2000s United States housing market correction

none United States housing prices experienced a major market correction after the housing bubble that peaked in early 2006. Prices of real estate then adjusted downwards in late 2006, causing a loss of market liquidity and subprime defaults.http://web.mit.edu/cjpalmer/www/CPalmer_JMP.pdf Why did so many subprime borrowers default during the crisis: Loose credit or plummeting prices? Palmer Christopher 2013-11-15 2014-10-01 2017-05-17 https://web.archive.org/web/20170517121310/http://web.mit.edu/cjpalmer/www/CPalmer_JMP.pdf dead A real estate bubble is a type of economic bubble that occurs periodically in local, regional, national or global real estate markets. A housing bubble is characterized by rapid and sustained increases in the price of real property, such as housing' usually due to some combination of over-confidence and emotion, fraud, https://www.economist.com/blogs/freeexchange/2013/02/bubbles-and-fraud A smoking gun? The Economist The Economist the syntheticThe Financial Crisis Inquiry Report - Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf The Financial Crisis Inquiry Commission January 2011 978-0-16-087983-8 offloading of risk using mortgage-backed securities, the ability to repackage conforming debt Redfin http://www.redfin.com/home-buying-guide/conforming-vs-non-conforming-loans Home Buying Guide Redfin 1970-01-01 2022-03-20 via government-sponsored enterprises, public and central bank policy https://www.wsj.com/articles/SB123811225716453243 Symposium: Did Alan Greenspan's Federal Reserve Cause the Housing Bubble? – WSJ Wall Street Journal 27 March 2009 availability of credit, and speculation. Housing bubbles tend to distort valuations upward relative to historic, sustainable, and statistical norms as described by economists Karl Case and Robert Shiller in their book, Irrational Exuberance.http://www.irrationalexuberance.com/ Home irrationalexuberance.com As early as 2003 Shiller questioned whether or not there was, "a bubble in the housing market"Brookings Papers in Economic Activity Cowles Foundation Paper No. 1089 Case Karl E. Shiller Robert J. Is there a bubble in the housing market? http://www.econ.yale.edu/~shiller/pubs/p1089.pdf Cowles Foundation for Research in Economics, Yale University that might in the near future correct. Timeline Timeline of the 2000s United States housing bubble thumb|350px|center|Cost of housing by State Market correction predictions thumb|350px|Percentage change of the Case-Shiller Home Price Index for the housing correction beginning in 2006 (red) and the correction (blue) beginning in 1989, comparing monthly CSI values from the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices Based on the historic trends in valuations of U.S. housing,Shiller Robert Robert J. Shiller Irrational Exuberance 2d 2005 Princeton University Press 0-691-12335-7 Max Sarah The bubble question: How will rising interest rates affect housing prices? CNN 27 July 2004 https://money.cnn.com/2004/07/13/real_estate/buying_selling/risingrates/ https://web.archive.org/web/20040806084614/http://money.cnn.com/2004/07/13/real_estate/buying_selling/risingrates/ dead August 6, 2004 There has never been a run up in home prices like this. many economists and business writers predicted a market correction, ranging from a few percentage points, to 50% or more from peak values in some markets,US heading for house price crash, Greenspan tells buyers The Times 27 August 2005 http://business.timesonline.co.uk/tol/business/economics/article559641.ece https://web.archive.org/web/20070309141404/http://business.timesonline.co.uk/tol/business/economics/article559641.ece dead March 9, 2007 London Graham Searjeant 26 May 2010 Alan Greenspan, the United States' central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher. ... On traditional tests, about a third of U.S. local homes markets are now markedly overpriced.Buffett: Real estate slowdown ahead; The Oracle of Omaha expects the housing market to see "significant downward adjustments", and warns on mortgage financing. CNN 8 May 2006 https://money.cnn.com/2006/05/05/news/newsmakers/buffett_050606/index.htm https://web.archive.org/web/20060616091228/http://money.cnn.com/2006/05/05/news/newsmakers/buffett_050606/index.htm dead June 16, 2006 Jason Zweig Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing ... Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun—and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice.Surviving a Real-Estate Slowdown: A 'Loud Pop' Is Coming, But Mr. Heebner Sees Harm Limited to Inflated Regions The Wall Street Journal 5 July 2006 https://www.wsj.com/articles/SB115204791463597636 Gregory Zuckerman Gregory Zuckerman A significant decline in prices is coming. A huge buildup of inventories is taking place, and then we're going to see a major [retrenchment] in hot markets in California, Arizona, Florida and up the East Coast. These markets could fall 50% from their peaks.The No-Money-Down Disaster 21 August 2006 Barron's http://online.barrons.com/article/SB115594208047539900.html Lon Witter Bubble Blog: A popular blogger explains how he predicted the cooling of the real estate market and what the mainstream business press can learn from sites like his. Kathy Jones 8 August 2006 Newsweek http://www.newsweek.com/2006/08/07/bubble-blog.html and, although this cooling did not affect all areas of the United States, some warned that the correction could and would be "nasty" and "severe".Krugman Paul Paul Krugman No bubble trouble? The New York Times 2 January 2006 https://www.nytimes.com/2006/01/02/opinion/no-bubble-trouble.html Part of the rise in housing values since 2000 was justified given the fall in interest rates, but at this point the overall