What they are saying about The Great Housing Bubble
"…the author has a background in real estate that's far removed from
the sales process, he's able to step back and provide the sort of
unemotional, macro-economic overview that seems quite atypical for a
guide to investing in real estate.
…Filled with 64 exhibits, 146 footnotes and a nine-page bibliography
of source material, "The Great Housing Bubble" is probably not a casual
read during a day at the pool or the beach. But for real estate
professionals wanting to educate themselves or their clients on how to
successfully build wealth through the buying and selling of real
property, this author has a lot to teach."
Patrick S. Duffy – Principal with MetroIntelligence Real Estate Advisors and author of The Housing Chronicles Blog.
Mortgage Equity Withdrawal
Mortgage Equity Withdrawal or MEW is the process of obtaining cash
through refinancing residential real estate using the accumulated
equity as collateral for the loan. Before MEW homeowners would have to
wait until the property was sold to get their equity converted to cash.
Apparently, this was deemed an inefficient use of capital, so lenders
found ways to “liberate” this equity with home equity lines of
credit or cash-out mortgage refinancing. Home equity lines of credit
are popular with lenders despite the additional risk of being in the
second or third lien position because borrowers are less likely to
default or prepay than non-cash-out refinancing. [1] The impact of MEW
on equity is obvious; it reduces equity by increasing the loan balance.
It has been noted that equity is a fantasy and debt is real, and MEW is
the process of living the fantasy with the addition of very real debt.
MEW has been utilized by homeowners for home improvement for decades,
but the widespread use of this money for consumer spending was largely
an innovation of the Great Housing Bubble. [ii] Since consumer spending
is almost 70% of the US economy, mortgage equity withdrawal was the
primary mechanism of economic growth after the recession of 2001–a
recession caused by the deflation of another asset bubble, the
NASDAQ technology stock bubble.
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What they are saying about The Great Housing Bubble
"The author does an excellent job in showing how various commercial
and investment banks sought to create a speculative market for home
loans by the process of securitization. The main tool was
collateralized debt obligations (CDO'S).The idea is purely speculative
since real estate is a nonliquid durable asset. The bundling and
selling of trillions of dollars worth of the subprime backed bonds that
were not only highly risky, but of uncertain value, created the bubble
that deflated just as every other banker financed, speculative bubble
has deflated in world history.
The author does a good job in demonstrating that low interest rates
were not the cause of the problem. The main cause of the problem was
the loan practices of various financial institutions that threw
overboard their own clearly specified creditworthiness criteria and
standards for borrowers seeking loans."
Michael Emmett Brady – PhD Economics
Stated Income Loans
One unique phenomenon of the Great Housing Bubble was the
utilization of stated-income loans, also known as “liar loans” because
most people were not truthful when stating their income. Loan
documentation is usually a routine part of obtaining financing. Lenders
ordinarily require a borrower to provide documentation proving income,
assets and debt. However, during the final stages of the Great Housing
Bubble, loan documentation was seen as an unnecessary barrier to
completing more transactions, and loan programs which circumvented
normal documentation procedures flourished. The fact that these
programs existed at all is remarkable proof of the risk lenders were
taking through the relaxing or outright elimination of lending
standards. Eighty-one percent of Alt-A purchase originations in 2006
were stated-income, and 50% of subprime originations in 2005 and 2006
were stated income (Credit Suisse, 2007).
Stated income loans increased from 18% of originations in 2001 to 49%
in 2006 according to Loan Performance. In a related study by the
Mortgage Asset Research Institute, 60% of stated-income borrowers had
exaggerated their incomes by more than 50%.[1],[ii] Obviously, lying about one’s income to obtain a loan is not a conservative method of financing a property purchase.
The stated-income loan was originally provided to borrowers such as
the self-employed who most often do not have W-2s to verify income.
When these loan programs were first started, they were not made
available to borrowers with W-2s as the transparency of the lie would
have been obvious to all parties. During the bubble rally, this loan
was made available to anyone, and lying was not only encouraged,
borrowers were often assisted in fabricating paperwork by aggressive
loan officers and mortgage brokers. [iii] Since the loan could be
packaged and sold to investors who had no idea what they were buying,
there was a complete lack of concern for whether or not the borrower
actually made the money stated in the loan application and thereby
could actually make the payments on the loan. Everyone involved was
raking in large fees, the borrower was obtaining the real estate they
desired, and for a time, the investor was receiving payments from the
borrower. [iv] As long as prices were rising, everyone benefited from
the arrangement. Of course, once prices started to fall, borrowers did
not want to continue making payments they could not afford, and the
whole system collapsed in a massive credit crunch.
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What they are saying about The Great Housing Bubble
"The Great Housing Bubble is a fantastic resource for anyone looking
to understand why home prices fell. The writing has exceptional depth
and detail, and it is presented in an engaging and easy-to-understand
manner. It is destined to be the standard by which other books on the
subject will be measured. It is the first book written after prices
peaked, and it is the first in the genre to detail the psychological
factors that are arguably more important for understanding the housing
bubble. There have been a number of books written while prices were
rising that used measures of price relative to historic norms and
sounded the alarm of an impending market crash. Economic statistics and
technical, measurable factors show what people did, but they do not
explain why they did it. The Great Housing Bubble analyzes not only
what happened; it explains why it happened.
