Beat the Press

Dean Baker's commentary on economic reporting


The Deflation of the Housing Bubble Continues

The weak second quarter GDP numbers were driven in part by the housing sector as noted in the NYT. See also the separate piece on the housing market. In addition to the GDP data, the Commerce Department also released data on vacancy rates for the second quarter. The vacancy rate for ownership units hit a new record.

Cheap tip for the months ahead -- watch for credit card debt to soar. People who can't borrow against their homes, now that prices have stopped rising, will turn to credit cards. It isn't pretty, but that's what desperate people will do to hold onto their homes in a collapsing bubble.


  • At 7:28 PM, Blogger Jim Hannley, RIA said…

    The detection of the housing bubble has been of great interest to me as an investment advisor and has placed the Greeenspan Fed in a new, negative light. During the "measured" interest rate advances, I felt the Fed was very wise in that they did not upset the bond market much. With hindsight, it seems a more aggressive rate of increase, might have forced the mortgage industry to raise their rates more rapidly, which would have checked the inflationary movement in the housing market. It seems the Fed is to blame for the bubble.

  • At 11:54 AM, Anonymous Harry Forsyth said…

    At the center of the housing boom lies the market for mortgage-backed securities. As is the case with any capital market, supply and demand play the most critical role. The demand for MBS has been huge - obviously - as is liquidity.
    Why? MBS, like all asset-backed paper, are rated in the highest category. We won't get into the reasons why but a lot has to do with gaurantees provided by government sponsored enterprises or agencies like Fanny Mae and Freddy Mac. They, in turn, base the credit worthiness of the paper on the ability of originators to understand value.
    If you want to understand the coming bust in housing, which will bring the rest of the US economy down with it, look no further than the balance sheets of these vastly over-leveraged companies.
    I know that the stakes are high, but the fact that nobody is writing about the weakness of the system and the extent to which the market relys on the agencies for credit support, is incredible.
    When was the last time that you saw a AAA rated company with leverage greater than 100 times?
    It all rests on LTV as opposed to a more retro way of underwriting - say income qualificatioin as an example.
    When the LTV goes away, so will the market and so will the agencies.
    A 1% increase in defaults brings the whole thing down.
    The markets have very short memories.
    What will happen when that over-leveraged homeowner finds out that his/her neighbor just sold his/her house for $20,000 less than what he/she owes on his/her mortage?
    It won't be pretty.
    Two things are certain; 1. it will be a disaster, and 2. nobody in Washington has a clue. The MBS market lies at the root of the problem. Only its practitioners understand its complexities. Alas, so long as the money flows, nothing else matters.

  • At 1:05 PM, Anonymous Dan in Madison said…

    "They, in turn, base the credit worthiness of the paper on the ability of originators to understand value."
    Right there is the problem. Mortgage lenders get the House (gov't) to back them with deep pockets as they place their bets. Every appraiser knows: to get repeat business, the number must be what is expected.
    Soon to be popped

  • At 7:02 PM, Anonymous Gary G said…

    Why would someone even purchase a home in a marketing where they know homes are over priced? (due to the hot market).

    Clearly what goes up must come down.

    In this economy now, here are my 3 picks for prices headed south!
    1. Gold
    2. Oil
    3. Houses

    dallas real estate

  • At 8:34 AM, Blogger dicconzane said…

    Speaking from the UK the housing bubble is still happily inflated in some areas. While overall the prices are falling other places are still on the rise at above inflation rates. Similarly there has been an increase in people wanting second investment properties both at home and abroad. So while overall the prices are slowing the careful investor can still find properties to invest in. Parts of East London for example are set to rise due to massve investment for various reasons. So I'd imagine there must be similar cases in the US. My tip would be to look for places close to where big companies are moving to, e.g. a large law firm. A move like that, especially if it is to a building desgined for them as a long term solution, will mean a massive influx of people with money to the area of which a proportion will be looking for places close by.


  • At 4:29 PM, Anonymous dehumidifiers said…

    My take on real estate right now is nothing but optimism. I'm optimistic that some day, the average hard working family will be able to buy the average house and that is all that should matter!!! As the prices of homes continue to slow down, a higher number of the average income earning families stand better chances of buying affordable homes even if it means that some others may have paid too much for theirs...I see a stabilizing point in the near future thereby prices keeping steady for sometime.

  • At 5:30 PM, Anonymous Eric Schisler said…

    The S&L crisis, in the late 80's/early 90's, left the US taxpayer with a staggering bill of over $ 150 Billion.

    Less than 20 years after those dark days in American banking when the RTC was created, and hundreds of thousands of properties were liquidated at huge loses, the banking system is looking down the barrel of another gun; the housing bubble.

    Who owns the blame of this latest disaster; the public- for playing musical chairs with huge sums of borrowed money, where the last man in at inflated levels is going to be paying huge principal amounts for years without any equity or just walk away in bankruptcy.
    The mortgage brokers- who trained consumers to bend, contort or ignore the truth when filling out mortgage applications. Bankers- who unscrupulously sold interest only , interest deferred, negative equity products that are financial disasters waiting to happen. Bush and the Fed for shamefully bloating the money supply and spending ungodly amounts on war in order to avoid a recession after 9/11.

    I agree that one of the telling tip-offs of a bubble is this marked disconnect between house prices and rent. During the bubble, rents have moved predictibly, in lockstep with inflation, whereas house prices have grossly exceeded inflation.

    I respectfully disagree with Gary G , I believe the three commodities that are poised for heavy losses are:
    1. the value of the US dollar
    2. the US standard of living
    3. the ethics of leaders

    Eric S

  • At 5:29 PM, Anonymous Anonymous said…

  • At 10:31 AM, Anonymous Anonymous said…

  • At 7:42 PM, Anonymous online bachelor degree said…

    While overall the prices are falling other places are still on the rise at above inflation rates. Similarly there has been an increase in people wanting second investment properties both at home and abroad.

    online bachelor degree

  • At 1:37 AM, Anonymous jewelry beads said…

    Magnetic Bracelet to be made using Magnetic Beads is one way to add something uncommon to your jewelry inventory, while potentially improving the health of anyone who wears the Magnetic Earring. For stringing the polymer clay beads, options include beading Brass wire like SoftFlex, Beadalon or Wrap-It, or ordinary elastic or nylon cord. Cut a piece long enough for the Pearl Bracelet itself plus 5 or 6 inches for finishing the ends. A wrap bracelet may need up to 17 inches total, while a Magnetic Clasps-closed bracelet requires at least 7.5 inches. Fashion and fabulous feather earring are ideal for counter display and gift giving. wholesale jewelry supplies, jewelry beads from online store for jewelry making is popular now.

  • At 2:27 AM, Anonymous Anonymous said…

    Good post.
    I like it!

  • At 6:01 AM, Anonymous Tera Gold said…

    You have made some good points in this post, nicely done!

  • At 2:02 AM, Anonymous hp laptop battery said…

    The HP laptop is packed with the latest features that include Windows Vista Home Premium operating system, Intel Core 2 Duo processor, RAM performance, HP 510 battery replacement, HP pavilion DV5000 battery, HP Pavilion dv6 Battery and much more. It really helps a person to manage his or her personal and professional works effectively and efficiently.
    In fact, laptops offer different entertainment options also as a powerful gaming experience, so you can play your favorite games, watch movies, view movies, videos, store photos, HP Compaq 6720S battery, HP Pavilion dv8000 Battery and last but not least, you can also listen favorite songs.


Post a Comment

Links to this post:

Create a Link

<< Home