market value of housing has lost touch with economic reality. And there's a nasty correction ahead.Housing bubble correction could be severe U.S. News & World Report 13 June 2006 Paul J. Lim https://www.usnews.com/usnews/biztech/articles/060613/13housing_bubble.htm dead https://web.archive.org/web/20070704225821/http://www.usnews.com/usnews/biztech/articles/060613/13housing_bubble.htm 4 July 2007 dmy-all 22 October 2017 Chief economist Mark Zandi of the research firm Moody's Economy.com predicted a crash of double-digit depreciation in some U.S. cities by 2007–2009.Study sees '07 'crash' in some housing 5 October 2006 Chicago Tribune https://www.chicagotribune.com/2006/10/05/study-sees-07-crash-in-some-housing/ Mary Umberger Moody's predicts big drop in Washington housing prices 5 October 2006 Washington Business Journal http://www.bizjournals.com/washington/stories/2006/10/02/daily45.html Jeff Clabaugh Dean Baker of the Center for Economic and Policy Research was the first economist to identify the housing bubble, in a report in the summer of 2002.The Run-Up in Home Prices: Is it Real or Is it Another Bubble? August 2002 Dean Baker http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble/ Investor Peter Schiff acquired fame in a series of TV appearances where he opposed a multitude of financial experts and claimed that a bust was to come." Peter Schiff Was Right 2006 – 2007 (2nd Edition) November 2, 2008 Jdouche https://www.youtube.com/watch?v=sgRGBNekFIw https://ghostarchive.org/varchive/youtube/20211221/sgRGBNekFIw 2021-12-21 liveCrash Proof:How to Profit From the Coming Economic Collapse February 26, 2007 Peter Schiff John Wiley & Sons 9781118038932 https://books.google.com/books?id=gUbvPPD9QkUC The housing bubble was partly subsidized by government-sponsored entities like Fannie Mae and Freddie Mac and federal policies intended to make housing affordable for all.http://reason.com/archives/2011/03/04/the-truth-about-fannie-and-fre The Truth About Fannie and Freddie's Role in the Housing Crisis Reason.com 2011-03-04 2014-02-21 Market weakness, 2005–06 National Association of Realtors (NAR) chief economist David Lereah's Explanation of "What Happened" from the 2006 NAR Leadership ConferenceLereah David David Lereah 17 August 2006 Real Estate Reality Check http://www.realtor.org/Research.nsf/files/Leadership%20Summit%20%28August%202006%29.ppt/$FILE/Leadership%20Summit%20%28August%202006%29.ppt dead https://web.archive.org/web/20060901045051/http://www.realtor.org/Research.nsf/files/Leadership%20Summit%20(August%202006).ppt/$FILE/Leadership%20Summit%20(August%202006).ppt 1 September 2006 1 July 2007 National Association of Realtors Leadership Summit PPT dmy-all NAR plot of Condominium Price Appreciation (percentages) in the south and west United States, 2002–2006: right|thumb|300x300px|Condominium Price Appreciation (percentages) in the south and west United States, 2002–2006 (source: NAR) Boom ended August 2005 Mortgage rates rose almost one point Affordability conditions deteriorated Speculative investors pulled out Homebuyer confidence plunged Resort buyers went to sidelines Trade-up buyers to sidelines First-time buyers priced out of market thumb|350px|Common indexes used for Adjustable Rate Mortgages (1996–2006) The booming housing market halted abruptly in many parts of the United States in the late summer of 2005, and as of summer 2006, several markets faced ballooning inventories, falling prices, and sharply reduced sales volumes. In August 2006, Barron's magazine warned, "a housing crisis approaches", and noted that the median price of new homes had dropped almost 3% since January 2006, that new-home inventories hit a record in April and remained near all-time highs, that existing-home inventories were 39% higher than they were just one year earlier, and that sales were down more than 10%, and predicted that "the national median price of housing will probably fall by close to 30% in the next three years ... simple reversion to the mean." In Boston, year-over-year prices dropped,Housing slowdown deepens in Mass.: Single-family prices, sales slip in March The Boston Globe 26 April 2006 http://archive.boston.com/business/globe/articles/2006/04/26/housing_slowdown_deepens_in_mass/ Kimberly Blanton sales fell, inventory increased, foreclosures were up,Adjustable-rate loans come home to roost: Some squeezed as interest rises, home values sag The Boston Globe 11 January 2006 http://archive.boston.com/business/articles/2006/01/11/adjustable_rate_loans_come_home_to_roost/ Kimberly BlantonMass. home foreclosures rise quickly Boston Herald 29 August 2006 http://business.bostonherald.com/realestateNews/view.bg?articleid=154892&format=text dead https://web.archive.org/web/20061110125549/http://business.bostonherald.com/realestateNews/view.bg?articleid=154892&format=text November 10, 2006 and the correction in Massachusetts was called a "hard landing" in 2005.Sellers chop asking prices as housing market slows: Cuts of up to 20% are now common as analysts see signs of a 'hard landing'. The Boston Globe 9 December 2005 http://archive.boston.com/business/articles/2005/12/09/sellers_chop_asking_prices_as_housing_market_slows/ Kimberly Blanton The previously boomingLaing Jonathan R. 20 June 2005 The Bubble's New Home http://online.barrons.com/article/SB111905372884363176.html Barron's The home-price bubble feels like the stock-market mania in the spring of 1999, just before the stock bubble burst in early 2000, with all the hype, herd investing and absolute confidence in the inevitability of continuing price appreciation. My blood ran slightly cold at a cocktail party the other night when a recent Yale Medical School graduate told me that she was buying a condo to live in Boston during her