Harvard: Lax Underwriting Standards Did Not Inflate The Housing Bubble

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

Contact: Doug Gavel

Phone: (617) 495-1115

Date: May 05, 2010

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.

Irvine debt-to-income ratios 1975-2009

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.

Loose Lending Didn't Create the Housing Bubble

"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

Property Details for 20 VILLAGER Irvine, CA 92602


Beds: 5

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

Community: Northpark

Tract: Bela


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!

Defaulting owner

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:

Foreclosure Record

Recording Date: 09/03/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/29/2009

Document Type: Notice of Default

68 thoughts on “Harvard: Lax Underwriting Standards Did Not Inflate The Housing Bubble

  1. OrangeRenter

    Your entire post is so well written – clear, logical and well-supported – it’s of the quality one might expect in a national news magazine… Bloggers like you are underrated 🙂

    Too bad these “Hazard guys” will get the MSM coverage, while your opinion (facts!) on the matter are only viewed by a few thousand of us over coffee in the morning.

    Maybe it’s because I’m in the business, but I can’t find a single conclusion of yours to argue – yet the Harvard guy’s argument is that is was a “strange cocktail” of which he fails to mention a single ingrediant – that caused the “mysterious” bubble.

    I’m feeling a little better about NOT being Harvard Material right now.

    1. AZDavidPhx

      That Harvard article was great. Can’t you just picture some blind pointy haired bumbling professor wanking himself in his Ivory Tower spilling coffe all over his lap?

      You could drop a common sense anvil on these types of people and they would not know what hit them.

      The argument is that since the professor’s economist theory cookbook contains no recipe calling for low interest rates – the bubble cannot be explained. He can’t fit the bubble to his voodoo formula so therefore it is not the culprit. As though economics were some kind of science like Physics.

      It really is an embarrassment to the University’s standards. Low grade research effort. Why are these people being paid to work on crap like this? I am thinking a work furlough on this group of Hooligans would go a long way for the Univerity’s bottom line.

      1. avobserver


        Totally agree with your assessment of economists.
        Procrustean tendency has plagued Economics profession for ages. Trying to make solutions fit the problems is nothing new. In fact that’s what modern economics is all about – making a bunch of assumptions like:
        – The Earth is flat
        – Consumers/investors are always rational
        – Market is always efficient
        – Blah, blah, blah….

        Then throw in some fancy mathematical formulas and you have a nice “theory”. Common sense has never been one of the ingredients. Economists are a running joke to everyone else but themselves. If these buffoons tried a little harder their track record might catch up with astrologists or palm readers. It’s a wonder that people (especially those in our government) still bother listening to them.

        I had the misfortune of wasting a couple of years of my life learning this pseudo-scientific crap, and to this day I am still attempting to purge any last trace of this garbage out of my brain. Nowadays I mainly use economists’ commentary (media love this stuff) as a contrarian measure to predict political ramifications and ensuing bad policies, and determine where to place bet accordingly.

        1. Food

          Good comment from David and good post from IR as usual.

          In any college, economics is usually where engineering dropouts would go to as alternative.

          Amazingly, every year, a Nobel Prize in economics would go to one or two of these clowns.

        2. tonyE


          Once upon a time, I was walking with one of my math profs (took fiziks n’ them fancy arithmetic in skool) by one of the economics lecture halls.

          We peeked inside and on the board they had all of these graphs but not a single equation.

          My prof dashed inside and scribbled a few nice differential equations and ran back out.

          “That should keep them puzzled for a semester”..

          And we went to get a beer ( I had just turned 21 then).

          This is so far back…. 😛

        3. matt138

          This Harvard mumbo jumbo is what makes us collectively dumb. I remember being confused as hell in econ and while reading about the tech stock boom/bust. Assholes like this are the reason why. I would love to be an econ student now and give these guys hell.

          NAR: “Hey profs, these bloggers are getting good, can we put something really confusing out to keep everyone guessing and this bear market rally going?”

          Harvard profs: “We will have to put in extensive research bearing significant expense”

          NAR: “We can help offset those costs”

    2. IrvineRenter


      Thank you. Reading your comment was a great way to start my day.

    1. flyovercountry

      Exactly. It wasn’t the lips that sank the boat, it was a torpedo. But the torpedo wouldn’t have found it’s way to the boat without the leaked info.

      So in a way, the Harvard egg heads are correct… it wasn’t the bad loans, it was the willingness of buyers to use those bad loans and over bid that caused the bubble. But as IR has pointed out before, desire is not demand.

