Our financial system is crumbling this week.

[AWvsCBsteeeerike3]

In that case, what should we do with the millions of $200k houses we have built? $200k doesn't go very far in most US cities.[\quote]

Yeah, that's the multi-trillion dollar question right now.

I don't think it has much to do with "entitlement". That's what the market has established as a value for a house of moderate size and quality (or tiny and crappy in some markets). If those people don't buy and rent instead, then you're going to see a run-up in rental rates. Free markets and all that.

Who cares what the market value is if you can't afford it?

[Arthur Dent]

speaking of this, whatever happened to the house flipping shows that used to be on TLC etc? I don't notice them on at all anymore, -am I missing them? I would watch those with Mrs. Freed (-brain dead veg-out TV) most of it was West Coast centered - the LA area or Vegas. many of the house flippers would be clueless, yet managed to come out ok in spite of their stupidity, so it was a happy ending. I'm guessing that shows not on anymore because its no fun to watch without a happy ending.

Haha. I was just going to bring that up. Those shows pissed me off. It seemed like they were still going well after the bubble started to deflate. Wasn't there even a new one last year?

But yeah, I don't have much sympathy for speculators who lost their shirt. That was the game they were playing. That said, I don't get this intense need to find certain home buyers to blame. The problem was primarily macro and not about individual bad choices. Is it somehow more satisfying to put this in a (false) framework of personal responsibility?

[Arthur Dent]

Maybe this is the "media" AD was referring to.

The media I was referring to loved to rely on the author of this book as the sole source in stories about the housing market.

[Popeye_Card]

In that case, what should we do with the millions of $200k houses we have built? $200k doesn't go very far in most US cities.[

Yeah, that's the multi-trillion dollar question right now.

I don't think it has much to do with "entitlement". That's what the market has established as a value for a house of moderate size and quality (or tiny and crappy in some markets). If those people don't buy and rent instead, then you're going to see a run-up in rental rates. Free markets and all that.

Who cares what the market value is if you can't afford it?

The economy used to be able to afford it for most individuals. With the recent downturn, it's putting more people than normal into dire financial straights. Again, I'm not talking about people who took out some crazy ARM to afford a $500k house in California. I'm talking about a "normal" person/couple/family who is doing fine with their normal 30 year fixed mortgage at a comfortable rate and payment for them, then one or both of them loses their job and they're forced to scramble to make ends meet. That house payment becomes an anvil in a hurry.

You just complimented ghostrunner on his common sense. Let's say he loses his job next week, now suddenly can't afford to keep paying his mortgage plus his HELOC for several months before he can find another job. That's the type of situation I'm talking about. People can budget for house payments in a normal economy, and even factor in some risk for losing their job, etc. Nobody planned for the type of economy we're facing right now.

[Popeye_Card]

The problem was primarily macro and not about individual bad choices. Is it somehow more satisfying to put this in a (false) framework of personal responsibility?

Yes, this.

And ultimately the big-picture problems right now are with the banks, who made the very faulty decision to decide it was OK to loan out all of this money.

[Hungary Jack]

Maybe this is the "media" AD was referring to.

The media I was referring to loved to rely on the author of this book as the sole source in stories about the housing market.

I guess Lereah wrote this when he was chief economist for the National Association of Realtors.

Now he's one of Time's "25 People to Blame for the Financial Crisis"

[Freed Roger]

speaking of this, whatever happened to the house flipping shows that used to be on TLC etc? I don't notice them on at all anymore, -am I missing them? I would watch those with Mrs. Freed (-brain dead veg-out TV) most of it was West Coast centered - the LA area or Vegas. many of the house flippers would be clueless, yet managed to come out ok in spite of their stupidity, so it was a happy ending. I'm guessing that shows not on anymore because its no fun to watch without a happy ending.

Haha. I was just going to bring that up. Those shows pissed me off. It seemed like they were still going well after the bubble started to deflate. Wasn't there even a new one last year?

But yeah, I don't have much sympathy for speculators who lost their shirt. That was the game they were playing. That said, I don't get this intense need to find certain home buyers to blame. The problem was primarily macro and not about individual bad choices. Is it somehow more satisfying to put this in a (false) framework of personal responsibility?

ha ha yeah I remember at the end of that show's run getting a little ticked by all the happy endings and Mrs Freed could never understand why - and I'd say because its just not real. ....I'm glad to have a fellow member of the Schadenfreuden society.

[Arthur Dent]

I would also like to point out that the average length of home ownership is less than 10 years. People count on being able to sell their homes instead of paying the mortgage for 30 years.

[Freed Roger]

Maybe this is the "media" AD was referring to.

The media I was referring to loved to rely on the author of this book as the sole source in stories about the housing market.

I guess Lereah wrote this when he was chief economist for the National Association of Realtors.

Now he's one of Time's "25 People to Blame for the Financial Crisis"

I had an interesting email dialog with one of those economic dudes. I remembered reading way back in 2002 WSJ about some old economist named Charles Kindelberger (since-died) who saw a housing bubble and problems with the mortgage industry. So when this bubble started bursting, I went googling for the article - and lo and behold I find another economist (JF Smith) who is using this same Kindelberger's material to explain why there is no housing bubble. I stumble upon this economists website and turns out he is an exhubarant real estate cheerleader.

I just had to email the guy. he was a little snippy, blew me off, and wouldn't admit he erred. but at least he responded.

anyhow I'll spoiler our dialog.

