A recent Harvard study concluded, "the boom and bust in housing over the last decade was not primarily caused by low interest rates, reduced downpayment requirements, or laxer underwriting standards"
I cringe with embarrassment for them….
Irvine Home Address … 20 VILLAGER Irvine, CA 92602
Resale Home Price …… $950,000
Now I like takin' off
don't like burnin' out
Every time you turn it on
makes me want to shout
We keep getting hotter
movin' way too fast
If we don't slow this fire down
we're not gonna last
Cool the engines
red line's gettin' near
Cool the engines
better take it out of gear
Boston — Cool The Engines
The wisdom of song lyrics eludes everyone in a market rally. Prices can only rise so fast in a stable market. Fundamental constraints can be ignored for a time, but wicked bear markets signal their return when the collective insanity that grips the market wanes.
Academics study the problem, but so far, progress in the field of economics has been very slow and prone to decades long wastes of time on theories like Efficient Markets. Greed and fear are the features that move market prices. What we really need is to learn how to cool the engines; instead, we strive to go faster and we blow the engine apart.
New Harvard Kennedy School Study Questions Direct Link between Lower Interest Rates and Higher Housing Prices
Cambridge MA. — Contrary to the assertions of many economists and others, the boom and bust in housing over the last decade was not primarily caused by low interest rates, reduced downpayment requirements, or laxer underwriting standards, conclude Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko in “Did Credit Market Policies Cause the Housing Bubble?” a new Policy Brief published by the Rappaport Institute for Greater Boston and the Taubman Center for State and Local Government at the John F. Kennedy School of Government at Harvard University.
… “It isn’t that higher mortgage approval rates aren’t associated with rising home values. They are,” they add. “But the impact of these variables, as predicted by economic theory and as estimated empirically over many years, is too small to explain much of the housing market event that we have just experienced.” Specifically, the authors found that the 1.3 percentage point drop in real interest rates between 2000 and 2006 was responsible for only a 10 percent rise in prices, about a third of the average price increases nationally during that time and even a smaller share of the increase in many metropolitan areas, including greater Boston, where prices rose by 54 percent between 2000 and 2006.
I reached the same conclusion when researching the Great Housing Bubble. With a spreadsheet, anyone can input the income data, apply the appropriate debt-to-income ratio and calculate what a proper loan would have been. Add an appropriate 20% down payment, and you arrive at what houses should sell for. This simple math predicts housing prices in less volatile markets. Prices deviate from expectations when irrational exuberance takes over.
If banks didn't allow DTIs above 25%-32%, we would not inflate housing bubbles. In the late 1970s, lenders allowed DTIs to go well over this safe range because both the lenders and the borrowers anticipated more wage inflation. A borrower can take on a 60% DTI if they believe they will be making 10% more in salary each and every year. In a few years, the DTI would be under 30% and falling quickly. In the face of rising wage inflation, taking on debt at fixed interest is very attractive. This is the trap of inflation expectation the Federal Reserve had to bring under control under Paul Volcker.
Our latest housing bubble was built on a different mechanism: the toxic loan. DTIs were again allowed to rise above the stable range because the terms of repayment provided borrowers with a manageable DTI on a temporary basis. First it was the interest-only loan, then it was the Option ARM. Once lenders started making loans based on the temporary affordability these loans provided, they inflated a massive housing bubble sure to deflate once the unstable loan terms blew up. The terms of the toxic loans were the direct cause of the housing bubble. The reduced underwriting standards merely allowed lenders to give toxic loans to more people and make the bubble go on a little longer.
Glaeser, Gottlieb and Gyourko did find that the price effect of interest rates was greatest in metropolitan areas such as Boston, San Francisco, New York, and Seattle that have less land, more regulation and/or topography that is not conducive to new buildings. However, that impact was not enough to explain the full magnitude of the housing bubble in those places. They estimate, for example, that reduced interest rates should have caused prices in greater Boston to rise by about 14 percent between 2000 and 2006, significantly less than the actual increase of 54 percent.