      Sort of like how you have the classic combination of motive + means + opportunity making one a suspect in a crime. Motive is the greed of someone beliving in ever expanding home prices. Means is a no money down option ARM loan so that they can make the payment (for a while), and opportunity is the lax lending standards where a bank is willing to right a NINJA / Liar Loan.

  2. OrangeRenter

    Oh… And “stunning curb appeal”? Hello?? I can see the photo! It’s a square pink box with a bunch of concrete in front.

    It’s embarassing that someone can bullsh*t like that as a “licensed professional” who stands to make $30,000 off this “deal”!

    1. matt138

      If you call a lime green pinto “bitchin” to enough prospects, eventually somebody comes along and says, “totally bitchin” and buys it.

      Getting kicked in the head by a mule is stunning as well.

  3. Planet Reality

    Nice DTI updated chart. Looks like we are back in the green region in 2009. That explains a lot.

    1. IrvineRenter

      Yes, it does. If we were in the green due to stable mortgage interest rates, I might be celebrating. However, since we are at the bottom of the interest rate cycle and coming off a massive Federal Reserve intervention to lower rates, it is difficult to be bullish.

      1. Planet Reality

        I would say it’s near impossible to be bullish. However a bearish scenario where home prices only go up 5% in total over the next 5 years is certainly possible. That’s the mild bear scenario.

        1. Geotpf

          That would be my prediction. Low overall inflation for the next five years or so, with housing prices to match.

  4. theyenguy

    I cringe with embarrassment for them as well; and I cringe with moral fear as I am exposed to moral risk. You have written often about moral hazard; well the report makes me aware that I constantly come in contact with people who do not have the facts. They and I do not share the same value system. By coming in contact with them, I can experience moral corruption.

    Resale Home Price … $950,000 and Home Purchase Price … $1,148,000 … I have to ask where, just where has our society gone? I live in Bellingham, WA, and I keep hearing that homes are overpriced at $273,000. I think a million dollars for housing is very overpriced. Million dollar homes is what happens when there is Option Arms lending, and second and even third loans handed out like candy. There was a lot of commission money made at mortgage brokers, FirstFed, Wachovia, and at Wall Street Banks on CDOs.

    I know of a migrant farm worker who walked into Washington Mutual and got a stated income loan for a $750,000 home in Riverside County. The officers at WaMu and other toxic lenders should be held accountable; but they will not be; their only judge will be The Almighty come Judgement Day; I truly fear for them. Too bad they don’t read blogs like this; they are probably enjoying their retirement years out of the country.

    Yes it is true 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 … We are on the verge of the engine blowing apart!!!

    You write: 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.

    Please, please, please understand, we have an even greater problem: I write in the referenced blog article, Soon There Will Not Be Any US Treasury Funds Available For Home Mortgages, that a tidal wave Of home loans are resetting just as the stock market and bond market are beginning to tank. There will not be enough credit available through the US Treasury to keep funding the Fredie Mac, Fannie Mae and FHA guaranteed loans which now account for over 90% of all mortgages.

    Dr. Housing Bubble presents the chart of home mortgages that will reset in 2010, 2011 and 2012.

    This conincides with the stock market turning down and credit default swaps on sovereign debt rising, and currencies falling, which portends a recession if not hyperinflation and a second great depression.

    The only result can be strategic defaults skyrocketing from the current 12%. There will not be enough mortgage capital available in the debt market place to fund these loans as they come due; either the properties will go vacant or they will be leased.

    Please, please understand, leasing not mortgaging, will be the way people will be living in homes, as investors simply are not going to be funding US or any nations sovereign debt.

    One can click on the reference link to see the debt charts for Aggregate Debt, High Yield Corprate Debt, Municipal Bond Debt, Emerging Market Bonds, and the Ten Year US Govenment Note: they have all topped out!

    Did you ride the wave up on any of thes investments which came courtesy of Uncle Ben’s TARP and Quantative Easing, as well as 0.25% interest rate carry trade loans courtesy of the Sumitomo Bank and the Bank of Japan?

    1. lowrydr310

      Dude, this is Irvine, not WA. Everybody makes lots of money and can afford $1M homes. 😀

      I’m being sarcastic, but there is an ounce of truth to that statement. There’s a premium, and apparently some people feel it’s worth it.

      I’ve lived in Irvine for five years, in a house that was purchased near the last housing bottom in the mid 90s. It’s a nice city (especially when you have a 1/2 asian child) but personally to me it’s not worth the premium that it’s currently fetching (renting or buying).

