While the contractual obligation of mortgage service companies forced properties into an already crowded market, over-supplied with speculative home investments, it was far from the cause of the housing bubble between 2006-2012 and (IMHO) had very little to do with the S&L Crisis. The “06-12 Bubble” was caused by excessive speculation, free money, and an expanding housing affordability index.
The HAI (housing affordability index) is the relationship between the median price of a home and the mortgage interest rate with a normal down payment), where a relationship of 1 to 1 or higher is good, and less than 1 to 1 is bad. Forget the national HAI. You need to look at the local area where you live. For example, many places in California, New York, etc., have been below 1 for a long time, while places in Nevada, Arizona, Florida, and other areas were well above 1, and the reason people moved to those locations during the 80s, 90s, and into the 2000s.
During the S&L Crisis, the housing affordability index was less than 1 to just over 1. The issue wasn’t with S&Ls and single-family loans. The issue was that S&Ls had been deregulated, and they began competing with the banks, investing in highly speculative acquisition and development loans for builders, causing excessive overbuilding in the residential, multi-family, and commercial real estate sectors. Effectively, the S&Ls were overleveraged and under-secured.
In the late 80s and early 90s, S&Ls were phased out and replaced by Federal Savings Banks or absorbed by Commercial Banks. The median home price rose steadily from the 90s through 2006. However, the HAI dropped steadily, dipping well below 1 during the “2006-2012 housing bubble.” Essentially, housing prices were outpacing household income. From 1990 to 2000, the Case Shiller Index (National Home Prices) rose 32% or an average of 3% annually. From 2000 to mid-2006, the CSI rose 84% or an average of 13% annually.
Housing prices declined from mid-2006 through 2012, yet the Feds kept interest rates artificially low, and the economy recovered. Between 2012 and 2020, the CSI rose 60% or 7.5% annually. From 2020 through April of 2024, prices have risen 47% or an average of 12% annually. Annual foreclosures rose during the housing crisis, peaking in 2012 and declining to the lowest level in 2021. In 2022 and 2023, the foreclosure rate has been twice that of 2021.
If you don’t learn from history, you’re destined to repeat it. Are we destined to see a correction? All economic indicators would seem to be pointing towards one. Time will tell.
Great column that got my brain working! My conclusions:
1. Incentives matter. Want to know how a market will go… look at the incentives.
2. Extend and pretend for commercial mortgages seems to be a very similar problem in today’s market. I will now be dwelling on how important the late 1980’s S&L model is when considering how the Fed will deal with future interest rates. My base case for Fed cuts sooner rather than later has been because of the very real danger the rotten commercial mortgage problem is for all banks. I am pretty sure the Fed is aware of the problem and is wringing their hands at the dilemma.
3. Ours is a credit-based economy. Despite Fed “management” and attempts to engineer “soft-landings”, I do not think that we can avoid the boom and bust (Minsky moments) of credit based markets. Incentives and human nature are very difficult (impossible?) to overcome.
4. The moral hazard associated with government insurance amplifies the credit cycle and makes market drawdowns more severe.
5. The attempt to control and direct markets with interest rates from a central bank has far reaching unintended consequences. Some of these are/ have been easy to guess (e.g. the dramatic slow-down of residential real estate in the face of rising interest rates). Other consequences are impossible to guess in the very complex and very dynamic credit-based economy in which we exist. My guess is that we are still in the eye of the inflation hurricane. I still think that, given the choice between a severe deflation or long-lasting inflation, the Fed will choose the latter as the lesser of two evils. I see inflation-stagflation as the sin-wave of the foreseeable future.
6. As long as governments insure markets, taxpayers will continue to bear the burden of losses when the boom turns to bust.
7. Government management and participation in markets is inherently inflationary over the long-run.
The Ghost of Karl Popper sings in my head and tells me to consider where I am wrong. The answer is there are an infinity number of ways in which I am wrong. But the most obvious counter-arguments are: the Fed is blind to the danger, holds on to ‘higher for longer’ for far too long, and we enter a nasty, inescapable deflation. Then again, perhaps the Fed does everything right, we soft-land our way right out of this mess, and my pessimism of government management and participation is unwarranted.
I am sure of this: one way or another, something is going to happen.
