And Why It Is Struggling To Recover
Radio show host Tom Sullivan (my favorite financial/business-oriented radio show program), asked me in an interview to talk about the US housing market. Oh, where to begin (on a short radio interview)? Well, here goes!
We’ve enjoyed years of “recovery” since the Great Financial Crisis by literally papering over our problems with newly-printed money, instead of addressing their root causes.
For example, The Federal Reserve dropped their benchmark target rate to 25 basis points in December 2008 just after President Obama was elected to his first term as President, and began their asset purchases (QE) in September 2008. The Fed raised their target rate only once during Obama’s eight years as President (December 2015) and only stated shrinking its balance sheet in earnest in 2018 (while Trump was President).
As a result, we have seen rapidly rising stock prices (e.g, S&P 500), home prices (e.g, FHFA’s home price index) and commercial real estate prices (e.g, RCA’ core commercial RE index). But now The Fed is, at least for the moment, shrinking the very balance sheet that helped asset prices swell abnormally.
Thanks in part to The Fed’s dramatic dropping of their target (short-term) rate following the 2001 recession, we saw an explosion of 1-unt home construction that ended the next time The Fed jacked-up their target rate. Following the financial crisis, Congress handed us the Dodd-Frank legislation that begat the Elizabeth Warren-designed Consumer Financial Protection Bureau (CFPB) that gave us Qualified Mortgage (QM) rules for lenders that resulted in the decrease of adjustable-rate mortgage (ARM) lending and mortgage lending to subprime households.
So now, we have an alleged shortage of housing in the US (leading to rapid price increased in certain US housing markets.
As an example, here is a 2-bedroom, 1-bathroom postage-stamp house in the beautiful Sunset district (western) of San Francisco.
Why so little inventory and why are prices too damn high (like rents)?
Freddie Mac estimated 1.6 million million more senior households are staying in place than would have been the case if they had behaved like previous generations of homeowners. The 1.6 million units equates the number of new single-family and multifamily housing units built each year and represents more than half of the current shortfall of 2.5 million housing units Freddie Mac previously estimated.
Let’s just hope seniors in these MSAs don’t have to sell their homes that are underwater (home value < mortgage balance due).
Well, that is one reason.
Another reason is that younger households (millenials) may be laden with student debt and/or can’t find a job.
And don’t forget that YoY home price growth has almost twice that or hourly earnings growth.
Another reason? How about strict land use controls that hinder the supply function? Japan has far less strict zoning laws, so at least one nation can do it. But generally, the real estate community like the NIMBY approach (Not In My Back Yard). And since it is difficult to control local land use controls from Washington DC, you will have to settle for rising home prices in coastal American cities. And in some interior cities as well.
Another reason? Banks are increasingly nervous about lending to consumers. Builders won’t build unless there is demand.
And despite the conclusions of books like The Big Short, collateralized debt obligations (CDOs like Goldman Sach’s ABACUS) were NOT the cause of the financial crisis, only a symptom. The real cause was the expansion of credit to non-prime borrowers, relaxed underwriting standard and speculators using gimicks like pay-option ARMs and Ninja (no income, no job) loans. And The Federal Reserve for raising their target rate rapidly and klling off the party.
*Note: I was interviewed by the Financial Crisis Inquiry Commission (FCIC) and discussed CDOs (and why they weren’t the cause of the financial crisis) and the failure of regulatory bodies to blow the whistle. [Needless to say, my 4 hour interview did not make it into the report, nor did they thank me].
Here is the report: fcic_final_report_full
At the heart of the housing bubble and crash was Clinton’s National Homeownership Strategy: Partners in the American Dream. Or American Scream when the push for homeownership helped fuel a crash after HUD encouraged their bank partners to take the safeties off of loan underwriting. At least homeownership rose until the mid-2000s. Then all hell broke loose as home prices plunged and defaults skyrocketed.
Foreign home buyers driving up home prices? Perhaps. But they are trickling away.
There will likely not be a subprime credit bubble burst in housing, but there could be one in the A and lower-rated corporate bond market that could bleed over into CMBS and housing.
So, the root cause of the financial crisis was … the Federal government encouraging lenders to remove underwriting restrictions from mortgage lending to which lenders responded (fearing the wrath of litigation). And The Federal Reserve for their whipsaw rate policies in the early 2000s and failure to warn markets.
Except those who watched housing prices falling and subprime mortgage delinquencies rising. Not to mention Fannie Mae, Freddie Mac, Lehman Bros, Bear Stearns, Countrywide, Wachovia, etc, etc stock plunging.
But aside from the data, Greenspan never saw it coming!
To be sure, there was host of other culprits like underwriting fraud, loan application fraud, etc. But the root causes were with bad housing policy and a hyper-active Federal Reserve.
In honor of Bill Clinton’s contribution to the housing crash and financial crisis, I present you the Old Grandad limited edition bottle!
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