year-long internship, so that she could flip it for a profit next year. Tulipmania reigns. Plot of inflation-adjusted home price appreciation in several U.S. cities, 1990–2005: right|thumb|367x367px|Plot of inflation-adjusted home price appreciation in several U.S. cities, 1990–2005 housing markets in Washington, D.C., San Diego, California, Phoenix, Arizona, and other cities stalled as well in 2005.Bubble, Bubble – Then Trouble: Is the chill in once-red-hot Loudoun County, Va., a portent of what's ahead? BusinessWeek 19 December 2005 http://www.businessweek.com/magazine/content/05_51/b3964052.htm https://web.archive.org/web/20051211064953/http://www.businessweek.com/magazine/content/05_51/b3964052.htm dead December 11, 2005 Paul Magnusson Stan Crock Peter Coy Can San Diego Home Prices Affect Coeur d'Alene Pricing? Real Estate CDA 28 October 2014 http://realestatecda.com/can-san-diego-home-prices-affect-coeur-dalene-pricing Fortune magazine in May 2006 labeled many previously strong housing markets as "Dead Zones";This article classified several U.S. real-estate regions as "Dead Zones", "Danger Zones", and "Safe Havens." + Fortune magazine Housing Bubble "Dead Zones" "Dead Zones" "Danger Zones" "Safe Havens" Boston Chicago Cleveland Las Vegas Los Angeles Columbus Miami New York Dallas Washington, D.C. / Northern Virginia San Francisco / Oakland Houston Phoenix Seattle Kansas City Sacramento Omaha San Diego Pittsburgh Welcome to the Dead Zone Fortune 4 May 2006 https://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/ https://web.archive.org/web/20060617223334/http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/ dead June 17, 2006 Welcome to the dead zone: The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others. Shawn Tully other areas were classified as "Danger Zones" and "Safe Havens". Fortune in August 2005 also dispelled "four myths about the future of home prices".Tully Shawn Getting real about the real estate bubble: Fortune's Shawn Tully dispels four myths about the future of home prices 25 August 2005 Fortune https://money.cnn.com/2006/08/24/real_estate/pluggedin_tully.fortune/index.htm https://web.archive.org/web/20060829203611/http://money.cnn.com/2006/08/24/real_estate/pluggedin_tully.fortune/index.htm dead August 29, 2006 The Arizona Regional Multiple Listing Service (ARMLS) showed that in summer 2006, the for-sale housing inventory in Phoenix had grown to over 50,000 homes, of which nearly half were vacant (see graphic).Over 14,000 Phoenix For-Sale Homes Vacant March 10, 2006 http://thehousingbubbleblog.com/?p=256 November 5, 2018 July 1, 2007 https://web.archive.org/web/20181105230131/http://thehousingbubbleblog.com/?p=256 dead Plot of Phoenix inventory: thumb|300px|right|Inventory of houses for sale in Phoenix, AZ from July 2005 through March 2006. As of March 10, 2006, well over 14,000 (nearly half) of these for-sale homes are vacant. (Source: Arizona Regional Multiple Listing Service.) Several home builders revised their forecasts sharply downward during the summer of 2006, e.g., D.R. Horton cut its yearly earnings forecast by one-third in July 2006,D.R. Horton warning weighs on builders: Largest home builder cuts 2006 outlook on difficult housing market MarketWatch Alistair Barr John Spence 14 July 2006 http://www.marketwatch.com/story/dr-horton-cuts-year-outlook-as-home-building-market-slumps the value of luxury home builder Toll Brothers' stock fell 50% between August 2005 and August 2006,December 2010Toll Brothers, Inc. (NYSE:TOL) MarketWatch and the Dow Jones U.S. Home Construction Index was down over 40% as of mid-August 2006.December 2010DJ US Home Construction Index MarketWatch 18 August 2006 http://www.marketwatch.com/tools/quotes/intchart.asp?symb=DJ_3728&sid=171546&freq=1&time=8 CEO Robert Toll of Toll Brothers explained, "builders that built speculative homes are trying to move them by offering large incentives and discounts; and some buyers are canceling contracts for homes already being built".Toll Brothers lowers outlook: Luxury home builder says buyers still waiting on sidelines MarketWatch 22 August 2006 http://www.marketwatch.com/story/toll-brothers-cuts-outlook-again-and-details-land-write-downs Homebuilder Kara Homes announced on 13 September 2006 the "two most profitable quarters in the history of our company", yet the company filed for bankruptcy protection less than one month later on 6 October.BANKRUPTCY CONSIDERED: Kara Homes lays off staff; talk of filing for Chapter 11 makes local clients anxious Asbury Park Press 6 October 2006 http://www.app.com/apps/pbcs.dll/article?AID=/20061006/NEWS/610060412 December 2010 Six months later on 10 April 2007, Kara Homes sold unfinished developments, causing prospective buyers from the previous year to lose deposits, some of whom put down more than $100,000 (~$US-GDP 100000 2007 in US-GDP).Kara Homes buyers may lose deposits Asbury Park Press 10 April 2007 http://www.app.com/apps/pbcs.dll/article?AID=/20070410/NEWS/704100305 December 2010 As the housing market began to soften from winter 2005 through summer 2006,Fleckenstein Bill The housing bubble has popped msnbc.com 24 April 2006 http://moneycentral.msn.com/content/P149596.asp Reports of falling sales and investors stuck with properties they can't sell are just the beginning. Property owners should worry; so should their lenders. 