity.  

I wonder how much of this has continued over the last five years, and only now are investors sending their hot money spewing over commodities and international funds-- and sucking all the loose money out of the housing market.

 

[brewer12345]

Thanks Brewer, nice explanation.  Still, I'm curious, is the banking industry actually experiencing higher profitability due to all these subprime loans?  Are subprime loans actually "bringing home the bacon" to their stockholders?  If so, it implies that the higher rates charged for subprime loans are more than making up for the higher risk, that the market is not efficient for these products. Interesting.....

Up until recently, at least, a big involvement in the subprime market was VERY profitable.  Things aren't quite as fun now because the bank that sells the loans has to guarantee that the loans are good for a certain (short) period after the loans are sold.  Check out the beating HRB is getting today to see why this can be bad for shareholders.  But for several years, subprime mortgages were a very fat profit stream indeed.

 

[greg]

Might I add at this point: The Creature from Jekyll Island (not sure about the spelling of Jekyll) is a wonderful book about how the banking system in this country works. Good reading while watching events unfold.

 

[brewer12345]

Might I add at this point:  The Creature from Jekyll Island  (not sure about the spelling of Jekyll) is a wonderful book about how the banking system in this country works.  Good reading while watching events unfold.   

Heh, I dunno, I think the big, fat textbook on my desk is even more fascnating: "Financial Institutions Management: A Risk Management Approach"

Seriously, an interesting and very readable book on how bubbles play out is "Devil Takes The Hindmost". IIRC, it was written befoe the dot bomb unfolded, but it starts with the tulip craze and covers most of the other big bubbles since.

 

[d]

while the bubble was due to more than ...

there's likely a semantics problem here ... a bubble is defined by "pure speculation" ie speculation upon speculation. if the price rise is caused by "fundamentals", it's not a bubble. In the case of housing, i'd guess there is some pure speculation, but the authors of the study are not-so-simply concluding that there's more to it than that, and hence it's not a "bubble".