Felix Salmon

Why banks aren’t lending to homebuyers

Felix Salmon
Jan 15, 2014 16:53 UTC

“Despite the confluence of promising signs,” write Peter Eavis and Jessica Silver-Greenberg today, “little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market.”

This is absolutely true, and it’s a significant problem. To get a feel for just how sluggish the mortgage market is, my favorite chart comes from the Mortgage Bankers Association. Every month, the MBA releases its Mortgage Credit Availability Index, which makes it easy to concentrate on minuscule differences: in December, for instance, the index rose to 100.9, from 110.2 in November. But in order to see the big picture you need to zoom out and look at what credit availability was like before the financial crisis. And if you do that, the chart looks something like this:

Screen Shot 2014-01-15 at 11.49.43 AM.png

Of course, mortgage availability was way too lax in 2006-7, and the new index doesn’t have historical data going back before the end of 2010, so we can’t really see what was normal before things went crazy. But anecdotally, it’s much harder to get a mortgage now than it used to be. In the NYT article, the Center for American Progress’s Julia Gordon says that “a typical American family” with a credit score in the low 700s is “being left out”: that’s a very long way from subprime, which is what you’re considered to be when your credit score is below 620.

Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.

Why are banks so reluctant to lend? It’s not because of new rules about qualified mortgages, or anything regulatory at all, really. Instead, it’s much simpler:


To put it another way, would you lend money fixed for the next 30 years at a rate of less than 5%? Mortgage rates might still be well above the rates on mortgage bonds, but on an absolute basis, they’re still incredibly low. If you hold the loan to maturity, you’re never going to make very much money, and if you mark it to market, you run the risk of substantial losses if interest rates move back up to more historically-normal levels.

On top of that, the mortgage business is consolidating even more than the banking business more generally, with Wells Fargo being the big whale. It has the scale and the financial technology to manage all the risks and the regulations, as well as a big enough balance sheet that it can easily cope with being forced to repurchase loans it is currently selling. Most smaller banks have essentially zero competitive advantage over Wells, and it can make a lot of sense for them to get out of the game entirely, as Joe Garrett says:

One of the great myths of our industry is that a mortgage is the foundational product for consumer relationships. With many people having their mortgage payment automatically taken from their checking account, a significant number of borrowers don’t even know who their mortgage lender is. And mortgage borrowers are much more interested in getting the lowest rate than in getting a mortgage from their primary bank.

There are many commercial banks that do just fine not offering mortgages. Some offer it through a private-label mortgage company. Some refer borrowers to local mortgage bankers, and most simply don’t offer it. Mortgage banking does not generate deposits from customers, and to the extent that customer deposits are a major part of what makes a franchise valuable, mortgage banking does not help.

I cannot think of a single banker who was ever criticized for getting out of mortgage banking, but there are plenty who stayed in too long and lost their job and even lost their bank. Yes, mortgage banking can be very lucrative when times are good, but bank executives must know when to cut back, and they must also have the courage to simply exit this business when it no longer adds value to the bank and its franchise.

There are a few possible solutions to this problem, none of which are particularly hopeful. One is to simply wait for mortgage rates to rise back to say 6.5%, at which point a lot more lenders will start coming out of the woodwork. Another is to phase out the 30-year fixed-rate mortgage entirely, since it’s a product no private-sector financial institution would ever offer, were it not for the distorting influence of Fannie and Freddie. Both solutions would probably be accompanied by a decline in house prices, which no one wants right now. And then of course there’s the risk of overshoot — that if conditions loosen up, that will only serve to precipitate another bad-loan crisis.

Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers. I’m in general a believer in renting rather than buying, but the US is a nation of homeowners, and in such a country, a liquid housing market is a necessary precondition for economic vitality. Right now, we don’t have one — and we don’t have much hope of getting one in the foreseeable future, either.