1 July 2007 https://web.archive.org/web/20100430135214/http://moneycentral.msn.com/content/p149596.asp 30 April 2010 dead Sales Slow for Homes New and Old The New York Times 26 July 2006 https://www.nytimes.com/2006/07/26/business/26home.html A variety of experts now say, the housing industry appears to be moving from a boom to something that is starting to look a lot like a bust Jeremy W. Peters 26 May 2010 NAR chief economist David Lereah predicted a "soft landing" for the market.Lereah David David Lereah Realtors' Lereah: Housing To Make 'Soft Landing' Forbes 1 January 2006 https://www.forbes.com/facesinthenews/2006/01/25/existing-home-sales-cx_gl_0125autofacescan08.html https://web.archive.org/web/20071013142331/http://www.forbes.com/facesinthenews/2006/01/25/existing-home-sales-cx_gl_0125autofacescan08.html dead October 13, 2007 However, based on unprecedented rises in inventory and a sharply slowing market throughout 2006, Leslie Appleton-Young, the chief economist of the California Association of Realtors, said that she was not comfortable with the mild term "soft landing" to describe what was actually happening in California's real estate market.Appleton-Young Leslie Housing Expert: 'Soft Landing' Off Mark Los Angeles Times 21 July 2006 https://www.latimes.com/business/la-fi-soft21jul21,0,3311200.story?coll=la-home-headlines Leslie Appleton-Young is at a loss for words. The chief economist of the California Assn. of Realtors has stopped using the term 'soft landing' to describe the state's real estate market, saying she no longer feels comfortable with that mild label. ... 'Maybe we need something new. That's all I'm prepared to say,' Appleton-Young said Thursday. ... The Realtors association last month lowered its 2006 sales prediction. That was when Appleton-Young first told the San Diego Union-Tribune that she didn't feel comfortable any longer using 'soft landing.' 'I'm sorry I ever made that comment,' she said Thursday. ... For real estate optimists, the phrase 'soft landing' conveyed the soothing notion that the run-up in values over the last few years would be permanent. The Financial Times warned of the impact on the U.S. economy of the "hard edge" in the "soft landing" scenario, saying "A slowdown in these red-hot markets is inevitable. It may be gentle, but it is impossible to rule out a collapse of sentiment and of prices. ... If housing wealth stops rising ... the effect on the world's economy could be depressing indeed".Hard edge of a soft landing for housing 19 August 2006 Financial Times https://www.ft.com/content/97a6e948-2f1f-11db-a973-0000779e2340 "It would be difficult to characterize the position of home builders as other than in a hard landing", said Robert I. Toll, CEO of Toll Brothers.Toll Robert Housing Slump Proves Painful For Some Owners and Builders: 'Hard Landing' on the Coasts Jolts Those Who Must Sell; Ms. Guth Tries an Auction; 'We're Preparing for the Worst' 23 August 2006 The Wall Street Journal https://www.wsj.com/articles/SB115630090176442994 Angelo Mozilo, CEO of Countrywide Financial, said "I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen."Mozilo Angelo Countrywide Financial putting on the brakes 9 August 2006 The Wall Street Journal http://www.contracostatimes.com/mld/cctimes/news/nation/15231922.htm 1 July 2007 https://web.archive.org/web/20070120124637/http://www.contracostatimes.com/mld/cctimes/news/nation/15231922.htm 20 January 2007 dead dmy-all Following these reports, Lereah admitted that "he expects home prices to come down 5% nationally", and said that some cities in Florida and California could have "hard landings."Lereah David David Lereah Existing home sales drop 4.1% in July, median prices drop in most regions 24 August 2006 USA Today https://www.usatoday.com/money/economy/housing/2006-08-23-july-sales_x.htm The World Bank lowered the global economic growth rate due to a housing slowdown in the United States, but it did not believe that the U.S. housing malaise would further spread to the rest of the world. The Fed chairman Benjamin Bernanke said in October 2006 that there was currently a "substantial correction" going on in the housing market and that the decline of residential housing construction was one of the "major drags that is causing the economy to slow"; he predicted that the correcting market would decrease U.S. economic growth by about one percent in the second half of 2006 and remain a drag on expansion into 2007.Bernanke Says 'Substantial' Housing Downturn Is Slowing Growth 4 October 2006 Bloomberg L.P. https://www.bloomberg.com/apps/news?pid=20601087&sid=ah6TAhIScG0M&refer=home National home sales and prices both fell dramatically again in March 2007 according to NAR data, with sales down 13% to 482,000 from the peak of 554,000 in March 2006 and the national median price falling nearly 6% to $217,000 from the peak of $230,200 in July 2006. The plunge in existing-home sales was the steepest since 1989.May 2008 The new home market also suffered. The biggest year over year drop in median home prices since 1970 occurred in April 2007. Median prices for new homes fell 10.9 percent according to the U.S. Department of Commerce.Sales of new U.S. homes surged in April 2007-05-24 msnbc.com https://www.nbcnews.com/id/wbna18842917 live https://web.archive.org/web/20070526231748/http://www.msnbc.msn.com/id/18842917/ May 26, 2007 Others speculated on the negative impact of the retirement of the Baby Boom generation and the relative cost to rent on the declining housing market.Fletcher June Slowing Sales, Baby Boomers Spur a Glut of McMansions The Wall Street Journal 19 July 2006 http://www.realestatejournal.com/buysell/markettrends/20060619-fletcher.html The golden age of McMansions may be coming to an end. These oversized homes—characterized by sprawling layouts on small lots, and built in cookie-cutter style by big developers—fueled much of the housing boom. But thanks to rising energy and mortgage costs, shrinking families and a growing number of retirement-age baby boomers set on downsizing, there are signs of an emerging glut. ... Some boomers in their late 50s are counting on selling their huge houses to help fund