Morgan Brown – The Great Loan Blog
Conservative House Financing
When people decide they want to buy a house, they figure out how
much they can afford, then they search for something they want in their
price range. For most people, what they can “afford” depends almost
entirely upon how much a lender is willing to loan them. Lenders apply
debt-to-income ratios and other affordability criteria to determine how
much they are willing to loan. Buyers are generally limited in how much
they can borrow because lenders are wise enough not to loan borrowers
so much that they default. Borrowers behave much like drug addicts–they
will borrow all the money a lender will loan them whether it is good
for them or not. Most borrowers are not wise to the differences between
the various loan types, and they have limited understanding of the
risks they are taking on.
The vast majority of residential home sales have lender financing.
The interest rates and various loan terms have evolved over time. After
World War II a series of government programs to encourage home
ownership spawned a surge in construction and the evolution of private
lending terms resulting in the 30-year conventionally amortized
mortgage. This mortgage generally required a 20% downpayment, and
allowed the borrower to consume no more than 28% of their gross income
on housing. These conservative terms became the standard for nearly 50
years. Lending under these terms resulted in low default rates and a
high degree of market price stability.
There were experiments with various forms of exotic financing during
this period, particularly in markets like California where price
volatility required special terms to facilitate buying at inflated
pricing. The instability of these loan programs was demonstrated
painfully during the deep market correction of the early 90s in
California characterized by high default rates and lender losses.
Rather than learn a difficult lesson regarding the use of these
alternative financing terms from this experience, lenders sought out
ways of shifting these risks to others though a complex transaction
called a credit default swap. Once lenders and investors in mortgages
thought the risk was mitigated, these unstable loan programs were
brought back and made widely available to the general public resulting
in the Great Housing Bubble.
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What they are saying about The Great Housing Bubble
"A very well-written and thoughtful analysis of what went wrong in
the housing world and how we can avoid this problem in the future.
Lawrence Roberts has a great understanding of the subject and does an
excellent job communicating his ideas to the reader.”
Jim Randel – Best-selling author, Confessions of a Real Estate Entrepreneur
What is a Bubble?
A financial bubble is a temporary situation where asset prices
become elevated beyond any realistic fundamental valuations because the
general public believes current pricing is justified by probable future
price increases. If this belief is widespread enough to cause
significant numbers of people to purchase the asset at inflated prices,
then prices will continue to rise. This will convince even more people
that prices will continue to rise. This facilitates even more buying.
Once initiated, this reaction is self-sustaining, and the phenomenon is
entirely psychological. When the pool of buyers is exhausted and the
volume of buying declines, prices stop rising; the belief in future
price increases diminishes. When the remaining potential buyers no
longer believe in future price increases, the primary motivating factor
to purchase is eliminated; prices fall. The temporary rise and fall of
asset prices is the defining characteristic of a bubble.
The bubble mentality is summed up in three typical beliefs:
- The expectation of future price increases.
- The belief that prices cannot fall.
- The worry that failure to buy now will result in permanent inability to obtain the asset.
The Great Housing Bubble was characterized by the acceptance of
these beliefs by the general public, and the exploitation of these
beliefs by the entire real estate industrial complex, particularly the
sales mechanism of the National Association of Realtors.
Speculative bubbles are caused by precipitating factors.[1] Like a
spark igniting a flame, a precipitating factor serves as a catalyst to
begin the initial price increases that change the psychology of market
participants and activates the beliefs listed above. There is usually
no single factor but rather a combination of factors that stimulates
prices to begin a speculative mania. The Great Housing Bubble was
precipitated by innovation in structured finance and the expansion of
the secondary mortgage market, the lowering of lending standards and
the growth of subprime lending, and to a lesser degree the lowering of
the Federal Funds Rate. All of these causes are discussed in detail in
later sections.
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What they are saying about The Great Housing Bubble
"…The cover is perhaps the clearest representation of what Roberts'
book really is: a clearly-communicated, often satirical, and at some
points very stern, no-nonsense account of why home prices soared,
fomenting the nation's housing bubble, leaving couples across the
nation struggling to stay afloat on their mortgages.
…In a market already flooded with books on the housing crisis, The
Great Housing Bubble scores points by focusing on explanation and less
on inundating a reader with the sort of heavy-handed quantitative
analysis that only a few economists can love. While some figures are
necessary, the book's message is never bogged down.
Instead, Roberts presents multiple facets of the real estate market
by taking the reader through the fundamentals and broad concepts of
real estate economics. He then weaves psychology-based theories with
structural factors of the bubble to offer a deeper, more detailed
insight into how and why the housing bubble inflated and burst the way
it did…."
