United States housing bubble

United States housing bubble

The United States housing bubble is an economic bubble in many parts of the United States housing market including areas of California, Florida, New York, Michigan, the Northeast Corridor, and the Southwest markets. On a national level, housing prices peaked in early 2005, began declining in 2006 and may not yet have hit bottom. Increased foreclosure rates in 2006–2007 by U.S. homeowners led to a crisis in August 2007 for the subprime, Alt-A, Collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets.cite episode |series=Bill Moyers Journal |title=In Washington, big business and big money are writing the rules on trade... |transcripturl=http://www.pbs.org/moyers/journal/06292007/transcript5.html |airdate=2007-06-29 |network=PBS ] In October 2007 the U.S. Treasury Secretary called the bursting housing bubble "the most significant risk to our economy."cite news |title=Housing woes take bigger toll on economy than expected: Paulson |date=2007-10-17 |work=AFP |url=http://afp.google.com/article/ALeqM5hWSjWmGJ4YXTh3PM5kOC7csTT48g ]

Housing bubbles may occur in local or global real estate markets. They are typically characterized, in their late stages, by rapid increases in the valuations of real property until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This may be followed by decreases in home prices that can result in many owners holding negative equity—a mortgage debt higher than the value of the property. The underlying causes of the housing bubble are complex; factors include historically-low interest rates, lax lending standards, and a speculative fever.cite news |title=No mercy now, no bail-out later |work=The Daily Telegraph |date=2006-03-23 |url=http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/03/23/ccfed23.xml&menuId=242&sSheet=/money/2006/03/23/ixcoms.html |quote= [T] he American housing boom is now the mother of all bubbles—in sheer volume, if not indegrees of speculative madness. ] cite news |title=Lowering the Boom? Speculators Gone Mild |date=2006-03-15 |work=Fortune |url=http://money.cnn.com/magazines/fortune/fortune_archive/2006/03/20/8371785/index.htm | quote=America was awash in a stark,raving frenzy that looked every bit as crazy as dot-com stocks. ] This bubble may be related to the stock market or dot-com bubble of the 1990s.cite web |url=http://www.federalreserve.gov/fomc/fundsrate.htm |title=Intended federal funds rate, Change and level, 1990 to present ] cite news |last=Shiller|first=Robert |title=The Bubble's New Home | work=Barron's |date=2005-06-20 |url=http://online.barrons.com/article/SB111905372884363176.html |quote=The home-price bubble feels like the stock-market mania in the fall 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 priceappreciation. 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:]
*Boom ended August 2005
*Mortgage rates rose almost one point
*Affordability conditions deteriorated
*Speculative investors pulled out
*Homebuyer confidence plunged
*Resort buyers went to sidelines
*Trade-up buyers to sidelines
*First-time buyers priced out of market

Based on the historic trends in valuations of U.S. housing, [cite news |last=Baker |first=Dean |title=The bubble question |work=CNNMoney.com |date=2004-07-27 |url=http://money.cnn.com/2004/07/13/real_estate/buying_selling/risingrates/ |quote=There has never been a run up in home prices like this. ] many economists and business writers have predicted a market correction, ranging from a few percentage points, to 50% or more from peak values in some markets, [cite news |title=US heading for house price crash, Greenspan tells buyers |work=The Times |date=2005-08-27 |url=http://business.timesonline.co.uk/tol/business/economics/article559641.ece |quote=Alan Greenspan, the United States's 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. ] [cite news |title=Buffett: Real estate slowdown ahead
work=CNNMoney.com |date=2006-05-08 |url=http://money.cnn.com/2006/05/05/news/newsmakers/buffett_050606/index.htm |quote=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.
] [cite news |title=Surviving a Real-Estate Slowdown |work=The Wall Street Journal |date=2006-07-05 |url=http://online.wsj.com/public/article_print/SB115204791463597636-_dwtqavFBN5w_kTARC8T9SKB_Fs_20060711.html |quote=A significant decline in prices is coming. A huge buildup of inventories istaking 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. ] cite news |title=The No-Money-Down Disaster |date=2006-08-21 |work=Barron's |url=http://online.barrons.com/article/SB115594208047539900.html ] cite news |title=Bubble Blog |date=2006-08-08 |work=Newsweek |url=http://www.msnbc.msn.com/id/14252223/site/newsweek/ ] and, in spite of the fact that this cooling has not affected all areas of the U.S., some have warned that it could and that the correction would be "nasty" and "severe". [cite news |last=Krugman |first=Paul |title=No bubble trouble? |work=The New York Times |date=2006-01-02 |url=http://select.nytimes.com/2006/01/02/opinion/02krugman.html |quote= [T] he overall market value of housing has lost touch with economic reality. And there's a nasty correctionahead. ] [cite news |title=Housing bubble correction could be severe |work=US News & World Report |date=2006-06-13 |url=http://www.usnews.com/usnews/biztech/articles/060613/13housing_bubble.htm ] Chief economist Mark Zandi of the economic research firm Moody's Economy.com predicted a "crash" of double-digit depreciation in some U.S. cities by 2007–2009.cite news |title=Study sees '07 'crash' in some housing |date=2006-10-05 | work=Chicago Tribune |url=http://www.chicagotribune.com/business/chi-0610050109oct05,1,1050563.story?coll=chi-business-hed&ctrack=1&cset=true ] [cite news |title=Moody's predicts big drop in Washington housing prices |date=2006-10-02 |work=Washington Business Journal |url=http://www.bizjournals.com/washington/stories/2006/10/02/daily45.html ] In a paper presented at a Federal Reserve Board economic symposium in August 2007, Yale University economist Robert Shillerwarned, “the examples we have of past cycles indicate that major declines in real home prices—even 50 percent declines in some places—are entirely possible going forward from today or from the not too distant future.”cite news |publisher=Finfacts Ireland |title=Two top US economists present scary scenarios for US economy; House prices in some areas may fall as much as 50% - Housing contraction threatens a broader recession |date=2007-09-03 |url=http://www.finfacts.com/irelandbusinessnews/publish/article_1011005.shtml |quote=The examples we have of past cycles indicate that major declines in real home prices—even 50 percent declines in some places—are entirely possible going forward from today or from the not too distant future. ]