retirement. Yet a number of factors are weighing down demand. With the rise in home heating and cooling costs, McMansions are increasingly expensive to maintain. ... The overall slump in the housing market also is crimping big-home sales. ... Meantime, the jump in interest rates has put the cost of a big house out of more people's reach.Editorial: It Was Fun While It Lasted 5 September 2006 The New York Times https://www.nytimes.com/2006/09/05/opinion/05tue2.html With economic signals flashing that the housing boom is over, speculation has now turned to how deep the slump will be and how long it will last ... conventional wisdom holds that as long as you don't plan to sell your house any time soon ... you can cash in later. Or can you? The downturn in housing is overlapping with the retirement of the baby boom generation, which starts officially in 2008 ... Most of them are homeowners, and many of them will presumably want to sell their homes, extracting some cash for retirement in the process. Theoretically, that implies a glut of houses for sale, which would surely mitigate an upturn in prices, and could drive them ever lower. ... The house party is over, but we don't yet know how bad the hangover is going to be. In many parts of the United States, it was significantly cheaper to rent the same property than to purchase it; the national median mortgage payment is $1,687 per month, nearly twice the median rent payment of $868 per month.For some, renting makes more sense USA Today 10 August 2006 https://www.usatoday.com/money/perfi/housing/2006-08-09-rent-1a-usat_x.htm Noelle Knox 26 May 2010 Predictions of housing bubble bursting thumb|180px |Robert Shiller In 2005, economist Robert Shiller gave talks warning about a housing bubble to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. He was ignored, and later called it an incidence of Groupthink. That same year, his second edition of Irrational Exuberance warned that the housing bubble might lead to a worldwide recession.Challenging the Crowd in Whispers, Not Shouts, Robert J Shiller, New York Times, 2008 Nov 1. As mentioned in Econned, by Yves Smith Also in 2005, economist Fred Harrison commented: "The next property market tipping point is due at end of 2007 or early 2008... The only way prices can be brought back to affordable levels is a slump or recession."Bezemer, Dirk J, 16 June 2009. "“No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models" In January 2006, financial analyst Gary Shilling wrote an article entitled: "The Housing Bubble Will Probably Burst".How To Prosper In The Changing Real Estate Markethttps://finance.yahoo.com/blogs/daily-ticker/global-recession-only-time-heal-economy-says-gary-123445059.html Global Recession: Only Time Can Heal the Economy, Says Gary Shilling finance.yahoo.com 13 August 2012 In May 2006, JPMorgan's Christopher Flanagan, director of global structured finance research, warned clients of a coming housing downturn.https://www.institutionalinvestor.com/article/b150ny2f12sbsp/the-2007-all-america-fixed-income-research-team The 2007 All-America Fixed-Income Research Team Pam Abramowitz Institutional Investor September 16, 2007 September 7, 2022 In August 2006, economist Nouriel Roubini similarly warned that the housing sector was in "free fall" and would derail the rest of the economy, causing a recession in 2007.Roubini Nouriel Recession will be nasty and deep, economist says 23 August 2006 MarketWatch http://www.marketwatch.com/story/coming-recession-will-be-nastier-than-2001s-economist-says This is the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices. Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics, also said that the U.S. might enter a recession as house prices declined.Stiglitz Joseph Stiglitz Says U.S. May Have Recession as House Prices Decline 8 September 2006 Bloomberg L.P. https://www.bloomberg.com/news/av/ Major downturn and subprime mortgage collapse, 2007 thumb|350px|A graph showing the median and average sales prices of new homes sold in the United States between 1963 and 2008https://www.census.gov/const/uspriceann.pdf Median and Average Sales Prices of New Homes Sold in United States Census.gov 2014-02-21 thumb|350px|A graph showing the monthly median and average sales prices of new homes sold in the United States between 1999 and 2009https://www.census.gov/const/uspricemon.pdf Median and Average Sales Prices of New Homes Sold in United States Census.gov 2014-02-21 thumb|200px|right|Inventory of houses for sale in Phoenix, AZ from July 2005 through March 2006. As of March 10, 2006, well over 14,000 (nearly half) of these for-sale homes were vacant. (Source: Arizona Regional Multiple Listing Service.) thumb|250px|Incomplete housing development near Houston, Texas thumb|350px|Sales prices of homes sold 2002–2010 The White House Council of Economic Advisers lowered its forecast for U.S. economic growth in 2008 from 3.1 per cent to 2.7 per cent and forecast higher unemployment, reflecting the turmoil in the credit and residential real-estate markets. The Bush administration economic advisers also revised their unemployment outlook and predicted the unemployment rate could rise slightly above 5 per cent, up from the prevailing unemployment rate of 4.6 per cent.Bush Advisers Reduce Growth Forecast for 2008 to 2.7% 2007-11-04 Bloomberg L.P. https://www.bloomberg.com/apps/news?pid=20601087&sid=awEbVLpYgqog&refer=home 2008-03-17 The appreciation of home values far exceeded the income growth of many of these homebuyers, pushing them to leverage themselves beyond their means. They borrowed even more money in order to purchase homes whose cost was much greater than their ability to meet their mortgage obligations. Many of these homebuyers took out adjustable-rate mortgages during