patrick.net

I think the biggest thing that is never really said by anyone is this...

Exactly how will the baby boomer generation retire?

If everyone has basically put their money in the same 401(k), 403(b), IRA, 501(k), stocks, bonds, etc.

With a house the market is limited to the local market. By that I mean that if a large number of homes in one town in one state happens it probably won't matter to other areas. But with stocks it is the same ones...

Retirement as a concept has no real basis outside of having large numbers of children. By replacing the family with the state (also religion with the state) it implies that somehow this would all be paid for by someone/something.

For any investment to make sense it must be able to be purchased and sold. Without the concept of selling it that would be entrapment and pretty much illegal (I helped bust a guy selling false securities 8 or so years ago).

So if the first boomers start to sell it off at what point is the Rubicon crossed and people start selling to avoid losing more value? No one can survive on social security alone. Medicare won't pay non medical bills. So if they dip into savings earlier this won't be that odd to see.

Bellingham Bill can't accept reality it seems. Low interest rates certainly were the main cause of the bubble. Here in Canada we've got much tighter lending standards than the US. Yet housing is arching into what looks like a parabolic bubble like we've never seen before. This despite the apparent weaknesses in the world economy. That cannot be explained by anything other than low interest rates. Lending standards can be as tight as you want to make them. Ultra-low rates entice too much borrowing and too much debt.

RagingRanter says

Low interest rates certainly were the main cause of the bubble

Boom yes, bubble no.

The difference between a boom and bubble is simply sustainability.

Low(er) interest rates themselves do not make home prices unsustainable, the purchase price rises as the monthly payment stays the same.

Though there is a feedback effect or two here, since increasing home prices attract specuvestors, and higher home prices do allow for home equity withdrawal, which artificially stimulates the economy.

Ultra-low rates entice too much borrowing and too much debt.

utterly vague and ideological-driven statement.

Rates fell from 8% in 2000 to 5% in 2003. Yes, home prices shot up in response, but the monthly payment did not change!

Debt doesn't kill you, it's the debt service.

http://research.stlouisfed.org/fred2/graph/?g=3r9

I just edited my comment to add that you "can't accept reality". Just thought, out of fairness, that I'd point that out, since you responded to the first version. :)

However, given your response, I'd say my edit was accurate. Stating that ultra-low interest rates encourage too much debt is not ideological, it is a basic cause and effect relationship. One does not have to be a Milton Friedman disciple to understand that.

Debt doesn't kill you, it's the debt service.

That's like saying cancer doesn't kill you, it's the tumour. In order for debt servicing costs to hurt you, you must first take on debt. The more debt you have, the quicker the servicing costs will kill you if things go south. See the relationship now?

RagingRanter says

. The more debt you have, the quicker the servicing costs will kill you if things go south. See the relationship now?

No. If debt's a disease, then ZIRP is the cure : )

RagingRanter says

Stating that ultra-low interest rates encourage too much debt is not ideological, it is a basic cause and effect relationship. One does not have to be a Milton Friedman disciple to understand that.

Banks theoretically determine the risk.

I agree that lower interest rates don't really benefit anybody in real estate, since the supply of real estate (in built areas) can not rise in response to increased demand -- the increased buying power just ends up in higher prices.

But the bubble times of 2004-2006 were actually executed in a time of rising interest rates:

http://research.stlouisfed.org/fred2/graph/?g=3rb

your theories are wrong, find some new ones.

Note that I divide recent history into two periods -- the boom (2002-2004) and the bubble (2004-2007).

The bubble did not appear in Texas, even though they enjoyed the same low interest rates as the rest of the country.

Plug *that* into your ideology.

Bellingham Bill says

The bubble did not appear in Texas, even though they enjoyed the same low interest rates as the rest of the country.
Plug *that* into your ideology.

Your missing variable was California buyers + Irrational Exuberance.

Bellingham Bill says

Ultra-low rates entice too much borrowing and too much debt.

utterly vague and ideological-driven statement.

Utter this utter that...a litany of St. Louis Fed hyperlinks does not a doyen-of-all-things financial-crisis-related make.

