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
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, the synthetic offloading of risk using "mortgage-backed securities, the ability to repackage conforming debt  via "government-sponsored enterprises, public and central bank policy 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. As early as 2003 Shiller questioned whether or not there was, "a bubble in the housing market" that might in the near future correct.
Based on the historic trends in valuations of U.S. housing, 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, 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".
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. "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. 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.
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.
The booming housing market halted abruptly in many parts of the United States in late summer of 2005, and as of summer 2006, several markets faced the issues of 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 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."
"Fortune magazine labeled many previously strong housing markets as "Dead Zones"; other areas were classified as "Danger Zones" and "Safe Havens". "Fortune also dispelled "four myths about the future of home prices". In "Boston, year-over-year prices dropped, sales fell, inventory increased, foreclosures were up, and the correction in "Massachusetts was called a "hard landing".
The previously booming housing markets in "Washington, D.C., "San Diego, California, "Phoenix, Arizona, and other cities stalled as well. The Arizona Regional "Multiple Listing Service (ARMLS) showed that in summer 2006, the for-sale housing inventory in Phoenix hads grown to over 50,000 homes, of which nearly half were vacant (see graphic). 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, the value of luxury home builder "Toll Brothers' stock fell 50% between August 2005 and August 2006,["original research?] and the "Dow Jones U.S. Home Construction Index was down over 40% as of mid-August 2006.["original research?]
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". 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. 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.
As the housing market began to soften from winter 2005 through summer 2006, "NAR chief economist "David Lereah predicted a "soft landing" for the market. 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.
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". "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.
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." 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."
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.["citation needed] 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.
Based on slumping sales and prices in August 2006, economist "Nouriel Roubini warned that the housing sector was in "free fall" and would derail the rest of the economy, causing a "recession in 2007. "Joseph Stiglitz, winner of the "Nobel Prize in economics in 2001, agreed, saying that the U.S. might enter a "recession as house prices declined. The extent to which the economic slowdown, or possible recession, would last depended in large part on the resiliency of the U.S. consumer spending, which made up approximately 70% of the US$13.7 trillion economy. The evaporation of the wealth effect amid the current housing downturn could negatively affect the consumer confidence and provide further headwind for the U.S. economy and that of the rest of the world.
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.
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. 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.
"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.
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.
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 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.
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. "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 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.
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.
"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 as of April 30, 2007. 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 in loans on 22 June 2007 to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.
"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."
A "The 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". 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. 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.
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.
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. 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".
The 30-year mortgage rates increased by more than a half a percentage point to 6.74 percent during May–June 2007, 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.
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.”
International property bubbles:
There has never been a run up in home prices like this.
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.
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.
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.
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.
|"Dead Zones"||"Danger Zones"||"Safe Havens"|
|Las Vegas||Los Angeles||Columbus|
|Washington, D.C. / Northern Virginia||San Francisco / Oakland||Houston|
Tully, Shawn (4 May 2006). "Welcome to the Dead Zone". "Fortune.
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.
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:
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.
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
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.
This is the biggest housing slump in the last four or five decades: every housing indicator is in free fall, including now housing prices.
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.
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.
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.
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.
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.
Note: Sources that are blank here can be found here. This is a problem that is not yet fixed.