Bubble bursts

The booming housing market appears to have halted abruptly for many parts of the U.S. in late summer of 2005, and as of summer 2006, several markets are facing 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 has dropped almost 3% since January 2006, that new-home inventories hit a record in April and remain near all-time highs, that existing-home inventories are 39% higher than they were just one year ago, and that sales are down more than 10%, and predicts 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 labelled many previously strong housing markets as "Dead Zones;" other areas are classified as "Danger Zones" and "Safe Havens". "Fortune" also dispelled "four myths about the future of home prices." In Boston, year-over-year prices are dropping, [cite news |title=Housing slowdown deepens in Mass. |work=Boston Globe |date=2006-04-26 |url=http://www.boston.com/business/globe/articles/2006/04/26/housing_slowdown_deepens_in_mass?mode=PF ] sales are falling, inventory is increasing, foreclosures are up, and the correction in Massachusetts has been called a "hard landing". [cite news |title=Sellers chop asking prices as housing market slows |work=Boston Globe |date=2005-12-09 |url=http://www.boston.com/business/articles/2005/12/09/sellers_chop_asking_prices_as_housing_market_slows?mode=PF ] The previously booming housing markets in Washington, D.C., San Diego, Phoenix, and other cities have stalled as well. [cite news |title=Bubble, Bubble-Then Trouble |work=Business Week |date=2005-12-December 19 |url=http://www.businessweek.com/magazine/content/05_51/b3964052.htm ] [cite news |title=San Diego Home Prices Drop |publisher=NBC |date=2006-07-13 |url=http://www.nbcsandiego.com/news/9512588/detail.html ] Searching the Arizona Regional Multiple Listing Service (ARMLS) shows that in summer 2006, the for-sale housing inventory in Phoenix has grown to over 50,000 homes, of which nearly half are vacant (see graphic).cite news |title=Over 14,000 Phoenix For-Sale Homes Vacant |date=2006-03-10 |url=http://thehousingbubbleblog.com/?p=256 |publisher=The Housing Bubble Blog ] Several home builders have revised their forecasts sharply downward during summer 2006, e.g., D.R. Horton cut its yearly earnings forecast by one-third in July 2006, [cite news |title=D.R. Horton warning weighs on builders |work=MarketWatch |date=2006-07-14 |url=http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BB9264E12%2DEB3C%2D4572%2DB46A%2DDAECCED62EC2%7D&siteid=myyahoo&dist=myyahoo ] the value of luxury home builder Toll Brothers' stock fell 50% between August 2005 and August 2006, [cite news |title=Toll Brothers, Inc. (NYSE:TOL) |work=MarketWatch |date=006-08-22 |url=http://www.marketwatch.com/tools/quotes/intchart.asp?symb=TOL&siteId=yhoo ] and the Dow Jones U.S. Home Construction Index was down over 40% as of mid-August 2006. [cite news |title=U.S. Home Construction Index (DJ_3728) |work=MarketWatch |accessdate=2006-08-18
] 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 anxious buyers are canceling contracts for homes already being built." [cite news |title=Toll Brothers lowers outlook |work=MarketWatch |date=2006-08-22 |url=http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B7DA32685%2DEC81%2D4C3B%2D80F0%2D95C91D3AFD51%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo ] Homebuilder Kara Homes, known for their construction of "McMansions", announced on September 13, 2006 the "two most profitable quarters in the history of our company", yet filed for bankruptcy protection less than one month later on 6 October. [cite news |title=Bankruptcy Considered |work=Asbury Park Press |date=2006-10-06
] Six months later on April 10, 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. [cite news |title=Kara Homes buyers may lose deposits |work=Asbury Park Press |date=2007-04-10 |url=http://www.app.com/apps/pbcs.dll/article?AID=/20070410/NEWS/704100305 ]