“yours” – was directed to the lenders BTW, lol :)

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America’s rental crisis

Felix Salmon
Dec 10, 2013 00:13 UTC

Earlier today, a union organizer from Oakland named Max Bell Alper successfully (if briefly) trolled the internet with a stunt showing him shouting at a protestor. The protest was against Google’s buses: they use municipal infrastructure, but don’t giving anything back in return. Alper’s monologue, delivered in character as an obnoxious Google employee, went like this:

I can pay my rent. Can you pay your rent? … Well then, you know what? Why don’t you go to a city where you can afford it? This is a city for the right people. Who can afford it. If you can’t afford it, it’s time for you to leave. I’m sorry, I’m sorry. It’s time for you to leave. If you can’t pay your rent, I’m sorry. Get a better job.

OK, it’s not exactly Tony Award-winning stuff. But the attitude being skewered here — the idea that people who can’t pay their rent deserve no sympathy and should just move out of sight and out of mind — is actually deeply American.

The problem is simple arithmetic, as laid out in a sobering new report from Harvard University:

In 2011, 11.8 million renters with extremely low incomes (less than 30 percent of area median income, or about $19,000 nationally) competed for just 6.9 million rentals affordable at that income cutoff—a shortfall of 4.9 million units. The supply gap worsened substantially in 2001–11 as the number of extremely low-income renters climbed by 3.0 million while the number of affordable rentals was unchanged. Making matters worse, 2.6 million of these affordable rentals were occupied by higher-income households.

When you have 11.8 million households chasing 4.3 million affordable rental units, no amount of moving out of town is going to solve the problem, which is only getting worse, thanks to the way in which inequality is getting worse in America. Here’s the chart, which shows the inexorable rise of rents, even as the median income of renters has declined dramatically since 2000:

The result is the next chart: half of all renters now spend 30% of their income on rent, and a quarter spend more than 50%. This is an unprecedented squeeze on the people who can least afford the shelter they need.

The squeeze hits all non-rent expenses, naturally, including food: households in the lowest expenditure quartile spend $350 per month on food if they’re in affordable housing, but just $200 per month if they’re part of the group with severe rent-cost burdens. That works out to about $6.50 per day — and we’re talking millions of households, here. Overall, there are 21.1 million cost-burdened renters in America, including 83% of people with incomes under $15,000 per year.

In general, renting is a good thing: it improves labor mobility, and avoids forcing cash-strapped households to put an enormous proportion of their net worth into a single unreliable asset. But even as the number of renters has increased in recent years, the proportion of renters receiving any kind of government assistance has steadily declined. The result is that America as a whole is turning into a version of San Francisco — a place where the privileged rent expensive apartments, and not-so-secretly wish that everybody else would just go away. Annie Lowrey’s story today says it all:

“We’ve seen a huge loss of affordable housing stock,” said Jenny Reed, the policy director at the D.C. Fiscal Policy Institute. “We have lost 50 percent of our low-cost units over the past 10 years, and at the same time, the number of high-cost apartments, the ones going for more than $1,500 a month, more than tripled.”…

“Builders always are aiming at that higher end,” said Jed Kolko, the chief economist at Trulia. “And eventually, as those new units age, they trickle down to lower-income borrowers.”

But not now. With demand surging, inventories are shrinking, vacancy rates are falling and rents are rising at the low end.

The government, of course, is part of the problem, rather than part of the solution: sequestration, in particular, has hit housing programs (which weren’t exactly ubiquitous to begin with) very hard indeed. But if the government won’t step in here, the market is going to be no help for the foreseeable future. The economic recovery of the past five years has left millions of Americans behind — Americans who, increasingly, simply can’t afford to make rent any more. Those Americans are never going to be a source of great profits for private-sector developers. But getting them safely housed isn’t just a moral issue. Failure to find them affordable housing will, in the long term, cost us even more.


This is a pretty awesome article. One of those articles that you find after weeks of searching. And I am grateful that all of that searching was worth it. Because this article is pretty damn awesome. luis souto

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Why mortgage rates are weird

Felix Salmon
Sep 5, 2013 21:26 UTC

This time last year, Peter Eavis came out with a pair of columns asking the question: why were mortgage rates so high? Back then, the typical 30-year mortgage cost 3.55% — more than 140bp above prevailing mortgage-bond rates. Given that banks normally lend out at only about 75bp above mortgage-bond rates, said Eavis, mortgage rates should by right have been much lower.

