we imposed the “inevitable” bust on the owner-occupier housing market. Instead of looking for ways to stabilize mortgage markets, lending was largely cut off to the bottom half of the market from 2008 on, and we can see the devastating effect if we look within cities, most of which look like Atlanta, where low tier prices took a post-crisis hit to valuations, frequently of 30% or more. This has caused the market price of low tier homes to drop below the cost of construction, causing new building to dry up in low tier housing markets.
Read the whole post. Note especially the first chart. My thoughts:
1. That first chart depicts construction spending as a percent of GDP. Baker did the same thing. This makes 1986-1990 appear similar to 2006-2010. But the denominator, GDP, was rising in the early period and falling in the latter episode. So the slump in the numerator, construction spending, was probably much more pronounced in the latter period.
2. Some of the credit tightening in the mortgage market was inevitable. You could not keep lending on generous terms to non-owner occupants. At some point, the speculators had to get squeezed out.
3. But the political crackdown on mortgage lending was severe. I remember that it seemed as though in 2009 the only people who could get mortgages were those who did not need them.
4. Some day, people may look back at “quantitative easing” as a credit crunch. It steered banks toward holding interest-bearing reserves rather than lending to the private sector. I think of it as a credit-allocation scheme, in which government debt was favored (by the Fed, which n-tupled the size of its balance sheet) and private investment was dis-favored.
5. Instead of looking at aggregate demand, try to think of 2007 to the present from a PSST perspective. Perhaps patterns of specialization and trade related to the construction boom became unsustainable around 2007. Other patterns became unsustainable when the government took over the credit markets in 2008 and 2009. Other patterns became unsustainable when the Obama-era zeal for regulation had an impact. Only recently have new patterns of trade been emerging significantly faster than old patterns disappeared.
1. I still say the 1990 S&L scandal was the Great Recession dress rehearsal and there was a similar dip in 1991 & 1992. (We forget how long the recession bottom late 1990 to unemployment high point summer 1992 lasted.) I am not sure that 1990 Jobless Recovery and The Great Recession acted much differently outside of the size of it. In reality I was surprised unemployment turned around in 2010 instead of 2012.
3) Unemployment hit ~10% and hit the middle class was hit the earliest with job losses. And all the bank balance sheets were a ‘problem’ in 2009 and maybe 2010 so I dubious of the regulations were the problem.
4) I find this claim without a lot of evidence especially since the oil boom grew in 2010 – 2014 while mortgage amounts continued to dip to 2013ish. There was a lot of open repo houses on the market until 2013.
5) With any recession PSST plays a role but I still see the housing boom and jobs rhyming the Japanese Inc. boom of 1980s into housing 1990s. (In which incredibly productive economy overheats a stock market and then private markets flock to housing.)
Actually I would argue the government borrowing crowding out private investment appears to starting to happen more today than anytime since 1994 or 1989.
Since I lived through both S & L panic (at ground zero in Dallas) and Great Recession, not sure I understand how one was like the other. S & L meltdown had its roots in allowing banks/S&Ls to pay market rates on deposits when inflation killed value of assets and was attempt of S & L to move into higher margin commercial market. Great Recession was a lot of things, but commercial real estate lending was not at heart of problem.
One can almost hear a banker argue:
“But look at those price charts! If I had lent to anyone after the peak in 2007, the collateral would have declined in value for nearly five years straight – and by up to 50% in some important cases – before the correction was over and things began turning around, converging to what, post facto, we can see “ought to have been” slow and steady exponential growth curves supported by the fundamentals of supply and demand.”
“Even requiring down payments of 20% would not have been enough to protect my investment at that point and my bank was struggling. (And asking for 20% had become much less common during the boom, so even “getting back to normal” would have meant effective tightening). And foreclosures had become incredibly time-consuming, costly, and politically difficult, so it’s reasonable to not want to risk it, even if the down payment cushion meant we could eventually recoup the principle.”
“Yes, the ease of general credit conditions affects prices, but also, the expected path of prices affects credit conditions. And the latter direction of causation was what was really important to the drying up of easy credit after the bubble popped.”
“Yes, you could argue that prices could have flatlined for an extended period if everybody had been willing to keep easy credit flowing, but at the time, no one could have predicted that with confidence, and no one wanted to be left too far ahead of the pack if it proved untrue. Only something like a state surety – an absolute guarantee from the government of free insurance – that all mortgages would be taken over for full contract value at the first delinquency event would have given the confidence necessary to incentivize more easy lending at that point.”
#4 is very insightful. Keep in mind, also that the first trillion or so of new Fed assets were accumulated before QE1 as a result of paying interest on reserves at a rate that was higher than the effective fed funds rate in the 4th quarter of 2008. #4 is especially true then.
One comment about 2009 recession. Hit sand states hardest, where approval process for new development was longer. In California takes 5 years, at least and in inland areas, before increased demand can be met with new housing. In Dallas, cornfield disappears in 6 months and families moving in.
Second comment, housing was used as social policy. Studies showed two otherwise like families would have different outcomes based on whether they owned or rented housing. So put families in houses whether or not they could afford to own home. My law partner in working with HUD housing referred to it as the “water heater test”, meaning if the water heater went out, could they afford to replace it or does that cause a foreclosure.
Many pre 2007 got 100% home loans without being able to pass the water heater test.
The rise in homeownership rates from 1995 to 2004 was entirely among the top 3 income quintiles and households with a college degree. The relative income of homeowners in 2004 was no lower than in 1995. Imputed rental value of owners in % of income was stable or declining. The rise of households with debt payments more than 40% of income was entirely among households in top 2 income quintiles.
So are we past the idea that it was the CRA forcing banks to loan money to poor people that caused everything?
Steve
Check out Stan Liebowitz’s Anatomy of a train wreck.
http://www.independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf
We should be.
Why should we be?
Because most of the rise in homeownership happened when prices were within long term norms and the rise in homeownership was among households with high incomes, professional and managerial jobs, and college degrees.
#2 You mean non-occupant owners, don’t you?
I have only quickly reviewed that, but he gets a lot right, which is pretty impressive for early 2008. But I would argue that he still makes the fatal error everyone makes of conflating high prices, rising homeownership, and loose lending, and seeing massive equity losses as inevitable.
Oops that was a reply to Handle.