Continuing to examine and hold a lively discussion of the Northern Virginia Real Estate market.
Please post your local house search updates, MLS finds, on-topic ideas, and links here.
From Diana Olick at CNBC: A paper by 3 Harvard professors claims loose lending alone cannot explain the bubbleWhat do they think had the strongest causal relationship?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. 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.
correction 1 Harvard professor, 1 grad student and 1 Wharton professor.
Cara-To me the argument comes down to what came first the chicken or the egg. I agree that mathematically each interest rates, lending.. wasn't the problem. The problem is these started the bubble, and that bubbles are self sustaining because people see easy money and chase after it. So without the loose lending people would have gotten the 20% gains that made them think they could get rich. So personally I would blame the loose lending, but if you wanted you could probably blame human nature.
hb,Their argument is that there is a historical correlation between each of these variables and the size of the bubbles exceeded what could be explained by those variables. To me that's simply what defines it as a bubble. The lending standards are what allowed the bubble to exist and constrained the extent to which it could grow. It grew as a bubble to the largest size it could within those constraints. (well in Las Vegas it did anyway, other places the bubble could have been even worse than it was.)So I'd say loose lending didn't create the bubble it facilitated and enabled it. But that's pretty darn semantic.
Cara-I agree. I also think that a lot of these things started the bubble. It is very rare historically that bubbles come out of nowhere and have no real reason for existing. Back in 2002 cheap rates made payments lower which made housing more affordable, then loose lending, then "animal spirits" brought the bubble to absurd prices. The loose lending also as you said facilitated the absurdity.
From Harriet's table's double digit year over year gains started at least as early as 2001. So I'd say the "buy now or be priced out forever", "real estate only goes up" and real credible fear that postponing buying by a year could put you way behind the eight ball started first. I'd say greed and fear started in the people. After years of housing being a comfortably safe bet and everyone and their mother telling you to buy, once price gains started it was hard to stop them, even though 2002's March YoY gains were not as impressive. I would say looser lending came later as banks got greedy seeing this gravy train and wanting to keep it going. The question could be why 2001? What made the long slow flat period end then?I posit that there's no particular reason for that particular year. But rather that America's housing mentality has been such for the whole century at least that housing is prone to bubbles. It's not like they're a new thing to Florida or California. Or even here. The "forced savings plan", "renting is throwing your money away", "tax deductions make owning better than renting (no matter how the math actually comes out)", "american dream", "white picket fence" are fertile enough ground. Combined with the fact that it's the only leveraged investment normal people can make. Everyone saw the upside of leverage, but ignored the down.
Cara,2001 was the first full year after the fallout of the dot.com bubble spurred on by the IT boom. My observation is that people either made a lot of money, or lost a lot of money leading into the dot.com boom. That bubble popped a lot faster and more dramatically. Add in 9-11-01 and suddenly hunkering down and buying a home seemed a safe place to put your money. Add in, long term RE stability, and herd mentality and wallah! You kick off the housing bubble.My $0.02
mytwocents,Yeah I was thinking about it more in terms of the post dot.com recession and thinking that no one had any money, which is of course wrong. Those with money always have to put it somewhere, and housing seemed steady and safe. And way fewer people lost big in the dot.com bust than lost this time around.
I think that what these folks are talking about with the incentives to buy causing the bubble is partly correct, but more symptomatic of a larger problem that you have with a market that's operated like a cartel. That is, the propaganda that comes from the industry is treated as expert opinion. Hence, everybody likes their interest deductions and everybody keeps repeating the benefits of getting them. Just like "you'll be priced out forever", once these cockroaches at NAR get the word out on the street, it's treated as expert opinion when it's really just poisonous propaganda.Just my opinion.
Although its not particularly exciting news Meridith Whitney (a famous analyst who was bearish on Banks a couple years ago) said she was expecting a double dip in housing prices. She did say it would be a lot more mild than the previous dip, so it is probably similar to many of our views that housing will be pretty rangebound where we hit the top of the range a couple of months ago...
