“I believe you are right that government-mandated housing policies (forced upon Fan and Fred by HUD), caused a massive, industry-wide loosening of mortgage lending underwriting standards and this helped sustain the bubble, but I believe as you note (and agree) more importantly they were the cause of the massive defaults once housing prices started to fall…

…In regards to the “massive bubble” pre-crisis your book notes: “by 2000, the developing bubble was already larger than any bubble in history and it kept rising until 2007, when…at nine times larger than any previous bubble it finally topped out, and housing prices began to fall. Figure 1.2, based on Yale professor Robert Shiller’s data, shows the extraordinary size of the 1997-2007 housing bubble in relation to the two other significant bubbles of the postwar period.”

This statement and your Figure 1.2 imply that the bubble was massive and should have been obvious to almost anyone.

My focus is on understanding how very few saw this massive bubble and/or predicted its bursting and whether as the CEO of a major mortgage lender, I should have seen it coming. No one ever brought it to my attention. In fact, I recall Fed Chairman Greenspan say as late as 2005; ”not likely we have a speculative housing bubble” and citing very logical reasons why not.

I am just going to take the FHFA and Fed data from your two attached charts (I don’t use Shiller, because real home prices can’t be benchmarked to the Fed’s household balance sheet, which is in nominal terms.)

The FHFA Home Purchase index starts at 101 for Q1-1991. When you say the bubble was bigger than any in history (“by 2000”), the index was 136.88 in Q1-2000.  Over that nine year period, that annual nominal home price appreciation of about 3.55% (about normal, FHA uses 4% in perpetuity in its reverse mortgage model). So, I don’t see any bubble yet?

Then from Q1-2000 (136.88) to the peak of the index Q2-2007 (226.63), the annual home price appreciation rate roughly doubles to 7.20%, over that 7.25 year period. I agree, that looks bubbly. But massive? For the 16.25 year period from Q1-1991 to the peak Q2-2007, you have annualized home price appreciation of 5.16% a year, that’s just 1% a year over FHA’s 4% annual, nominal home price appreciation assumption that the government itself uses to underwrite reverse mortgages (and it’s supposed to be a conservative figure).

And today, as of the latest available data, Q4-2014….the index is back up to 213.89 (94.4% of the massive Q2-2007 bubble figure)…..and 20% higher than the index bottom of 178.26 in Q1-2011 (by the way, this bottom was much higher than the Q1-2000 “bubble” index of 136.88). (And this rise is during a period of very low nominal inflation.)

Everything I read and hear, says that housing prices are going to continue to rise at very smart rates for the next few years. In fact, I would go so far as to say that the market in my home state is on fire…..at, near, or exceeding all-time highs in many areas. Do we have another massive, unsustainable bubble today?

And you produced the Fed chart showing that as nominal home prices recovered post Q1-2011, they are in line with nominal value increases of households other assets (like stocks and bonds). So, if we have a massive housing bubble again today, we probably also have a similar asset bubble in stocks and bonds? And if that’s the case, then NTMs (which I agree hurt in the housing price downturn) probably weren’t a big part of the housing run-up pre-crisis and its more likely that the Fed’s policies (or other macro events) are the cause of these asset bubbles?

What if instead of a massive housing bubble, pre-financial crisis, we had a smaller one (harder to detect) and home (and other asset) prices were driven down by the weaknesses you so clearly point out in these NTMs, a concerted (and maybe coordinated) effort by short sellers to exploit this weakness (and other weaknesses in our financial system) in a housing price downturn and turn it in to a panic, where asset values were driven down by these speculators well-below their fair value. Doesn’t the fairly quick recovery in home prices (and many other types of assets), support this thesis? I think so. (Read Soros’ book on the financial crisis and his theory about “reflexivity”….it’s basically a primer on how investors/speculators can use their power to create their own outcome. I would be happy to describe how I think they attacked IndyMac and others.)

(By the way, when you look at the Fed balance sheet of households and its monetary growth rates over the years, it’s seems clear to me why the government and community-activists pushed affordable housing policies. Lower income Americans don’t own stocks and bonds, so they weren’t building wealth there…but if you could get them into a home (with a low rate 30-year fixed government mortgage)….they could earn 4% to 5% or more nominal home price appreciation a year and with that, they can build significant wealth over time. Shiller hasn’t done the math on returns on invested capital for homeowners. I have….they are good as long as nominal home prices don’t decline and that has only happened twice in 100 years.)

Just a thought. Mike

P.S. Not sure, but it’s possible that the real bad guys might be the short sellers/speculators (and not the well-intended, but misguided government housing policies or the private banks and mortgage lenders who were forced to adapt to their and the Fed’s market manipulation)?

(Mike Perry’s correspondence re. the “housing bubble” with Peter J. Wallison, author of “Hidden in Plain Sight: What Really Caused the Worst Financial Crisis and Why It Could Happen Again” on April 13/14, 2015.)

Case-Shiller vs. FHFA Purchase-Only Index, 1991-2014 Household Assets vs. Househould Real Estate,1990-2014 (1990 =100) Household Assets vs. Househould Real Estate, 1997-2014 (1997 =100)

Posted on April 14, 2015, in Postings. Bookmark the permalink. Leave a comment.

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