The Housing Bubble

[JP226]

So the month of July is the big conferences were macroeconomic data as to be put together to create forecasts for all the "wonderful" clients we have.

As of late I've been doing quite a bit of tax forecasting but I've started veering off that road and jumped into housing starts. Housing starts is probably one of if not the best indicator of housing demand. The question I get to empirically answer is why did we get a housing bubble? Or what led to it. We all have our theories, cheap cash, the fed, the fed and cheap cash, over regulation, under regulation, the weather etc etc etc.

What I did was break demand down into two parts, the fundamentals and the once in a lifetimers. The fundamentals were fairly simple, your income, population growth, mortgage rates, and confidence in the economy (ie can I sell the house?). Threw the values in, did a little bit of analysis and found that those values explain things well enough, but they miss the economic bubble. When I ran the actuals versus what I predicted to happen given those parameters, the actual plots end up on opposite sides of the specturm at the very end.

So I moved on, reading and researching looking for answers to debates that even raged here. And I came across an article by Krugman (god damn his soul) that mentioned a speech given by Bernanke. Bernanke and Greenspan felt that the housing bubble was not the result of cheap cash from the fed because Mortgages are based on long term rates and flooding cash effects short term, and it was too global a boom even for the fed. Their answer was not the government forcing mortgages, and to an extent I agree with that given the trend in the housing boom as the latest bubble is number one single family homes versus multi but more importantly the run up doesn't really explode until 2002. I'm not saying the government easing credit and forcing riskier loans didn't play an effect, it did but I think the inflated prices in the market may have already had that incorporated. The government played an effect but it wasn't the primary driver. Their answer was the savings glut. Following the recession in Asia in 98, Asian economies began amassing huge warchests by devaluing thier exports and awashing the world with cash.

So more or less I'm at a road stop. I have to figure away to incorporate a savings glut, but more importantly what do you think caused the housing bubble, the spark of the mess we're in now? Was it the gov? Was it the fed? Was it Asia? Or was it something else?

[Calvin]

I figured it was banks being completely idiotic by giving out things like 100% mortgages. And people being so idiotic as to get them. But then that's just me, I don't pretend to understand the bigger picture of economics.

[The Devil's Sergeant]

Hmm, let me think about this:

Spoiler Alert, click show to read: 

[JP226]

Hmm, let me think about this:

Spoiler Alert, click show to read: 

I also read some testimony that said fannie, freddie and the US Gov's pushing for cheap housing created a crowd in effect and riskier lending by banks, especially when it was compounded by cheap credit.

[The Devil's Sergeant]

Perhaps there was no one thing, death by a thousand cuts, or a set of circumstances that no one has seen before.

I got nothing for you other to say that if you are stuck on a question, maybe you are asking the wrong question. Maybe its not a question of economics in the mathematical sense.

[JP226]

Perhaps there was no one thing, death by a thousand cuts, or a set of circumstances that no one has seen before.

That's really the answer, it was everything. Although I'm not too keen on under regulation, anyone who works with banks or know of friend s and family that work there, regulators are always crawling up the ass of bankers and creating bigger problems then they are worth.

[nopasties]

Check this guy out http://www.michaelgreenberger.com/
this is an audio interview with him http://www.npr.org/templates/story/s...oryId=89338743

thi is the law that changed things http://en.wikipedia.org/wiki/Commodi...on_Act_of_2000

another audio program that simplifies the credit derivative issue
http://www.thisamericanlife.org/radi...px?episode=375

former head economist for the IMF
http://baselinescenario.com/

[Giuliano Taverna]

I found this a fascinating summery of the mess.

[Viking Prince]

There are a great many causes of the bubble. The tax system is also a part of the mess. You will notice that lower priced housing seemed to be a bit exempt of the bubble effect. This is due to the tax deductability of interest has less of an effect against income. With the current standard deductions, a married couple with children in a modest lower middle class home may not even be deducting on their taxes today.

Then there is the benefit of tax exemption on income when selling a personal residence. Just like the UK legislative members, the rich in the USA have more than one house. With careful tax planning all homes sold are the principal residence and the gains are rolled into the next purchase. And at some point in down sizing, the gains are grabbed on a one time basis free of tax effects.

All this make the demand for housing ownership greater and increased demand means increased prices.

The irony is that the bubble breaks and the economy goes into recession at the same time. The low priced real estate plummits even though it was not really part of the bubble. Why, unemployment, higher banking standards on all loans, economic uncertainty leads to lower demand, etc. My house has dropped about 40% and I do not itemize deductions on my taxes.