Yep. Portfolio loans.
While the contractual obligation of mortgage service companies forced properties into an already crowded market, over-supplied with speculative home investments, it was far from the cause of the housing bubble between 2006-2012 and (IMHO) had very little to do with the S&L Crisis. The “06-12 Bubble” was caused by excessive speculation, free money, and an expanding housing affordability index.
The HAI (housing affordability index) is the relationship between the median price of a home and the mortgage interest rate with a normal down payment), where a relationship of 1 to 1 or higher is good, and less than 1 to 1 is bad. Forget the national HAI. You need to look at the local area where you live. For example, many places in California, New York, etc., have been below 1 for a long time, while places in Nevada, Arizona, Florida, and other areas were well above 1, and the reason people moved to those locations during the 80s, 90s, and into the 2000s.
During the S&L Crisis, the housing affordability index was less than 1 to just over 1. The issue wasn’t with S&Ls and single-family loans. The issue was that S&Ls had been deregulated, and they began competing with the banks, investing in highly speculative acquisition and development loans for builders, causing excessive overbuilding in the residential, multi-family, and commercial real estate sectors. Effectively, the S&Ls were overleveraged and under-secured.
In the late 80s and early 90s, S&Ls were phased out and replaced by Federal Savings Banks or absorbed by Commercial Banks. The median home price rose steadily from the 90s through 2006. However, the HAI dropped steadily, dipping well below 1 during the “2006-2012 housing bubble.” Essentially, housing prices were outpacing household income. From 1990 to 2000, the Case Shiller Index (National Home Prices) rose 32% or an average of 3% annually. From 2000 to mid-2006, the CSI rose 84% or an average of 13% annually.
Housing prices declined from mid-2006 through 2012, yet the Feds kept interest rates artificially low, and the economy recovered. Between 2012 and 2020, the CSI rose 60% or 7.5% annually. From 2020 through April of 2024, prices have risen 47% or an average of 12% annually. Annual foreclosures rose during the housing crisis, peaking in 2012 and declining to the lowest level in 2021. In 2022 and 2023, the foreclosure rate has been twice that of 2021.
If you don’t learn from history, you’re destined to repeat it. Are we destined to see a correction? All economic indicators would seem to be pointing towards one. Time will tell.
Great column that got my brain working! My conclusions:
1. Incentives matter. Want to know how a market will go… look at the incentives.
2. Extend and pretend for commercial mortgages seems to be a very similar problem in today’s market. I will now be dwelling on how important the late 1980’s S&L model is when considering how the Fed will deal with future interest rates. My base case for Fed cuts sooner rather than later has been because of the very real danger the rotten commercial mortgage problem is for all banks. I am pretty sure the Fed is aware of the problem and is wringing their hands at the dilemma.
3. Ours is a credit-based economy. Despite Fed “management” and attempts to engineer “soft-landings”, I do not think that we can avoid the boom and bust (Minsky moments) of credit based markets. Incentives and human nature are very difficult (impossible?) to overcome.
4. The moral hazard associated with government insurance amplifies the credit cycle and makes market drawdowns more severe.
5. The attempt to control and direct markets with interest rates from a central bank has far reaching unintended consequences. Some of these are/ have been easy to guess (e.g. the dramatic slow-down of residential real estate in the face of rising interest rates). Other consequences are impossible to guess in the very complex and very dynamic credit-based economy in which we exist. My guess is that we are still in the eye of the inflation hurricane. I still think that, given the choice between a severe deflation or long-lasting inflation, the Fed will choose the latter as the lesser of two evils. I see inflation-stagflation as the sin-wave of the foreseeable future.
6. As long as governments insure markets, taxpayers will continue to bear the burden of losses when the boom turns to bust.
7. Government management and participation in markets is inherently inflationary over the long-run.
The Ghost of Karl Popper sings in my head and tells me to consider where I am wrong. The answer is there are an infinity number of ways in which I am wrong. But the most obvious counter-arguments are: the Fed is blind to the danger, holds on to ‘higher for longer’ for far too long, and we enter a nasty, inescapable deflation. Then again, perhaps the Fed does everything right, we soft-land our way right out of this mess, and my pessimism of government management and participation is unwarranted.
I am sure of this: one way or another, something is going to happen.