Arnold Kling  

Morning Commentary

PRINT
Scott Sumner Cries Out... Taking Krugman's Side...

Tim Duy:


For Bernanke and Geithner, there are no bad assets. Only misunderstood assets.

Read the whole thing, and follow the link to Yves Smith. Thanks to Mark Thoma for the pointer.

Tyler Cowen:


No one wants to say it, but essentially the Fed has been bailing out European banks.

Again, read the whole thing, which starts as a riff on the AIG bailout. For more on AIG, also read James Kwak.

Finally, Richard Florida:


foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that "66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines."

He is quoting from this article on a study by a professor and a graduate student at the University of Virginia. He provides more, including a link to the study.


Comments and Sharing






COMMENTS (6 to date)
Mike Rulle writes:

Statement followed by 2 Serious Questions


This information was available to anyone who simply browsed the heat maps on Trulia.com since the summer of 2008. On my blog (see link) I have discussed this since the late summer. It was obvious what was happening. The most compelling "conundrum" was/is how Texas and California, 2 almost identical demographic border states, were on complete opposite ends of the foreclosure spectrum. There were 400% price increases in "California, et.al" in a 3-4 year period. As we know, this is even worse than it sounds. Within a 2 year period virtually all of these homes were either refinanced at the top or bought at the top of the market. The mortgages were then either bought by the GSEs or securitzed and sold throughout the world in CDOs. If one owns a CDO you can be sure you own real estate from these 4 states.

Now come the Questions. Since the problem was foreclosures and bubbles in these states, why has this never been stated by any official in either the Bush administration or the Obama administration? Secondly, since these mortgages are the problem (or certainly were the problem--"mental contagion" has now spread the disease) why haven't the financial officials specifically targeted the actual problem?

Instead, we have fantasia commentaries about everything EXCEPT this. I do not get it. I do not believe in exotic theories of 30 years of built up leverage coming home to roost. I do not believe these states were "canaries in the coal mine". I believe the problem is as mundane and localized as it appears on the surface.

Anyone have a thought or 2 on this?

John Thacker writes:
Since the problem was foreclosures and bubbles in these states, why has this never been stated by any official in either the Bush administration or the Obama administration? Secondly, since these mortgages are the problem (or certainly were the problem--"mental contagion" has now spread the disease) why haven't the financial officials specifically targeted the actual problem?

The "actual problem?" If you really want to get into a comparison of California and Texas, you have to compare the zoning and land use regulation. (Krugman agrees on this.)

Many of the states with the biggest problem had zoning and land use regulation that drove up the price of housing in desirable central locations. This caused people to move ever outwards into exurbs in order to buy their dream house. Once you moved farther out, prices became cheaper, and so anyone for whom cost was an issue moved farther out.

However, while areas farther out allowed building, which should have allowed supply to adjust rather than prices, keeping a lid of the bubble (as happened in TX and NC in general), it did not. Several psychological factors of bubbles played into this. In my view, one of the biggest problems is that prospective buyers compared prices to the zoning and land use controlled central city prices, and viewed their current home as a "bargain" compared to those artificially inflated prices. The Nevada and Arizona markets were inflated by California refugees willing to pay near-California prices.

The usual psychological factors of bubbles occurred, including speculation from flippers and others. Once supply built up, however, it became difficult to deny that prices should drop.

One problem is that prices have so far not dropped so much in the most desirable, supply-constrained locations (and similarly, nor have foreclosures risen), or at least not their central cities. The biggest problems are in the outer suburbs of these supply-constrained cities. My fear is that people will take this as justifying the supply constraints, and set the stage for a future bubble (or future permanently affordable prices.)

Mike Rulle writes:

John

Agree with what you wrote on causes--particularly the land use laws in California. Whether that caused the other properties to "appear" cheap may or may be true but assume it did.

What has befuddled me is why this "Fact" (the localized bubble) has not been the front and center issue focused on by Treasury and the Fed. Even if not "front and center", it seems to be treated as an irrelevant factoid. Of course now, all credit is discredited. Giethner is fixated on finding "true value" in mortgage securities (not true prices). Perhaps it would be helpful to have such facts as these be part of the discussion. This just seems obvious that it is a major error in communication and judgment

DWAnderson writes:

Nice comment, John.

Jim Longo writes:

Could the high percentage of foreclosures in the Jerkanator's California have anything to do with the illegal invaders? What percentage of foreclosed properties were bought by illegal invaders who then abandoned them to return to their beloved Mexico?

John Thacker writes:

Small error at the end of my first post. I meant to say "permanently unaffordable housing" was the risk, obviously.

What has befuddled me is why this "Fact" (the localized bubble) has not been the front and center issue focused on by Treasury and the Fed.

Because no politician really wants to say something like "Those house prices that got really high? Not coming back." Even some economists who should know better argue that home prices need to be stabilized at a high plateau.

But you're right; sense would have us look at places that suffered from the bubble and crash, and those that didn't, and try to draw lessons. But as I mentioned, I greatly fear that people will draw the wrong less (we must restrict supply to prevent the crash), since most people don't see the harm of incredibly high house prices.

Could the high percentage of foreclosures in the Jerkanator's California have anything to do with the illegal invaders?

While I'm sure that some foreclosed properties were bought by illegals (considering the proliferation of no-doc loans and the like), illegals are more likely to rent. Owning a house creates property taxes and more of a paper trail.

In addition, Texas still serves as a counterexample. Texas has lots of Mexican immigrants, including illegals, and has not suffered anywhere near the same problems. Logic leads us to look for other explanations.

Texas in general does a much better job adopting laws that are "resistant" to illegals. California, partly due to Prop 13, relies a lot of income tax and capital gains tax of wealthy people to fund their state government. Illegals don't pay that, so illegals are a drain. Texas relies on sales tax and on property tax, which are paid by illegals. (When illegals rent, they get hit indirectly for property tax paid by owners.) So illegals cost California a lot of money, but in Texas they pay about the same as anybody else, and aren't so much of a burden.

Comments for this entry have been closed
Return to top