Kevin-I agree this is a big problem. There is obviously a ton of money made in the real estate market when you buy/sell houses. There is virtually no money made if you stay where they are. So no money/effort is spent trying to convince people they should continue renting or not buy a larger home...
Housebuyer, you wouldn't believe the number of times that a friend or family member would dispute my opinion about the market with "but my realtor said blah blah blah, and he's an expert in real estate".Somehow we don't lend this trust to other salesmen. It's scary and shameful.
In looking at the effect of low interest rates on creating the bubble, you have to look beyond the role of the home buyer to the role of the investor. Barry Ritholtz summarizes it pretty well in this post:http://www.ritholtz.com/blog/2010/05/attention-ben/Low yields on traditional products led fund managers to look for higher yielding alternatives. Mortgage backed securities met the need. Demand was high enough that Banks and non-bank lenders could dump off all kinds of junk on these investors. Using pre-junk default rates, securities based on mortgages looked like safe investments. As long as the demand was there to buy the mortgages, the banks and mortgage companies maximized their profits by generating as many mortgages as possible - quality be damned. In fact, they made more money on the higher-risk sub-prime mortgages.The bubble couldn't have taken place without the bubble mentality of the buyers, but that wasn't enough. These buyers could only pay as much as they did because they were able to get the right mortgages. It was the demand for mortgage securities, generated by low interest rates, that made these mortgages possible.I think the 2001 date was important. The first predictions I read of a housing bubble came in the months after 9/11 when the Fed worked to keep liquidity high and interest rates low. (This followed similar but more limited Fed actions in response to the 1997 Asian crisis and in anticipation of the Y2K bug "disaster"). I don't remember if the word "bubble" was used, but the authors stated flat out that this was going to cause enormous amounts of money to flow into housing (which they did not think was going to be a good thing in the long term) and a run-up in prices. Their reasoning all seemed sound at the time, but I didn't follow any of their resulting investing advice because real estate prices already seemed so high to me in 2001 and I couldn't imagine them going higher.[The articles were on some contrarian investor web site, but I'm not sure which one, and I haven't been able to locate the posts].
Kevin-I agree 100%. I think people used to believe their financial advisers an equal amount, but 2008 shattered that trust
At least financial advisers have at least some incentive to see that their clients don't go belly-up in their investments as well as a fundamental understanding of the markets they work in. Realtors in my experience are terribly ignorant about finance/economics, and just want people to buy and sell.
kevin,realtor (a good one) may be an expert in the local housing market, maybe even able to identify some trend in this market, but apart from that, blah.
"Contrarian said...No, this time around it's countries going belly-up -- starting with Dubai, Greece, Portugal, Spain, Ireland and Iceland, which will spread to G.B. and France, on it's way to the U.S. and then to China and India."Its a shame all your wealth is tied up in dollars and bonds, both of which will be worthless if the US goes "belly up" like you think.At least your worthless investments are made of paper and serve as a good source of fuel in your apocalyptic world. Perhaps some homeowner will take you in for a night in exchange for burning your entire net worth of dollars and bonds for heat.