I have but anecdotal evidence to bolster what you so readily disregard as pish-tosh. I was on an eight month contract in Central Florida in 2004-05. My neighbour at the time decided to buy a 1200 sq foot shotgun house in a not-great part of town with a monthly payment of almost $1900. He was renting the very handsome 1100 sq ft bungalow next to mine for nearly half that amount. I knew he was spreading his and his wife's means rather thin in order to make this transaction happen. When I asked what his motivations were, he recited what he'd read about super low interest rates and something about throwing his money away on rent. Pretty soon, all that I heard being parroted by other friends and colleagues was "(gasp), but interest rates are so low!" (Actually...I still hear it.) Unless I am to wholly disregard what I readily perceived with my own senses, low interest rates were absolutely a huge inducement for new home debtors in those years. There is nothing ideological about this assertion.

Rates fell from 8% in 2000 to 5% in 2003. Yes, home prices shot up in response, but the monthly payment did not change!

How could you utter what must be the uttermost insane thing I've ever read? I am utterly incredulous. Granted, the total monthly *might* have remained at or close to par IF a buyer took out an interest-only or some other exotic loan product. Otherwise, what I recall was that the perceived rate of appreciation (housing wealth) was enough to allay any misgivings that a buyer might otherwise have had about overextending themselves from month to month. "Real Estate never goes down in value!" -- another popular canard.

...

Austinhousingbubble says

When I asked what his motivations were, he recited what he'd read about super low interest rates and something about throwing his money away on rent.

Wait a second. You heard something from a guy down the street?? I stand corrected. All the supporting data is meaningless--you have certainly found the answer.

Just a quick question though--interest rates are very near historic lows. House prices continue to fall. Shouldn't they be rising?

tatupu70 says

Just a quick question though--interest rates are very near historic lows. House prices continue to fall. Shouldn't they be rising?

Any reasonable man would realize we are coming out of a bubble and low rates simply can't keep prices up like they would in normal times. This is a seller market, not a buyer marker except for a few deals at the auction.

When rates go up in the future, prices will go down, and cash will be king again.

Tatupu70, a bubble is an unsustainable price increase. Period. We all agree on that definition. Therefore, by definition, a bubble cannot be sustained indefinitely, even with zero interest rates. Because a bubble, by definition, cannot be sustained by ANY means. If it could be, it's not a bubble. So even though the current low interest rates could not be expected to sustain the bubble at its peak, they are certainly preventing the complete deflating of the bubble, and by extension, an unwinding of the whole housing mess.

Raise interest rates back up to a more natural level (by ‘natural’ I mean a level where people could expect a return on short term deposits to equal or slightly exceed the inflation rate – currently around 3%, which would mean mortgage rates of 7% or more) and see what happens to housing prices then.

Had interest rates been kept higher during both periods Bellingham mentions, the bubble simply would not have happened. Low interest rates increased the demand for credit, while they simultaneously allowed banks to extend themselves further, and thereby increased the supply of money, much of which went into real estate.

Despite tatupu70's dismissals as "anecdotal", Austinhousingubble's observations are not isolated. I'm seeing the same thing here in Canada, in all our major cities. I'm also observing people running around buying houses they can barely afford "because interest rates are so low!!!" and "You're just throwing your money away on rent." People buying houses so expensive that they can barely afford to live is an unsustainable situation by definition, and I don’t care how much better Canadian lending standards are. Tighter lending standards have certainly helped keep things going, but the Canadian bubble, like all bubbles, will burst.

There are certain aspects of human behaviour that simply must be observed in a qualitative sense. This is something the stats monkeys and econometricians will never accept. The Canadian banks and real estate associations are all churning out data that allegedly proves we are not in a housing bubble. Sound familiar? You need only visit Youtube to see various American "experts" presenting the exact same statistical evidence to the viewers as recently as 2007. Sometimes the stats monkeys overlook things, even in hindsight. Other times they're just wrong.

Austinhousingbubble says

Otherwise, what I recall was that the perceived rate of appreciation (housing wealth) was enough to allay any misgivings that a buyer might otherwise have had about overextending themselves from month to month. "Real Estate never goes down in value!" -- another popular canard.

