I was lucky, bought a little house (new) for $103,000 in 1999. In 2006, maybe early 2007, a house just like mine was listed at $270,000. I wondered, "How are people affording these mortgages?" As it turned out, they really couldn't; the payments weren't sustainable.
I knew there was a bubble, that speculation could drive prices up beyond any reasonable chance of return. When a mortgage company went out of business overnight I assumed, without a lot of clarity, that what had been going on was basically a Ponzi scheme. Mortgages got decoupled from the actual asset by being bundled and sliced and sold as derivatives. This obscured what was going on: a lot of bad loans, a lot of bad debt. Not enough income to cover the debt service so the house of cards tumbled.
There are a lot of things I don't understand about this.
1. Didn't we have some "fundamental" read on housing units vs. housing demand? Most people live somewhere, whether an apartment, a rental, owner-occupied single-family home, etc. Didn't it become apparent that excess housing was being built?
2. When the market crashed, people who had spent as if their house was their savings account were hit hard. So everyone bemoaned the state of the "housing market." But in double-entry bookkeeping, every cloud really does have a silver lining: The crash lowered housing prices, so doesn't this mean that more people eventually can afford to buy houses? Not much help if they can't get a loan, though.
3. If it weren't for the mortgage-interest deduction, would buying have looked as attractive as it did in the lead-up to the 2008 meltdown? How much did this distort the picture of the pros and cons of home ownership?
4. When I bought my house the builders didn't break ground until I signed a contract. When the next subdivision built out in my area, slightly more upscale, I noticed that there wasn't much activity. Lights went on and off and trash bins were wheeled to the curb, but I hardly every saw anyone and there was a lack of tricycles, outdoor furniture and other things that make an area look lived-in. When I looked up ownership on these houses many of the names sounded Vietnamese, Chinese and Russian - maybe Armenian. Same builder. Were these houses likely built "on spec"? Did foreign investors further inflate the bubble?
5. If the biggest industry in town is construction, there must be a constant influx of newcomers to buy houses, appliances etc. Is there ever a point when it becomes obvious this isn't sustainable? Is the belief that it *is* sustainable the same as an overheated market?
6. As dominoes continued to fall people were foreclosed on and many moved in a panic. Yet, the banks then couldn't sell the homes. All the for-sale signs and neglected properties on a street look bad, and without cash or credit, who's going to buy them? This all culminated in a bailout of more than $700 billion. So here is a really naive question: What happened to the money?
7. After an earlier crisis the U.S. government in effect stepped in as buyer and there was eventually some return on the investment as demand finally caught. Is anything like that in play now? Any chance to recoup that quarter-of-a-trillion dollars?
8. I had a theory that if the 12 million illegal immigrants in the U.S. had received provisional legal status back in 2007, some would have bought homes, to be paid off by having several working family members. Although that complicates the picture, I later felt somewhat vindicated by a 2011 article in The Economist:
This last is of particular interest to me but I don't want to muddy the waters. Though I'd like to see provisional legal status for immigrants with roots here, I also realize that as soon as these people become legal, they will be undercut by more people willing to come in illegally and work under the table, as long as the U.S. retains its premium brand. Still, I think it might help expand the economy to regularize the status of some immigrants.
There is a lot to unpack here, and if anyone can suggest any good books to read I'd be interested. Or, I'd just be interested in reading some informed opinions from ISF readers.
I knew there was a bubble, that speculation could drive prices up beyond any reasonable chance of return. When a mortgage company went out of business overnight I assumed, without a lot of clarity, that what had been going on was basically a Ponzi scheme. Mortgages got decoupled from the actual asset by being bundled and sliced and sold as derivatives. This obscured what was going on: a lot of bad loans, a lot of bad debt. Not enough income to cover the debt service so the house of cards tumbled.
There are a lot of things I don't understand about this.
1. Didn't we have some "fundamental" read on housing units vs. housing demand? Most people live somewhere, whether an apartment, a rental, owner-occupied single-family home, etc. Didn't it become apparent that excess housing was being built?
2. When the market crashed, people who had spent as if their house was their savings account were hit hard. So everyone bemoaned the state of the "housing market." But in double-entry bookkeeping, every cloud really does have a silver lining: The crash lowered housing prices, so doesn't this mean that more people eventually can afford to buy houses? Not much help if they can't get a loan, though.
3. If it weren't for the mortgage-interest deduction, would buying have looked as attractive as it did in the lead-up to the 2008 meltdown? How much did this distort the picture of the pros and cons of home ownership?
4. When I bought my house the builders didn't break ground until I signed a contract. When the next subdivision built out in my area, slightly more upscale, I noticed that there wasn't much activity. Lights went on and off and trash bins were wheeled to the curb, but I hardly every saw anyone and there was a lack of tricycles, outdoor furniture and other things that make an area look lived-in. When I looked up ownership on these houses many of the names sounded Vietnamese, Chinese and Russian - maybe Armenian. Same builder. Were these houses likely built "on spec"? Did foreign investors further inflate the bubble?
5. If the biggest industry in town is construction, there must be a constant influx of newcomers to buy houses, appliances etc. Is there ever a point when it becomes obvious this isn't sustainable? Is the belief that it *is* sustainable the same as an overheated market?
6. As dominoes continued to fall people were foreclosed on and many moved in a panic. Yet, the banks then couldn't sell the homes. All the for-sale signs and neglected properties on a street look bad, and without cash or credit, who's going to buy them? This all culminated in a bailout of more than $700 billion. So here is a really naive question: What happened to the money?
7. After an earlier crisis the U.S. government in effect stepped in as buyer and there was eventually some return on the investment as demand finally caught. Is anything like that in play now? Any chance to recoup that quarter-of-a-trillion dollars?
8. I had a theory that if the 12 million illegal immigrants in the U.S. had received provisional legal status back in 2007, some would have bought homes, to be paid off by having several working family members. Although that complicates the picture, I later felt somewhat vindicated by a 2011 article in The Economist:
Quote:
|
Sean Dobson, the chairman of Amherst Securities, is more bearish than most. He argues that some 11.5m American homes (out of 125m in all) remain at risk of ending up in foreclosure, and that principal forgiveness for borrowers under water is the only option: "You are not going to create new buyers for 11m homes, short of legalising every illegal immigrant and forcing them to buy a house." |
There is a lot to unpack here, and if anyone can suggest any good books to read I'd be interested. Or, I'd just be interested in reading some informed opinions from ISF readers.
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