The "real estate" bubble

[drz-400]

For those of you that still believe the real estate bubble's root cause was Frannie/Freddie, the community reinvestment act, predatory lending, subprime morgages, etc...

tulipomania

 

[pendulum_jaw]

I don't hold that belief, but what is the implied argument here?

 

[drz-400]

Mostly that those things, although they did contribute to the bubble, were not the sole or even main cause of the bubble.

It was a broad bubble created by the market, or more specifically a crowd of people obviously behaving irrationally. "Animals spirits" or human nature were the main cause.

 

[Dirty Harry]

It was caused by the hundreds of billions of dollars pumped into the economy by the FED and the historically low interest rates. There was just way too much easy money out there to be lent for all kinds of real estate.

 

[TacticalEvilDan]

Well, it wasn't just that.

It was also lending institutions processing as many loans as they could, even to customers who couldn't afford them, then selling those loans off to someone else for a fee, step and repeat.

It was also the belief that real estate, being a tangible thing, wouldn't ever dramatically lose value.

It was also the proliferation of get-rich-quick schemes which involved the flipping of real estate with very little initial investment.

 

[Dirty Harry]

Well, it wasn't just that.

It was also lending institutions processing as many loans as they could, even to customers who couldn't afford them, then selling those loans off to someone else for a fee, step and repeat.

It was also the belief that real estate, being a tangible thing, wouldn't ever dramatically lose value.

It was also the proliferation of get-rich-quick schemes which involved the flipping of real estate with very little initial investment.

If there hadn't been all the money to loan and at such low interest rates the lenders would have been more careful who they lent it to. It was all about volume and making money. After all, real estate values never go down so they couldn't lose. They never ran out of money to lend.
The bubble could have never happened without all that cheap money.

 

[TacticalEvilDan]

Well, firstly, I didn't exclude the cheap money, I just said it wasn't the sole cause of the problem.

All the same, the cheap money only made it easier for the bubble to inflate. When you get right down to it, selling off the mortage obligations as secure investments made the Federal Reserve an unnecessary component of the problem, since they could get their money right back (plus a fee) and then loan it right back out again.

 

[justabubba]

this represents a graph of the most retailed nations
notice how over-retailed the USA is
those store fronts remained viable only as long as consumers had access to the credit needed to keep them open
if you were like me, parking spaces at the mall days prior to Christmas were easy to find
commercial real estate sector has the potential to tank like the residential market
Fannie And Freddie Receive Unlimited Future Funds To Stay Afloat
fannie mae and freddie mac are with unlimited funds and now able to warehouse defaulted mortgages; so maybe the foreclosures will not be so great as to swamp the commercial real estate values
expect round two of a hemmorage of losses ... possibly mitigated by the efforts of fannie mae and freddie mac now that they are recognized as public policy instruments of the federal government
Barney Frank: Fannie, Freddie Are Basically 'Public Policy Instruments Of The Government' (VIDEO)

 

[Dirty Harry]

Well, firstly, I didn't exclude the cheap money, I just said it wasn't the sole cause of the problem.

All the same, the cheap money only made it easier for the bubble to inflate. When you get right down to it, selling off the mortage obligations as secure investments made the Federal Reserve an unnecessary component of the problem, since they could get their money right back (plus a fee) and then loan it right back out again.

The bubble could not have happened without the low interest and abundant money supply, courtesy of the FED. The MBS did fuel the fire, no doubt about it. Had interest remained at normal levels the refinancing frenzy which started the ball rolling would not have been possible. Everyone wanted a piece of the action. It wasn't just in the housing sector. The easy money created the commercial bubble too and we haven't even felt that collapse yet.

 

[washunut]

Well, firstly, I didn't exclude the cheap money, I just said it wasn't the sole cause of the problem.

All the same, the cheap money only made it easier for the bubble to inflate. When you get right down to it, selling off the mortage obligations as secure investments made the Federal Reserve an unnecessary component of the problem, since they could get their money right back (plus a fee) and then loan it right back out again.

I think even greespan would say that not regulating the " shadow banking" industry was one of his biggest mistakes. He thought the market would self correct. In a way it did, in that most of the big mortgage companies went broke. However it took the whole economy down.

 

[TacticalEvilDan]

I think Greenspan, having implicitly encouraged the banks to do what they did, and considering his 180-degree change on monetary policy before he was Chairman versus after he became Chairman, would have very little to say.

 

[washunut]

I think Greenspan, having implicitly encouraged the banks to do what they did, and considering his 180-degree change on monetary policy before he was Chairman versus after he became Chairman, would have very little to say.

I think he has admitted making mistakes about the market self-correcting

 

[drz-400]

The bubble could not have happened without the low interest and abundant money supply, courtesy of the FED. The MBS did fuel the fire, no doubt about it. Had interest remained at normal levels the refinancing frenzy which started the ball rolling would not have been possible. Everyone wanted a piece of the action. It wasn't just in the housing sector. The easy money created the commercial bubble too and we haven't even felt that collapse yet.

According to Ben Bernanke:

"Some observers have assigned monetary policy a central role in the crisis. Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years...

With respect to the magnitude of house-price increases... Economists who have investigated the issue have generally found that, based on historical relationships, only a small portion of the increase in house prices earlier this decade can be attributed to the stance of U.S. monetary policy."

Bernanke again:

"With respect to the magnitude of house-price increases...At some point, both lenders and borrowers became convinced that house prices would only go up. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages."