If banks had not abandoned underwriting, the lower interest rates would have not mattered.

Lower interest rates themselves did not cause anyone to overextend themselves.

RagingRanter says

Had interest rates been kept higher during both periods Bellingham mentions, the bubble simply would not have happened. Low interest rates increased the demand for credit, while they simultaneously allowed banks to extend themselves further, and thereby increased the supply of money, much of which went into real estate.

So? Your analysis here is missing about a dozen OTHER factors that were also contributory to higher prices, and these factors are what turned the housing boom into the bubble.

The rise of 80/20 lending.

NINJA loans.

Pay option (negative am) lending.

Aggressive Subprime lending that stuffed the lower end of the market with buyers, allowing move-up transactions all along the line.

Automated application approval (allowing brokers to submit applications until they passed).

CDOs and CDOs of CDOs.

An utterly corrupted debt ratings system.

The feedback of high home prices giving households increased buying power via home equity loans (this is the one thing that Texas limited since they had 80% LTV hard limits on HELOCs).

RagingRanter says

People buying houses so expensive that they can barely afford to live is an unsustainable situation by definition

No, that's just normal. People expect future wage inflation to bail them out. From 1950 to 2005, that was a rational expectation.

"Low interest rate" were contributory to the 1986-1988 bubble, but things were not allowed to get so out of hand then.

http://research.stlouisfed.org/fred2/graph/?g=3rC

Hell, even in 2005 I thought prices were too high but inflation would come and save anyone.

This was before I heard about Casey Serin and understood that so much of the housing bubble -- and, basically, the very economy itself -- was based on fraud, fiction, and fantasy.

Bellingham, most of those "other factors" could not have happened in an environment of higher interest rates. Higher rates would have meant that the so-called housing "boom" you refer to would not have happened. Had the boom not happened, housing prices would not have been perceived to have been on a never-ending price ladder upwards, and banks and mortgage insurers would not have been so quick to lend out NINJA loans and zero-down mortgages.

It is true that low interest rates were not the only factor. The whole concept of mortgage insurance is certainly an aggravating factor. Go back to requiring a minimum 20% down, and you wouldn't need mortgage insurance. This would substantially decrease the demand for loans, and then we might well have interest rates even lower than they were, but still no bubble.

Sounds like I'm contradicting myself. But I'm not. "Low" is a relative term. And starting with the Russian currency crisis and Asian economic crisis of 1997-98, the Fed responded by drastically lowering interest rates. These lower interest rates were too "low" relative to the domestic economic environment (the domestic environment that included mortgage insurance, ABCPs and all the other market-distorting goodies that create a bias towards home ownership). Thus, the bubble really can be traced back to low interest rates. Said rates might have been just fine against the backdrop of sane mortgage policies, but they were too low to discourage home-buying against the backdrop of insured mortgages and banks that were too easily able to package their lending risks and sell them to unsuspecting investors at AAA ratings.

Interest rates must be determined according to the financial environment within which they exist, not some idealized, distortion-free environment that does not exist. We can both agree that there are MULTIPLE market-distorting factors that fed into and perpetuated the boom/bubble, and all the behaviours that went along with it. Alas, these problems have not even been acknowledged by policy makers yet, let alone fixed.

RagingRanter says

most of those "other factors" could not have happened in an environment of higher interest rates

Sure they could.

Had the boom not happened, housing prices would not have been perceived to have been on a never-ending price ladder upwards

Housing is ALWAYS driven UP by "affordability". Yes, this is a ratchet effect / ladder.

Housing is unlike any other good since the supply of land is utterly fixed in urban areas, and building new stock itself is a time-consuming process too.

The apartment I was renting 20 years ago in LA for $700/mo now rents for $1500/mo. It's the same apartment, location, and community, yet it costs twice as much.

That is the ratchet effect of housing, in all areas where there's any balance between supply and demand.

The 1990s saw real wages climb, and what was odd was gas prices remained very low.

This REALLY primed the pump for housing. $1 gas made distant suburbs like Salinas and Los Banos doable, which brought appreciation trend further afield as buyers became locked out of the insane dotcom-fueled bay area ca 2000.

