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Archive for the ‘Housing Bubble’ Category

San Bernadino County to Seize Mortgages Using Eminent Domain

In Economy, Housing Bubble, Loan Forgiveness on July 5, 2012 at 5:00 pm

Threats to our rights not only come from Washington, they originate in city halls and county offices across the nation.  An example is a movement in several economically devastated California municipalities to use the power of eminent domain to seize not land, but mortgages.  The San Bernardino Board of Supervisors approved this action June 20, 2012.  [1]   Unemployment is as high as 30% in parts of San Bernardino County. [2]

Regardless of the merits or demerits of the specific proposal, this most certainly is NOT what eminent domain is intended for.

This odd interpretation of a city’s right to condemn land needed for a public project (e.g. building an expressway) is to be used to go after the mortgage holders of vacant properties.  [2] Note it does nada to improve the properties nor does it get jobs for out-of-work borrowers.  It is simply to seize mortgages from the prior mortgage holder and shrink the loan balance to an amount determined by San Bernardino and its private-sector financial partner.

The obvious impact of this attack on long-standing property rights would be to make lending more dangerous.  This will increase mortgage rates and make lenders less likely to extend mortgages, both of which have the long-term impact of making mortgages harder to come by, especially for the poor.  Which would seem to be a perverse effect of the original attempt.

Who came up with this hair-brained idea?  Someone with their hand in the cookie jar.  A couple of San Francisco investment banks and venture capital fund devised the idea and just happen to profit from the transactions (the Mortgage Resolution Partners firm refinances the seized mortgages for municipalities).  Roger Altman, the chairman of one of the investment banks, Evercore, just happens to be a former Clinton Administration official who also raises funds for President Obama. [2]

Let’s hope this misguided attack on property rights is nipped in the bud by the courts.

 

[1] http://www.latimes.com/business/money/la-fi-mo-eminent-domain-20120620,0,4970444.story

[2] http://online.wsj.com/article/SB10001424052702303933404577505013392791018.html?KEYWORDS=cities+california+mortgages

 Pictures from Wikipedia Commons.

Bubbles Going Dutch: Mortgages at 125% Loan To Value

In Housing Bubble, Mortgage Interest Deduction, Netherlands on December 5, 2011 at 10:19 pm

Following up on my post about the difficulty of spotting and deflating speculative bubbles [1], there is an interesting article in today’s Wall Street Journal “Mortgage Burden Looms Over Dutch” referring to a possible housing bubble in the Netherlands, home of the most infamous bubble of all: the tulip bulb mania of 1636-7.

We read:

“In the boom years, Dutch banks routinely wrote mortgages that exceeded 125% of the value of the home– covering closing costs, taxes, renovations and even new car purchases on the side.”

Household debt in the Netherlands was more than 240% of disposable income, according to EU statistics agency Eurostat – one of the highest levels of any advanced economy and easily the highest in the Euro zone.” [2] [emphasis added]

Is the Dutch economy in a speculative real estate bubble?  Might it burst and bring down one of Europe’s better performing economies?  The article says some Dutch regulators “see it as a major risk for the economy.”

What caused the Dutch housing bubble?  Lehman?  The article says:

“Economists lay part of the blame for the Netherlands’ high household debt levels on the tax deduction for mortgage interest.”

Sound familiar?

The [mortgage deduction] policy, similar to the U.S., inflates real-estate values, many economists say, and encourages households to take on more debt than they can handle.” 

Here we have regulators identifying a risk.  Surely the examples of Spain, the USA and other nations should serve as a bonus red flag to the Dutch. 

Are the Dutch government and the Dutch people on the case?

“On Tuesday, Dutch Prime Minister Mark Rutte dismissed worries about the Netherlands’ mortgage debt.  ‘It’s not a big issue…if you look at the whole picture’, he said, noting the Dutch “have huge private savings.”

To my ears, the Prime Minister is spouting typical bubble rationalizations.   We always seem to hear ‘look at the entire picture of a fundamentally sound economy.’  His point about private savings is suspect for the obvious reason a debt crisis is usually accompanied by a plunging stock market.  Dutch savings, like American savings in 1929, 2000 or 2008, can shrink very quickly in a stock market collapse, which may move in tandem with other asset declines, such as housing. 

If not the head of the Dutch government, what about the Dutch people who surely have seen what happened in other countries?  “Only 18% of the Dutch public support eliminating the mortgage interest deduction entirely.”  [3] I do not speak Dutch, so I rely on the Wikipedia summary of the literature, which shows a lack of political will to take on the mortgage deduction.

