Anonymous writes:
Are these the same FED guys that never saw the tech bubble of 2000?
I would trust these FED economists as much as I could eat them.
Anonymous | 08.21.06 - 7:59 pm | #

dc1000 writes:
isnt it true that this phenomenon pulls demand from the future if and only if the mortgage instruments used today are not available tomorrow? i.e. won't there now be a new class of buyers that there werent before?
dc1000 | 08.21.06 - 8:14 pm | #

Calculated Risk writes:
dc1000, Yes, I think you are correct. But I think some of this "class of buyers" will go away for two reasons: 1) people that speculate and get burned, tend to stay away from any market - and many of these marginal buyers were speculating on price appreciation, and 2) when the new guidance is issued I think that will eliminate some of this class.

Best Wishes.
Calculated Risk | Homepage | 08.21.06 - 8:25 pm | #

ac writes:
Can the owner resort to Jingle Mail if they have a HELOC or 80/20 loan with negative equity? I thought this was only a possiblity with the traditional 20% downpayment loan types used back in the Victorian era of housing.
ac | 08.21.06 - 8:42 pm | #

anon writes:
Oh, I see, the FED concluded they are not to blame.

How convenient, and totally fictional.
anon | Homepage | 08.21.06 - 8:50 pm | #

Tanta writes:
ac:

Yep, that would be a major problem.

The Victorian term for "Jingle Mail" is "deed in lieu of foreclosure." You can probably get a first lien lender to agree to take deed in lieu as long as there are no other encumbrances to title (like those HELOCs) and state law (and the mortgage insurer, if there is one) permit it. However, the first lien lender isn't likely to take deed in lieu if there are those pesky other liens out there and it doesn't look like sale proceeds will satisfy them. If the mortgage documents and state law permit it, and the second lienholder feels like it, the second lienholder can buy the first mortgage from the first lender and then accept deed in lieu to satisfy the combined liens. Of course the second lienholder is screwed if sale proceeds are short, and so it might prefer to foreclose and pursue a deficiency judgement if state law permits.

In any case, no lender is ever required to accept "Jingle Mail." You can mail in your keys and the lender can mail them right back, taped to a foreclosure notice. Maybe that's called "Jungle Mail."
Tanta | 08.21.06 - 9:38 pm | #

PW writes:
All-

You are way too pessimistic. The Fed did a study and concluded that there really is no bubble. I for one completly believe everything they say.
PW | 08.21.06 - 9:51 pm | #

ac writes:
That Fed study sounds precisely like the typical "New Era" argument one would expect to appear during a speculative bubble. In fact, I would have begun to question whether we were in fact in a bubble at all if such a report from ostensibly credible economists had not surfaced.

Thankfully, I can now rest easy knowing the matter has been settled.
ac | 08.21.06 - 9:56 pm | #

Thomas writes:
What a bunch of screwballs.
Thomas | 08.21.06 - 10:22 pm | #

The Insider writes:
The US economy is having a very very bad month of August. Probably the worst since the last recession. I think September we can officially announce the housing boom is over as it turns negative, if not already toward US growth. It came into 2006 full head of steam, now is cratering to the business cycle.

A clear sign of a slowdown bigger than what the "braintrust" has commented on and one they probably know and expect to come. Yet, they will sweet talk the cattle as long as possible.
The Insider | 08.21.06 - 11:56 pm | #

zephyr writes:
The real issue with their conclusion is the relative weight they give to each contributing factor. They point out the mortgage issue and then give it essentially no weight.

I think they have also under-estimated the timing shift of demand (incl. speculators and real demand) caused by the rush to buy as the peak is approached and the deferred demand as people become cautious after the peak.
zephyr | 08.22.06 - 12:53 am | #

blaze writes:
Hey CR, isn't there a 3 year lag on this data? The demographics are according to 2003...
blaze | 08.22.06 - 1:56 am | #

dr strangemoney writes:
Oh, it's a PDF. I thought for sure it was a link to The Onion.

The Migration paragraph is especially convincing. Talk about an airtight conclusion backed by solid data. I think that is what George Tenet would call a Slam Dunk!

As for regions with net outward migrations and skyrocketing prices... well... Move along folks! Nothing to see here.

"How I wish that somewhere there existed an island for those who are wise and of goodwill! In such a place even I would be an ardent patriot." --Einstein

CR, thanks for the internet island. It is very much appreciated.
dr strangemoney | Homepage | 08.22.06 - 4:21 am | #

Kett82 writes:
Dear CR

Coming in on the EL this morning, I read about that report in the Chicago Tribune. Thinking, gee whiz, don’t those exotic loan products they talk about fuel speculation? I need to see if CR has anything to say about this.

Lo and behold, already posted!

Best regards,
Kett82 | 08.22.06 - 7:46 am | #

semper fubar writes:
Yep. Sounds like a permanently high plateau to me.