Interest rate drops were one cause that got the party started, but the dirty secret of the bubble was that all the 2/28 teaser-rate loans allowed people to basically avoid paying much interest at all anyway.

The risk layering that was allowed to go on 2002-2007 was simply insane. Fed Interest rate policy were neither necessary nor sufficient to create the bubble overreach -- this was engineered by the mortgage industry in cahoots with lax Federal regulation and oversight.

Putting people into more loan than they could repay was the core cause of the bubble -- literally -- mortgage brokers only had to qualify people on the teaser rate, not the fully-amortizing back-end rate. Insane! Interest rates had NOTHING to do with that, since fixed is fixed and even ARMs have not reset outside what people could afford to pay now.

And starting with the Russian currency crisis and Asian economic crisis of 1997-98, the Fed responded by drastically lowering interest rates.

No they didn't.

http://research.stlouisfed.org/fred2/graph/?g=3rI

Thus, the bubble really can be traced back to low interest rates.

blah blah blah. You've got your ideology and you're sticking to it. Got it.

You've got part of the picture, but you're missing what happened ca. 2003-2007, when the bubble took over the macro economy:

http://research.stlouisfed.org/fred2/graph/?g=3rJ

RagingRanter says

I'm seeing the same thing here in Canada, in all our major cities. I'm also observing people running around buying houses they can barely afford "because interest rates are so low!!!" and "You're just throwing your money away on rent."

RagingRanter says

There are certain aspects of human behaviour that simply must be observed in a qualitative sense. This is something the stats monkeys and econometricians will never accept.

Yes, this certainly occured in CA, USA very early on. Robert Shiller wrote his book on this both as it relates to then Stock Bubble (1999) and Housing Bubble (2005). But it was frankly ignored by Economists and certainly by Journalists.

Bellingham Bill says

Housing is ALWAYS driven UP by "affordability". Yes, this is a ratchet effect / ladder.
Housing is unlike any other good since the supply of land is utterly fixed in urban areas, and building new stock itself is a time-consuming process too.

And yet as interest rates have fallen post 1989 and 2005 prices have fallen.

As for limited supply, we certainly saw a boom in new home building even in land-locked SF BA.

thomas.wong1986 says

yet as interest rates have fallen post 1989 and 2005 prices have fallen.

Of course there is boom/bust cycles at work too. People who bought during the 1980s housing boom were underwater in the 1990s.

I think the condo I was renting 1988-1991 was underwater in 1990, and they had bought in late 1986.

Aside from the 1980s tho, the 2005 price plateau was driven not by interest rates -- negative-am allowed people to avoid interest altogether -- but the entire rotten edifice of mortgage lending, roping cherry pickers into $700,000 loans.

http://drhousingbubble.blogspot.com/2007/05/yearly-income-14000-purchase-of-house.html

Interest rates didn't cause that problem, so interest rates couldn't fix it.

All current intervention has done is soften the drawdown from the bubble top.

http://research.stlouisfed.org/fred2/graph/?g=3rN

shows how prices are now at pre-bubble levels (2003).

Given flat real incomes since 2000, that's the best we can expect.

thomas.wong1986 says

we certainly saw a boom in new home building even in land-locked SF BA.

not anything relative to demand. I'm aware of like 30 new SFH homes between 85 and Stanford.

There's been infill, but the quality stuff was done built before I was born.

The ratchet:

http://research.stlouisfed.org/fred2/graph/?g=3rP

Bellingham Bill says

Aside from the 1980s tho, the 2005 price plateau was driven not by interest rates -- negative-am allowed people to avoid interest altogether -- but the entire rotten edifice of mortgage lending, roping cherry pickers into $700,000 loans.

And what about the irrational behavior of consumers regarding real estate purchasing ? Why drive prices higher 15-20% year over year well above the historical mean. It was rather troubling to tell people that RE prices actually do decline and have declined in prior years, but the denial amoung buyers and journalists was , home prices never decline. Somewhere along that line, it just wasnt just the toxic loans.

Bellingham Bill says

not anything relative to demand. I'm aware of like 30 new SFH homes between 85 and Stanford.

scope needs to be much larger, since South Bay is much larger than that. LOL! the center of the Universe isnt Palto Alto.