As the housing market began to soften in winter 2005 through summer 2006, [cite news |last=Fleckenstein |first=Bill |title=The housing bubble has popped |work=MSNBC |date=2006-04-24 |url=http://moneycentral.msn.com/content/P149596.asp |quote=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. ] [cite news |title=Sales Slow for Homes New and Old |work=The New York Times |date=2006-07-26 |url=http://www.nytimes.com/2006/07/26/business/26home.html |quote=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] NAR chief economist David Lereah predicted a "soft landing" for the market. [cite news |last=Lereah |first=David |title=Realtors' Lereah: Housing To Make 'Soft Landing' |work=Forbes |date=2006-01-01
] 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 is not comfortable with the mild term "soft landing" to describe what is actually happening in California's real estate market. [cite news |last=Appleton-Young |first=Leslie |title=Housing Expert: 'Soft Landing' Off Mark |work=Los Angeles Times |date=2006-07-21 |url=http://www.latimes.com/business/la-fi-soft21jul21,0,3311200.story?coll=la-home-headlines ] 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." [cite news |title=Hard edge of a soft landing for housing |date=2006-08-19 |work=Financial Times |url=http://www.ft.com/cms/s/97a6e948-2f1f-11db-a973-0000779e2340.html ] "It would be difficult to characterize the position of home builders as other than in a hard landing", said Robert Toll, CEO of Toll Brothers. [cite news |last=Toll |first=Robert |title=Housing Slump Proves Painful For Some Owners and Builders |date=2006-08-23 |work=The Wall Street Journal |url=http://online.wsj.com/article_email/SB115630090176442994-lMyQjAxMDE2NTI2MzMyMDMwWj.html ] 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." [cite news |title=Matters to Mind Over the Weekend |date=2006-08-11 |publisher=The Street |work=RealMoney |first=Cody |last=Willard |accessdate=2008-03-17 |url=http://www.thestreet.com/p/_googlen/rmoney/codywillardblog/10303328.html ] Following these reports, Lereah admitted that "he expects home prices to come down 5% nationally", and said that some cities in Florida and California couldhave "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 is the steepest since 1989. The new home market is also suffering. 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 Commerce Department. [cite news |title=Sales of new U.S. homes surged in April |date=2007-05-24 |work=MSNBC |url=http://www.msnbc.msn.com/id/18842917/ ]

Based on slumping sales and prices in August 2006, economist Nouriel Roubini warned that the housing sector is in "free fall" and will 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. may enter a recession as house prices decline. [cite news |title=Stiglitz Says U.S. May Have Recession as House Prices Decline |date=2006-09-08 |work=Bloomberg ] The extent to which the economic slowdown, or possible recession, will last depends in large part on the resiliency of the U.S. consumer spending, which now makes 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 recently lowered the global economic growth rate due to a housing slowdown in the United States, but it does not believe that the U.S. housing malaise will further spread to the rest of the world. The Fed chairman Benjamin Bernanke said in October 2006 that there is currently a "substantial correction" going on in the housing market and that the decline of residential housing construction is one of the "major drags that is causing the economy to slow"; he predicted that the correcting market will decrease U.S. economic growth by about one percent in the second half of 2006 and remain a drag on expansion into 2007. [cite news |title=Bernanke Says 'Substantial' Housing Downturn Is Slowing Growth |date=2006-10-04 |work=Bloomberg |url=http://www.bloomberg.com/apps/news?pid=20601087&sid=ah6TAhIScG0M&refer=home ] The White House Council of Economic Advisers recently lowered their outlook for U.S. economic growth in 2008 from 3.1 percent to 2.7 percent and forecasthigher unemployment, reflecting turmoil in the credit markets and residential real-estate market. The Bush Administration economic advisers also revised their unemployment outlook and predict the unemployment rate could rise slightly above 5 percent, up from the current unemployment rate of 4.6 percent. [cite news |title=Bush Advisers Reduce Growth Forecast for 2008 to 2.7% |date=2007-11-04| work=Bloomberg |url=http://www.bloomberg.com/apps/news?pid=20601087&sid=awEbVLpYgqog&refer=home |accessdate=2008-03-17]