Eavis was pessimistic that market competition would drive rates down: “mortgage rates may not decline substantially from here,” he said, adding that “the 2.8 percent mortgage may never materialize”. Little did he know that he was writing at the very low point for mortgage rates — they have spiked over the course of the past year, and today, reports Nick Timiraos, they’re at 4.73%.

Using Eavis’s benchmark, we’re still pretty much in the same place as we were a year ago: that 4.73% rate is about 130bp more than the yield on Fannie Mae’s current-coupon mortgage bonds. It could be lower, it should be lower, but at least the spread isn’t continuing to widen.*

But in one way, today’s rate is even crazier than the 3.55% rate a year ago. As Timiraos says, this marks the first time ever that the typical 30-year mortgage rate, which comes with the blessing of a government guarantee, is higher than the typical rate on unguaranteed “jumbo” loans. Even in a world of crazy spreads, this is pretty bonkers:

Before the housing bubble burst six years ago, jumbo mortgages over the past two decades typically had rates at least 0.25 percentage point above conforming loans, but that widened sharply after 2007, reaching a peak of 1.8 percentage points in 2008, according to HSH.com, a financial publisher. The rate difference between the two stood at 0.5 percentage point as recently as last November.

Timiraos tries to explain this rationally: if banks hold jumbo loans on their balance sheets, he says, that means the price of the loan isn’t “set by bond markets”. To which I say, pull the other one. Of course the price is set by bond markets. Or, says Timiraos, maybe this whole thing can be explained by looking at the cross-selling opportunities represented by jumbo borrowers: if they come for the mortgage, they’ll stay for the investment advice! Or something. Again, this is highly unpersuasive, especially since there’s no indication that cross-selling abilities have suddenly blossomed in the past year or so.

The real story here, I think, is not about banks at all; rather, it’s about the government, which is desperately trying to extricate itself from its current position as the ultimate source of just about all mortgage finance. In the absence of a formal plan of how to do this, it’s trying a market-based approach: make mortgages expensive, and maybe the banks will take the hint and start offering private-label mortgages at lower, more competitive rates. As Timiraos says, part of the reason mortgage rates are so high is the fees that Fannie and Freddie are slapping on to every loan they buy from lenders.

In a way, that’s what we’re seeing in the jumbo market — when you don’t have to deal with Frannie, rates are lower than when you do. But if the government hopes that expensive mortgages will cause the private sector to stop dealing with Frannie, it should prepare itself for disappointment. As I said in March, whatever Frannie pays for mortgages will simply become the market price for mortgages. The government is just too big not to be the marginal price setter: it speaks volumes that mortgage rates are lower than the government is paying only in the one area where the government isn’t competing.

All of which is to say that if the government wants to shrink Frannie, it’s going to have to do more than tack on a bunch of fees and leave the rest to the market. Five years after the crisis, we’re still waiting for a plan, however, and there’s no indication that we’re going to get one any time soon. Which means that the government is going to remain the dominant monopoly in housing finance for the foreseeable future.

*Update: I’ve now managed to pull the chart: this is the 30-year mortgage rate, minus the yield on the 30-year current-coupon bond from Fannie Mae. As you can see, it has actually tightened in back towards its historical level over the past year: the excess profits that Eavis was complaining about a year ago seem to have largely disappeared.


Matt Levine, in his new job at Bloomberg View, has a good take on this – http://www.bloomberg.com/news/2013-09-06  /cheaper-jumbo-loans-just-aren-t-that-w eird.html

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from Shane Ferro:

The dark side of homeownership

Jun 6, 2013 17:06 UTC

Owning your home, long a pillar of the American dream, could actually be bad for the economy. In a new paper, economists Andrew Oswald, of the University of Warwick, and David Blanchflower, at Dartmouth, found that rates of high homeownership lead to higher rates of unemployment in both the United States and Europe.