Contrarian- I agree that most analysts do not give their most bearish scenarios, but analysts who made their name by being bearish tend to stick to their "its the end of the world views", because it is the best way to get in the media again. Look at Roubini as a good example. I agree Greece will default and likely some of the other PIIGS, but I don't think this is that big of a deal. I think England will survive (they can print their way out of debt) and if you think that Dubai, Portugal, Greece, and Iceland defaulting is going to bring down the world economy I just don't agree. These countries may default on their debt and write it down to 30-50 cents on the dollar, but this will still only be ~$1 trillion. While the U.S. wealth that evaporated during the housing/ stock market fall in 08-09 was ~20x that much. u.s. wealth
If you want to explain the bubble you need to look at what I think is/was a more important date, 1997.That is the year when the law changed regarding the sale of your home: when a home owner did not have to pay taxes on the first $250,000 (if single), or $500,000 (if married)gain made on the sale of the home. (I believe this law changed again in 2009, at least there have been attempts to change the law). It used to be that if you live in your home 2 out of 5 years, you could still cash your gain without paying taxes. Now, I believe, if you rent your home for any period of time, you pay taxes over that period (it gets deducted from your gain). I need to check this change if it actually went through. Anyways as a result of the 1997 lawa change, people were encouraged to sell, cash the profit and buy another home with some of that gained equity. You could do this every two years and cash up to $500,000 if your house happened to gain that much equity. This started slow, but it snowballed from there. No doubt that the 2001 dot com crash also caused many people to put their money into housing since the stock market was seen as unsafe, but that alone did not keep it growing. If you recall the stock market went up again in the years after that. Many people pulled their money and invested it back in stocks.It was the $500,000 bonanza (the change of the law) which was the catalyst of the bubble. This is my opinion based on observation of facts.Look at how home prices started growing slowly from that year on.
Contrarian-Did you see what the credit spreed is on the England Government. I haven't looked recently, but I am pretty sure it is ~20 bps, which implies the traders think there is a 0.2% chance of England defaulting. This is a 1 in 500 chance. So I would hardly call this deep shit.
dc2,Agreed that was a huge one. I used to harp on that alot.Prior to that you had to reinvest the capital gains from a sale into another house again within a certain time frame or use your one life-time exemption if you were over some age. It took a few years for the knowledge that this change had occurred to trickle down through the public consentiousness for it to have a snowballing effect. But given what a small portion of the housing stock is actually for sale at any given time, it's enough. There are still some people unaware of this 1997 change in capital gains according to my old realtor, who are tickled to death when he tells them the news. Of course this means they missed out on selling at the peak because of this lack of knowledge, but for the rest of society the fewer transactions at peak prices the better.
dc2 & Cara-I agree that probably had some impact on the really expensive markets (NY, CA, DC, maybe Boston), but its hard to believe that had much if any impact on some of the cheaper areas. In order to get those sort of gains you need a lot of people owning houses that are worth $700K+ homes. These houses are pretty rare in most of the country.
hb,(1) Why would the gains have to be up to the maximum allowed in order for it to have an effect? Paying no taxes on a $100k gain is no small cheese. Wasn't the capital gains rate higher back then too?(2) The high cost cities are also where the bubbles were the worst. (other than Florida and Vegas)Increasing mobility amongst owners seems like a good thing for the economy (allowing people to move for jobs) but renting already served that purpose well. Just the fact that you didn't have to document that your home price reflected inflation adjustments or that you reinvested the gains in a new home within a year, or whatever other actual onerous hoops were in place before, just dropping those alone gives a greater incentive to move. (I don't actually know exactly how it all worked before since my parents only used option 2 of reinvesting it in a new home)What it eventually created was the mom-and-pop flipper. The 2 year hold people who got most royally screwed when the exponential growth curve rolled over.
Cara-I had misread dc2s post and thought the change was just increasing the gains from $250K to $500K. If the gains were from $0 to $500K you are correct that it would matter everywhere. So whoops haha it looks like I should learn how to read better :)
hb,Happens to all of us. Sorry I pounced on you, but it's so uncommon that we disagree.
I remember how it worked (generally). You needed to keep records of your basis forever (still need to keep them a long time IMHO). If you bought a house for $100K, put $30K into it, then sold it for $200K (after selling expenses) you had a gain of $70K, and you rolled that into the basis of your new house (if you bought in time, the new house was worth as least as much as the selling price of the former house, and other rules). So if your new house was $250K, your basis is now $250K less $70 deferred gain (I'm ignoring the other things that affect your basis, such as loan acquisition costs). If several years later, you were to sell that house for net $300K and meet the rules, your gain is now $300K-$180K (assuming away all the other complications, such as improvements), or $120K. If you don't reinvest in another house worth $300K or more, you have to pay income tax on the $120K now. But if you do reinvest, you adjust its basis by $120K, and rinse and repeat. After a certain age (65?) the gains were excluded to a point, IIRC.So it was a nice break for those who kept "moving up the ladder", and encouraged people to take on more expensive houses. It could be argued that this actually slowly pushed some prices up prior to the legal change (because you would lose the tax break if you downsized/priced), but it may not have encouraged flipping as much as the new law.