Others speculate on the negative impact of the retirement of the Baby Boom generation and the relative cost to rent on the declining housing market. [ cite news |last=Fletcher |first=June |title=Slowing Sales, Baby Boomers Spur a Glut of McMansions |work=The Wall Street Journal |date=2006-07-19 |url=http://www.realestatejournal.com/buysell/markettrends/20060619-fletcher.html ] [cite news |title=It Was Fun While It Lasted |date=2006-09-05 |work=The New York Times |url=http://www.nytimes.com/2006/09/05/opinion/05tue2.html ] In many parts of the United States, it is 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.cite news |title=For some, renting makes more sense |work=USA Today |date=2006-08-10 |url=http://www.usatoday.com/money/perfi/housing/2006-08-09-rent-1a-usat_x.htm ] However, the appreciation of home prices in many parts of the country has lured many renters to become homeowners. Yet the appreciation of home values far exceeded the income growth of many of thesehomebuyers, pushing them to leverage themselves beyond their means. They borrowed even more money in order to purchase homes that were far more expensive than their ability to meet their mortgage obligations. Many of these homebuyers took out adjustable-rate mortgages during the period of low interest rates to purchase homes of their dreams. Initially, they were able to meet their mortgage obligations due to their low "teaser" rates in the first few years. However, as the Federal Reserve Bank exercised 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 to default on their mortgages in mid-2007 and the cracks in the U.S. housing foundation began to appear.

ubprime mortgage industry collapse

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.cite news |title=The Mortgage Mess Spreads |date=2007-03-07 |work=BusinessWeek |url=http://www.businessweek.com/investor/content/mar2007/pi20070307_505304.htm?chan=rss_topStories_ssi_5 ] 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 April 2, 2007 with liabilities exceeding $100 million. [cite news |title=New Century Financial files for Chapter 11 bankruptcy |date=2007-04-02 |work=MarketWatch |url=http://www.marketwatch.com/news/story/new-century-financial-files-chapter/story.aspx?guid=%7BB6C60623-1D41-4209-A347-4BEA486963D2%7D&dist=rss&siteid=mktw ] 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 will eventually take a toll on the economy and whose ultimate impact will be on the impaired prices of homes.cite news |title=PIMCO's Gross |date=2007-06-27 |work=CNNMoney.com
] 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... [T] he point is that there are hundreds of billions of dollars of this toxic waste... This problem [ultimately] resides in America's heartland, with millions and millions of overpriced homes".cite news |title=When mainstream analysts compare CDOs to 'subslime', 'toxic waste' and 'six-inch hooker heels'... |date=2007-06-27 |publisher=RGE Monitor

Business week has indicated financial analysts predicting that the subprime mortgage market meltdown 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 imperiled 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. [cite news |title=Merrill sells off assets from Bear hedge funds |date=2007-06-21 |work=Reuters |url=http://www.reuters.com/article/gc06/idUSN2024502520070621 ] H&R Block reported that it made a quarterly loss of $677 million on discontinued operations,which included subprime lender [http://www.oomc.com/ 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 unit's net asset value fell 21% to $1.1 billion as of April 30, 2007. [cite news |title=H&R Block struck by subprime loss |date=2007-06-21 |work=Financial Times |url=http://www.ft.com/cms/s/2485fd88-1ffa-11dc-9eb1-000b5df10621.html ] 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 June 22, 2007 to bail out one of its hedge funds that was collapsing because of bad bets on subprime mortgages.cite news |title=$3.2 Billion Move by Bear Stearns to Rescue Fund |date=2007-06-23 |work=The New York Times |url=http://www.nytimes.com/2007/06/23/business/23bond.html ] 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." [cite news |title=Bear Stearns Hedge Fund Woes Stir Worry In CDO Market |first=Leslie |last=Wines |date=2007-06-21 |work=MarketWatch |url=http://www.marketwatch.com/news/story/bear-stearns-hedge-fund-woes/story.aspx?guid=%7B11C86668-22D1-4D93-BE09-62E7B0EA6C67%7D ] The "New York Times" report connects this 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 lendingpractices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes."

On August 9, 2007, BNP Paribas announced that it could not fairly value the underlying assets in three funds as a result of exposure to U.S. subprime mortgage lending markets. [cite press release |title=BNP Paribas Investment Partners temporally suspends the calculation of the Net Asset Value of the following funds: Parvest Dynamic ABS, BNP Paribas ABS EURIBOR and BNP Paribas ABS EONIA |date=2007-08-09 |url=http://www.bnpparibas.com/en/news/press-releases.asp?Code=LPOI-75W9PV ] Faced with potentially massive (though unquantifiable) exposure, the European Central Bank (ECB) immediately stepped in to ease market worries by opening lines of €96.8 billion (US$130 billion) in low-interest credit. [cite news |title=Big French Bank Suspends Funds |date=2007-08-09 |work=The New York Times |url=http://www.nytimes.com/2007/08/10/business/worldbusiness/09cnd-eurobank.html ] One day after the financial panic about a credit crunch swept through Europe, U.S.Federal Reserve Bank conducted an "open market operation" to inject US$38 billion in temporary reserves into the system to help overcome the ill effects of a spreading credit crunch, on top of a similar move the day before.cite news |title=Fed Acts to Stem Credit Turmoil |date=2007-08-10 |work=Forbes |url=http://www.forbes.com/feeds/ap/2007/08/10/ap4009183.html ] In order to further ease the credit crunch in the U.S. credit market, the chairman of the Federal Reserve Bank Ben Bernanke decided to lower the discount window rate, which is the lending rate between banks and the Federal Reserve Bank, by 50 basis points to 5.75% from 6.25% at 8:15 a.m. on August 17, 2007. The Federal Reserve Bank stated that the recent turmoil in the U.S. financial markets raised the risk of an economic downturn.

