patrick.net

tts says

It vanished as a requirement when prices got so high that no one could own a home without relaxed loan conditions. That is the banks/Wall St./gov. colluding together. Aka Bush’s “ownership society”.

1,000% wrong minded position. Market conditions work just fine. A homes price will match the buyers ability to buy it in an unmanipulated market.

your other stuff is wrong too, but we all had that arguement a long while back. No ned to cover it again. It's cool. HAve a good night.

Fannie was bad but weren't the drivers of the price appreciation of 2002-2005.

This is the only chart that matters:

http://research.stlouisfed.org/fred2/series/HHMSDODNS

Here it is 1995-2010

Here's a chart with total real estate valuation in red.

Mexicans and subprime borrowers didn't drive up total valuation to $24T in the US. That was done by a financial system OUT OF CONTROL.

Part of the insanity was the FEEDBACK effect higher valuations had via the ability of specuvestors to cash-out refi their loans as valuations rose and interest rate terms fell.

The kept the bubble going long past the breaking point, and also stimulated appreciation, at least in the 2004-2006 period (when traditional mortgage interest rates were no longer falling).

thomas.wong1986 says

Prices from $200K - $400K skyrocketing to $750K to $1MILLION+ …

and had no idea what a mortages were ? Irrational Exhuberance!

Yes, that is right, they had no idea what mortgages were.

I know professionals, college educated and everything who're intelligent, but didn't know the first damn thing about mortgages or the housing market. Who'd they go to for info. about what to do with their home or to buy a new home?

1)Realtor buddies.
2)Banks.
3)LO's, also usually they're buddy.

and sometimes maybe

4)the news.

Just who do you think was supposed to be educating these people anyways about the realities of the marketplace anyways? The schools? Really? Come on man...

tts says

Just who do you think was supposed to be educating these people anyways about the realities of the marketplace anyways? The schools? Really? Come on man…

Common sense!

Bap33 says

Market conditions work just fine.

You're gonna play the "efficient market" card? God even Greenspan doesn't believe that anymore. If markets were efficient there never would've been a crash or recession ever in any laissez faire system.

Bap33 says

A homes price will match the buyers ability to buy it in an unmanipulated market.

Maybe, but even you believe the housing market wasn't unmanipulated. You just attributed it incorrectly to the CRA which is a Repub. talking point to put the blame on the Dems. when its really all their damn fault, but not because of the CRA.

Clinton helped relax the rules on the banks by finally canning the last few scraps of Glass-Stegall and Bush finished the job with his "ownership society".

Bap33 says

your other stuff is wrong too, but we all had that arguement a long while back. No ned to cover it again. It’s cool. HAve a good night.

Phht. This is a forum, people are supposed to talk back. If you don't want to talk to someone don't say anything.

thomas.wong1986 says

Common sense!

Doesn't really exist, never has. Weep for humanity I guess.

maybe? maybe? lol

there is something familure about this one .... hmm

thomas.wong1986 says

Of all things said! Conservatives want more regulations, while Libs wanted less regulations… see for yourself.

They're all full of crap, Dems and Repubs. You're falling for ginned up political controversy. It doesn't matter which one is in power since they all do what the banks/mega corps want right now.

Instead of focusing on the Red vs. Blue "politics as football" game we need to concentrate on issues. But that means putting aside ideological purity for being practical, and most people simply can't do that because they're blinded by the showmanship both sides are displaying.

Amazing stuff..... some people got it, some dont

231 Harding Ave
Los Gatos, CA 95030
Source: Public Records Beds: 2
Baths: 3.0
Finished Sqft: 1,707
Unfinished Sqft: -
Total Sqft: 1,707
Floors: 2
Lot Size: 8,528
Style: Single Family Residential
Year Built: 1965
Year Renovated: 1965
County: Santa Clara County

Property History
Date Event Price Appreciation Source
Aug 17, 2010 Sold (Public Records) $258,500 -7.3%/yr Public Records
Jan 09, 1998 Sold (Public Records) $675,000 -- Public Records

Bap33 says

maybe? maybe? lol
there is something familure about this one …. hmm

Laissez faire is a old idea that was tried for hundreds of years, had bubbles and busts and all that jazz too. Some the biggest bubbles ever (google the Tulip bubble) were under Laissez Faire economic systems.

"Free" and "unmanipulated" markets are something that can only exist on paper. In the real world they've never existed and never can.

