patrick.net

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.