    2. lowrydr310

      I write in the referenced blog article, Soon There Will Not Be Any US Treasury Funds Available For Home Mortgages, that a tidal wave Of home loans are resetting just as the stock market and bond market are beginning to tank. There will not be enough credit available through the US Treasury to keep funding the Fredie Mac, Fannie Mae and FHA guaranteed loans which now account for over 90% of all mortgages.

      This conincides with the stock market turning down and credit default swaps on sovereign debt rising, and currencies falling, which portends a recession if not hyperinflation and a second great depression.

      As many astute observers have pointed out over the past week or so, as bad as the USA is, we’re better off than many other countries around the world.

      I’m going to do some research and invest heavily in the suppliers of inks, papers, and machinery to the US Mint.

  5. winstongator

    I think they also wrote in 2007 that there was no housing bubble, and probably in 2008 that ‘subprime was contained’. Why do people give forum to those that were so wrong previously?

  6. winstongator

    I would also add that the complete ignoring of owner-occupancy in mortgage underwriting was a bubbling factor. You had speculators getting mortgages that were intended for actual resident-owners.

    Getting a 5% or 10% DP loan for a speculative investment? I guess that’s what they teach at HBS.

  7. winstongator

    Any serious analysis also needs to break things down geographically. How many North Dakotans were taking out pick-a-payment loans with 40% DTI’s on a 2nd home in their new subdivision? Any? I’ll be you could look and not find a single one. Now how many in Dade Cty FL? Thousands.

    1. AZDavidPhx

      Nah. These guys do good work. They are able to walk into a shambled room covered in crushed peanut husks with a big giant elephant sitting on the couch and conclude that the elephant was not involved in the mess. That takes some real talent if you ask me.

      If the Harvard researcher thing doesn’t work out for the professor, I have a great idea for his next job.

    1. IrvineRenter

      Thank you. I may use that article tomorrow. Clueless professors are fun targets because they are as arrogant as they are ignorant.

      1. winstongator

        The worst part is they’re spreading their ignorance. It will take all the strength of my stomach to read the whole article.

        1. matt138

          An entire nation’s educated population has been indoctrinated by their ignorance. And this ignorance votes and runs the country.

          I always pretended to agree with professors to stroke them. Why argue and risk the chance of a lower grade?

      2. winstongator

        This is another ‘sole cause’ vs. ‘ingredient’ straw-man. Some of the increase in prices could have been due to market fundamentals, HOWEVER, not nearly all of it was.

      3. winstongator

        Mulligan’s conclusion was in his head before he looked at the data: But another interpretation is that a large fraction of the housing price boom was justified by fundamentals (and next week I’ll consider some of the specific fundamentals that may have permanently increased housing demand in the 2000s). If so, we are probably asking too much of the Federal Reserve and other regulators to accurately disentangle bubbles from fundamentals the next time that asset prices rise.

        The Fed should ignore asset price inflation and cede its duties of bank regulation to the market. Whatever facts are needed for support that might be missing can be made up or ignored.

  8. winstongator

    This whole ‘ingredient in the cocktail’ vs. ‘sole driver’ is BS. There was no ‘sole driver’, it was a Kool-Aid-Cocktail. However, you could probably write down 10 things, nearly half related to mortgage underwriting, and you’d get a cocktail tasting pretty close to the housing bubble.

  9. Planet Reality

    The debt to income ratios from 1978 to 1983 make the housing bubble look small. This is very sobering.

  10. JackTheStripper

    “Clueless professors are fun targets because they are as arrogant as they are ignorant. ”


    This is by far THE BEST QUOTE OF THE DAY!

  11. Subject Property

    On the subject property, it seems well priced for TODAY’S market considering it’s 3,536 sq.ft in a nice area of Irvine. Still, a buyer had better have a very secure monthly household income to cover the 5,477 monthly payment he/she/they are stuck with, possibly for the next 30 years.

      1. Subject Property

        No bad areas in Irvine as far as I know. Maybe I should have said newer? There are many housing structures in Irvine that are not that distinguished but still ok because “Location, Location, Location…”.

        1. zubs

          someone once told me to buy the worst house in the best neighborhood. A bad area of Irvine would be similar to this example.

      2. phil

        This house is in Tustin USD, not IUSD…loss of Irvine schools is a *huge* factor.

        Those train tracks go by another name…Culver drive.

  12. Geoffrey Chaucer

    Nice to see some Harvard prof with a Fields medal on his wall dip his toe in the real world, only to have IR go all Good Will Hunting on his ass. Wonder how he likes them apples.