@Troy,
ok.
But when you say the financial system was out of control, what was the main vehicle used to free up most of the liquid that the investors played with? I suggest it was, in part, due to the newly built houses in Everywhere, California that sold for $XXX (10 times HH income) to people who did not see that as a problem. If the free money for houses was not the way liquid was getting brought to the WallSteet types, then what was it? (seriously, what was it? I'm not being smartassed)

thomas.wong1986 says

231 Harding Ave
Los Gatos, CA 95030

that's not a comp.

there was no listing prior to sale.
probably not an arm's length sale (too lazy to check propertyshark to verify).

http://www.redfin.com/CA/Los-Gatos/231-Harding-Ave-95030/home/833489
http://www.zillow.com/homedetails/231-Harding-Ave-Los-Gatos-CA-95030/19751308_zpid/

zillow has it for $1M.
no way it sold on the open market for under $300k.

Big money for Wall St. was in repackaging those home loans over and over again, selling back and forth to suckers. The suckers being supposedly forgien SWF's and investors for the most part, turned out instead to be lots of domestic municipal fund buyers and pension fund buyers too though. CDO's and CDO Squared and such. That is where the insane tens of trillions of debt was created, housing itself is only "maybe" a couple of trillion.

Bugger!

Bap33 says

But when you say the financial system was out of control, what was the main vehicle used to free up most of the liquid that the investors played with?

For one, it was the Fed dropping interest rates to near-ZIRP:

10-Year Treasury Constant Maturity Rate (DGS10)

3% for a 10 year bond in 2003! That sucked!

Luckily, Wall Street found other vehicles for the world's rich people looking for yield. Safe as Houses!

Even safer thanks to the modern miracle of collateralized debt obligations (CDOs).

They could tranche all the suicide loans they were making and call 10% of them "equity piece" (stashed somewhere on someone's balance sheet as an asset), 30% of them moderate risk, and leave 60% of them TRIPLE-A, the same risk as sovereign debt. They offered a little sweetener for the suckers buying the 30% B piece, since with home rising 10%+ a year getting into this gravy train was like getting more free money for the world's rich people.

Then around 2007 all the suicide loans starting blowing up and lenders had to start pulling people's HELOCs, which caused further blow-ups because too many people were using debt to service debt.

http://economictimes.indiatimes.com/news/international-business/norways-central-bank-sues-citigroup-report/articleshow/6630369.cms

LONDON: Norway's central bank is suing Citigroup for alleged non-disclosure of financial risks at the time when Norwegian sovereign wealth funds were used to purchase securities issued by the US lender prior to the global financial crisis

Norges Bank alleges that it lost USD 835 million because Citi failed to fully reveal the financial risks it was facing, particularly from investments in sub-prime mortgages, British daily The Financial Times reported, citing a lawsuit filed in New York.

What they were also doing was 80/20 loans with Fannie Mae taking the 80% conventional part and wall street securitizing the shit 20% part.

Literally what they did was take 1000 second liens and call 80% of them safe (AAA) and 20% of them not safe (B).

Remember the higher interest rates 2nd liens had, back when they were offered? That was to sucker in the investors looking for 8% AAA-rated yields.

Banks looking for further credit enhancements could take the B-rated paper and then get AIG, MBIA, Ambac, Radian etc. to insure it, magically turning it into A-rated (basically borrowing the insurer's AAA-credit rating, since they were now on the hook for the risk).

Debt buyers were also hoodwinked by the private mortgage insurance providers. They too were writing checks their balance sheets couldn't cash.

NY judge rules MBIA couldn't tell if GMAC misrepresented MBS

The New York Supreme Court on Wednesday ruled that MBIA Insurance Corp. did not have any way to discover if GMAC Mortgage LLC intentionally misrepresented the true nature of mortgage-backed securities that MBIA insured.

http://www.housingwire.com/2010/12/21/n-y-judge-rules-mbia-couldnt-tell-if-gmac-misrepresented-mbs

There is a local flipper out in our area. I think he is filing for bankruptcy though. He bought a few properties and couldn't sell them, his purchases also dropped in price. Maybe one day he'll go do something useful for society.

Adding cabinets from "Home Depot" is hardly renovation for which people will overpay 50,000 for.

Every house I watched get bought by investors in the last three years, are now selling for less than they bought them for. This after they gave those houses "The Treatment" standard issue Granite counter tops, stucco covered furring strips trimming the windows and doors, and painted crap brown trimmed in turkey shit green.

Troy says

Literally what they did was take 1000 second liens and call 80% of them safe (AAA) and 20% of them not safe (B).

Anything with implied goverment guarantee, is considered safe.

Bap33 says

Who wanted them in place? Who wanted them removed?

The people who cleaned up the S&L mess wanted more regulation.

The people who made the S&L mess wanted less regulation.