The authors also found that contrary to the assertions of many analysts, including Benjamin Bernanke, chairman of the Board of Governors of the Federal Reserve System, reduced downpayment requirements did not greatly contribute to the housing bubble. Rather, they found that on average the share of the purchase price covered by a mortgage was basically unchanged over the course of the boom, rising from about 84 percent in 1998 (before the boom began) to 88 percent at the peak of the bubble in 2006 and then dropping to about 80 percent by 2008 after the bubble had burst. Moreover, the changes were even smaller among the share of people who borrowed as much as possible. Nationally, in 1998 one-quarter of home purchasers put down only about 96 percent of the total purchase price; by 2006 this figure had risen to 99 percent.
While the data do not explain the housing bubble, the authors do contend that the “the relatively modest link between interest rates and housing prices makes us more confident about rethinking [other] Federal housing policies,” most notably the ability to deduct mortgage interest from federal income taxes, a politically popular policy that many analysts believe is inefficient, unfair, and environmentally unsound. They also suggest that states such as Massachusetts that have restrictive local land use laws could reduce the extremity of its housing price cycles via policies that supersede local zoning or reward communities that allow for more housing.
I like their two policy recommendations, but neither one has any chance of passage.
Diana Olick didn't see the wisdom in this study either, and I will let her have the first shot.
"Contrary to the assertions of many economists and others, the boom and bust in housing over the last decade was not primarily caused by low interest rates, reduced down payment requirements, or laxer underwriting standards."
My sixth grade English teacher always told me never to start with a quote, but in this case, how could I not?
Read it again, if you will; I read it three times just to make sure.
Yes, after years of bashing the mortgage industry for lax underwriting, bashing the Federal Government for negligently low interest rates and blaming investors for vacuuming up homes with no-money-down loans, three guys from Harvard say they're all off the hook.
Thank you, Diana. I am not the only one dumfounded at the ignorance of their assertions.
…I found a lot of this quite hard to digest, given the debate I've been covering for the last four years, from peak to trough to recovery. So I called Prof. Glaeser, who very affably took my questions.
Diana: If loose lending and over-borrowing didn't cause the housing bubble, what did?
Prof. Glaeser: The historical relationship between these variables and the housing market is just to small to explain this. In terms of understanding it, we believe that neither we nor anyone else understands this. The mechanics of bubbles, they certainly are associated with all sorts of irrational exuberant beliefs of future price changes. That's' always been true of housing. What specifically caused this thing? A strange cocktail that brought together things that created the bubble.
It is clear that Professor Glaeser does not understand what happened, but there are many people who do understand it. I explained it clearly above, and I will expand more now.
There is a mechanism by which prices are inflated. Prices do not increase by magic. A borrower is given a loan by a lender to buy real estate. The standards the lender applies and the terms of the loan determine who gets the loan and how big it is. It isn't mysterious; It is how our housing market works. All causes of the housing bubble must be explained by their impact on loan terms and standards. In fact, the failure to make this link is the weakness of all housing market analysis based on macroeconomic conditions.
There is a basic connection between what individuals do and the results of the collective actions of individuals. Individual borrowers taking out very large loans from stupid lenders bid up the prices on houses. The collective action of all these individuals is rising market prices and a bubble. I hope everyone who reads this is capable of explaining it to the Harvard professor. All of you now know more than he does.
Diana: But didn't subprime lending drive prices higher by bringing certain fiscally ineligible buyers into the market?
Prof Glaeser: The subprime mortgage market is different than the housing price boom. We think that it did drive prices higher. But even the historical relationship of LTV is a very small fact relative to the boom that occurred.
I pushed the professor on the loose lending some more, and he agreed that it was certainly an ingredient in the cocktail, but not the sole driver of the housing bubble.
One thing I do find interesting about this study is the conclusions they draw from their work.
So what are these researchers are trying to prove? Well that comes at the end of the press release:
While the data do not explain the housing bubble, the authors do contend that "the relatively modest link between interest rates and housing prices makes us more confident about rethinking [other] Federal housing policies," most notably the ability to deduct mortgage interest from federal income taxes, a politically popular policy that many analysts believe is inefficient, unfair, and environmentally unsound .
Prof. Glaeser argues that the mortgage interest deduction is not healthy for the housing market, and, while he didn't say as much, perhaps more dangerous than low, low mortgage interest rates or no-money-down loans. Why? Because it gives borrowers a continuing, long term incentive to borrow more than they should.
How did the home mortgage interest deduction get dragged into this? The professor is correct in his observations, but there is no linkage to his study. If the HMID somehow inflated the bubble, the argument would have greater strength, but since it didn't, the professor's argument looks like a pet idea he included because he couldn't figure out what really caused the bubble and what anyone could do about it.