Not only do high rates of homeownership keep people from moving to areas with good jobs, it also turns out that they tend to stunt job creation where the people live. What’s more, because suburbanites are unlikely to have a jobs in the same place that they live, they often spend a lot more time in traffic than they need to  -- time that could surely be used more productively.

This is not a new idea for Oswald and Blanchflower. They’ve been working on this area of research for the better part of two decades, although this is the first time they’ve had the hard data to show how the labor market in the US is affected when homeownership rates increase. Even though individual homeowners aren’t necessarily more likely to be unemployed than their renter counterparts, a doubling of the homeownership rate leads to more than doubling of the unemployment rate, the researchers find.

High rates of homeownership lead to fewer businesses being formed, says Blanchflower. The authors aren’t fully able to explain this correlation, though they hypothesize in the paper that it could be a result of zoning restrictions in residential areas and/or a NIMBY (not in my backyard) attitude from homeowners. Fewer businesses in the area mean fewer jobs, which lowers the employment rate. People who cannot find a job near their home, but are tied down by a mortgage, then end up commuting long distances for work.

Switzerland is a prime example of low homeownership and low unemployment. Only about 30% of the Swiss own their homes, and unemployment in the country hovers just above 3%. Spain is at the opposite end of the spectrum, with 80% homeownership and more than 25% unemployment. The paper shows that OECD countries and every state in the US fall somewhere in between Spain and Sweden. Here’s the scatter chart: the higher the homeownership rate, the higher the unemployment rate, generally.

As the subprime crisis hit, Oswald’s ideas became somewhat popular, as various people began to argue that perhaps homeownership shouldn’t be the bedrock of our economy. Clive Crook argued back in December 2007 that the focus on housing could be holding our economy back. “If investment in housing goes up, investment in things that would expand the economy and improve future living standards—such as commercial building and business equipment—goes down”.

As Free Exchange added, putting people to work efficiently means having a labor force that can move around to where the jobs are. “Roots are for vegetables”, as the article puts it.

In a panel discussion on the Canadian television show The Agenda back in 2010, both Yale economist Robert Shiller (of the Case-Shiller home price index) and urban studies theorist Richard Florida argued that homeownership should be less idealized, and the government shouldn’t promote homeownership through tax breaks. As Crook notes in his piece, the UK abolished mortgage tax breaks and saw no change in housing prices. “In the US, labor mobility and residential mobility tend to go hand-in-hand, and it’s really put a crimp in the US ability to adjust to this time of economic restructuring”, said Florida.

There are reasons to argue for homeownership, of course. Not only is it a leveraged investment that can pay off handsomely (if prices go up), it’s a commitment device, “which forces people to build wealth rather than fritter away their income on consumer products”, as Felix Salmon pointed out, also back in 2007. Shiller responds that if you have the discipline and self-control to put that money in the stock market, you’d likely get a better return.

In 2007, as the economy was spiraling downward, no one really wanted to talk about taking action that might further collapse the housing market. But perhaps now that the economy is slowly marching towards recovery, it’s time to bring it up again and ask ourselves whether being a nation of homeowners is worth the price we pay in stunted economic growth. It may be time to do away with the mortgage-interest tax deduction, rezone the suburbs, or simply embrace Blackstone’s quest to own as many single-family homes as possible.

America’s healthily idiosyncratic housing market

Felix Salmon
May 28, 2013 15:17 UTC

This is the chart of US Case-Shiller prices. You can click to enlarge it, but sometimes it helps to take a step back: The thicker blue line is a composite of 10 cities, the red line is a composite of 20 cities, and the medium-weight green line, for you locals, is New York City.

This isn’t the chart you’re possibly familiar with, the one showing the sharp spike upwards in the past few months. That chart measures year-on-year gains; this one shows absolute levels, with January 2000 arbitrarily set as the 100 point.