"In the summer of 2003, leaders of the four federal agencies that oversee the banking industry gathered to highlight the Bush administration's commitment to reducing regulation. They posed for photographers behind a stack of papers wrapped in red tape. The others held garden shears. Gilleran, who succeeded Seidman as OTS director in late 2001, hefted a chain saw."

http://dorkmonger.blogspot.com/2008/11/cutting-red-tape.html

Chart: Annual rate of real estate appreciation, 1990-2006

(red is 30 year interest rates for reference)

Here you can see that the rate of appreciation SPIKED after that press conference in 2004 and 2005, from the 10% of 2002-2003 to 17.5% at the end of the summer of 2005.

But nobody covered themselves in glory insisting on making housing less affordable in the 1990-2005 period.

This guy here:

http://www.vdare.com/sailer/080928_rove.htm

details the argument that all the minority buying you were seeing in your area was a similar political master-plan to the political move to invade Iraq and take their oil.

Something that seemed smart at the time but didn't quite work out as planned.

thomas.wong1986 says

and it certainly did not explain why prices doubled prior to the 2000-2001 recession.

Interest rates fell from 10% in 1985-1990 to 7.5% in 1990-1998.

GDP rose from $5.7T in 1990 to $10T in 2000.

This graph

is complicated but shows two things:

blue line: total real estate asset valuation to GDP. Down is RE growing faster than GDP (bad), up is GDP growing faster than RE (good).

red line: is the 30 year mortgage rate regime (/10 to fit the scale)

With this graph you can see the 1980s run-up in RE relative to GDP was partially due to the falling interest rate regime (from 13%+ to ~9-10%). It's my general thesis that the baby boom entering their prime credit draw-down years (the median boomer was age 30 in 1985) pushed money into housing and was thus responsible for the secular rise in prices 1975-1990 (and the inflation in general).

With the 1990 bubble crash the Fed dropped rates a lot, helping to arrest the slide in RE valuations -- valuations in nominal terms held flat while the economy slowly recovered in the 1990-1995 period.

Affordability started the downtrend in 1998 as the market started coming back to life in dotcom areas (and most investors in the stock market were sitting on fat equity gains that gave them purchasing power in real estate).

The Fed attempted a brave attempt to but the brakes on the economy in 1999-2000 (that this was just before the 2000 election is just a coincidence no doubt), but after the election was decided in late 2000 the let rates fall down to historical lows, which continued the upwards trend in RE valuations.

Bap33 says

And this most recent bubble was a return to that original open market mistake by moving away from the new idea of lending rules. Is that about right?

The story of real estate lending is generally one of increasing access to credit.

I think analyzing anything prior to 1970 is a waste of time since that was both before the baby boom entered the housing picture (as buyers) and also for the first half of the 20th century most communities had plenty of land available for easy residential development.

But starting in 1970 banks started qualifying households not just on the man's salary but both. This encouraged households to fall into the "two income trap" of buying a better house at the expense of requiring both spouses to remain working.

The stupid thing is eventually every household was forced to commit to the two-income trap to be able to bid against everyone else doing the same thing. Prices went up, but nobody was getting more for their money since people were just bidding up the site value and not buying actual better houses.

After the 1970s inflation adjustment, interest rates have been on a secular downswing, with 30 year mortgage rates falling from 13% in 1985 to the 5% of today. Specific periods of rate change were 1985-1987 (from 15%+ to 10%), from 1990-1994 (10% to 7%), from 2000 to 2003 (from 8% to 5%), 2009-now (from 6% to ~4.5%).

This rate adjustment appears to be a one-way street, since the lower 80% of the population has been only keeping up with inflation as far as wages go:

The Fed simply has no ability to raise rates until wages turn upwards again. This is obvious to everyone and is why the 30 year Treasury bond is still under 5%:

http://research.stlouisfed.org/fred2/series/WGS30YR

Lending also has been in the process of loosened. Low-down loans were formerly only available to VA borrowers, but in the 80s and 90s they have been extended to more people.

But what really changed in 2001-2005 was the rise of 80-20 financing, or even 80-20-25 financing, where 120% of the purchase price was borrowed to get the borrower into the house.

In addition, middle class borrowers could abuse their high FICO scores and avoid the income documentation step. This allowed them to sidestep traditional lending underwriting and buy more house than they could safely afford.

Up to 50% of the loans being made in 2005 were low-documentation.

Another affordability innovation was pick-a-pay, negative amortization. This was very popular with specuvestors interested in only holding the property 2 years to get the tax treatment.

