The Washington Post Is Still Missing the Housing Bubble
In keeping with a proud tradition of misreporting on financial markets, the Post began a three part series on the housing bubble yesterday in which it defines the housing bubble as a story of bad subprime loans.
This is wrong. We had a housing bubble before the beginning of the subprime nonsense. The corruption associated with the suprime market extended the bubble, but it did not create it.
Competent economists were warning about the bubble in the housing market as early as 2002. It was easy to recognize because real house prices had already increased by more than 30 percent. By comparison, real house prices had remained virtually flat for the century from 1895 to 1995. No economist had any plausible explanation of this run-up, which is why it was possible to recognize it as a bubble.
Unfortunately, the Post does not like to present the views of competent economists. The most widely cited expert on the housing market in the Post in the years from 2003 to 2006 was David Lereah, then chief economist of the National Association of Realtors, and the author of Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them. (Available for 39 cents from Amazon.com.)
The article might have benefited if it didn't rely almost exclusively on the people who missed the bubble as sources. Nonetheless the piece includes some real gems.
For example, it describes a scenario in which Greenspan "puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that the subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier."
This one is almost mind-boggling. The percentage of subprime loans in the market is not exactly a nuclear secret. It is a widely available statistic that people who follow the housing market knew quite well. Is it really possible that Alan Greenspan, the chairman of the Federal Reserve Board, a person who repeatedly asserted that there was no housing bubble, knew nothing about the explosion of subprime lending until his last weeks in office, in January of 2006? If this is true, the Greenspan was out to lunch in an incredibly big way.
The article also tells readers that Greenspan "did not recall" whether he mentioned the growth in subprime lending to Bernanke. The idea that the outgoing and incoming chairs of the Federal Reserve Board were just finding out about the explosion of subprime lending in January of 2006 is really frightening. If this is true, it suggests that our central bank is being run by incompetents.
Of course, I very much doubt that Greenspan and Bernanke were not fully aware of the explosion of subprime lending long before January of 2006. In this case the problem is almost certainly with the Post, not with our Fed chairs.
Comments (12)
Great takedown, Dean. I know I've disagreed with you about what we should do now but nobody quite understands what happened to the extent that you do. Thanks for this.
June 16, 2008 8:58 AM | Reply | Permalink
Housing Bubble! Housing Schmubble!
A few folks bought overpriced houses. Others MEW'd and vacationed in Tahiti. So what! That's not the problem.
While people like Dean Baker were yammering about the "housing bubble" (and missing out on the last 30%), the real problem (and a problem they never identified) was the failure of the regulators -- principally, the Fed and the SEC -- to compel the financial industry to maintain adequate equity to support its short-term liabilities, -- the failure to limit -- even after Enron -- the industry's use of SIVs, and the failure to understand and control structured financial instruments (all the various hedging devices and asset backed debt instruments).
Recognizing a bubble (and who other than real estate industry shills didn't?) is useless unless you can, also, identify how the bubble will collapse and what actions will be required to minimize its untoward effects.
And the latter these I-told-you-so's didn't do!
June 16, 2008 10:11 AM | Reply | Permalink
Ellen makes another in her series of posts from planet Mars.
Ellen would have you believe it just happened by itself. Ooops!
Nevermind that politicians wholly sold-out to real estate and finance lobbyists actively scuttled regulation and oversight. Nevermind crooks like Grover Norquist behind the curtain.
One of the sparks igniting the explosion in housing prices was due to a change in policy and lack of oversight of Freddie and Fannie buying bad loans from lenders, and absorbing all the risk while lenders made all the fees. That was deliberate corporate welfare by corrupt pols, and designed to undermine regulatory and public welfare agencies.
By removing the risk of these bad loans, they became exceedingly profitable for lenders, driving up housing prices, creating even more need for larger and more profitable loans. Eventually the loans became larger than corrupt pols overseeing Freddie and Fannie could absorb.
Corruption and defrauding of the public on an immense scale. Truly sick.
June 17, 2008 12:10 AM | Reply | Permalink
Nevermind that politicians wholly sold-out to real estate and finance lobbyists actively scuttled regulation and oversight
Koz, ol cuz, you are misconstruing Ellen; were there an adequate, searchable, archive, I could point you to an interesting inventory she provided of the going rate (in millions of dollars of campaign contributions) for senators on the Finance & Banking Committee, (or whatever it is that Dodd is chair of...)
June 17, 2008 2:09 AM | Reply | Permalink
Even our local paper was reporting the percentage of ARMs--although they didn't seem to mind, as the real estate advertising section of the paper had mushroomed to four separate sections.
