econscius

Posts Tagged ‘Housing Bubble’

$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