From this I can only conclude that now, in addition to being a middle east scholar and strategist (having pretty well predicted from the get-go the outcome of our adventure in Mesopotamia) I am now also well-qualified to be a Fed economist. And here I thought you had to know stuff to get that job!!
semper fubar | 08.22.06 - 7:59 am | #

DaveL writes:
Based on a careful reading of that extract the argument seems to be that there's been a permanent shift in the underlying demand for housing enabled by new mortgage products. As it happens if you examine residential investment's share of GDP it was declining from about 1949 to 1993 (6 downto 4%), rose from 93 to 03 on the back of the boom, etc. and jumped radically.

In that timeframe it doesn't make sense, at least to me, to appeal to fundamental demographic changes so it's likely two things: new classes of homeowners + bubble. Both enabled by the same mechanisms.

Both of which are likely to go away if the economy slows down. And then we get into the 'borrowing from future demand' argument which would take over and take 'base' housing demand backto and below l.t. trend to offset the above trend sales.

So the question is where is that sustainable floor ? And are we likely to go thru it ? And while we're going at it - what happens to the rest of the economy given how influential housing has been this time around (CR - your MEW analysis is eargerly awaited indeed ! Have you seen Goldman's look ahead at GDP and housing ?)
DaveL | 08.22.06 - 8:24 am | #

k harris writes:
Toll Brothers, in their latest quarterly release, beg to disagree with the Fed view. They point to speculative buyers in 2004-2005 turning speculative seller today. The Fed paper seems to imply that any market activity that can be explained is not, by definition, speculative. That seems an odd position.
k harris | 08.22.06 - 8:29 am | #

mood swing writes:
The Fed has two tasks: 1) inflate the money supply while 2) deflating the fear of inflation. As these rube-baiters published this report they could be heard stating, "number two... check."
mood swing | Homepage | 08.22.06 - 8:31 am | #

Bob writes:
In 1994, my wife and I sold our townhouse in the Washington DC area for $103,000 and bought a single family home for $220,000. We were married a year earlier and both of us worked. We had to really stretch to afford it. We took out an ARM and had to pay about $150/month in mortgage insurance since we could only put down 5%. Most of which we had to borrow from relatives.

A few years later, we had our fist child and my wife quit her job to take care of the kid. Fortunately, my salary had gone up and we could manage, but it was very tight.

Currently, my wife still stays at home with the kids and after several refinancings at lower and lower interest rates combined with raises, we can comfortably afford our home and have a financial cusion. Fortunately, this was a period of lower and lower mortgage rates instead of rising mortgage rates.

At any time in say the first 7 years of owning our home, if I had lost my job for more than a few months, we would have been in trouble.

My point is, all this talk about how people who have purchased in the last few years will be in trouble if they lose their jobs is nothing new. For as long as I can remember, every young person or young couple who bought a house were stretched to the limit for the first several years. The key is employment. If people keep their jobs, they won't lose their house.

Here's my take on the market near my house....
Inventories are way up. I think this has more to do with increased supply than decreased demand. When prices reached unsustainable levels last summer, a lot of people decided to try and cash out this selling season (which is spring and summer here). Higher prices caused people to try and sell who otherwise wouldn't have. Houses are moving, but at lower prices than last summer. People who bought before 2000 are still making a big profit.

I live in a Maryland suburb. Over the last 5 years, just about every available plot of land between my house and the white house has been filled with homes and office buildings. This is long term very bullish for housing prices in my neighborhood. You can't buy a new house closer to downtown. While I agree much of the run up in housing prices has been to speculation and low interest rates, it hasn't all been due to that. Much of it is basic supply and demand. What I expect to happen is prices will soften over the next 2-3 of years. Maybe drop as much as 20%, After that, appreciation will resume and I wouldn't be surprised if 10 years from now, my house is worth much more than it currently is.
Bob | 08.22.06 - 8:59 am | #

edhopper writes:
I wonder when the American people will ever wake up and figure out how screwed they were by the whores in Congress (Reps and Dems) by the new bankrupcy bill.
This was one of the biggest assaults on the middle class in years.
edhopper | 08.22.06 - 10:29 am | #

Anonymous writes:
Hey Bob,

Have you heard of Japan?
Prices are still off by more than 70% after their real estate/economy crashed a decade ago.
I am not saying US will be like Japan.
But that 10 yrs is along ways off to predict. Lots of things can happen in 10 years like oil reaching 100+ dollars a barrel, wars and etc....
Anonymous | 08.22.06 - 11:09 am | #

JS writes:
I hope no one took the Fed paper too seriously. The dead giveaway is the straw man: “the press.” And it’s even a weak ad hominem variant of straw man where simply mentioning an opponent rather than addressing arguments is sufficient. If this was serious economic analysis the authors would have taken on IMF or BIS economists, or Shiller, Krugman, Volker or any number of others (perhaps even CR!) who have argued about various aspects of the housing bubble. Just take a look at the references at the end of the pdf, awfully short for such a well documented, frequently researched and very current issue. The Fed paper really looks more like an exercise in self-congratulatory mea culpa avoidance, most likely crafted by central bank careerists looking for promotions.
JS | 08.22.06 - 1:04 pm | #