The messages from this chart are different from the ebullient headlines you might be seeing elsewhere. The first message is that house prices aren’t suddenly soaring again: we had a big bubble from about mid-1997 to mid-2006, whe then had a big crash from mid-2006 to mid-2009, and since then we’ve basically just been wiggling sideways: nationwide house prices now are basically back to where they were at the beginning of 2009.

The second message is that there are massive regional variations, as you’d expect in a country the size of the USA. After setting every city equal to 100 in January 2000, the range today is enormous: it goes from 81, in Detroit, to 190, in Washington. And for all the bidding-war anecdotes in chattering-class circles about houses selling in one day for way above the asking price, there’s not much sign of frothiness here: indeed, New York prices actually fell in March.

All of this is good news. The last thing we need is another housing bubble, or any hint that we’re moving back towards a world where housing costs comprise a disproportionate part of the typical family’s monthly budget. Affordable housing is good for everybody, and if you see housing costs spiraling out of reach, that’s bad for the economy; it’s not amazing good news. Yes, it might be a consequence of a healthy economy — although it might equally just be a consequence of new home construction failing to keep up with demand. But it’s not in any way a leading indicator when it comes to broad-based growth; quite the opposite.

We’re also seeing a healthy degree of divergence between cities — and, as those chattering classes will tell you, between neighborhoods within cities, as well. “Property” is not some all-encompassing asset class; different houses in different cities are going to be worth different amounts, and their value is going to fluctuate in different ways. When all house prices start behaving the same way, and correlations start tending towards 1, that’s a good sign you’re either in a bubble or a bust.

The Case-Shiller index, by its nature, attempts to boil down the richly varied set of American housing markets, both between and within cities, to a single number. At one point, Robert Shiller even tried to sell derivatives based on the index, by which homeowners could try to hedge the value of their property, and non-homeowners could try to hedge the risk that prices would move out of reach. They never took off, for various good reasons.

In a reasonably healthy market, property prices tend towards the idiosyncratic — at the level of the individual property, at the neighborhood level, and at the municipal level. Looking at the Case-Shiller numbers, I’d say that today’s market is healthily idiosyncratic, and that even the city-by-city data hides an enormous amount of neighborh0od-level variation. So don’t generalize from today’s numbers — but do feel heartened by them, all the same.


So this time is different. Just like the last time, of course.

At least this time the Fed Chairman is not an ideologically hell-bent liar. This Chairman is not about propping up useless equities…..oh no.

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How helium is like mortgages

Felix Salmon
Mar 28, 2013 21:32 UTC

John Kemp might just have delivered the perfect John Kemp column yesterday: 1,700 words on an obscure commodity you probably didn’t even realize was a commodity. In this case, it’s a noble gas: the Federal Helium Reserve (yes, there’s a Federal Helium Reserve) is at risk of imminent shutdown, which in turn threatens everything from the semiconductor industry to MRI scanners. Already, at least one particle accelerator had to delay operations “because of problems obtaining fresh supplies of helium.”

Kemp’s column is based in large part on a 17-page GAO report which includes this chart, showing the seemingly inexorable rise in the price of refined helium. (Another thing you didn’t know: helium comes in both “crude” and “grade A refined” versions.)


As you can see from the chart, the problem here isn’t finding crude helium, so much as it is refining the stuff into something usable. Reports Kemp:

Problems at helium refineries in Texas, Oklahoma and Kansas, as well as start up delays with new refining facilities in Qatar in 2006, led to shortages and rationing, as well as price spikes for some customers.

Reliable and affordable supplies are essential. But around half of the helium used in the United States, and roughly a third of the gas consumed worldwide, is sourced from a stockpile in northern Texas left over from the Cold War.

At the moment, the only way that helium can be sold from that stockpile is in order to pay down the debt which was run up in 1960 building the Texas facility. But thanks in large part to the soaring helium price, there’s virtually none of that debt left — and when it’s all gone, the government can’t sell any helium any more. As a result, it’s pretty urgent that Congress put in place some kind of mechanism to keep the sales going. The alternative would be devastating to many industries including the medical profession.