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 are already proposing a federal government bailout of subprime borrowers, like the one use in the Savings and Loan crisis, in order to save homeowners from losing their residences. Opponents of such proposal assert that government bailout of subprime borrowers is not in the best interests of the U.S. economy because it will simply 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.cite news |title=Next: The real estate market freeze |date=2007-03-12 |work=MSN Money |url=http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NextTheRealEstateMarketFreeze.aspx ] Former Federal Reserve Chairman Alan Greenspan praised the rise of the subprime mortgage industry and the tools which it uses to assess credit-worthiness in an April 2005 speech. [cite news |title=Remarks by Chairman Alan Greenspan, Consumer Finance At the Federal Reserve System's Fourth Annual Community AffairsResearch Conference, Washington, D.C. |author=Alan Greenspan |publisher=Federal Reserve Board |date=2005-04-04 |url=http://www.federalreserve.gov/BoardDocs/speeches/2005/20050408/default.htm ] Because of these remarks, along with his encouragement for the use of adjustable-rate mortgages, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry. [cite news |title=The Great Unraveling |author=Stephen Roach |publisher=Morgan Stanley |date=2007-03-16 |url=http://www.morganstanley.com/views/gef/archive/2007/20070316-Fri.html |quote=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 punchbowl away just when the party is getting good,' Alan Greenspan turned into an unabashed cheerleader for theexcesses of an increasingly asset-dependent U.S. economy. I fear history will not judge the Maestro's legacy kindly. ] [cite news |title=Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry |author=Nouriel Roubini |publisher=RGE Monitor |date=2007-03-19 |url=http://www.rgemonitor.com/blog/roubini/184125 ] Greenspan later admitted about the subprime mortgage mess that, "I really didn't get it until very late in 2005 and 2006."

On September 13, 2007, the British bank Northern Rock applied to the Bank of England for emergency funds caused by liquidity problems related to the subprime crisis.cite news |title=Northern Rock asks for Bank help |date=2007-09-13 |work=BBC News | url=http://news.bbc.co.uk/1/hi/business/6994099.stm ] This precipitated a bank run at Northern Rock branches across the UK by concerned customers who took out "an estimated £2bn withdrawn in just three days".cite news |title=Banks remain under fire in London |date=2007-09-17 |work=Financial Times| url=http://www.ft.com/cms/s/0/0475e976-64f2-11dc-bf89-0000779fd2ac.html ]

Alt-A mortgage problems

Subprime and Alt-A loans (including "stated income loans", which are loans made to home buyers without the verification of their incomes; as home buyers tend to overstate their incomes in order to get the loan amounts they desire to purchase their dream homes, the term "liar's loans" is often used to describe them) account for about 21 percent of loans outstanding and 39 percent of mortgages made in 2006.cite news |title=Defaults Rise in Next Level of Mortgages |date=2007-04-10 |work=The New York Times |url=http://www.nytimes.com/2007/04/10/business/10lend.html ] 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. American Home Mortgage filed for bankruptcy in August 2007.cite news |title=American Home Mortgage Gets Bankruptcy Court OK |date=2007-08-08 |work=Reuters |url=http://investing.reuters.co.uk/news/articleinvesting.aspx?type=bankingFinancial&storyID=2007-08-08T070054Z_01_N07275495_RTRIDST_0_SP_PAGE_012-N07275495-OISBN.XML ] 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. [cite news |title=Alt A Loans'Disconcerting,' Jumbos Weaker, S&P Says|date=2007-06-27 |work=Bloomberg |url=http://www.bloomberg.com/apps/news?pid=20601009&sid=aXDYv12DZNcc ] 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."

Foreclosure rates increase

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. Furthermore, a number of big commercial banks such as Citibank and investment banks such as Merrill Lynch have announced significant write-offs against 3rd and 4th quarter 2007 earnings. As a result, Citigroup's Board of Directors ousted its CEO Charles Prince and replaced him with Vikram Pandit, a former Morgan Stanley executive and hedge-fund manager, and Merrill Lynch's Board of Directors replaced its CEO Stanley O'Neal with John Thain, an alumni of Goldman Sachs and former CEO of NYSE Euronext. 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.cite news |title=Rate Rise Pushes Housing, Economy to 'Blood Bath' |date=2007-06-20 |work=Bloomberg |url=http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adDRCBB5fqZQ ]

Government bailouts

Many in the U.S. Congress and Administration are proposing government bailouts of the mortgage and credit crisis, similar to the Savings and Loan crisis of the 1980s. Critics of such proposals quickly rebuffed the idea of government bailouts and calling such bailouts irresponsible. They further argued that bailouts would only promote imprudence in the future.

Following the collapse of the subprime mortgage industry in March 2007, Democratic Senator Charles Schumer of New York proposed a federal government bailout of subprime borrowers in order to save homeowners from losing their residences (or to save big banks from losing billions of dollars with taxpayers' money).