the period of low interest rates in order to purchase the home of their dreams. Initially, they were able to meet their mortgage obligations thanks to the low "teaser" rates being charged in the early years of the mortgage. As the Federal Reserve Bank applied its monetary contraction policy in 2005, many homeowners were stunned when their adjustable-rate mortgages began to reset to much higher rates in mid-2007 and their monthly payments jumped far above their ability to meet the monthly mortgage payments. Some homeowners began defaulting on their mortgages in mid-2007, and the cracks in the U.S. housing foundation became apparent. Subprime mortgage industry collapse Subprime mortgage crisis In March 2007, the United States' subprime mortgage industry collapsed due to higher-than-expected home foreclosure rates, with more than 25 subprime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale.The Mortgage Mess Spreads 7 March 2007 BusinessWeek Mara Der Hovanesian Matthew Goldstein http://www.businessweek.com/investor/content/mar2007/pi20070307_505304.htm https://web.archive.org/web/20070310164527/http://www.businessweek.com/investor/content/mar2007/pi20070307_505304.htm dead March 10, 2007 The stock of the country's largest subprime lender, New Century Financial, plunged 84% amid Justice Department investigations, before ultimately filing for Chapter 11 bankruptcy on 2 April 2007 with liabilities exceeding $100 million (~$US-GDP 100000000 2007 in US-GDP).New Century Financial files for Chapter 11 bankruptcy 2 April 2007 MarketWatch Katherine Hunt http://www.marketwatch.com/story/new-century-financial-files-for-chapter-11-bankruptcy The manager of the world's largest bond fund PIMCO, warned in June 2007 that the subprime mortgage crisis was not an isolated event and would eventually take a toll on the economy and impact the impaired prices of homes.PIMCO's Gross 2007-06-27 CNNMoney.com https://money.cnn.com/2007/06/26/news/economy/bc.usa.markets.gross.reut/?postversion=2007062616 May 2026 medicmedic Bill Gross, "a most reputable financial guru", sarcastically and ominously criticized the credit ratings of the mortgage-based CDOs now facing collapse: AAA? You were wooed Mr. Moody's and Mr. Poor's, by the makeup, those six-inch hooker heels, and a "tramp stamp." Many of these good looking girls are not high-class assets worth 100 cents on the dollar. ... And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone? ... AAAs? [T]he point is that there are hundreds of billions of dollars of this toxic waste and whether or not they're in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. [T]he subprime crisis is not an isolated event and it won't be contained by a few days of headlines in The New York Times ... The flaw lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006. Because while the Bear hedge funds are now primarily history, those millions and millions of homes are not. They're not going anywhere ... except for their mortgages that is. Mortgage payments are going up, up, and up ... and so are delinquencies and defaults. A recent research piece by Bank of America estimates that approximately $500 billion (~$US-GDP 500000000000 2007 in US-GDP) of adjustable rate mortgages are scheduled to reset skyward in 2007 by an average of over 200 basis points. 2008 holds even more surprises with nearly $700 billion ARMS subject to reset, nearly ¾ of which are subprimes ... This problem—aided and abetted by Wall Street—ultimately resides in America's heartland, with millions and millions of overpriced homes and asset-backed collateral with a different address—Main Street.When mainstream analysts compare CDOs to "subslime", "toxic waste" and "six-inch hooker heels"... 27 June 2007 RGE Monitor http://www.rgemonitor.com/blog/roubini/202280 dead https://web.archive.org/web/20070629131731/http://www.rgemonitor.com/blog/roubini/202280 29 June 2007 dmy-all 1 July 2007 Financial analysts predicted that the subprime mortgage collapse would result in earnings reductions for large Wall Street investment banks trading in mortgage-backed securities, especially Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch, and Morgan Stanley. The solvency of two troubled hedge funds managed by Bear Stearns was imperliled in June 2007 after Merrill Lynch sold off assets seized from the funds and three other banks closed out their positions with them. The Bear Stearns funds once had over $20 billion of assets, but lost billions of dollars on securities backed by subprime mortgages.Merrill sells off assets from Bear hedge funds 21 June 2007 Reuters https://www.reuters.com/article/gc06/idUSN2024502520070621 H&R Block reported a quarterly loss of $677 million on discontinued operations, which included subprime lender Option One, as well as writedowns, loss provisions on mortgage loans and the lower prices available for mortgages in the secondary market for mortgages. The units net asset value fell 21% to $1.1 billion (~$US-GDP 1100000000 2007 in US-GDP) as of April 30, 2007.H&R Block struck by subprime loss 21 June 2007 Financial Times https://www.ft.com/content/2485fd88-1ffa-11dc-9eb1-000b5df10621 The head of the mortgage industry consulting firm Wakefield Co. warned, "This is going to be a meltdown of unparalleled proportions. Billions will be lost." Bear Stearns pledged up to US$3.2 billion (~$US-GDP 3200000000 2007 in US-GDP) in loans on 22 June 2007 to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.