Who Sunk Housing?

Morgan Stanley’s view of a “rentership society” is an interesting read, but underlying it is the specious argument that Fannie and Freddie caused the housing crisis. This myth has been debunked over and over again (e.g., New York Review of Books, The Atlantic, Economist’s View (blog), or Still, Wall Street prefers denial. Here is the how does cialis work for bph concluding paragraph of Morgan’s statement on rental housing:

Throughout the housing bubble, the homeownership rate increased from 66% to 69%. During this period, significant and numerous opportunities were created

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from housing finance to securitization to home building to mortgage servicing. The initial collapse of the housing bubble then led to one of the greatest trades in US housing history – shorting the subprime market. As we viagra vs cialis vs levitra cost move into the next stage of this cycle, what opportunities will emerge if the homeownership rate moves in the opposite direction by three times the magnitude? That is the sixty billion dollar question.

Morgan is asking us to believe that 5% growth in U.S. home ownership (the Bush Administration favored this as part of an “ownership society”) led to what is currently estimated as a 40% loss of national home equity, to say nothing of the additional trillions of dollars lost in other global markets.

Supposedly, all these losses occurred because our government lured new homeowners to get in over their heads. Wall Street, says Morgan, did nothing but provide “opportunities” in mortgages and securitization, including (with no hint of irony) the ultimate opportunity to short all those worthless prior opportunities. How many people laughed out loud when they read that?

Honey, We Shrunk the Standard of Living

Morgan basically gets the housing

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story backwards. The ultimate cause of the bust was not a small minority of unqualified borrowers, nor an enabling federal policy, but a long-term shift of income and wealth away from the middle class.

In other words, there were not too many homeowners, there was too little income. Borrowing was a symptom of economic distress, not its agent. Quite the opposite of Morgan’s point of view, the middle class did not get into trouble because it overextended itself in housing. It overextended itself because it was already in trouble.

Forty years ago, it was commonly accepted that housing should cost no more than about one-quarter of a family’s household income. Both mortgage underwriters and landlords cialis and l-arginine together used 4:1 income ratio as the rule-of-thumb. At viagranorx-canadianpharma the time, fewer than half of American households had two wage earners. The national savings rate was about 12%. Forty years later, the income qualifying ratio had sunk to 3:1, the savings rate was below 4% (it was zero or below for most of the middle class), and far more than half of U.S. households required multiple wage earners and/or multiple jobs. Housing had grown to consume a much greater share of household income and a much greater number of working-hours.

Yet while housing cost was growing, wages were stagnant against the CPI.

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So, how did people maintain their standard of living? How through all those years did they manage to support their families while paying more for housing?

They took out student loans and auto loans and payday loans, they maxed out credit cards, and more than anything else they

borrowed on home equity, because that’s where their erstwhile savings had gone. Home equity supported the most debt at the least cost and was additionally subsidized by the tax deduction for mortgage interest.

Get a House

So, housing seemed like a good port in a storm. People who didn’t own a home wanted to buy one, and people with small homes wanted bigger ones. If household income was not keeping pace in real terms, at least home equity was growing, and homeowners could borrow. For 99% of wage earners, their debt-load doubled relative to their income in the 20 years between 1987 and 2007.

Above: The solid blue line is household income (HHI) from 1980 through 2010. The columns represent household debt segmented into commercial credit (dark green) and mortgages (light green). The dotted purple line is the debt-to-income ratio for all households. The dotted orange line is the debt-to-income ratio for the bottom 99% of adjusted gross income (AGI).


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ever more borrowing, the market to originate and securitize home loans grew correspondingly lucrative. To increase volume, terms were relaxed (and frauds were committed), which

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increased the flow of money into housing and pushed home prices higher yet. In turn, higher home prices justified larger loans and more

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aggressive home buying. Even after households could not

move farther into the countryside nor pull their belts any tighter, the demand for credit went up. Wages did not increase, yet borrowing continued. Oil prices rose, and tax cuts mostly by-passed the middle-class. Yet even as borrowers were reaching the end of their financial rope, easy loan terms persisted.

The Fed held rates down while Wall Street created and enabled more household debt than could possibly be sustained. This wasn’t a problem caused by a viagra and canadian pharmacy few latecomers trying to buy homes they couldn’t afford. Thirty years in the making, this was an endemic problem for all but the wealthiest American households.

Above: Family income is shown in dark purple columns. Median home price is shown in light purple columns. Home prices substantially outpaced income, but they became more affordable because mortgage rates fell.

Look what happened in 1980. my canadian pharmacy When it was clear that inflation (including home prices) was accelerating at a dangerous pace, the Fed quashed borrowing by rocketing up interest rates. This precipitated the Savings & Loan crisis. Construction & development loans went bad; mortgage originations dropped to nil. Lenders perished in droves. Nevertheless, as the chart shows, an emerging home price bubble (1975-1980) was suppressed, at least until rates fell back.

Sound Money… Unsound Finance

Twenty years later, the Fed declined to take preemptive action. They could see that inflation was low, because globalization had driven wages (and consumer prices) down, so they believed they had no reason to raise interest rates. Remembering the S & L Crisis, they thought that raising rates would impair the economy — particularly the financial sector. But by leaving rates low and turning a blind eye to cialis 2.5 bad lending practices, the Fed exacerbated the borrowing binge and fueled the home price bubble.

Above: Globalization suppressed inflation by lowering costs across the board (both prices and wages). Low inflation kept interest rates low, which encouraged borrowing to supplement low wages. Also, as shown in the chart above, low interest rates supported high home prices. This perfect debt-storm blew up a housing bubble.

A declining standard of living for the middle class was at the heart generic cialis canada pharmacy of the housing collapse. Low wages contributed to low CPI, but could not support customary levels of consumption without borrowed money. In turn, low cialis 5mg coupon CPI kept the cost of funds down, and accelerated demand.

Bondholders, whose god is low inflation, were misled by the CPI (also by greed and securities fraud) into thinking that their financial investments were sound. Their appetite for mortgage backed securities was uncritical. On Wall Street, the opportunity for easy money and the incentive for misbehavior was enormous.

Federal Reserve Chairman Greenspan has since admitted that he was wrong to presume that banks would exercise discipline, that markets would automatically self-correct in order to avoid excessive risk. He finally admitted that market fundamentalism was a flawed ideology, because it did not comport with human nature. The market had proven inherently unable to self-regulate. An out of control Wall Street bore the principal blame for the housing collapse and the Great Recession overall.

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