Cara-No problem its I am perfectly happy to be corrected when I am saying something that is wrong :)
Ace,Thanks! What a headache.I wonder if, for a time, the 1997 law helped insulate the South from bubbling. Too many Northerners moving south for jobs have definitely been a factor in driving up prices in Chattanooga, Atlanta, Lousiana, Texas over the years. People moving there "had" to get homes that cost as much or more than the ones they left. You can see it in the crazy out of place McMansions that were built at various points of expansion of local industries. Starting in 1997 this madness ended. Finally when you moved to a lower cost of living area, you could benefit materially from the move by picking the home you wanted at the price that happened to be at while still avoiding paying taxes on your gain.Now, the bubble money from CA definitely did effect Phoenix and Las Vegas, and bubble building did move on to new targets like Chattanooga towards the end of this bubble anyway, so the shear wealth created during the bubble in bubble areas did infest the prices and housing stock of other areas, but I contend that there are places which experienced growth in the 2000's that might have been worse off if the old law had remained.
Very good point, Cara. It also may have encouraged people to negotiate less hard, e.g., if the house they wanted was offered at $320K and they "had" to spend at least $320K to avoid current taxation, then they might have simply paid that price.Two other factors that are radically different from 20 or even 10 years ago are: (a) the massive amount of info easily accessible on the web re: house prices (e.g., franklymls)--used by some buyers very carefully, probably ignored by others; and (b) the rise in buyer agency. In the past even if you as a buyer worked with an agent, s/he by law (in many states) HAD to represent the interests of the seller. So that agent didn't work nearly as hard to get you the best house at the best price -- in fact couldn't do so, even though s/he may have acted as if s/he were "your" agent. I had a number of friends who refused to believe me when I told them this, and they frequently would tell their agents their bottom line price and other info that by law "their" agents had to pass along to the seller.
PS, the old law may have created what now is (or was, for several years) an oversupply of big, costly homes relative to demand.It reminds me of a complaint my then-hubby relayed about a manager transferred to our low cost community by his employer. The mgr. sold a home near NYC for a huge gain, and was upset that the company was not giving him cash to cover the taxes, because he probably needed to spend only about a third as much to have as nice a house in the new city. We thought at the time it was rather greedy of him, since he was being given a promotion and pay increase, and had realized a huge passive gain simply by living near NYC, and the company had policies to help those moving to more expensive communities, in case he was transferred again.
Ace,That's exactly what my husband saw in Lousianna. The problems came when 40 or more people were moved there for job transfers and then all 40 also had to leave at the same time. They avoided the capital gains tax upon the move to Lousianna, but then had no market to sell their home to when they left so took a loss later instead.It's funny how people think of capital gains as their money, free and clear. As if the lottery and income aren't taxed too. You get money, Uncle Sam gets his cut.
"Government do take a bite, don't she?"Hi's co-worker, in Raising Arizona
Regarding a few topics on this thread:There were alternatives prior to 1997(?) for people moving to less expensive areas and paying for more house than they wanted or needed.I came up with a creative solution. Granted it wasn't everyone's cup of tea. Rent the residence here for 6 months and then 1031 into 2 properties which would also have to be rented for 6 months (min). Then move into them and convert to personal residences - a primary home and a second/vacation home.This was a real concern to many people moving to very inexpensive areas. I spoke at many RE office meetings regarding this option.As far as the "boom starting in 2001 and 2002, the simple answer was money coming out of stocks and into the relative safety of RE.The 250/500K exemption that came along clearly encouraged alot of selling. This combined with lower rates and the stock market debacle drove RE. Easy lending caused by the greed of Wall Street and the lack of intelligence of the buying public perpetuated the situation.
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