  13. Brock

    So I’m a little disconcerted with the effect of the Federal bailout programs on the local markets. I had planned to be prepared to purchase a home sometime between summer of 2011 and summer of 2012. Should I reconsider?

    1. Planet Reality

      Whether you purchase now, in 2011, or 2012 is unlikely to matter much given the affordable nature of the debt to income curve.

        1. Planet Reality

          If you aren’t basing your decision on debt to income affordability it won’t make sense for you to buy in 2010, 2011, or 2012. I’m not sure it will ever make sense for you to buy since you can never eliminate all risk in buying or deciding not to buy.

          1. Brock

            I don’t think that’s right. I’m basing my decision on not losing hundreds of thousands of dollars by buying at the wrong time. Had I bought this year, or last year, that would have been what fate had in store for me…regardless of my debt to income analysis.

          2. Planet Reality

            Prices are up versus last year. If you had bought this time last year in Irvine you would be up 5-10%. This may not hold but that’s a fact.

          3. matt138

            You can buy now and take on a high amount of debt (due to artificially low rates keeping prices high).

            You can buy later and take on less debt (higher rates put downward pressure on prices).

            Either way your payment will be fairly similar.

            I think the cool thing about buying when rates are higher is it gives you the chance to refinance to a lower rate in the future. Can we agree that rates are cyclical and have been too low for too long?

            I have chosen to not believe this “hyped false bottom” in prices because I have common sense and use it. Unemployment, defaults, shadow inventory, artificially low rates, buyer credits, the list is a mile long. Unless we see rampant, runaway inflation (in wages) in the very near future, this is not the bottom.

            Is your boss ready to give you a 10% raise next year just because?

            It is easy to be fooled by snapshot analyses and crackpot “experts” lack of sound reason.

            If your wife wants a home, then by all means, get one tomorrow.

        2. Geotpf

          As I said above, more or less flat prices would be my medium term (5 to 10 years) prediction. This would involve no equity loss (or significant gain).

          My recommendation (for what little it is worth) is as follows:

          1. If you plan on living in the same house for at least five years, perferably ten or more, buying now is fine, but take your time and look for the perfect property at the perfect price. No rush.
          2. If you live in an area where rents are significantly higher than monthly payments, you might as well buy now as well, even if there’s a chance you might move sooner than five years. Irvine would not qualify-most areas that do are on the fringe (deserts, Inland Empire, etc.).
          3. If you plan on moving within five years and don’t live in a place with high rents compared to monthly payments, renting is the best move.

          1. Planet Reality

            I agree completely. Given the current debt to income ratios and current rental parity relatively flat prices are the most likely scenario given income increases for buyers, interest rates, and possible inflation. Everything ties together to keep prices relatively flat. Five years from now prices may be up 5% or down 10% but we are likely to be in that range.

  14. es

    Has anyone been keeping up with the Goldman Sachs senate hearings? There are lots of emails within Goldman Sachs talking about “clueless senators who don’t understand what we do” or the like. Traders are sick of people who “don’t understand’ what they do criticizing what they do. Recently, Greenspan was found to have stated that the fed doesn’t want the common person learning about the housing bubble because they “don’t understand.”

    Louis Black said it best: we don’t have to understand. If your business takes more than one sentence to explain what it does, it’s illegal.

  15. Stock Investor

    IrvineRenter: “All causes of the housing bubble must be explained by their impact on loan terms and standards.”

    The analysis should not stop here. Next question is why lenders had to change loan terms and standards. IMHO, there was damn good reason.

    1. pretend and extend

      “The analysis should not stop here. Next question is why lenders had to change loan terms and standards. IMHO, there was damn good reason.”

      I agree there was a “good” reason. If they did not change the loan terms, then the bubble would have popped sooner, so they decided to pretend and extend and hope for the best…

      1. Stock Investor

        February 2010:
        – US export = $143.2 billion
        – US import = $182.9 billion
        – US international trade deficit = $39.7 billion


        How to finance the deficit?

        If nobody wants to work then somebody has to pull money out of thin air.

        Housing bubble has been carefully engineered. It was really bright idea to print collateralized mortgage obligations instead of dollars or other papers.

        Housing bubble ended, but we still need money. Lets simply print more dollars. So bailout has been carefully engineered.

        The biggest question is – “What’s next?”.

  16. Soylent Green Is People

    When I hear anything associated with Harvard University I recall the great William F. Buckley’s quote: “I’d rather be governed by the first 2000 names of the Boston phone book than by the faculty of Harvard.”

