The Housing Bubble Continues to Burst

The National Association of Realtors said today that home prices have now dropped to the point where they’ve wiped out all the gains in housing prices since 2004. 2004, not incidentally, was when interest rates last hit bottom, and the Feds looked the other way while mortgage bankers began shoving money out the door to anyone who could stand up straight and many who could not. In other words, 2004 marked the start of the housing bubble.

Should we take comfort from this? A bit, except for the fact that housing still has a way to fall because boomers will be cashing in their homes over the next few years — buying smaller condos or, if necessary, rentals, for their retirement years. (Even though fewer and fewer boomers will be able to retire, they’ll need all the cash they can get). That means still more homes on the market, including all those bigger ones that were built when the boomers were having families. And more homes on the market means still lower prices.

In truth, home prices first began to rise more rapidly than rental prices in the 1980s, when boomers hit the housing market big time. So, demographically speaking, there may be even a longer way to go before the housing market hits bottom.

Meanwhile, younger people who might otherwise consider buying a home are waiting on the sidelines. Either they can’t get a mortgage loan (the banks continue to hoard) or they assume housing prices will continue to fall and are prepared to wait.

All this raises questions about how long and how much the federal government can mitigate the mortgage crisis. Obviously, it can do much more than it’s doing now — which is remarkably little, given the $350 billion that Hank Paulson has already burned through. But as housing prices continue to deteriorate, the number of home owners who are under water — owing more on their homes than their homes are worth — continues to rise. A portion of them will walk away from those homes, dragging down home prices around them.

It’s another mess Bush is leaving at Obama’s front door.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

18 Responses to "The Housing Bubble Continues to Burst"

  1. Guest   December 24, 2008 at 8:31 am

    Get over yourself Robert. This is not about Bush. This is about a Democratic Presidential (Clinton) initiative and a corrupt Fanie May & Fredie Mac who contributed to (bribed) many Democrats & Republicans into a senseless, yet self profiting, mortgage give away, backed by fairy dust. This was a Democratic dominated, Republican tolerated, “a-house-in-every-home” imitative, many years is the making. As a well connected preacher has said: “The chickens have come home to roust”.This whole continuing mess (including the Bailout bonanza) is the best example of the worst in national politicians. Get over your Bush bashing. It avoids the real issues and makes you look small.

    • Anonymous   December 24, 2008 at 10:38 am

      You are still drinking Bush koolaid. So sorry for you. The financial bubble is obviously too complex for your Bush-sized brain to understand.

      • Anonymous   December 31, 2008 at 11:59 am

        explain it to me then. If you could with out tracking it back to the beginning you would not have commented. Sort of like the palistinians that are being “attacked” by Israel. Look beyond the mainstream media and do a little research outside of your usual sources.

    • Guest   December 24, 2008 at 11:08 am

      Even if Clinton started Fannie Mae, Bush did not stop them for eight years, that makes Republicans equally guilty or even an accomplice for condoning such a “senseless” mistake.

    • Steven Ramirez   December 24, 2008 at 4:49 pm

      Blaming this mess on Fannie and Freddie is delusional. It is the ultimate indulgence of ideological blindness. A short review, that you will find impossible to rebut:1) The GSEs originated zero subprime mortgages;2) The GSEs securitized zero subprime mortgages;3) The GSEs were ordered by the Bush administration to buy more subprime mortgages in 2004;4) The GSEs cut back on those purchases in 2005, 2006, and 2007 specifically because of credit quality and lax underwriting. These were the worst of the worst in terms of vintages of subprime crud.You are correct to suggest that we have a bi-partisan problem with bi-partisan roots (especially with regard to the structure of globalization and the de-regulated shadow banking system). Secretary Reich is correct that Bush’s neglect of the economy is a more proximate cause than what happened 10 years ago (it has been Bush II for 8 years now!) and that the administration has really bollixed up this bailout. We will all come to wonder why no political party was able to mount a credible bailout of residential real estate.

      • Jim Carr   December 25, 2008 at 3:58 am

        Yes, and even Mr. Geithner’s New York Fed got into the trap. In late 2005 they published a paper that said — rather definitively — that there was NO housing bubble in the Stigliz sense of the word. Rather, they concluded, the rise in house prices was completely understandable as a function of lower interest rates. Of course, they left out the other half of this theory — what happens to those house prices when rates rise? Which is exactly what the Fed did.What really happens in all these bubbles is a misunderstanding of what it is that creates value. What is something actually worth? For the entire history of real property valuation, house values have been linked to incomes NOT interest rates; which have been flat to declining in real terms for a long time.As yours and other posts conclude, the fuzzy thinking occurred in all political camps. When politicians make laws based on the short term happiness of the population and not on the long term health of the economy, they put a sub-prime mortgage on our future to get the big screen TV of being popular.

  2. Guest   December 24, 2008 at 11:04 am

    Robert,I read your articles a lot and listen to you on Bloomberg / CNBC sometimes. i actually like your commentary.PlEASE do us all a favour, stop this Obama kiss ar** behaviour.

    • Guest   December 24, 2008 at 11:11 am

      You are not making sense. If you agree with Robert, instead of asking him to stop, you should start kissing Obama’s ar**.