Places like Salinas and the Central Valley saw up to half the new loans going out as negative-am in 2005. Of course, by juicing affordability, what really happened is that prices were bid up as multiple bidders abusing the system bidded against each other for houses coming onto the market.

Banks were also qualifying borrowers on the introductory teaser rate of IO loans, not the back-end fully-amortizing rate. Pure suicide loan for all borrowers wanting to maximize how much the bank would lend them.

In 2008-2009 all the worst of the suicide lending innovation listed above were removed from the market.

IIRC there was even some talk of qualifying borrowers on the highest household income, not both. OH HAPPY DAY if that actually happens (not holding my breath).

Troy says

Interest rates fell from 10% in 1985-1990 to 7.5% in 1990-1998.

You cant make an otherwise $200-300K home into a $1.2M in a few years just
based on interest rates and monthly payments. Based on incomes and inflation
it bearly cracks $400K today. As your graph shows prices and rates both fell
in the early 90s.

Only insanity (irrational exhuberance) has gripped the minds of buyers!

Troy says

Places like Salinas and the Central Valley saw up to half the new loans going out as negative-am in 2005. Of course, by juicing affordability, what really happened is that prices were bid up as multiple bidders abusing the system bidded against each other for houses coming onto the market.
Banks were also qualifying borrowers on the introductory teaser rate of IO loans, not the back-end fully-amortizing rate. Pure suicide loan for all borrowers wanting to maximize how much the bank would lend them.

In 2008-2009 all the worst of the suicide lending innovation listed above were removed from the market.

IIRC there was even some talk of qualifying borrowers on the highest household income, not both. OH HAPPY DAY if that actually happens (not holding my breath).

One should mention the clamp down on apprasiors. Its interesting that after the blow up that falling prices in part were blamed on apprasiors who no longer bound to being black listed by realtors and loan officers if they didnt play the game and inflate or re-inflate prices. That certainly was found on main street not wall street. And today, lots of REA not too pleased with that.

I read this recently in the Economist and tend to agree with it.
He refers to research by Atif Mian, of the University at California, Berkeley, and Amir Sufi, of the Booth School, which shows that increased mortgage availability pushed up American home prices by only around 4.3%. This was a small fraction of the rise in prices during the boom. Irrational exuberance and a willingness to bet on prices rising for ever were probably much bigger contributors to the bubble than credit expansion. My head hurts trying to figure out how they isolated the various causes and effects, but it fits with my "flipper velocity" theory of home prices.

fewy, when did lending really change?

I walked into a CFC retail branch in late 2001 with a solid FICO and a nice salary (but little down payment and only 1 1/2 years of salary history) but they didn't feel any great ability to fund a loan for me in the bay area at that time.

4 years later I'd have had a wide choice of offerings.

EBGuy says

My head hurts trying to figure out how they isolated the various causes and effects, but it fits with my “flipper velocity” theory of home prices.

what also fueled the price rises in 2004-2005 was the gains of 2002-2003 funding the specuvestors via hard cash-out capital gains or the ability to jack the equity out of their existing portfolio via cash-out refis.

The $500B/yr of cash-out equity conversions also funded millions of bubble jobs, who were also willing & able buyers into the bubble, especially with the rise of subprime originations 2004-2006.

It was a beautiful bubble machine. I had no belief such a thing could be created in a modern, lawful, protestant work-ethic society.

How wrong I was.

EBGuy says

I read this recently in the Economist and tend to agree with it.

He refers to research by Atif Mian, of the University at California, Berkeley, and Amir Sufi, of the Booth School, which shows that increased mortgage availability pushed up American home prices by only around 4.3%. This was a small fraction of the rise in prices during the boom. Irrational exuberance and a willingness to bet on prices rising for ever were probably much bigger contributors to the bubble than credit expansion. My head hurts trying to figure out how they isolated the various causes and effects, but it fits with my “flipper velocity” theory of home prices.

I'm curious how they separate mortgage availability and irrational exuberance. It seems like you can't have irrational exuberance (or at least can't act upon it) without the mortgage availability. Even if a person making $50k thinks the $700k house is going to be worth $1M in 3 years, if no one gives him the loan to buy the $700k house, he can't buy.

thomas.wong1986 says

Only insanity (irrational exhuberance) has gripped the minds of buyers!

negative-am also had a lot to do with. Effective interest rates fell -- carrying cost -- as low as 2%.

also the sky-high valuations were supporting themselves as borrowers were accessing equity/credit to service the mortgage debt.

It was possible to carry a $1.2M loan on $3000/mo or so, no?