Paul Jackson – CEO, Housing Wire Magazine and HousingWire.com
Preface
I work as a development consultant in the real estate industry in
Southern California. My education and experience has acquainted me with
a variety of real estate markets, but residential real estate is the
one with which I am most familiar. I am not a realtor or a mortgage
broker, and my livelihood, though dependent upon the real estate
industry, it is not dependent upon facilitating a home-sale
transaction. What is presented here is both historical account and
unbiased analysis. My observations of the residential real estate
market are not tainted by any need or desire to convince anyone they
should buy a house. In fact, one of my motivations for writing about
the Great Housing Bubble is to convince people not to buy a
house when prices are inflated and save them from financial ruin. It
saddens me to watch homebuyers get caught up in the bubble mythology
and enter into a financial transaction that will have a strongly
negative impact on their financial lives. People who have already made
that decision cannot be helped except at the expense of a naïve buyer.
Sellers have the marketing machine of the National Association of
Realtors to help them. Buyers have few sources of unbiased information
to assist their decision. Part of the purpose of this writing is to
educate both buyers and sellers on the realities of the residential
real estate market.
One of the difficulties of writing a book on the Great Housing
Bubble in 2008 is that the bubble has not played itself out yet. There
is a necessary change in tense required when speaking of events prior
to 2008 and those projected to occur during and after 2008. Someone
reading this in 5 years may look back on it as history, but for those
of us living it now, it is a history not yet lived. Much of what is
presented here may not come to pass, or it may not happen in the way
hypothesized in this book. History will judge whether this is
prescient, or if it is “a tale told by an idiot, full of sound and
fury, signifying nothing.” [1]
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Address: 129 Islington, Irvine, CA 92620 (Northwood)
Plan: 1250 sq ft - 2/2
MLS: P513933 DOM: 131
Sale History: 07/11/2005: $555,000
Current Price: $575,000
This property in the Greystone Villas tract sold in only 4 DAYS last year. Now the same property has been on the market for over 4 MONTHS!! Perhaps a reduction in price would help make the sale? It appears the property is tenant occupied. So could it be that the owner isn't bleeding money every month and is just hoping to get out of the market without any serious damage?
*IF* the property sells for the asking price, the owner is still looking at a loss of $14,500 (assuming 6% in commissions). OUCH! That's serious enough for me!
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IHB analysis posts
9-16-2009 -- Cure Rates -- The rates at which people "cure" their ailing loans has declined to very low levels. People are walking away.
7-28-2009 -- Entitlement Leads to Socialism -- The housing bubble caused a shift in societal attitudes that leads to more socialist government programs.
7-6-2009 -- The Bailout for Prodigious Spenders -- Did renters benefit as much as owners did during the bubble years?
6-22-2009 -- Regulatory Solutions to Prevent the Next Housing Bubble -- Excerpt from final chapter of The Great Housing Bubble concentrating on regulatory solutions to the problem.
6-15-2009 -- Should Adjustable-Rate Mortgages be Curtailed? -- Another look at the problems created by adjustable rate mortgages and their place in the housing market.
3-30-2009 -- Responsible Homeowners are NOT Losing Their Homes -- People who were truly responsible with their borrowing are not losing their homes in the housing price crash.
3-2-2009 -- What Risks Should Borrowers Be Allowed to Take? -- Excessive risk caused the rise and fall of the housing bubble. Should some of the riskiest practices be eliminated?
2-12-2009 -- The Financial Implications of Short-Sales and Foreclosures -- Reference to an attorney's description of the what can happen in
short sales and foreclosures depending upon the circumstances of the
borrower.
2-9-2009 -- The Moral Hazard of Market Supports and HELOC Abuse -- Is the government's efforts to support the real estate market going
to serve to create the psychology that inflates the next one?
1-19-2009 -- Tax Policy and Housing -- A review of the various tax programs and how they impact house prices
1-13-2009 -- Unlocking the Housing Market Recovery -- A review of a popular proposal for saving the economy and the housing market.
1-12-2009 -- Bring Back Paternalism in the Mortgage Market -- A plea to re-regulate the mortgage market.
11-17-2008 -- A Free-Market Solution to Prevent Housing Bubbles -- From the final chapter of The Great Housing Bubble.
11-13-2008 -- Reverse Liar Loans -- An example of how bailouts are creating more problems than they are solving.
11-11-2008 -- The Carrot and The Stick -- a look at what is really necessary to make a homeowner bailout program successful.
3-17-2008 -- Bailouts and False Hopes -- A cynical look at the psychology of potential bailouts.
3-15-2008 -- Mortgage Default Losses -- Parsing the distinction between default rates and resulting default losses on residential loans.
3-12-2008 -- Mortgages as Options -- A look at how borrowers and speculators gamed the system using mortgages as option contracts.
2007-04-16 -- How Homedebtors Could Avoid Foreclosure -- A look at a potential financing mechanism which might be used to
assist homeowners who are underwater. It also examines the potential
implications of the widespread use of such tools.
2007-03-24 -- Who is responsible for this mess? -- A rant on the difficulty of identifying the party or parties responsible for our current problems.
Outside Links
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