Why did the housing meltdown happen in the United States?
Interesting discussion -- not too wonky -- on "Why did the housing meltdown happen in the United States?" via this BIS working paper.
Abstract:
The crisis enveloping global financial markets since August 2007 was triggered by actual and prospective credit losses on US mortgages. Was the United States just unlucky to have been the first to experience a housing crisis? Or was it inherently more susceptible to one? I examine the limited international evidence available, to ask how the boom-bust cycle in the US housing market differed from elsewhere and what the underlying institutional drivers of these differences were. Compared with other countries, the United States seems to have: built up a larger overhang of excess housing supply; experienced a greater easing in mortgage lending standards; and ended up with a household sector more vulnerable to falling housing prices. Some of these outcomes seem to have been driven by tax, legal and regulatory systems that encouraged households to increase their leverage and permitted lenders to enable that development. Given the institutional background, it may have been that the US housing boom was always more likely to end badly than the booms elsewhere.
Housing construction and vacant homes
US MBS issuance and subprime lending standards
Source:
The housing meltdown: Why did it happen in the United States?
Luci Ellis
BIS Working Papers: No 259
Monetary and Economic Department, September 2008
http://www.bis.org/publ/work259.htm
Thursday, October 02, 2008 | 03:00 PM | Permalink
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Great chart porn. Thanks BR.
Posted by: Jay | Oct 2, 2008 3:06:46 PM
Little known fact is the housing meltdown first started in Alaska because of global warming...igloos were actually the first structures to go...
I knew you'd want me to share that with you....
Posted by: Bruce in Tennessee | Oct 2, 2008 3:07:57 PM
Three good things
1) Everybody’s got their shorts in a bunch. The sky is not falling. Let me repeat. The sky is not falling.
SPX ex-financials last 4Q was 46 pre-recession. (Financials were, and are, a charade.) Figure SPX ex-fin in the recession at 30. Give it a multiple of 12 due to fear and we arrive at a bottom of 360.
So screw all those fear-mongers out there. The sky is not falling, or, at least, it will not fall to the ground. The S&P 500 will not go to ZERO. It will bottom way above zero at 360 give or take.
Just wish we’d get there tomorrow instead of the three to five year grinder.
2) They will still play football games on Sunday. We will have our entertainments until nobody can afford to pay the players anymore.
3) CNN just said “the market is off its lows!”
Posted by: TG Randini | Oct 2, 2008 3:13:14 PM
It would probably be worth taking another look at what happened in Japan in the late 1980’s for insights as to how this could play out. I don’t know the details, but at the heart of it was over-leverage within the banking system.
I suppose that for the politicians, the trick is to let the air out of the bubble as quickly as the public can withstand. Let the real estate deflation occur too slowly, and we wind up with a lengthy (but shallow) recession; too quickly, and we have massive unemployment.
Posted by: DL | Oct 2, 2008 3:19:54 PM
Barry, and others,
Is there a consensus here that the bailout bill will not work?
I should step back a bit. Are we clear that the Bailout Bill (BB) has only an aspirational sense of "helping"? I know they want to help the economy, but how?
So I need some remedial summarizing here:
The bill is supposed to help. (Goal)
Strategy? How is that going to work?
And tactics or implementation, what are the actual steps going to be taken?
I am at a loss, so by example, lets say the Goal is to help the economy. The strategy is to put a floor under house prices. And the tactics are to buy thinly traded MBS.
I know that this will not work, b/c the market for MBS is way too disconnected to the real estate purchase market to make any difference.
Is there some other way to look at it where it will work? Is the bill due a careful analysis, or is giving it 'the finger' all that it is due?
(I didn't read it)
I did see a summary that the attached Senate version had details about what arrows would be covered, and I did note that the covered/eligible securities are not nearly that well described.
Clinton
Posted by: clinton | Oct 2, 2008 3:24:24 PM
Very interesting charts. It is interesting that house construction as a percent of GDP in the US never got wildly out of whack even though the price of house did get very much out of line with both incomes and rentals.