Basically as long as nominal prices were rising faster than the carrying cost, the equity gains could fund themselves.

http://www.freelancenews.com/news/contentview.asp?c=213141

"With their combined incomes, the Ramirezes and the Martinezes estimated that they could afford monthly payments of $3,000 - around 50 percent of their income. However, the Ramirezes said Rancho Grande real estate agent Maria Avila promised they could refinance their home in three to six months to an affordable rate; until then, Rosa Ramirez said, Avila said she would pay for whatever they couldn't afford.

"Avila did supplement the mortgage payments on the Hollister home, paying about $2,200 per month for nine months."

I think loans had like a six-month throw-back window, if it didn't default in the first six months the originator was in the clear.

Free market capitalism at its best!

Troy and everyone, thanks, great info.

I’m curious how they separate mortgage availability and irrational exuberance.
Let me suggest a simple metric:
- one home: mortgage availability
- two or more homes: irrational exuberance
From Fannie Mae Economist David Berson via the CR Wayback Machine:
Over the two-and-a-half year period from the beginning of 2003, total home sales would have been 17.9 million units instead of the actual sales of 19.3 million units over that period if the investor/second home share had stayed flat at 10 percent (a drop of 7.3 percent, or 1.4 million fewer units). Using the assumption that the investor/second home share would have increased to 13 percent by the middle of 2005, total sales would have been 18.2 million units (a drop of 5.7 percent, or 1.1 million fewer units).

Yes, it's probably easy to classify most 2nd+ homes as irrational exuberance, but there were plenty of single home purchases also fueled by it as well.

Here is another working definition:
mortgage availability: This is my primary residence (I'm telling the truth)
irrational exuberance: This is my primary residence (I'm lying*)
*For instance, you could be a member of the SF Board of Supervisors, except your primary residence isn't in San Francisco. In addition, you apply for a mortgage for another primary residence in Arizona. You can't make this stuff up.

Okay I just hit the ignore button on one of the guys here. Now the thread will be easy to read.

Troy says

However, the Ramirezes said Rancho Grande real estate agent Maria Avila

Bingo! REA, on mainstreet, were not qualified to make such statements.

Troy says

It was possible to carry a $1.2M loan on $3000/mo or so, no?

LOL! nice quick retirement package for the seller. And certainly many did!

$ 1.2M for some of these houses, no not worth it. To put that much risk on
oneself with actual worth around $300-350K home is pretty much asking for trouble.

Nomograph says

bubblesitter says

Okay I just hit the ignore button on one of the guys here. Now the thread will be easy to read.

Most people use the ignore button for trolls, not to avoid dissenting opinion during legitimate discussion.

Don't worry. It is not you :) and yes he has proven himself to be a troll several times and was called so by many bloggers here.

newhomebuyer7 says

Man this whole situation is freaking me out. I’ve saved up 100k and paid off all my debt. I’m currently crammed in a one bed room apartment and really want to purchase a house for a higher standard of living. I’m in the DC area where many of the homes I’m looking at sold for $150k in 2001, sold for 500k in 2006, and are now selling for 300k.

Personally I'm waiting for those 2001-ish prices before I move. During the bubble I saw condos in downtown Laurel being bought for 75K and relisted for 150K. This is someplace in the worst part of Laurel.

zzyzzx says

newhomebuyer7 says

Man this whole situation is freaking me out. I’ve saved up 100k and paid off all my debt. I’m currently crammed in a one bed room apartment and really want to purchase a house for a higher standard of living. I’m in the DC area where many of the homes I’m looking at sold for $150k in 2001, sold for 500k in 2006, and are now selling for 300k.

Personally I’m waiting for those 2001-ish prices before I move. During the bubble I saw condos in downtown Laurel being bought for 75K and relisted for 150K. This is someplace in the worst part of Laurel.

Note that newhomebuyer7's comment is dated back to last Jul 2010. I think he bought a nice SFH at 290K short after that time. I forgot about that till now, and you remind me of it.

By the year 2010, housing market in the area I think he bought his house went down 40~50% from the peak. One of the hitten hard area arround DC. I thought that's almost as low as it can get and I guess he thought it that way too. The thing is that, it still is going down in the area. 15~20% from 2101. It may or may not put him into underwater situation, depending on the downpayment though, I guess he can manage it.

We got several totally different markets arround DC area. I am keeping my eyes on springfield, burke and some other parts of fairfax county, where no signifcant hit happened. I am seeing more homes getting into the market in these days, but I am not sure what causes it. It could be usual spring thing. But I have this suspision about some people (flippers) are getting desperated, because quite lots of homes I went to openhouse in last few weeks were bought in either 2009 or 2010.