It also turns out that the US government’s role in the helium market is not dissimilar, in some ways, from its role in the mortgage market. Here’s Kemp:

The cost-recovery pricing formula ensured BLM was originally charging much more for its helium than other suppliers, minimizing the market impact.

But BLM has become such an enormous seller, in a market with few other competitors and substantial barriers to entry, that other suppliers have taken it as a benchmark, and moved their own prices higher to match it.

Essentially, when you’re the US government and you’re a major participant in a market, you can’t help but become the marginal price-setter. Whatever Frannie pays for mortgages becomes the market price for mortgages; whatever the government asks for helium becomes the market price for helium.

In both markets, the government wants out and wants the private sector to take over. But in both markets, the process of disentangling the government from the market is extremely difficult, because it can’t just shut down its operations and leave the market to its own devices.

Because Congress has left the helium problem to the last possible minute, it’s unlikely they’re going to be able to come up with an elegant solution here. Instead, they’ll just kick the can down the road by allowing the stockpile to continue to sell helium for another year or so. But over that time, someone is going to have to work out how to extricate the US government from the global helium market. If and when that happens, I hope that mortgage-minded legislators are paying attention. Because it’s long past time that the government stopped underwriting the vast majority of home loans in this country, and they could use all the ideas they can find.


This article is wrong (in a nice way to Mr. Salmon). The price for Grade A helium is FAR ABOVE what is shown on Figure 2. The obscure nature of the VALUE of helium makes it easy for companies to shroud the actual price they’re getting. The U.S. Government is literally giving away helium to the refiners along the BLM pipeline and they, in turn, are making a veritable fortune.

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Chart of the day, housing bubble edition

Felix Salmon
Sep 19, 2012 00:46 UTC


This chart comes from a new paper by Karl Case and Robert Shiller, looking at the results of a survey they’ve been handing out to homebuyers annually since 2003. The idea is a very smart one: if you want to get an idea of the behavioral economics of homebuyers, the best way to understand what they’re thinking is to simply ask them.

And this chart, in particular, is both very elegant and very informative. It’s elegant because you have a very close maturity match: the average duration of a US mortgage, before it’s refinanced or the house is sold, is about 7.5 years, which is close to the ten-year horizon in this question, which Case and Shiller ask every year:

On average over the next 10 years, how much do you expect the value of your property to change each year?

Now the number of homebuyers in America vastly exceeds the number of people who understand the mechanics of compound interest. If you asked instead “how much do you think your home will be worth in ten years”, and then presented that answer as an annualized percentage increase, I suspect that the answers — especially in the peak years of 2004 and 2005 — would be substantially lower. (Put it this way: if you bought a $260,000 home in 2004 and expected its value to rise at 12% a year for 10 years, then by 2014, you’re saying, it would be worth more than $1 million. I suspect the number of people answering 12% or more is going to be greater than the number of people who think the value of their home will quadruple in ten years.)

Still, that’s not particularly important, especially since the question has remained the same for the past decade: the trend here is real. And what’s fascinating is that the big fall in expected long-term home-price appreciation happened before the financial crisis, and that the crisis is actually completely invisible in this chart: expectations continued to deteriorate long after it was over.

And even given the fact that homeowners tend to overestimate annualized percentage returns over 10-year horizons, we’re now at the point at which the expected rise in home values barely exceeds today’s record-low mortgage rates. Over the long term, homebuyers still think it’s a good idea to buy a house. And they might be right about that. But they’re not buying because they think they’ll make a handy profit in ten years’ time.

Which brings me to one of the central themes of the Case-Shiller paper: the idea of a “speculative bubble”. If you look at the situation in the chart circa 2004-5, there was a huge gap between the cost of funds and the long-term expected return. And if people really believed house prices were going to rise that much in future, it made all the sense in the world to lever up, get the biggest mortgage they could find, and buy lots and lots of house. After all, the more levered you are, and the more house you buy, the more money you make.