$3.2 Billion Move by Bear Stearns to Rescue Fund 23 June 2007 The New York Times https://www.nytimes.com/2007/06/23/business/23bond.html?pagewanted=all Julie Creswell Vikas Bajaj 26 May 2010 Peter Schiff, president of Euro Pacific Capital, argued that if the bonds in the Bear Stearns funds were auctioned on the open market, much weaker values would be plainly revealed. Schiff added, "This would force other hedge funds to similarly mark down the value of their holdings. Is it any wonder that Wall street is pulling out the stops to avoid such a catastrophe? ... Their true weakness will finally reveal the abyss into which the housing market is about to plummet."Bear Stearns Hedge Fund Woes Stir Worry In CDO Market 21 June 2007 Barrons http://users2.barrons.com/lmda/do/checkLogin?mg=evo-barrons&url=http%3A%2F%2Fonline.barrons.com%2Farticle%2FON-CO-20070621-815034.html 1 July 2007 https://web.archive.org/web/20070927225939/http://users2.barrons.com/lmda/do/checkLogin?mg=evo-barrons&url=http:%2F%2Fonline.barrons.com%2Farticle%2FON-CO-20070621-815034.html 27 September 2007 dead A New York Times report connected the hedge fund crisis with lax lending standards: "The crisis this week from the near collapse of two hedge funds managed by Bear Stearns stems directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes." In the wake of the mortgage industry meltdown, Senator Chris Dodd, Chairman of the Banking Committee held hearings in March 2007 and asked executives from the top five subprime mortgage companies to testify and explain their lending practices. Dodd said, "Predatory lending practices endangered the home ownership for millions of people".Top five US subprime lenders asked to testify-Dodd John Poirier Reuters https://www.reuters.com/article/bankingfinancial-SP/idUSN1930923820070320 2007-03-19 2008-03-17 Moreover, Democratic senators such as Senator Charles Schumer of New York were proposing a federal government bailout of subprime borrowers in order to save homeowners from losing their residences. Opponents of such proposal asserted that government bailout of subprime borrowers was not in the best interests of the U.S. economy because it would set a bad precedent, create a moral hazard, and worsen the speculation problem in the housing market. Lou Ranieri of Salomon Brothers, inventor of the mortgage-backed securities market in the 1970s, warned of the future impact of mortgage defaults: "This is the leading edge of the storm. ... If you think this is bad, imagine what it's going to be like in the middle of the crisis." In his opinion, more than $100 billion of home loans are likely to default when the problems in the subprime industry appear in the prime mortgage markets.Next: The real estate market freeze 12 March 2007 MSN Money http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NextTheRealEstateMarketFreeze.aspx 1 July 2007 https://web.archive.org/web/20140814113928/http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NextTheRealEstateMarketFreeze.aspx 14 August 2014 dead Fed Chairman Alan Greenspan praised the rise of the subprime mortgage industry and the tools used to assess credit-worthiness in an April 2005 speech: Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country ... With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. ... Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.Remarks by Chairman Alan Greenspan, Consumer Finance At the Federal Reserve System's Fourth Annual Community Affairs Research Conference, Washington, D.C. Alan Greenspan Alan Greenspan Federal Reserve Board 4 April 2005 http://www.federalreserve.gov/BoardDocs/speeches/2005/20050408/default.htm Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country ... With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s. Because of these remarks, along with his encouragement for the use of adjustable-rate mortgages, Greenspan was criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry.The Great Unraveling Stephen S. Roach Stephen S. Roach Morgan Stanley 16 March 2007 http://www.morganstanley.com/views/gef/archive/2007/20070316-Fri.html#anchore0b0b9cc-419e-11de-a1b3-c771ef8db296 In early 2004, he urged homeowners to shift from fixed to floating rate mortgages, and in early 2005, he extolled the virtues of sub-prime borrowing—the extension of credit to unworthy borrowers. Far from the heartless central banker that is supposed to "take the punch bowl away just when the party is getting good," Alan Greenspan turned into an unabashed cheerleader for the excesses of an increasingly asset-dependent U.S. economy. I fear history will not judge the Maestro's legacy kindly.Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry Nouriel Roubini Nouriel Roubini RGE Monitor 19 March 2007 http://www.rgemonitor.com/blog/roubini/184125 Greenspan allowed the tech bubble to fester by first warning about irrational exuberance and then doing nothing about via either monetary policy or, better, proper regulation of the financial system while at the same time becoming the "cheerleader of the new economy". And Greenspan/Bernanke allowed the housing bubble to develop in three ways of increasing importance: first, easy Fed Funds policy (but this was a minor role); second, being asleep at the wheel (together with all the banking regulators) in regulating housing lending; third, by becoming the cheerleaders of the monstrosities that were going under the name of "financial innovations" of housing finance. Specifically, Greenspan explicitly supported in public speeches the development and growth of the risky option ARMs and other exotic mortgage innovations that allowed the subprime and near-prime toxic waste to mushroom. dead https://web.archive.org/web/20070705213834/http://www.rgemonitor.com/blog/roubini/184125 2007-07-05 Alt-A mortgage problems Subprime and Alt-A loans account for about 21 percent of loans outstanding and 39 percent of mortgages made in 2006.Defaults Rise in Next Level of Mortgages 10 April 2007 The New York Times https://www.nytimes.com/2007/04/10/business/10lend.html?pagewanted=print Vikas