  3. Mark   December 24, 2008 at 11:32 am

    Home prices began to escalate rapidly in 1996, not 2004, and picked up speed from 2000 on. Prices have fallen about halfway to baseline and have some ways to go, especially in areas of the country (most of California) where the bubble was extreme. Most wage earners are beginning to understand that they simply cannot afford jumbo mortgages at any interest rate and consumer’s appetite for risk taking, in general, has been greatly diminished. It is unlikely that Baby Boomers will attempt to sell their large homes in exchange for smaller units because a massive demand for smaller units would increase the price of those units and because Baby Boomers, in general, cannot afford to retire whether they sell their homes or not.

    • Little Labrador   December 24, 2008 at 12:15 pm

      Mark – I believe you are correct about when home prices began to escalate. When I bought my house in 1999, home prices had already been rising rapidly for a few years and I was worried that I was buying near the peak of the market. Little did I know.

    • Guest   January 5, 2009 at 12:00 am

      Exactly right. In fact, that is when Greenspan started loosening the rules on fractional reserve banking which really let the credit bubble kick into high gear. Want proof? Go look at the DJIA chart since the 1930s. Flat line until 1983 then a big ramp up until 1995 and then the rocket boosters kicked in. What fueled all that market growth since 1995???That’s right, cheap and easy money for business expansion. Now we have overcapacity and a bunch of bad consumer debt. I assume you know what will happen to the economy next. If not, better go read up on Austrian economics at the von Mises institute web site. Fiat currency and fractional reserve lending have done this global economy in. The housing bubble was just a part of the larger problem which was a global credit bubble which indeed took flight in 1995 thanks to the traitorous bastard, Alan Greenspan.

  4. CC   December 24, 2008 at 11:45 am

    The Fed didn’t exactly look away while evil lenders inflated the housing bubble. In fact, the government encouraged such lending across the board. True, Bush promoted home ownership and enjoyed the expansion in ownership. But the whole subprime mess was a Democratic creation. Anyone who thinks Fannie and the policies behind affordable housing and increased minority home ownership are GOP policies should be working on Barney’s Frank’s staff, probably as PR manager.

    • Little Labrador   December 24, 2008 at 12:26 pm

      Hate to tell you, but the subprime mess isn’t all about affordable housing, unless you call $500k to $1MM homes in California “affordable housing.” Let’s not forget the McMansion mess that permeates much of the U.S. To be sure, true affordable housing, which became unaffordable, is part of the problem, but where are your statistics to pin the weight of this problem on that aspect of the housing market? I am seeing plenty of foreclosures in “nice” neighborhoods.

    • Guest   January 5, 2009 at 12:12 am

      Don’t blame subprime or consumer credit or any one thing EXCEPT the use of dishonest money (fiat currency) and fractional (fictional) reserve credit creation policies. Without either of these two things, nothing else could have created this bubble. Think of them as the great enablers of our destruction.At the end of the day the result will be simple: people who worked for many year will find out one way or another that the wealth they thought they had was a vapor. There is no fix for it except to default on all bad debt and to destroy the credit which should never have been extended. In other words, a deflationary crash. But the only way to ensure it does not occur again is to abolish the fed and return to honest money based on gold and silver (just like the constitution mandates that we use).At the end of the day, Ron Paul is not such an idiot after all, is he? In fact, he is one of the few sane and honest politicians out there. Too bad we as a country spit in his face during his presidential run. I guess we wanted someone who looked more presidential again instead of someone who was qualified for the job. It had to be McCain or Hillary or Obama, didn’t it?And now the American people, and the people of the rest of the world will pay the price for childish American understanding of money and politics.

  5. walkingseemore   December 25, 2008 at 2:08 am

    Please, all of you! President Carter started this mess by being the first to deregulate the mortgage industry in ….yep…..1978. No other President since has overturned this deregulation. Carter has come back to haunt us! When O-Bummer gets done………the interest rate will be double digits.

    • JR   December 25, 2008 at 11:16 pm

      That gosh-darn Jimmy Carter. Why won’t he leave us alone?

  6. Guest   December 25, 2008 at 6:15 am

    The housing issue is not the main problem, nor the beginning of the problems, but merely one of the early signs.Dot com bust; $140 oil; $1,000 gold; commercial real estate boom & soon-to-be bust, consumer loans, auto companies, etc., are part of the same problem.There is only 1 mechanism that can almost simultaneously and continuously inflate the value of assets: Central banks.Although Central Bankers world-wide deserve blame, Alan Greenspan is the chief villain, who expanded the money supply for much of his rein, 1987-2006. Crisis-after-crisis, he responded by going to the printing presses.Greenspan will ultimately be responsible for more pain & suffering, & destruction of wealth than any dictator, invading army, or natural disasters.Unfortunately Bernanke is making Greenspan look like a piker, when it comes to inflating the money supply.I literally cry over the harm caused by these two men, although I expect to continue to profit as a short-seller for years to come, due to their ignorance of the operation of the free market.

  7. Anonymous   January 26, 2009 at 11:24 am

    What all of you say may be true. However, instead of blaming the always crooked politicians and the ever-corrupt political parties, look at the real cause behind all of this: Greed. Everyone who started this whether they were a republican, democrat, or independent was just looking to get their hands on some easy business deals and some quick cash. Instead we are now grasping for the few loans we can scrape up and banks will not give each other money much less the American public. The greed of many has developed into a disaster for all.