    DTI limits? Between 2004-2007ish DTI limits were old thinking. It was at that time a new economy, one where trees grew to the sky and limitless equity was yours by simply fogging a mirror at the mortgage office. Stated Stated near zero down, followed by stated stated 1% option ARMS (5% actual rate compounding monthly…)allowed a major conflagration grow into something akin to the Dresden firestorm of WW2.

    I have a jug of STFU in my fridge at home. It’s best swallowed along with a shot of GBTW. The people who composed this report need to seek another line of work. They should not be teaching economics, logic, reasoning, or anything else except “coloring book principals for beginners”.

    My .02c

    Soylent Green Is People.

  17. awgee

    This is just the beginning. The world is starting to realize that all fiat currencies are crap. the USD is the worst of all and it is only a matter of time before folks realize it.

    1. Major Schadenfreude

      By the time they realize it and load up on gold, governments will tax the crap out of it.

      1. Geotpf

        Hate to break this to you, Congressman Paul, but gold is already overpriced. Recommending people to buy gold today is like recommending people to real estate in 2006. “Fiat currencies” are here to stay. The American government ain’t going anywhere.

        1. tonyE

          Time to load up in bongs…

          Yep. BONGS.

          We’ll make a killing when pot gets decriminilized.

          Come on down sir… try this here bong. Made with the best recycled CDO paper notes. Once worth a billion. We paste them together, lacquer them and make them into something useful.

          Why! This one here is made with genuine Florida CDOs. That one there, the most expensive, the tallest, is made with CDOs from the Irvine North Korea Towers.

          Bongs… as the world burns I’ll make lots of money… MONEY….

        2. Harvard is broken

          Gold is just another item shysters hawk on late nite infomercials, like making millions buying foreclosed or tax delinquent properties,exercise equipment or push-up bras and male enhancement pills.

        3. matt138

          that’s right Geotpf. fiat currencies and the american gov/t are here to stay and print OUR savings away.

          There is no disciplinary check. None. There is no political will to stop the printing because of voters like YOU.

          I vote with my pocketbook and vote no confidence on our current politicians and our currency. Fundamentally, they both suck.

          Major Schade: I’ve heard one can pay cash for gold coins up to about $4K and stay under the radar. Repeat process until you have very few dollars. when you need cash, exchange coins. Taxing a capital gain incurred due to gov/t created inflation is theft. Reagan actually spoke on this topic a few times and he is right.

          Regarding speculation, it matters not if something is over or underpriced right now; it matters that you understand which way the tide is flowing and why. Dad thought real estate was overpriced in 2003 but did not understand exotic financing/lax lending/etc and the effects it would have on demand and price. Geotpf thought gold was overpriced but does not understand that fed giving money to banks and banks getting 3% treasury returns is inflationary, not magic. Everything they are doing is diluting the value of the dollar and creating a bigger bust down the road. gold will go up. It is likely gold will reach mania/delusion status. We are nowhere near that status currently.

  18. Major Schadenfreude

    Re: The DTI ratio

    Was there a government study which concluded that the most stable mortgages are those where the DTI’s are 25-32%?

    I would like to reference it in my letters to elected officials on why some should be prosecuted for treason for this mess.

  19. newbie2008

    Professors in business, economics and pol. science are to support the systems and set new trends and train future leaders, esp those in foreign countries. The latter being of utmost importance at Harvard. Hard science professors are for discovery and setting new trends (doesn’t have to be right, just new, popular and trend setting).

    Using my HP12C, with a constant monthly mortgage payment on a 30 year amortizing loan, with these interest changes the loan amount can increase
    Starting at 8% (100,000 loan at early 1991 rate)
    to 5%, 49% increase (149,000 loan)
    to 3%, 90% increase (190,000 loan)

    If interest only at 3%, 219% increase (319,000 loan).

    Interest was about 14% in the 1980’s.
    to a come on 3% interest only come on loan”
    468,500 loan possible.

    Through on some inflation and almost all the price increase can be account.


  20. Woodbury Renter

    from a letter from TIC to all residents of Woodbury dated May 4, 2010:

    “In fact, since the neighborhoods known collectively as The 2010 New Home Collection debuted in late January, nearly 400 homes have been purchased, a clear sign that the recession is over – and a clear sign still that Woodbury remains a highly desirable place to live and raise a family”.

    I’m sure all the people with NODs in Woodbury are rejoicing now that the “recession is over”! TIC, since the recession is over maybe then you wouldn’t mind helping all the underwater Woodbury homedebtors?

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