June 16, 2008 11:53 AM | Reply | Permalink
you'll never have any evidence that there ever was a national housing bubble because there never was a national housing bubble. you can't prove a bubble without a burst. but any deflation in prices is now directly attributable to the shenanigans in the mortgage markets which as you point out were not the source but only contributed to the run up in housing prices. every local market one by one will soon enough get past this speedbump and prices will go back to roughly where they were before the mortgage distortions.
June 16, 2008 2:35 PM | Reply | Permalink
Whatever goofball.
June 17, 2008 12:14 AM | Reply | Permalink
Mr. Baker-
I don't think that The Washington Post was in any way saying that subprime lending caused the housing bubble, in fact they even post a graph elucidating when the bubble started, when it peaked, and when it began on its precipitous declivity. I think the article points out some very obvious flaws with the lending industry as a whole (its lack of oversight and regulation) and myopic lending practices. However, as you agree and the articles suggest, the subprime markets extended the housing bubble (and brought homeownership and borrowing to ridiculously inflated levels), and, therefore, helped usher in the housing crash after it peaked.
I'm not nearly as erudite as you are in economics and, most likely, have a remedial understanding of what had taken place that is slightly better than the average American, but I think you're slamming these two journalists a little unfairly. I agree with your assertion that the Fed and the Bush Administration were aware of what was going on in subprime lending, but, as the White House has approached other domestic and foreign affairs, they chose to ignore the looming problem and assumed the market would correct itself; at worst, they likely assumed it'd correct itself more quickly than it has.
Anyway, I thought you might also be interested in a legal site that is dealing directly with the lawsuits against the lenders (TILA disclosure fraud). They seem to be very interesting cases and there are some decent blogs written on what took place and what is currently taking place per subprime lending and the pending prime borrower resets (which could result in even greater market losses). The site is losangeles.injuryboard.com. However, I think they endorsed The Washington Post article(s) much to your chagrin.
ThomasBenjamin
June 16, 2008 10:56 PM | Reply | Permalink
True. Though years before that, as the the collapse of the tech bubble was looming, a housing bubble was all but inevitable considering Greenspan's FED, Bill Clinton, and then GW Bush.
It was all but inevitable the IT crash would be softened with the inflation of another bubble. And what more obvious choice than housing, what with housing prices already inflated and trending up?
What more obvious choice after that, than fuel?
Coming up, what more obvious choice than food?
June 16, 2008 11:51 PM | Reply | Permalink
How true, and how pathetic. That sort of economic advice has been the norm for decades. The exact same thing can be said of the IT bubble advising mom and pop to get into IT stocks just as insiders were getting out.
June 16, 2008 11:55 PM | Reply | Permalink
Back to Bubble Schmubble!
Why is it so difficult for so many people to understand that asset bubbles only hurt a few marginal purchasers (most of whom never put any money into the property, anyway) and foolish secured lenders?
Look! There are 80+ million homeowners; about 5 million of them sell their home each year and buy another. When the price of the home they intend to purchase rises, that rise is offset by the rise in the price of their old home. If they take money off the table at closing (increase their leverage) that's their choice (you can be a "bubble participant," a "bubble sitter" like Dean Baker, or an average conservative Joe or Jane). It's your choice.
The same holds true for the tech bubble of 1997-2000. You buy $20,000 of Cisco for $20/sh. It should go to $28. It goes to $40/sh. You sell and buy Pets.com (stupid!) @ $100. It goes up to $200 and then down, or it goes down, only. You sell @ $70/sh. You haven't lost $30/sh. or on paper $130/sh.
You've got your $28,000 just as you would have had if there'd been no bubble and Cisco had gone to $28 as it should have.
This idea that the 2000-2002 cost investors $9 trillion of wealth is poppycock! Look at family net worth over that period -- and how quickly the small decrease was recovered. And the wealth was never ever there in the first place. What do we think would have happened to the prices had investors all tried to get out at the top? Price isn't wealth.
To paraphrase Carville, "It's the Wall Street financiers, stupid." The housing bubble is spin, a talking point, a misdirection intend to excuse the bail out lenders.
June 17, 2008 7:54 AM | Reply | Permalink
My personal experience may be singular, although I doubt it very much, but buying a house on Long Island in 1969 for $39,000 and selling it 16 years later in 1985 for $336,000 does not conform to the statement that housing prices remained virtually flat for the century ending in 1995. Or just lucky, I guess?
June 19, 2008 11:57 AM | Reply | Permalink