Concerns about the impact of the collapsing housing and credit markets on the larger U.S. economy caused President Bush and Fed Chairman Ben Bernanke to announce a limited bailout of the U.S. housing market for homeowners unable to pay their mortgage debts on August 31, 2007. Mr. Bush said that his administration wished to alleviate the subprime mortgage crisis by "helping people who have good credit but who have not made all of their payments on time because of rising mortgage payments" with FHA-Secure.cite news |title=White House Has It all WRONG On Subprime |date=2007-08-31 |work=CNBC |url=http://www.cnbc.com/id/20533556 ] However, homeowners with subprime loans have poor credit by definition; therefore, the immediate intent and scope of Bush's announced plan is not entirely clear. President Bush's largest campaign contributor was Roland E. Arnall, the former CEO of the largest subprime lender in the U.S., Ameriquest, which has since gone out of business;cite news |title=Ameriquest closes, Citigroup buys mortgage assets |date=2007-08-31 |work=The Washington Post |url=http://www.washingtonpost.com/wp-dyn/content/article/2007/08/31/AR2007083101702.html ] Bush nominated Arnall as the U.S. Ambassador to the Netherlands.cite news |title=Bush Picks Ameriquest Owner as Ambassador: Firm's Lending Tactics Investigated |date=2005-07-29 |work=The Washington Post |url=http://www.washingtonpost.com/wp-dyn/content/article/2005/07/28/AR2005072801842.html ] On December 6, 2007, Bush announced a plan to voluntarily and temporarily freeze the introductory mortgage rates (so-called "teaser rate") of a limited number of mortgage debtors holding ARMs for five years, declaring "I have a message for every homeowner worried about rising mortgage payments: The best you can do for your family is to call 1-800-995-HOPE".cite news |title=Bush: Dial 1-800-OOPS for housing help |date=2007-12-06 |work=Reuters
url=http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2007-12-06T191403Z_01_N06236443_RTRIDST_0_USA-SUBPRIME-BUSH-NUMBER.XML |quote=Anyone who dialed 1-800-995-HOPE did not reach the mortgage hotline but instead contacted the Freedom Christian Academy—a Texas-based group that provides Christian education home schooling material.
] Government officials denied that this proposal is a bailout and acknowledged that it is not a panacea to cure the housing ailment. Treasury Secretary Henry Paulson admitted that there is no easy solutions to the housing problem and this plan provides more a temporary relief to homeowners facing mortgage-rate resets than a long-term solution to stabilize the housing market. However, some experts criticized this plan as "a Band-Aid when the patient needs major surgery",cite news |title=Putting a freeze to mortgage meltdown |date=2007-12-06 | work=Marketplace |publisher=American Public Media |accessdate=2008-03-17 |url=http://marketplace.publicradio.org/display/web/2007/12/06/foreclosure_q/ ] a "teaser-freezer",cite news |title=Experts see Bush mortgage fix as a bandage: Freezing adjustable rates won't stop many foreclosures, they say |date=2007-12-06 |work=MSNBC |url=http://www.msnbc.msn.com/id/22068498/ ] and a "bail-out"cite news |title=Those Who Avoided Risk Call Plan A Raw Deal |date=2007-12-06 |work=The Washington Post |url=http://www.washingtonpost.com/wp-dyn/content/article/2007/12/06/AR2007120602572.html ] in which "the liars have won."cite news |title=Bail-out means the liars have won |date=2007-12-06 |work=The Age |url=http://business.theage.com.au/bailout-means-the-liars-have-won/20071207-1fqz.html ]

Whether the bursting of the U.S. housing bubble will become a partisan issue in the 2008 presidential election is uncertain. During a live interview on CNBC with Maria Bartiromo, New York Senator and 2008 Democratic Presidential Candidate Hillary Rodham Clinton suggested the government set up a $5 billion fund to assist homeowners on the brink of losing their homes. [cite news |url=http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUrn5NyCsERU |title=Clinton Calls for Foreclosure Moratorium, Adjustable Rate Hold |first=Kristin |last=Jensen |work=Bloomberg |date=2007-12-03 |accessdate=2008-03-17 ] Moreover, she argued that nationwide foreclosures would devastate communities and invite crimes into these neighborhoods. However, skeptics of such schemes questioned whether the $5 billion fund would be sufficient to help 1.4 million homeowners who are expected to lose their homes in 2008 and the first-half of 2009 once their "teaser" mortgage rates are reset tovariable market rates which could reach between 11 and 13 percent. On Jan 11, 2008, Democratic presidential contender Hillary Clinton proposed a $70 billion emergency spending package to help victims of the U.S. housing crisis. [cite news |url=http://uk.reuters.com/article/oilRpt/idUKN1130029720080111 |title=Clinton proposes economic stimulus plan |work=Reuters |date=2008-01-11 |accessdate=2008-03-17 ] A potential conflict of interest might arise because Senator Hillary Clinton has been the recipient of major contributions from the mortgage banking industry [cite web |url=http://www.opensecrets.org/industries/recips.asp?Ind=F4600&cycle=2006 |title=Mortgage Banking: Top 20 Recipients: 2006 |publisher=Center for Responsive Politics |accessdate=2008-03-17 ] and her strategist Mark Penn has been linked to Countrywide Mortgage, one of the major subprime lenders. [cite news |url=http://abcnews.go.com/Politics/story?id=3694881 |work=ABC News |title=Edwards LikensClinton Strategist To Rove |first=Jake |last=Tapper |date=2007-10-05 |accessdate=2008-03-17 ]

