By way of Edward Glaeser's post (via ScienceBlogling Jonah) about the relative stability of housing prices in the New York City area, I was looking at the S&P/Case-Shiller Seasonally Adjusted Home Price Values (I really need new hobbies...). The really odd thing I noticed is that in the metro areas that had huge crashes (greater than twenty percent of the maximal value), there was a huge spike in home prices from 2005-2006 (and which sometimes started in mid-2004), while, in metro areas that haven't crashed, there was no 2005-2006 spike. So what the hell happened in 2005?
Consider Boston and Denver. Neither metro area had this huge 2005-2006 surge: the maximum increase from 2003 to 2006 was ten percent for both areas with lots of fluctuations, which matches my anecdotal observations. On the other hand, the DC metro area roared ahead in 2005-2006, and then plunged twenty five percent from the high (which also correlates with personal observation). In Miami, the index dropped 39 percent from the 2006 high to its current value. San Francisco seems to be a rare intermediate case; I don't know what to make of that.
So what the hell happened? It can't be land scarcity, since Boston wasn't affected* (and, if it were, why would this suddenly become a problem in late 2004 and 2005?). Does this have something to do with regional and state lending practices? (I've been looking and couldn't find it--and I could be imagining this--but I remember a Boston Globe article that described how Massachusetts had a far less risky housing loan problem than other states). Or are housing markets are still driven by local phenomena, but Big Shitpile is so big that it is crushing local bubbles?
*Once you discount the area of Boston that is covered with water (and obviously uninhabitable), the city of Boston has one of the highest population densities in the U.S.
It was mostly driven by speculative buying using risky financing. Recall the cries of "They're not making any more land!" etc.
Drive to NC, they don't need to make more land.
But I live in Providence, RI. There is one beat down house that in 1999 sold for $25,000. By 2005 it was valued at an astounding $350,000. In six years it increased $325,000 in value, and of course that's when it got foreclosed.
One building I lived in was nominally worth perhaps $250,000 but a MA based management and real estate company bought it for $800,000 and then sunk about $300,000 in improvements into the building.
I then noted they put it up for sale for you guessed it, $1.2 Million. That was when we moved out because you can just guess what happened next.
Yep, the bank moved to foreclose.
So much for an ever growing market.
I agree with Tony P. I also think an important aspect of it is the fact that after the .com market bust in the 90's, a lot of money got moved over into real estate, and a resulting real estate bubble was almost inevitable at that point. As far as why certain areas got hit while others didn't, I think is just a combination of local conditions and herd mentality. If I remember correctly, prices in the metro NYC area were already relatively high in the late 90's/early 00's, so probably people looking for bargains just went elsewhere.
Florida, where I live, is an interesting case. I think a lot of money moved into the state with baby boomers buying second/retirement homes, and developers anticipating a strong market as a result of baby boomers retiring. But then we had awful hurricane seasons in 2004 and 2005. The insurance companies suddenly became believers in global warming, and started doubling and tripling homeowners insurance rates and canceling policies. As a result, people were unable to buy and sell homes, not because they couldn't get loans (which were still easy to get at that point), but because they couldn't get insurance! The Florida real estate market screeched to a halt, before most of the rest of the country was hit with this.
Now, I'm sure the real estate bubble would have burst anyway, although maybe a little bit later and not quite so hard, if the Florida market hadn't collapsed because of hurricane-related issues. However, I think it's worthwhile to look at this as a kind of foreshadowing of the kind of financial hardship that global warming can bring. The people who are against taking measures to fight global warming because they are concerned about the financial costs have it exactly backwards--not taking action against global warming is what will have dire financial consequences in the future.
In anticipation of the "it's Clinton's fault for pushing through a law that forced banks to sell mortgages to poor people" crowed, it is worth pointing out that the big banks that failed WERE NOT bound by that law: only one of the 25 big banks that have failed fell under its reach. The others bought into the idea of playing fast and loose with mortgages on their own.
On the other hand, every bank that has failed fell under a law that was passed in the early 2000s. That law significantly lowered the ratio of assets to risk banks had to carry.
I don't know what caused the entire crash; I'm reasonably sure the reasons are too complicated to assign to a single law, source, or person.
What Tony P. describes certainly seems to describe the Minneapolis/St. Paul housing bubble. Here, there was a push to way-out suburbs with land-clearing developments building houses that wasted energy both through heating and through increased drive times. As the price of oil rose, people were squeezed enough by their spiralling energy costs, and then when their ARM's kicked in, they didn't have enough to retain their mortgages.
It was a self-feeding cycle, as the prices of the homes in the developments rose the mortgages got "junkier," the money got easier and it affected the prices of the vacant homes in the cities and inner-ring cities as people speculated on "flipping" homes for quick profit.
This also led to unjustified rises in condo/townhome prices. On a sad note, I have a friend who had bought a condo on a five-year note with a balloon. When it came time to finance the balloon, he couldn't get any money because the prices of the units in his complex dived. It wasn't due to the mortgage market, but because the city had sponsored development of newer and fancier townhomes and condos less than a mile away. The units in his complex were no longer in demand, especially after the association learned that in order to upgrade the complex they needed to assess $10000 per unit to the owners.
It really sucked helping him move out of that place because he had been so proud of returning to property ownership ten years after a brutal divorce settlement.
This happened to a lot of people in Minnesota, and it makes me wonder about an economic system in which we have more empty housing stock than we do homeless people.
In spite of my english trouale,I am trying to read and understand your writing.
Lots of factors all coming together. Some of which aren't talked about much:
The lowering of the prime rate so that the effective interest rate of many loans were below the rate of inflation. You could, at least on paper, make money by just taking out and repaying loans. Even better if you could take out the loans as a business so the interest is tax deductible.
Changes in the tax code under Bush Sr. He added the 'passive loss clause' whereby builders could deduct the cost of holding properties they had built. Before this builders had to be careful what and how much they built because the costs of holding onto the property if they couldn't sell it would eat them up. Making these costs deductible removed a lot of the risk of building without carefully researching the market to make sure what was built could be sold.
The drying up of the tech sector, Y2K and other major financial wellsprings meant that real estate became one of the only places to put your money if you wanted a good return.
The changing of the rules of credit and assurances by the people rating securities that risk was lower than the individual pieces. Put a whole bunch of BB rated instruments together and magically it was rated AA.
Loans that pay, no money down and no recourse loans that are easy to walk away from, builders who have no fear of oversupply because it is all deductible, a lack of other places to put money and, the kicker, people marketing and/or promoting real estate as an easy, no-lose, no-brain wealth creation strategy all combine to create this cesspool of a situation.
This later point was a big clue. A lot of financial information and future trends can be discerned by observing the covers of magazines on the newsstands and the informational on late night TV. Then the glossy magazines tout people becoming overnight millionaires, sometimes Billionaires, anyone watching was effectively put on notice. When the late night infomercials started selling no-money-down, sure-thing, real estate 'systems' for five easy payments of $29.95 the writing was on the wall. These scams work only so long as a few swinging large sums of money are consolidating wealth from the many.
When the method, scam, has to reach down to the common man they are in effect scraping the bottom of the barrel for people to harvest money from. The great depression hit shortly after the common man got sucked in. The tech boom crashed when tech stock became seen as a way for 'anyone' to make money and shortly after the glossy mags celebrated the wisdom of the tech millionaires. The magazine covers always shout about how all is looking up in a sector after the prime has past and the bloom is off the rose.
So it goes.
I agree with you about Twitter and Facebook in general, but I do think that there is a chance for Twitter exit, only if the price is right.
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