The truth is lenders giving out Option ARMs and other toxic loans enabled borrowers to inflate prices, and the Desire for Mortgage Equity Withdrawal Inflated the Housing Bubble. The evidence is clear. And the government's response to the problem with HAMP is simply bringing back the Option ARM. Temporary interest rate reductions and principal deferment are the two characteristics of Options ARMs that made them unstable, yet that is the cornerstone of the government's loan modification program.
If the professor wanted to analyze the problem and suggest a change in government policy, he should go after the ridiculous bailouts and loan modification programs rather than proposing a battle against the politically impossible to repeal HMID.
Problem solving begins with a clear grasp of the problem. If the problem is not defined correctly, all solutions that follow are likely to fail. So far, we have defined the problem as foreclosure, so all our solutions are designed to delay or prevent foreclosure, and they have all failed. In reality, our problem is too much debt, and foreclosure is the solution. When policy makers finally realize this, perhaps they will get out of the way and allow the cleansing foreclosures to go forward. We can only wait and hope.
Irvine Home Address … 20 VILLAGER Irvine, CA 92602
Resale Home Price … $950,000
Home Purchase Price … $1,148,000
Home Purchase Date …. 5/28/2005
Net Gain (Loss) ………. $(255,000)
Percent Change ………. -17.2%
Annual Appreciation … -3.8%
Cost of Ownership
$950,000 ………. Asking Price
$190,000 ………. 20% Down Conventional
5.24% …………… Mortgage Interest Rate
$760,000 ………. 30-Year Mortgage
$202,116 ………. Income Requirement
$4,192 ………. Monthly Mortgage Payment
$823 ………. Property Tax
$300 ………. Special Taxes and Levies (Mello Roos)
$79 ………. Homeowners Insurance
$82 ………. Homeowners Association Fees
$5,477 ………. Monthly Cash Outlays
-$1036 ………. Tax Savings (% of Interest and Property Tax)
-$873 ………. Equity Hidden in Payment
$395 ………. Lost Income to Down Payment (net of taxes)
$119 ………. Maintenance and Replacement Reserves
$4,081 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,500 ………. Furnishing and Move In @1%
$9,500 ………. Closing Costs @1%
$7,600 ………… Interest Points @1% of Loan
$190,000 ………. Down Payment
$216,600 ………. Total Cash Costs
$62,500 ………… Emergency Cash Reserves
$279,100 ………. Total Savings Needed
Baths: 4 baths
Home size: 3,537 sq ft
($269 / sq ft)
Lot Size: 4,057 sq ft
Year Built: 2002
Days on Market: 104
MLS Number: P716076
Property Type: Single Family, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
Attention Investors!!! Attention Buyers!!! Looking to Start 2010 with a Bang? Want the Deal of the Year? Nestled in Irvine s Prestigious Northpark Square & Priced to Steal, this HANDSOME Residence boasts STUNNING CURB APPEAL & LUXURIOUS Comforts that Surpass Every Home in this Price Range! Spacious Open floor plan offers 5 Bedrooms & 4 Baths w/2-Car Garage in approx. 3,537 sq.ft. Inviting Living Room & Elegant Dining Room is perfect for Entertaining. Gourmet Kitchen w/Granite Counters & Chef s Island opens to generous Family Room & Breakfast Nook. Spacious Master Suite w/Huge Walk-in Closet plus Large Secondary Bedrooms offers Abundant Closet Space! Wait till you see the HUGE Bonus Room. Near Shopping, Dining, Entertainment & Schools including community Pool, Spa, BBQ s, Sports Courts, Outdoor Amphitheater, Parks, Walking Trails, Bike Trails, Tot Lots & More! Make No Mistake This Home Will Not Last, So ACT FAST! Only ONE like this!!!
That is one of the worst descriptions I have read in quite a while. I ran out of room for graphics. it has almost every convention of bad realtor writing in one paragraph. Stunning!
This property may be facing foreclosure due to unemployment. The owner paid way too much back in 2005, but he put $229,600 down. He refinanced and pulled out a little, but he still stands to lose $200,000 when this property sells. He is trying to short sell, and squatting until it happens:
Recording Date: 09/03/2009
Document Type: Notice of Sale
Recording Date: 05/29/2009
Document Type: Notice of Default