Case and Shiller have a handy definition of a speculative bubble, in this paper: it’s a bubble with “prices driven up by greed and excessive speculation”. But here’s the thing: people don’t speculate on a ten-year time horizon, and the producers of “Flip This House” weren’t waiting around to see what properties would end up being worth once the kids had gone off to college. A truly speculative bubble, it seems to me, is a function much more of short-term house-price expectations than it is of long-term expectations. If you think you can buy a house today, sell it in a few months’ time, and make tens of thousands of dollars doing so, and if you intend to do precisely that, then you’re clearly part of a speculative bubble. But it turns out that home buyers were actually surprisingly modest in their expectations of one-year price increases — they expected prices to rise less than they ended up rising in reality.

On the other hand, if you buy a house now in the expectation that it’s going to increase in value substantially over the next decade, you might be a buy-and-hold investor, but it’s hard to characterize what you’re doing as speculation.

I’ve been disagreeing with Shiller on the subject of speculative bubbles for five years now, but I think this is important: just because you have a bubble, doesn’t mean you have a speculative bubble. The dot-com bubble was speculative; the rise in house prices in 2000 was not. There was a speculative bubble in Miami condos; there was not a speculative bubble in Manhattan co-ops. If you buy because prices are rising, that might be because you want to flip your property and make money — or it might equally be because you worry that if you don’t buy now, prices are going to run away from you, and you’ll be forced to move out of the neighborhood you love because you can’t afford it any more. It’s still a bubble, but it’s more of a fear bubble than a greed bubble.

Still, bubbles are bad things, and they’re liable to burst either way. And so I take solace in this chart, because it shows me that people are buying, these days, for the right reason — which has nothing to do with expectations of future house prices, and everything to do with simply paying a fair price for the shelter they’re consuming. House prices might not rise much over the next decade. But if they fail to rise, today’s house buyers aren’t going to be disappointed: they will still have lived in their homes while paying a perfectly reasonable sum to do so. Which is a much better state of affairs than bubble-and-bust.


QCIC, by some metrics the US housing market remains overpriced by about 20%. Calculate cumulative inflation over the next decade (or wage inflation, if you believe that is the stronger driver of real estate prices) and subtract 20% — Harpstein’s figure seems realistic.

Not that free markets are known for being predictable and orderly…

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Housing crisis datapoint of the day, tax-relief edition

Felix Salmon
Aug 2, 2012 16:31 UTC

In 2007, it became clear to Congress that there was a serious mortgage crisis, with lots of underwater borrowers. And it was also obvious that an important part of working through the mess would comprise some combination of short sales and principal reductions. Thus was the Mortgage Forgiveness Debt Relief Act of 2007 born. Until the act was passed, any lender offering a short sale or a principal reduction would in doing so leave the homeowner with a massive tax bill, since the written-off debt would count as simple income for income-tax purposes.

In 2007, however, no one had a clue how long the mortgage crisis would drag on for, or how slow lenders would be to offer principal reduction. The original act expired at the end of 2009; it was then extended, through the end of 2012. But here we are, in August 2012, and principal reductions are only just beginning in earnest.

David Dayen has a good piece on the expiry of the tax break, including the interesting nugget that the CBO has put the cost of extending it for two more years at $2.7 billion. If the average underwater homeowner pays a marginal tax rate of 20%, then that means the CBO expects write-downs from principal reductions and short sales of somewhere in the $10 billion to $15 billion range during 2013 and 2014. And this, remember, is six years after the housing bubble burst.

My guess is that the tax break will be extended, somehow, somewhere in the horribly complex mess of legislative give-and-take that will arrive with the fiscal cliff. But it’s instructive to realize that if Ed DeMarco had actually agreed to Fannie and Freddie doing principal reductions, they would realistically only get started, in earnest, in 2013. As it is, thanks to his obstructionism, they’ll probably only happen even later than that.