Sound familiar. Look at the .com bubble. Remember how people were talking of Dow 36,000. In fact look at just about any speculative bubble and you will see the same thing; an irrational exuberance. People believe the price increases, bull market, whatever, will never end.

 

[Harry Guerrilla]

Mostly that those things, although they did contribute to the bubble, were not the sole or even main cause of the bubble.

It was a broad bubble created by the market, or more specifically a crowd of people obviously behaving irrationally. "Animals spirits" or human nature were the main cause.

This is what I was trying to point out in the other thread.

If "animal spirits" must be contained with such aggressiveness on the down curve then they must be contained on the up curve.

Why are they not contained?

 

[drz-400]

This is what I was trying to point out in the other thread.

If "animal spirits" must be contained with such aggressiveness on the down curve then they must be contained on the up curve.

Why are they not contained?

That is what much of the debate is about right now. Can the fed itentify bubbles effectively, in real time, and should it "pop" them.

The easier and more broad solution would be to regulate the financial market to make it less "fragile."

 

[Harry Guerrilla]

That is what much of the debate is about right now. Can the fed itentify bubbles effectively, in real time, and should it "pop" them.

The easier and more broad solution would be to regulate the financial market to make it less "fragile."

It seems to me that even with regulation, there is no want or will to effectively enforce it.

Keynes General theory is great in theory but it requires people in positions of power to be angels.

 

[drz-400]

House Prices were most affected in what seems to be the SW U.S. and Coastal areas.

I am begining to see a pattern. Perhaps people moving to certain areas in a "herd-like" mentality.

 

[pendulum_jaw]

Keynes General theory is great in theory

Equally great is the notion of perpetual motion machines...

 

[washunut]

It seems to me that even with regulation, there is no want or will to effectively enforce it.

Keynes General theory is great in theory but it requires people in positions of power to be angels.

You can't regulate greed. Is the Fed set up to be the thought police for society. To tell folks that a) your income level is not sufficient for the mortgage you are taking on or b) the price of the house you are about to buy is way too much.

Sort of like the internet crash in 2001 ( I think) people were gambling. In this case because of the large size of the bets and the leverage involved those gamblers, be they bankers or knuckleheads buying houses they could not afford took down the economy.

There were a lot of bad things done that came together and caused this crisis. No one simple answer.

 

[Harry Guerrilla]

Equally great is the notion of perpetual motion machines...

To tell you the truth his theory is mathematically sound, however, he forgot to introduce the people flaw into it.

A simple way to look at and prove this is with basic Algebra and solving equations.
What you do to one side of the equation, you must do to the other side.
Very simple.

What you do to one side of the business cycle, you must do to the other.

You can't regulate greed. Is the Fed set up to be the thought police for society. To tell folks that a) your income level is not sufficient for the mortgage you are taking on or b) the price of the house you are about to buy is way too much.

Sort of like the internet crash in 2001 ( I think) people were gambling. In this case because of the large size of the bets and the leverage involved those gamblers, be they bankers or knuckleheads buying houses they could not afford took down the economy.

There were a lot of bad things done that came together and caused this crisis. No one simple answer.

Sure you can.

Part of Keynes theory, the part that is rarely used, is to raise taxes and/or raise interest rates.
The problem is though that the Fed is never aggressive enough with its interest rate hikes and politicians do not have the intestinal fortitude to follow through with tax increases.

Another end to this is that the inflation generated during booms is greatly beneficial for debtors.
The largest debtor in the United States is the United States government.

There is no will by either the Fed or the government to actually manage the economy in a responsible way.

 

[washunut]

That is what much of the debate is about right now. Can the fed itentify bubbles effectively, in real time, and should it "pop" them.

The easier and more broad solution would be to regulate the financial market to make it less "fragile."

Identifying a bubble is hard. For example are gold, copper, US stocks now in a bubble? Or has there huge rise in the last nine months been because of some economic development.

Harder politically is bursting a bubble. When you do it like Volker did in the 80's, the country oftentimes goes into recession. Also whoever are the owners of whatever someone is going to call a bubble asset and burst it are going to be badly hurt.

It may also be worth debating whether our financial system is really fragile. After all, look at what we just went through. Absorbing 100's of billions of bad debt, a federal defecit in excess of a trillion dollars, state governments with shortfalls, I think the number is 250 billion, 10% unemployed, which goes to nearly 20% when you count part timers who would prefer to be full time and the people whose unemployment runs out so we stop counting them.

Pretty amazing that a 30 year bond still yields only about 5% and the stock market has regained about $6 trillion in value since the March bottom.

 

[DarkWizard12]

For those of you that still believe the real estate bubble's root cause was Frannie/Freddie, the community reinvestment act, predatory lending, subprime morgages, etc...

tulipomania

What does the graph supposed to prove?

 

[Dirty Harry]

What does the graph supposed to prove?

You really don't know?

 

[DarkWizard12]

You really don't know?

It looks like the S&P shows prices rising and falling before Moody's. This tells me they measure the same phenomena, but in different methods. Am I correct?

 

[washunut]

What does the graph supposed to prove?

I am not sure if someone who reads this knows how, I am not computer literate enough. It would be great to see a trendline through this graph that starts draws a line of where prices would be today if they grew at the historical rate.

Could help us gleen if we still have more to go with housing prices.

As to the question, the chart seems to show that there was a mania in housing prices. Otherwise known as a bubble.