Tuesday, December 6, 2011

What? Says the N.Y. Fed. There was a bubble?

If these are the guys in charge, we're in big trouble.

See, I thought the following was a given. Acknowledged by all. Understood.

But, then again, I watched the Bubble from Ground Zero -- Bend, ever-lovin Oregon.

"Flip This House”: Investor Speculation and the Housing Bubble

Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw

The recent financial crisis—the worst in eighty years—had its origins in the enormous increase and subsequent collapse in housing prices during the 2000s. While the housing bubble has been the subject of intense public debate and research, no single answer has emerged to explain why prices rose so fast and fell so precipitously. In this post, we present new findings from our recent New York Fed study that uses unique data to suggest that real estate “investors”—borrowers who use financial leverage in the form of mortgage credit to purchase multiple residential properties—played a previously unrecognized, but very important, role. These investors likely helped push prices up during 2004-06; but when prices turned down in early 2006, they defaulted in large numbers and thereby contributed importantly to the intensity of the housing cycle’s downward leg.

Really? Who'd have thunk it.

It was a Bubble, big guys. What part of the phenomenon don't you understand?

They act as though, the fact that "prices rose so fast and fell so precipitously" was a big mystery.

And that they are surprised, surprised I tell you!, that investor speculation was a main factor.

"...previously unrecognized?" Good lord.

In my experience, Speculation is the Major cause of any and all Bubbles. And the speculation in the housing market wasn't just investors in multiple houses -- it was buyers making bad deals and buying bigger houses than they could afford, with the idea that the house would increase in price and allow them to afford it later. Speculation, whether acknowledged or understood at the time.

Are the Fed really so clueless?

Or is this some kind of P.R. bullshit?


Anonymous said...

Americans love living beyond their means. Taking on more debt..


Leitmotiv said...

P.R. bullshit

Duncan McGeary said...

So would rather have our Fed duplicitous or stupid?

H. Bruce Miller said...

Sounds like the Fed is trying, as usual, to pin the blame on the little guys.

What inflated the bubble was not primarily the activity of "flippers" but massive speculation in mortgage-backed derivatives (collateralized debt obligations, credit default swaps) by Wall Street. That was what gave banks the incentive to issue mortgages in inflated amounts to unqualified borrowers. Read "The Big Short" by Michael Lewis for a very lucid -- and entertaining -- account of how this all happened.

Anonymous said...

No, this is very fair, patient research by the Fed.

It destroys the narrative of the right which says that it was loans to less qualified first-time home buyers that took things down.

This research says that it was not that -- it was speculative excess by those who ALREADY bought homes that brought things down.

These are good-quality researchers who are not beholden to anyone else's narrative.

Bruce - the 2nd, 3rd, 4th homebuyers were enabled by securitization, yes. Certainly that was part of it.

But that wasn't the most interesting part of what this particular piece of research was finding.

Anonymous said...

"Americans love living beyond their means..."

And why is that? Because real wages for median income earners have been falling for the last 30 years (CBO statistics).

How have American families coped?

First, by the mass migration of women into the workplace. This wasn't just about "women's lib", it was more about finding a way to supplement Daddy's falling real wages.

Second, by increasing availability of credit, and particularly by home-equity loans between 1998-2008. (Facilitated by securitization on Wall Street, which is due to ever laxer financial regulation, etc.)

Once the home-equity dried up, as a result of the popping of the housing bubble (about 2008), all of a sudden people were brought back to reality. They are living off savings, and now hitting a brick wall.

Down to one wage earner, often, and you better hope the job comes with health insurance.

Best thing - hold out until you're 59 and can starting collecting SS.

Anonymous said...

"Best thing - hold out until you're 59 and can starting collecting SS."

Sorry, meant to say 62. Not at all close myself.

Anyway, the point is that falling real wages of the average person have been shielded to some extent by entry of women into the workplace, and by the increasing availability of easy credit.

The latter thing has come undone, and now many families depend on mommy's wage, at least as much as daddy, who is more likely to be unemployed during this period of high unemployment (shan't say recession, because apparently the economy is growing, just not fast enough to bring down unemployment rate).

H. Bruce Miller said...

"Anyway, the point is that falling real wages of the average person have been shielded to some extent by entry of women into the workplace"

Now Newt Gingrich and Ron Paul are saying we should send the kids to work, just like in the good old days of the 19th Century. Grandpa and Grandma too. Pretty soon we'll reach the Republican Utopia in which everybody works from cradle to grave to enrich the billionaires.