Some economists say a bail out will create a moral hazard that encourages future risky lending and borrowing by signaling that in extreme circumstances, the government will bail out bad lenders and borrowers [cite news |url=http://www.npr.org/templates/story/story.php?storyId=16734629 |title=Subprime Bailout: Good Idea or 'Moral Hazard |first=Eric |last=Weiner |date=2007-11-29 |work=NPR ] They further argue that government bailouts will only encourage more speculative activities in markets other than housing. Such bailouts will prolong the inevitable consequences of the housing crisis and exacerbate other financial crisis in the future. They also asserted the taxpayers-funded bailout would merely assist real-estate speculators, irresponsible homebuyers, and mortgage fraudsters.

A September 2007 national poll by NBC News and the Wall Street Journal found widespread opposition to a bailout of subprime borrowers facing foreclosure, with 59% of respondents opposing a federal role in preventing foreclosures. [cite web |url=http://www.pollingreport.com/life.htm |title=NBC News/Wall Street Journal Poll |date=March 7-10, 2008 |accessdate=2008-03-17 ] Most respondents argued that a government interference in private transactions between homebuyers and lenders would set a bad precedent. Some of them wondered whether the government could compel credit-card companies to freeze the introductory rates of zero percent initially offered to credit-card debtors when debtors got into trouble paying their credit-card bills. Economic experts opined that only market-based solutions would eventually solve the current housing problem. Any non-market-based solutions will only put artificial floor in housing prices across the nation. According to former Fed Chairman Alan Greenspan, the credit crunch in the financial market would not end until the inventory of homes on the market is liquidated and declines in residential real-estate prices played themselves out. [cite news |url=http://money.cnn.com/2007/12/12/news/economy/greenspan/ |title=Greenspan says his Fed policy did not create housing bubble |date=2007-12-12 |work=CNNMoney.com] In other words, supply of and demand for homes must first come to equilibrium before any recovery in U.S. housing market and, after enjoying the housing boom from 2002 to 2007, homeowners must sit through this subsequent housing bust patiently. As former Fed Chairman Alan Greenspan warned before he completed his tenure at the Federal Reserve Bank:

Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low riskpremiums. [cite web |url=http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2006/FF+March+2006.htm |title=Musings on Inflation Targeting |first=Paul |last=McCulley |publisher=PIMCO Bonds |date=2006-02-27 |accessdate=2008-03-17 ]

Translated into plain English, risk-averse investors would demand higher yields on their investments, thus driving down asset prices especially highly leveraged assets such as real-estate. Therefore, homeowners must deleverage themselves by putting more equities into their homes in order to keep their homes and future homebuyers may have to deposit significant amounts of down-payment in order to get mortgage loans. The protracted period of Americans buying homes with zero down-payment and getting mortgage loans with no or little documentations has finally come to an abrupt end.

ee also

*Subprime mortgage crisis
*Subprime lending
*Mortgage loan
*Real estate bubble
*Economic crisis of 2008
*List of entities involved in 2007 finance crises
*The world housing bubble
**British property bubble
**Chinese property bubble
**Indian property bubble
**Irish property bubble
**Japanese asset price bubble
**New Zealand property bubble
**Romanian property bubble
**Russian property bubble
**Spanish property bubble
*Economic bubble
*Real estate pricing
*Real estate appraisal
*Real estate economics
*Real estate trends
*Creative Real Estate Investing
*Deed in lieu of foreclosure
*Foreclosure consultant

References and notes

Further reading

* June Fletcher (2005), "House Poor: Pumped Up Prices, Rising Rates, and Mortgages on Steroid - How to Survive the Coming Housing Crisis", New York: Collins. ISBN 0-06-087322-1.
* Fred E. Foldvary (1997), " [http://www.foldvary.net/works/geoaus.html The Business Cycle: A Georgist-Austrian Synthesis] ," "American Journal of Economics and Sociology" 56(4):521–41, October.
* Fred E. Foldvary (2007), "The Depression of 2008", Berkeley: The Gutenberg Press. ISBN 0-9603872-0-X.
* N. Gregory Mankiw and David N. Weil (1989). " [http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V89-458X25J-5&_coverDate=05%2F31%2F1989&_alid=419372230&_rdoc=1&_fmt=&_orig=search&_qd=1&_cdi=5865&_sort=d&view=c&_acct=C000057242&_version=1&_urlVersion=0&_userid=2425064&md5=ebb68aba7d4796869072535dc3368f64 The baby boom, the baby bust, and the housing market] ", "Regional Science and Urban Economics", Vol.19, No.2, May 1989, pp.235-258.
* John R. Talbott (2006). "Sell Now!: The End of the Housing Bubble", New York: St. Martin's Griffin. ISBN 0-312-35788-5.
* John R. Talbott (2003). "The Coming Crash in the Housing Market", New York: McGraw-Hill. ISBN 0-07-142220-X.
* Elizabeth Warren and Amelia Warren Tyagi (2003). "The Two-Income Tr