There are obvious parallels with the United States.  Well-intentioned government policies such as the mortgage interest deduction and low interest rates plus increasingly aggressive private bank lending fuel a speculative real estate bubble and excessive debt levels.  As with the United States, a handful of economists and regulators identify a potential problem.  But the public at large, and the politicians who represent them, deny there is a bubble and are unwilling to make the politically tough decisions to head off a potential disaster.  We know how this story usually ends.  The Netherlands is now one of the better EU economies (5% unemployment) and the Dutch can find reasons to believe their current prosperity is real and their home values justified, despite the meltdowns so many other countries have recently experienced.

I cannot predict the future but I think the dyke is about the break and a flood of Dutch housing problems will pour through when their housing bubble bursts.  It is another example of the difficulty of spotting bubbles and actually deflating them.

Aftermath of the flood in Oude-Tonge, Goeree-Overflakkee, Netherlands

[1] https://econscius.wordpress.com/2011/11/29/irrational-exuberance-about-spotting-bubbles/

[2] http://online.wsj.com/article/SB10001424052970203752604576640662346325544.html?KEYWORDS=mortgage+dutch

[3] http://en.wikipedia.org/wiki/Home_mortgage_interest_deduction#Netherlands, retrieved 12/5/2011.

Pictures (tulips, Amsterdam and Dutch inundation from North Sea flood of 1953) from Wikipedia Commons.

$26 Billion Failed To Stop Housing Market Decline

In Economy, Housing Bubble, Obama Administration, Tax Breaks on November 13, 2011 at 12:23 am

I recommend a Marketwatch story, http://www.marketwatch.com/story/the-great-26-billion-real-estate-swindle-2011-11-08 , which follows up on the home purchase tax credit “Stimulus” programs of the Obama Administration.

We are reminded about the $8,000 tax credits that were mailed out to home buyers in 2009 and 2010.  Using recent zillow.com data, we see most of these home buyers are worse off, even with the credit, because of the continued slide in home values.  That is sobering: the government spent $26 billion on home buyer subsidies and the average qualifying buyer made a losing bet even with the government money.  The average home dropped by more than $14,500 since the time of the tax credit, which more than offsets the $8,000 tax credit.  Needless to say, the taxpayer is worse off, too.

The graph below demonstrates this.  The tax credits helped cause a temporary halt of the decline in 2009 as home prices briefly increased.  Then home values went back to their decline after the credit ended in June 2010.  The real estate market had not yet cleared.  All that government money only delayed the inevitable, actually extending the housing recession by pushing back the time when housing would hit its trough. 

 

 

Graph from Wikipedia Commons, retrieved 11/12/11, http://en.wikipedia.org/wiki/File:Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_the_US_1963-2010_Monthly.png

Picture from Wikipedia Commons.

Wall Street Bulls Running in Pamplona?

In Economy, Housing Bubble, Spain, Wall Street on July 13, 2011 at 3:12 am

San Fermines Festival, Pamplona: running of the bulls. Source: Wikipedia Commons

Did the bulls of Wall Street charge through the streets of Pamplona?

Marketwatch.com columnist Brett Arends asks an interesting question in his July 6 column:

“Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, ‘liberals’ and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how? And what about the giant housing bubbles in Ireland, the U.K. and Australia? All Barney Frank? And the ones across Eastern Europe, and elsewhere?” [1]

Mr. Arends is correct Barney Frank is not a Spanish politician.

His argument, however, equally exculpates others more commonly blamed by the media for the American housing bubble: George W. Bush and the Republican Party.  Bush was not El Presidente de Espana.  Many opinion writers put much of the blame squarely on “Wall Street”.  Yet, American Wall Street firms were not a factor on the calles of Seville.  To paraphrase Mr. Arends, did Wall Street cause the Australian housing bubble?  If so, how? 

Many countries experienced dramatic housing bubbles during the exact same timeframe as the United States.  If George W. Bush “caused” the American housing bubble through supposedly lax regulation of mortgages and credit markets, is it merely a coincidence so many other varied nations experienced similar bubbles at the exact same time?

Rather than asking which politicians to blame, the better question is which common policies and conditions the bubble countries shared.  Is it also possible politicians have less to do with these bubbles than many believe?   Might individual consumers be susceptible to herd-like thinking, driving up prices in a feedback loop when prices are going up, then stampeding away from the housing sector bulls when the bubble bursts?

Pamplona: running of the bulls, Wikipedia Commons

I believe Spain is an excellent case study for the simple reason it experienced an even more dramatic 1994-2008 housing bubble than the United States.  Catalonia and the Basques were an ocean beyond the reach of American law.  In forthcoming posts, we will explore the evidence.

Footnote:

[1] http://www.marketwatch.com/story/the-next-worse-financial-crisis-2011-07-06