The housing recession is dragging on for longer than anybody anticipated, and there’s no end in sight. Principal reductions are a good way of bringing it to an end; they should of course not incur a massive tax bill. I hope that we’ll see most of them done by 2015, eight years after the housing bubble burst. But in my heart of hearts, I don’t actually believe that. This housing crisis, I think, is going to last a decade. Or more.


Great! Nice post. Hope to read some of your post in the future.. Serviced Offices Manila

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Principal reductions: DeMarco vs Geithner

Felix Salmon
Jul 31, 2012 20:36 UTC

It’s Ed DeMarco vs Tim Geithner today, on the subject of principal reductions, and the fight is getting ugly.

DeMarco, in a letter to Congress, explains that the Treasury has put a lot of effort, and is willing to put very large sums of money, into something with the rather unwieldy name of HAMP PRA, where PRA stands for Principal Reduction Alternative. But here’s the thing: PRA is going to get nowhere unless Fannie and Freddie sign up for it. And they can’t sign up for it until DeMarco signs off on it. And DeMarco is refusing to sign off on it.

DeMarco has released a 15-page paper explaining his decision, although in reality his letter, and the reasoning in it, is much clearer. He basically says that principal reductions would be costly to implement, and he doesn’t have a lot of time for Treasury’s offer to pick up the tab: “although principal forgiveness may provide some financial benefit to Fannie Mae and Freddie Mac,” he writes, “it presents operational challenges for them and their servicers as well as a risk of loss to the taxpayer”. It’s not his job to worry about costs to Treasury or taxpayers generally — but he’s making it his job.

But the main thrust of DeMarco’s argument is less financial than it is moral. Any kind of principal-reduction strategy risks encouraging strategic default, and DeMarco hates the very idea of strategic default. And even if there’s no strategic default at all — and the letter from Geithner makes a very strong case that strategic defaults as a result of this plan would be de minimis — DeMarco still hates principal reductions on, well, principle:

Perhaps the greatest risk of the Enterprises’ allowing principal forgiveness is one with far more significant long-term consequences for mortgage credit availability. Fundamentally, principal forgiveness rewrites a contract in a way that other loan modification programs do not. Forgiving debt owed pursuant to a lawful, valid contract risks creating a longer-term view by investors that the mortgage contract is less secure than ever before. Longer-term, this view could lead to higher mortgage rates, a constriction in mortgage credit lending or both, outcomes that would be inconsistent with FHFA’s mandate to promote stability and liquidity in mortgage markets and access to mortgage credit.

This is a classic “parade of horribles” argument, and it’s not a particularly strong one, either. As Jared Bernstein says, “in unusual times, like the aftermath of the worst housing bubble implosion in decades with 30+% price declines, guess what? Write downs happen.”

But the weirdest thing about this argument is that the horribles aren’t particularly horrible. Higher mortgage rates? Um, fine: no one is exactly complaining that mortgage rates are too high right now. A constriction in mortgage credit lending? That’s fine too: it was too-lax credit lending that caused this whole problem in the first place. Both together? Even that’s fine: it would help bring homeownership rates down from their current too-high levels, and encourage more people to rent rather than own, creating a more flexible national labor force.

The fact is that while it’s imperative that we fix the problem of broken mortgages issued at the height of the credit bubble, the last thing we want to do is return to those days and tell anybody who wants a house that they can just go out and buy one, whatever their creditworthiness or cash position. If you want to make mortgages safer, you should ensure that homeowners have large amounts of positive equity in their homes. That means significant down-payment requirements for people buying houses. And it also means significant principal reductions for those who are currently underwater.


There are alternative rules for HAMP loan modifications with and without principal reduction. Under principal reduction there are additional alternatives where the lender can reverse the order of certain steps. And any of these sets of rules will find a way to lower the payment to 31% of income.

For a while I’ve had an Unofficial HAMP loan modification calculator up at http://www.armdisarm.com that can calculate these various rules. It is totally free, and the source code is available under the GNU public license.

While a tool like this can not answer the fundamental questions, it can be used to gain some experience with how the various rules might operate.

Posted by DrPaulBrewer | Report as abusive