Bellingham Bill says

shows how prices are now at pre-bubble levels (2003).

For most of the US, that OK. There is a bottom for those regions, but for most of CA, we started much earlier.

Yes, its a good time to buy in Miami...

http://www.housingbubblebust.com/OFHEO/Major/Florida.html

The many trillions of dollars that our government has handed to the military-industrial-financial complex (with minimal tangible benefit to our society) has been a heinous crime.

And what about the homebuyers who signed up for crazy prices?

thomas.wong1986 says

LOL! the center of the Universe isnt Palto Alto.

yes it is : )

thomas.wong1986 says

Why drive prices higher 15-20% year over year well above the historical mean.

If interest rates fall 20%, you can expect a 20% rise in home values.

When I was in the market in 2001, I was looking at a $350,000 place. Back then interest rates were ~7%, making the monthly expense ~$1900.

Drop interest rates 20% -- to 5.6% -- and that $1900 expense supports a $410,000 purchase price -- instant 17% appreciation!

Plus not all homebuyers were entering the market with nothing, millions had appreciation to cash in as move-up buyers, so any % gain was immaterial to them.

Of course, what was really happening 2003-2005 was the loss of loan underwriting -- Wall Street had the money to fund loans and the industry went out and got the borrowers to take that loan money.

The problem with housing wasn't some exogenous forces with the Fed, it was the industry itself running amok.

Again, we have an ideology problem here.

Private industry fucked up, and that's simply anathema to ideologues.

It's gotta be the Fed, or gummint, or something other than the Holy Free Market.

Bellingham Bill says

It's gotta be the Fed, or gummint, or something other than the Holy Free Market.

Bellingham Bill says

homas.wong1986 says
LOL! the center of the Universe isnt Palto Alto.

yes it is : )

And there you have the irrational reasoning...

Bellingham Bill says

The problem with housing wasn't some exogenous forces with the Fed, it was the industry itself running amok.
Again, we have an ideology problem here.
Private industry fucked up, and that's simply anathema to ideologues.

While we have demonized the banks, we havent heard a single mention of REA wrong doing or any fixes with the RE industry.

Have we really fixed anything ?

thomas.wong1986 says

but the denial amoung buyers and journalists was , home prices never decline. Somewhere along that line, it just wasnt just the toxic loans.

As late as 2005 I thought things would work out like the 1990s, a slow beat-down.

The difference between 2007-now and 1989-1995 was that the housing ATM had become a MUCH larger part of the economy during the Bush (jr) years, compared to Bush (sr).

The early 1990s sucked too, but it was an honest suckage, hell, they even raised income taxes substantially right in the teeth of the recession.

Then we got a flood of cheap stuff from China, built a lot of big-box retail to sell it in, and gasoline actually went UNDER $1, then the internet and Windows came out and we apparently had an economy again.

The 2000s was nothing like this.

http://research.stlouisfed.org/fred2/graph/?g=3rR

I didn't know back then how much of the economy was being levered on debt, 2003-2007. I had my house in order and I didn't know how the mortgage market had lost its mind.

I only started figuring that out in late 2006, when the Casey Serin story broke.

Bellingham Bill says

The difference between 2007-now and 1989-1995 was that the housing ATM had become a MUCH larger part of the economy during the Bush (jr) years, compared to Bush (sr).
The early 1990s sucked too, but it was an honest suckage, hell, they even raised income taxes substantially right in the teeth of the recession.

I would agree with this... but try to explain this to the buyers back in 2000 to 2005.. Good Luck.

thomas.wong1986 says

And there you have the irrational reasoning...

I was joking but PA is in fact the height of a civilized existence if you ask me.

Los Altos is similar, but lacks the density of greatness that is PA.

Mebbe the nice, $$$ spots of OC and PB are just as livable, but PA just has the centrality of access and perfect mix of residential to biz that the more outlying nabes lack.

tatupu70 says

Wait a second. You heard something from a guy down the street?? I stand corrected. All the supporting data is meaningless--you have certainly found the answer.