Bajaj 26 May 2010 In April 2007, financial problems similar to the subprime mortgages began to appear with Alt-A loans made to homeowners who were thought to be less risky. American Home Mortgage said that it would earn less and pay out a smaller dividend to its shareholders because it was being asked to buy back and write down the value of Alt-A loans made to borrowers with decent credit; causing company stocks to tumble 15.2 percent. The delinquency rate for Alt-A mortgages has been rising in 2007. In June 2007, Standard & Poor's warned that U.S. homeowners with good credit are increasingly falling behind on mortgage payments, an indication that lenders have been offering higher risk loans outside the subprime market; they said that rising late payments and defaults on Alt-A mortgages made in 2006 are "disconcerting" and delinquent borrowers appear to be "finding it increasingly difficult to refinance" or catch up on their payments.Alt A Loans 'Disconcerting,' Jumbos Weaker, S&P Says 27 June 2007 Bloomberg L.P. https://www.bloomberg.com/apps/news?pid=20601009&sid=aXDYv12DZNcc Late payments of at least 90 days and defaults on 2006 Alt-A mortgages have increased to 4.21 percent, up from 1.59 percent for 2005 mortgages and 0.81 percent for 2004, indicating that "subprime carnage is now spreading to near prime mortgages". Foreclosure rates increase thumb|250px|House in Salinas, California under foreclosure, following the bursting of the U.S. real estate bubble The 30-year mortgage rates increased by more than a half a percentage point to 6.74 percent during May–June 2007,https://money.cnn.com/2007/06/14/real_estate/mortgage_rates/index.htm https://web.archive.org/web/20070618123714/http://money.cnn.com/2007/06/14/real_estate/mortgage_rates/index.htm dead June 18, 2007 CNN Mortgage rates: biggest spike in 4 years 14 June 2007 26 May 2010 Rob Kelley affecting borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the NAR reported that supply of unsold homes is at a record 4.2 million. Goldman Sachs and Bear Stearns, respectively the world's largest securities firm and largest underwriter of mortgage-backed securities in 2006, said in June 2007 that rising foreclosures reduced their earnings and the loss of billions from bad investments in the subprime market imperiled the solvency of several hedge funds. Mark Kiesel, executive vice president of a California-based Pacific Investment Management Co. said, It's a blood bath. ... We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.Rate Rise Pushes Housing, Economy to 'Blood Bath' 20 June 2007 Bloomberg L.P. https://www.bloomberg.com/apps/news?pid=newsarchive&sid=adDRCBB5fqZQ According to Donald Burnette of Brightgreen Homeloans in Florida (one of the states hit hardest by the bursting housing bubble) the corresponding loss in equity from the drop in housing values caused new problems. "It is keeping even borrowers with good credit and solid resources from refinancing to much better terms. Even with tighter lending restrictions and the disappearance of subprime programs, there are many borrowers who would indeed qualify as "A" borrowers who can't refinance as they no longer have the equity in their homes that they had in 2005 or 2006. They will have to wait for the market to recover to refinance to the terms they deserve, and that could be years, or even a decade." It is foreseen, especially in California, that this recovery process could take until 2014 or later. A 2012 report from the University of Michigan analyzed data from the Panel Study of Income Dynamics (PSID), which surveyed roughly 9,000 representative households in 2009 and 2011. The data seemed to indicate that, while conditions were still difficult, in some ways the crisis was easing: Over the period studied, the percentage of families behind on mortgage payments fell from 2.2 to 1.9; homeowners who thought it was "very likely or somewhat likely" that they would fall behind on payments fell from 6% to 4.6% of families. On the other hand, family's financial liquidity had decreased: "As of 2009, 18.5% of families had no liquid assets, and by 2011 this had grown to 23.4% of families."http://journalistsresource.org/studies/economics/housing/mortgage-distress-financial-liquidity-us-families-handling-savings-mortgages-debts/ Mortgage Distress and Financial Liquidity: How U.S. Families are Handling Savings, Mortgages and Other Debts JournalistsResource.org, retrieved June 18, 2012 Stafford Frank Chen Bing Schoeni Robert 2012 PSID Mortgage Distress and Financial Liquidity: How U.S. Families are Handling Savings, Mortgages and Other Debts Institute for Social Research http://jrnetsolserver.shorensteincente.netdna-cdn.com/wp-content/uploads/2012/06/US-Family-Distress-UMich.pdf 2012-06-18 https://web.archive.org/web/20130511132631/http://jrnetsolserver.shorensteincente.netdna-cdn.com/wp-content/uploads/2012/06/US-Family-Distress-UMich.pdf 2013-05-11 dead See also Great Recession Creative Real Estate Investing Deed in lieu of foreclosure Foreclosure consultant List of entities involved in 2007–2008 financial crises dot-com bubble General: Real estate pricing Real estate appraisal Real estate economics Real estate trends International property bubbles: Chinese property bubble (2005–2011) Affordability of housing in the United Kingdom Irish property bubble Japanese asset price bubble Spanish property bubble Further reading Muolo, Paul Padilla, Matthew Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis John Wiley and Sons Hoboken, New Jersey 2008 978-0-470-29277-8 References and notes 30em Note: Sources that are blank here can be found here. This is a problem that is not yet fixed. Category:2000s in economic history Category:2000s in the United States Category:Presidency of George W. Bush