Is this an aspect of personal incomes not tracking with GDP growth in the US?
Posted by: wally | Oct 2, 2008 3:25:31 PM
Some of the European countries weren't too much better. England, Spain and Ireland come to mind. Nowhere, however, did they combine the various elements that make the one in the US the uniquely foul situation that it is.
Which is why I laugh at the dollar's ascent. Europe is in worse shape than the US? No, their reporting is just more accurate (inflation, gdp, unemployment). They are entering the downturn and we are poised toward recovery? Color me (tragically) amused. We certainly did share the toxicity of our bubble, but I would imagine that it won't come home to roost anywhere else quite like it's going to come home here.
Posted by: bk | Oct 2, 2008 3:26:25 PM
Regarding the Senate version of the bail-out bill, does anyone have a freakin clue how, or WHY the "mental health parity" provision was thrown in? Do TPTB expect a lot of people to go stark-raving mad over this? I mean, I guess it would be a benefit, but how does it relate at all to the current financial situation?????
Posted by: RD | Oct 2, 2008 3:31:22 PM
Don't look now, but if we close at the market lows we will have had a more than 30% haircut on the NAZ and S&P since their highs in October.
Anyone know how far indicies fall in a typical bear market? I thought that I read somewhere that it was right at the 30% level.
How much further down can stocks really go from here before we all throw in the towel? Actually, I wonder if legislation will open up that will allow people to short stocks in their 401(k)'s? It may be the only way one can save enough for retirement......
Posted by: jdamon | Oct 2, 2008 3:32:24 PM
Clinton @ 3:24:24 PM
The politicians involved will be happy if the next credit crisis is postponed until after January 20th.
Posted by: DL | Oct 2, 2008 3:33:56 PM
A factor not mentioned but that was huge, literally and figuratively, were the ginormous trade deficits that had to be financed somehow, somewhere. The outflow of dollars had to be matched by an inflow, and in large measure, since MBS paid better than T-paper, it was funneled back into the housing market, especially with the negative real Treasury rates of 2003 on.
Ever wonder why almost all ARM loans are tied to Libor, and not Treasuries? Because the money was coming from foreign-held dollars.
This, too, was just another symptom of the central problem of too many dollars chasing too few goods and services, i.e., Greenspan's belief that free markets were great as long as he was in charge of the only un-free market monopoly--money creation--that mattered.
Posted by: Donkei | Oct 2, 2008 3:40:20 PM
I agree completely with DL regarding the Japan experience. A few years ago it was common for pompous US economists and commentators to criticize the Japanese handling of their crisis. Now that we are in our very own real estate deflation, we may be finding out that the Japanese weren't quite so dumb after all....
We have a lot to gain from studying the Japanese approach in terms of predicting problems down the road.
Posted by: leftback | Oct 2, 2008 3:41:27 PM
How I long for the days when the worst thing that could happen was an 80% decline in the Nasdaq.
Posted by: DL | Oct 2, 2008 3:45:39 PM
I think "hiring" the guy who helped create the mess and giving him hundreds of billions to 'solve' it is complete folly.
I read that the solution to too much credit and liquidity is not going to be more credit and liquidity.
-alas-
Posted by: Clinton | Oct 2, 2008 3:51:08 PM
Seems obvious to me what the biggest factor is: 0% down. Call it lose lending practices, or an overabundance of available credit, or whatever you want, but the bottom line is a lot of people got into houses, and more importantly second, third and fourth houses, without having to put anything down. For a while it seemed like everyone I met was buying their "investment houses," and when those houses got to expensive, they bought investment houses in places no one wanted to live. So naturally this created a glut of homes, and of course then comes the crash. People who I knew who were using the low-doc loans weren't poor by any means, just trying to avoid showing the bank that they already had massive debt compared to their actual income. Lots of "rental" properties were supposedly paying for themselves even though they were vacant. Pure greed at work. And it worked, they could make several payments and flip it, until housing prices went the other way. Had they had to put even 10% down, a majority of these people wouldn't have been able to do it.