External links

* [http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html Buy vs. Rent Calculator] - from The New York Times.
* [http://www.cepr.net Center for Economic and Policy Research] - CEPR regularly releases reports on the U.S. Housing Bubble.
* [http://www.cnbc.com/id/15837671/ Reality Check with Diana Orlick] - from CNBC.
* [http://www.ofheo.gov/ Office of Federal Housing Enterprise Oversight] - Quarterly Government Appreciation Statistics (Statewide)]
* [http://trendlines.ca/index.htm#realty TrendLines Research] - Long term price correction projection
*PDFlink| [http://www.dgtpe.minefi.gouv.fr/TRESOR_ECO/anglais/pdf/2008-014-40en.pdf The bursting of the US house price bubble] |401 KiB Article by Stéphane Sorbe, French Treasury, July 2008
* Housing bubble weblogs, cited in "BusinessWeek", "Chicago Tribune", "CNN/Money", "Newsweek", "Salon", "San Francisco Chronicle", "Times" (Trenton, N.J.), "Wall Street Journal", "Washington Post", "Motley Fool"::* [http://thehousingbubbleblog.com/ The Housing Bubble Blog] - blog.cite news |title=Chicken Little's revenge |date=2006-08-19 |work=Salon |url=http://www.salon.com/tech/htww/2006/09/19/lereah_watch/ ] cite news |last=Lloyd |first=Carol |title=As bubble sags, market critics are busting out |date=2006-11-05 |work=San Francisco Chronicle |url=http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/11/05/REG7DM52OS1.DTL ] - Ben Jones's news-oriented blog.:* [http://housingpanic.blogspot.com/ Housing Panic] - blog, broke the [http://iamfacingforeclosure.com/ iamfacingforeclosure.com] "liar loan" story.cite news |title=24 Years Old, $2 Million in the Hole |date=2006-09-25 |work=Motley Fool |url=http://aol.fool.com/news/commentary/2006/commentary06092517.htm ] :* [http://bubblemeter.blogspot.com/ Bubble Meter] - blog.:* [http://calculatedrisk.blogspot.com/ Calculated Risk] - blog.:* [http://www.patrick.net/ patrick.net] - blog.cite news |title=Renters gloat over housing slump |date=2006-12-26 |work=The Wall Street Journal |url=http://www.moneyweb.co.za/shares/international_news/535987.htm ] :* [http://www.piggington.com/ Professor Piggington] - blog.:* [http://njrereport.com/ New Jersey Housing Bubble] - blog.:* [http://www.housebubble.com/ House Bubble] - blog. [cite news |title=My turn: The renter who blogs on real estate |date=2006-11-02 |work=The Times (Trenton) |url=http://www.nj.com/business/times/index.ssf?/base/business-1/1162444129165180.xml&coll=5&thispage=1 Not available, 2008-03-17.] :* [http://davidlereahwatch.blogspot.com/ David Lereah Watch] - blog, [cite news |last=Coy |first=Peter |title=Oh, the Humanity! |date=2006-10-28 |work=BusinessWeek |url=http://www.businessweek.com/the_thread/hotproperty/archives/2006/10/oh_the_humanity.html?campaign_id=rss_blog_hotproperty ] monitors the statements of National Association of Realtors.:* [http://matrix.millersamuel.com/ Matrix] - blog.cite news |title=Blog if you love real estate |date=2006-01-19 |work=CNNMoney.com |url=http://money.cnn.com/2006/01/19/real_estate/blogging_for_real_estate/ ] :* [http://www.housingbubblecasualty.com/ Housing Bubble Casualty] - blog.cite news |title=Blogs from the Financial Front |date=2006-03-29 |work=CNNMoney.com |url=http://money.cnn.com/magazines/moneymag/moneymag_archive/2006/04/01/8373319/ ] :* [http://paper-money.blogspot.com/ Paper-Money] - blog,cite news |title=When Bubbles Attack! |date=2006-09-19 |work=Motley Fool |url=http://www.fool.com/news/mft/2006/mft06091929.htm ] also streams video of the Senate Banking Committee's housing bubble hearings, publishes " [http://www.paperdinero.com/BNN.aspx Bubble News Network] " and " [http://www.paperdinero.com/Times.aspx Bubble Times] ."

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