E Yes There WAS A Housing Bubble

Scott Sumner is dead wrong about the housing bubble last decade. Here is his view on the matter, recently published on his interesting blog, The Money Illusion:

There are two powerful pieces of evidence against the claim that the US housing market was overvalued.  First, many who made that claim also said the same thing about housing markets in Canada, Australia, the UK, and other countries.  And yet many of those other countries did not crash.  Even worse, America’s housing market has mostly recovered, and yet I see almost no one currently saying “America’s in a huge housing bubble, and when it crashes we’ll have another Great Recession”.  So why continue to claim the 2008 recession was caused by a housing bubble that no longer even looks like a bubble at all?

The problem with his analysis is that last decade, mortgage rates were far higher, while prices were similar to current prices in the bubble states. Yes, if you look nationally, as seen in the chart below, prices are higher everywhere now. But that figure is deceptive. The median price in California in the bubble was around $500,000 and that is about where we are now. It is in the bubble states where prices were high. Those were mainly California, Florida, Arizona and Nevada.

Nationally, prices are higher now but the housing bubble was confined to 4 states last decade.

And remember, Robert Shiller has said we have seen overheating in housing since 2012!

So, the bubble consisted of people who were given low teaser rates in certain states, and would be unable to pay once those rates went away. What actually happened in the bubble states is that when the crash came, many mailed in the keys, but in many wealthier neighborhoods, there was no attempt to foreclose right away, as the value of the housing was more important to banks than foreclosing and getting them back. And the Fed lowered rates after the housing crash, allowing some to save their homes. Yet many wealthy owners did walk away from their mortgages.

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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William K. 2 months ago Member's comment

Certainly the irresponsible issuing of loans that could not be repaid contributed to the ultimate collapse. And the bundling of bad loans, selling them as investments, added a lot of fuel.

Anastasija Janevska 2 months ago Member's comment

What would have been the better course of action, William K.?

William K. 2 months ago Member's comment

The better path, for starters, would have been through much tighter regulation of the mortgage industry, including NOT rescuing the loan companies that made loans to those obviously unable to pay them back. Then, some sort of control on the bundling of mortgages and selling them as securities. Probably full disclosure for a start.

Of course, about the same time, gasoline prices shot out of sight due to speculators buying petroleum futures on credit. preventing speculation with borrowed money could have dampened that fire a bit.

Gary Anderson 2 months ago Author's comment

Yes William. The government did not follow the law. The law of 1989 to resolve the S&L crisis clearly was for companies to be punished if they loaned money to people who could not reasonably pay it back. The FIRREA bill was added to the CRA law and while most explanations of the law leave it out, one of the reasons it was passed was to give the government power to investigate bad loans made by unscrupulous lenders. It was eventially used in the Great Recession, but not at first. https://www.thebalance.com/what-is-firrea-3305839 Needless to say, banks and politicians owned by banks do not like this law.

In the Great Recession, the loans were bundled and risk applied to those loans was mispriced from the beginning, and I believe the Fed and the BIS were up to their eyeballs in permitting this mispricing of risk. When I first came to Talkmarkets I wrote a few articles about this subject.

BreakingBad News 2 months ago Member's comment

Certainly makes sense.