Just a quick question though--interest rates are very near historic lows. House prices continue to fall. Shouldn't they be rising?

...and how are you? Beggin yer pardon, but were we discussing something? I should think for me to have attempted to correct you on a topic of discussion would, at the very least, assume that we were engaged at some point in a discussion -- no?

Anyway...yes -- I think it could be argued that forsaking empiricism for chart porn is a somewhat facile method of interpreting the goings on around you. The inverse is also true. Yes, 'some guy on the street' -- some carbon-based bipedal life mass full of glands firing all kinds of chemicals fixating over interest rates during the run-up in housing is a point of reference for me, because it represents a snapshot of what the consumer psychology was during that time. Regardless of how unscientific such a metric may strike you, I find that real experience adds a touch of dimensionality when trying to ascertain a picture of the world around me. I know, I know, LOL, right? Unfortunately, I've not yet developed the ability to fit myself entirely under a rock in order to tune out information that does not jibe with official data dredged up on the Googles, nor fits neatly into a pie chart or a whiteboard or a spreadsheet -- sorry. I know I'll get there one day, and you can bake me a cake when I do.

RE interest rates and prices: according to the wisdom of the average contrarian like yourself, the bottom was in in 2009; prices are not falling, they are flat. However, if we are to assume for the sake of argument that prices are falling, I would suggest that there are several price supports that are working in unison with low rates to buffer and even temporarily suspend the rate at which prices continue to correct and likely over-correct to the downside. Whether that is a good or a bad thing is a subject for another discussion.

Bellingham Bill says

The problem with housing wasn't some exogenous forces with the Fed, it was the industry itself running amok.
Again, we have an ideology problem here.
Private industry fucked up, and that's simply anathema to ideologues.
It's gotta be the Fed, or gummint, or something other than the Holy Free Market.

Oh I am an idealouge. These hard core corporations blow kind philosophical feathers out of their ass in their daily doings in television and the other things they own. They are realists the owners of the work a world are. They haven't got time for nice bullshit. Unless its them blowing smoke up our ass. Its a simple math. They started with paper got labor and assets.

Guess what Bill I'm a hard ass to. I'm out to take their assets away from them. After all they have a lot of unoccupied vacant shit sitting around. I could just might.. get together with some local developers not doing anything. Instead of occupying some street corner. Go downtown talk to the right people and get some codes written. See how that works Bill? Mr. Opportunity has been saying to me this just might be the time to get very rich.

Difference between me and most. I'm not fooled, paper is asswipe. It's the assets that make you rich and they are out there now in a big way. PAPER DETACHES YOU FROM ASSETS. See I can go to the grocery store with a fucking cow asking to trade it for a box of hamburger helper. They won't do it. See my asset has no value theirs does. They have very successfully established the means of trade. They have warehouses full of paper they can print more freely and take anything and everything they want. They take labor and material. With credit and paper. Thats the game.

The Main problem is no one really bought anything but many think they did. ( they borrowed btw)
Most of you folks don't understand what "buy" means when it comes to housing
Had these folk actually Bought (paid for with cash) we wouldn't be hear.

Debt slaves think they actually own something.

And BTW your kids think you REALLY own your house too.

Teach the children well (to be debt slaves)

Austinhousingbubble says

I should think for me to have attempted to correct you on a topic of discussion would, at the very least, assume that we were engaged at some point in a discussion -- no?

Sorry, didn't know an invitation was needed prior to entering a discussion on the pat.net boards. My apologies.

Austinhousingbubble says

RE interest rates and prices: according to the wisdom of the average contrarian like yourself, the bottom was in in 2009; prices are not falling, they are flat. However, if we are to assume for the sake of argument that prices are falling, I would suggest that there are several price supports that are working in unison with low rates to buffer and even temporarily suspend the rate at which prices continue to correct and likely over-correct to the downside.

That's not an unreasonable position. But, it is at odds with the previous statements that interest rates were the cause of the bubble. If interest rates cause bubbles, then we should be in another bubble. They are lower than in 2005-2008. Obviously it's not that simple. Interest rates may have had a small effect by initiating a rational housing boom which affected people's psychology. B. Bill is right though, loose lending is the real cause.