Posted by: Brendan | Oct 2, 2008 3:58:01 PM
"Was the United States just unlucky to have been the first to experience a housing crisis? "
*Cough* *Cough* Spain *Cough* Australia
Sheesh, travel much?
Spain's banks have been teetering for months now.
Australia was only saved (temporarily) by the resource bubble that briefly flipped this year.
Hong Kong? Hello? Shanghai?
Even the UK started their bust earlier than we did - and they haven't finished yet.
We weren't the first housing crisis - we were just the first to slide so quickly to depression level insolvency in our banking system - though certainly not the last.
And put that way, it's not hard to see why - lack of regulatory policing of the effected institutions and products, especially derivatives.
Posted by: Jim D | Oct 2, 2008 4:08:04 PM
I know most of you are investment professionals. I’m not but I learn a great deal from this site and the comments. That said, I thought I’d throw in my 2 cents.
For years my wife and I rode around wondering how working people afforded the huge houses and swimming pools and why it was that our own home was so small and modest. It was truly a mystery. We felt foolish with our 20% down, low mortgage, refinanced when interests rates went down enough to make it favorable, and when we took a second mortgage (a home improvement loan) we actually improved our home and paid off the loan; felt foolish, and timid, when we did not go larger and that our pride in a good credit rating and manageable finances was naive and the joke was on us for being so careful, like little cuckoo clock farmers.
Not now though. For us, being afraid of debt paid off, for the moment anyway.
Posted by: Harry | Oct 2, 2008 4:15:55 PM
Was anyone else buying today?
Double bottom formation formed at 1115 and a huge bubble has built up in Treasuries. All it takes here is the "rescue package/bailout" to pass, and a little change in psychology - we could see a substantial rally.
Anything else to worry about? Yes, hedge funds and the crumbling economy, but the market is very oversold on a short-term basis.
Posted by: leftback | Oct 2, 2008 4:18:02 PM
obviously it's because we have mo po people here
Posted by: Bob A | Oct 2, 2008 4:23:46 PM
leftback @ 4:18:02 PM
I bought some October QQQQ calls at the close.
Posted by: DL | Oct 2, 2008 4:34:14 PM
@ Harry:
You haven't been very American these past few years have you?
Don't you know you are to do like everyone else? Heck, if you keep showing these kind of smarts, you will never ever be able to run for public office.
Posted by: TG Randini | Oct 2, 2008 4:49:52 PM
Surprised that nobody is looking harder at the rating agencies (Fitch, S&P, Moody's) and their role in all this. The BIS report describes "over-reliance on ratings," and that was consistent with agencies' over-promising on ratings performance, and under-delivering on compliance and ratings quality.
Posted by: Very | Oct 2, 2008 5:00:16 PM
Clinton and RD:
Speaker Pelosi said during questions and answers
(on C-Span - CNBC cut to pay bills)
"Many of those provisions had passed the House "Pay For""
I took it at the time (& still) its a file of preapproved pork
Posted by: Greg0658 | Oct 2, 2008 5:06:50 PM
I think it was the 1% FED funds rate 2003 that made people borrow/consume (borrow some more on their house) too much, too much credit and bad credit followed.
Posted by: Ori | Oct 2, 2008 5:11:07 PM
This is a great site and I’m a little nervous posting to it for the first time. I’m in my last year getting an Econ degree and I’m paying for it by working in a gentlemen’s club (etc. etc…)
At any rate, I have two observations –
One. When the VIX goes up, my clients can’t get it up.
Two. The ones with small penises tend to drive those big SUV’s.
So, I think we can lower our dependence on foreign oil by providing government-funded penis enlargements.
That $700 trillion could give every male in this country a bigger d—k, make 50%+ of the population happier… AND reduce energy consumption. Isn’t this win-win-win?
(But then again, what do I know, I’m only a student, although they say I’m a good dancer.)
Posted by: Tiffany | Oct 2, 2008 5:18:54 PM
