In 1997, inflation-adjusted house prices were close to their average levels over the previous half-century. Only four years later, the price of the average home nationwide exceeded anything ever seen before in the United States. Prices continued to rise for another five years, peaking in 2006 at nearly twice the average price in 1997 ...If house prices are heading back to the levels seen in 1997, then we are facing catastrophe.
But there are good reasons to believe that much of the increase in prices was a rational response to changes in fundamental factors like interest rates and supply. The deeper fundamentals continue to suggest strong housing prices for the future.
Over periods of five or ten years, changes in house prices tend to be dominated by regional trends rather than a common national factor. I do not know what it means to talk about a U.S. housing market and its "deeper fundamentals." I can only think in local terms. My reading is that some markets, particularly several cities in California, are out of whack on the up side. Others may be out of whack on the down side, although not necessarily to the same degree.
Of the 46 million mortgages, 2.04% were in the foreclosure process in the fourth quarter of 2007, or about 940,000 homes. Of the total number of homes (69.7 million) including those with no mortgage, the percent of all homes in foreclosure was 1.35%.
Mark wants to view this as good news--most homes are not in foreclosure. But it could be that many more homeowners may be in jeopardy, just not yet in foreclosure.
According to data collected under the Home Mortgage Disclosure Act (HMDA), lending to non-owner-occupants has risen from about 5 percent of the home-purchase loans in the mid-1990s to about 17 percent of all purchases in 2005 and 2006 (Avery, Brevoort, and Canner, 2007).
...Much of the weakening in underwriting standards appears to have happened outside of institutions regulated by the federal banking agencies. The HMDA data for 2006 show that more than 45 percent of high-cost first mortgages were originated by independent mortgage companies, which are institutions that are not regulated by the federal banking agencies and that sell almost all of the mortgages they originate. In this instance, this originate-to-distribute model appears to have contributed to the breakdown in underwriting standards, as lenders often found themselves able to pass on the credit risk without much resistance from the ultimate investors. For a number of years, rapid increases in house prices effectively insulated lenders and investors from the effects of weaker underwriting, providing false comfort.
These are important points. There was some predatory borrowing going on in addition to predatory lending. And the worst lending mistakes were made by the least regulated segment of the market. So you have inexperienced amateur real estate speculators getting financing from Rolex-wearing mortgage brokers who sell the loans to 24-year-old Beamer-driving Wall Street investment bankers. Why can't the rest of us just sit back and watch them all get what they deserve?
Instead, we get the Treasury and Congress coming up with "plans" to rewrite mortgages. These brilliant solutions contribute to making the mortgage securities market totally illiquid, because now nobody has any idea what the cash flows are going be under the (make them up as you go along) rules.
Never do I want to hear again from my conservative friends about how brilliant capitalists are, how much they deserve their seven-figure salaries and how government should keep its hands off the private economy.
Except within the Republican Party, laissez-fairy tales have been discarded, and government support is being both sought and given.
I approve of what the Fed is doing. But looking at government as whole, I would say it is like a 10-year-old boy rescuing an old woman from a fire that the boy started in the first place. For most of the past year, the goal of the political class has been to keep unqualified buyers in homes as long as possible.
This is morally dubious. The people who most deserve to be in homes now are the people who decided in 2005 and 2006 that they could not afford the then-prevailing house prices or who decided to at least wait to accumulate a down payment. If you can sort out the predatory borrowers from the victims of predatory lenders sufficiently well to identify the latter, then the best thing that you can do with taxpayer money is to write checks for those victims.
The way I see it, government has served primarily to prolong and exacerbate the problem. That Dionne, Blinder and I can view the same situation and not change our priors about the role of markets and government says something about confirmation bias.