Housing Bust: Speculators Sounded the First Alarm, Not Government

It is interesting to note that speculative markets, not government institutions were the first to sound the alarm when it came to the US housing bubble. And actually... not only were government institutions asleep at the wheel in terms of warning people that prices had gone too far, but they were actually contributing to the problem and helping to inflate the bubble further.

It was speculative markets that sounded the alarm in 2007, keeping future capital away from jumping off a cliff, and preventing the bubble from running longer and crashing harder. (Hat tip to one of our readers for this great nugget)

It was not just a Wall Street phenomenon, but one pushed by our government, legislators, regulators, and even academics (for evidence, see Stan Liebowitz’s “Anatomy of a Train Wreck“)… the Federal Housing Administration was, and is, offering loans with only three percent down, and during the boom, the Department of Housing and Urban Development promoted a program where even this minor investment could be paid for by the homebuilder. … In light of this governmental housing exuberance, I doubt that a more powerful government would have mitigated the boom — rather, it would have made this crisis worse. Indeed, it was only the collapse of the subprime market at the beginning of 2007 as reflected by the ABX-HE subprime housing index that alerted people to the severity of this problem, and shut off financing by mid-2007, six months later. Market prices, not legislators, instigated the end of the insanity. How quickly are failed governmental initiatives usually stopped, once identified?

...speculative markets were the first of our institutions to clearly say we had overestimated housing values. If we want more such error-correction in the future, we should empower such institutions more, not less.

Comments

[Roger Knights:]

Shiller's new real estate ETFs (bull and bear) would be one such institution.

Aug 09 09:44 AM

[Vincent Fer...:]

Interesting.

Aug 09 11:25 AM

[theLonelyTr...:]

"It is interesting to note that speculative markets, not government institutions were the first to sound the alarm when it came to the US housing bubble."

How banal. I know of no person in government, in either the Bush II or the Obama Administrations, that has made such a claim. I know of no academic, journalist, or pundit who has made such a claim. So why is this interesting, exactly?

"It was speculative markets that sounded the alarm in 2007, keeping future capital away from jumping off a cliff, and preventing the bubble from running longer and crashing harder."

Nugget? More like a pile of horse $#!T!

You do not write rationally. You write like a pundit. But I'm sure you'll rationalize your way out of a tight argumentative corner, like all pundits tend to do.

Aug 09 11:53 AM

[Troyhector:]

The housing crash, however, did not happen overnight. A number of factors contributed to the housing crash resulting extensive foreclosures and plummeting housing prices to their all time low. One of the main cause for the housing crash lies in the fact that banks and financial institutions were lending mortgages at 5 to 10 times the annual incomes of people, which was way above the safe value of 3 to 4 times.

Read More: www.housingnewslive.co...

Aug 10 02:59 PM

[Smalltownba...:]

In fact a proposal to eliminate the downpayment was under consideration by Congress as late as early 2008 at the same time they were outlawing seller funded downpayment assistance. As the market continued to decline is was pulled back the downpayment was actually increased to 3.5% where it stands today, but they did increase the size of the loans they will insure significantly effectively weakening the program.

Aug 10 09:50 PM

[The Wog:]

Half truth.

Yes, the ABX tanked early Feb 07, but the bulk of that was only AFTER lenders like New Century were shut down when the banks pulled their funding (BBB tranche was $95 before, $70 after). Hard to argue that the ABX contributed significantly as a "canary in the cave." Indeed, the distress of the ABX seems to have encouraged the banks to push synthetic index CDOs over sub-prime (rather than selling less leveraged and lower rated RMBS directly) making investor losses worse than the mortgages actually funded. They had a ready-made arbitrage to exploit synthetically.

Aug 17 06:47 AM