[SHOW]

Sent: Tuesday, July 08, 2008 1:46 PM
To: jim@econforecaster.com
Subject: Kindleberger Spoke

Dr. Smith,
I remembered reading how the late economist, Charles P. Kindleberger, foresaw the current housing bubble. It was one of his last thoughts on the economy. In researching Kindleberger's outlook on the housing bubble I found an article in the Wall Street Journal 07/25/2002 excerpted:

The object of his greatest fascination today is the real-estate market. For weeks, Mr. Kindleberger has been cutting out newspaper clippings that hint at a bubble in the housing market, most notably on the West Coast. Nationwide, median home prices are up about 7% from a year ago, even though the stock market has tanked and the economy has floundered. Over the long term, economists agree, housing prices can't continue to outpace growth in household incomes. Mr. Kindleberger says he isn't certain there is a housing bubble yet, "but I suspect it is."

The trick with spotting real-estate bubbles, he says, is that they don't always spread. In 1925, for instance, real-estate prices in Florida soared and crashed, but that didn't spread to the rest of the country. Yet he notes that something is distinctly different about the nation's housing market today, when compared with 1925. Fannie Mae and Freddie Mac, two large government-sponsored enterprises, own or guarantee nearly $3 trillion in mortgages, helping to keep the mortgage market liquid with cash. That is a boon to homeowners, but Mr. Kindleberger says he fears that Fannie Mae and Freddie Mac's deep nationwide presence in the market is fueling a speculative fire.

"Banks will make a mortgage and sell it to them. It means that the banks are ready to mortgage more and more and more and more. It's dangerous, I think," he says.

A Fannie Mae spokeswoman describes the argument as "preposterous," and notes Mr. Greenspan dismissed the chances of a housing bubble in testimony to Congress last week. Robert Van Order, chief international economist for Freddie Mac, says home prices might decelerate in the months ahead, but they're unlikely to crash because interest rates are so low, the inventory of unsold homes is also low and the economy has proven surprisingly resilient.

Yet Mr. Kindleberger isn't convinced. "If I was 30 years younger," he says, "I'd write a small book on Fannie Mae and Freddie Mac."
Kindleberger was right again.

In searching for this above article, I also came across an article by you in 2005, I believe, titled "There is no housing bubble in the USA" Ironically, you reference the work of the same late Kindleberger in support of this postulation. http://findarticles.com/p/articles/mi_m ... 8086/pg_4>>

I'm curious - any retrospectives on your 2005 article?

Sincerely,
freed

From: j_smith@unc.edu
> Date: Tue, 8 Jul 2008 14:24:36 -0400
> Subject: RE: Kindleberger Spoke

Dear Mr. FREED,
I recently taught an MBA elective using the latest ( 5th) edition of Kindleberger's classic, Manias, Panics, and Crashes. Prof. Robert Aliber of theUniversity of Chicago updated it through 2004. No doubt he's hard at work on a chapter including the latest mess ( Panic) that has been ongoing since August 9, 2007. As to the " Housing Bubble" nonsense, there is not now nor has there ever been a national " Housing Bubble". What has been going on for some time is a new lesson in the fact that booms are not good because they are always followed by busts. The latest OFHEO show year over year house price appreciation in 36 states and declines in 14 states plus the District of Columbia.

Feel free to visit my web site econforecaster.com for more insights.

J.F. Smith

Dr. Smith
I am not an expert on the work of Kindleberger or even economics, as you are, but I do have interest. Accordingly, I am grateful for your reply.

What impressed me on Kindleberger was his ability to utilize the voluminous data on current market trends then refer back to history and see how it fits. Sure, that may be what economists do by trade, but he also had a knack for stepping back from all the details and applying common sense to arrive at big picture assessments.

Regarding the term Housing Bubble -from the WSJ article - Mr. Kindleberger says he isn't certain there is a housing bubble yet, "but I suspect it is." It appears Kindleberger was focusing on the former house price inflation in the populous region, California, and translating its national effect.
Semantics aside on what constitutes a Housing Bubble, it appears Kindleberger saw the big picture of a "mortgage crisis" coming of which housing is a part. Good that it is, that opportunities still exist and house prices are appreciating many regions; undoubtedly, the latest mess with housing/lending has had the significant repercussions in the national economy, of which Kindleberger was concerned.

Again, thanks for your reply.
FREED

>

[AWvsCBsteeeerike3]

The economy used to be able to afford it for most individuals. With the recent downturn, it's putting more people than normal into dire financial straights. Again, I'm not talking about people who took out some crazy ARM to afford a $500k house in California. I'm talking about a "normal" person/couple/family who is doing fine with their normal 30 year fixed mortgage at a comfortable rate and payment for them, then one or both of them loses their job and they're forced to scramble to make ends meet. That house payment becomes an anvil in a hurry.

You just complimented ghostrunner on his common sense. Let's say he loses his job next week, now suddenly can't afford to keep paying his mortgage plus his HELOC for several months before he can find another job. That's the type of situation I'm talking about. People can budget for house payments in a normal economy, and even factor in some risk for losing their job, etc. Nobody planned for the type of economy we're facing right now.

What is your definition of "being able to afford it"?

I see more where you are coming from now. We are looking at different demographics. You're asking about the responsible people that are losing their jobs BECAUSE OF the economy. I'm talking about people that took out loans hoping to make a quick buck and when the apex of the bubble had been reached, they defaulted went bankrupt and left the banks with unprecedented losses, collapsing many of them. The house ownership rate reached an all time high (I think like 75%) in the peak of the bubble, and history shows that number can only be 64%. I'm talking about the 11% or so that had no business buying houses and did so anyway as they are the ones that have caused much of this mess as well as many developers. There's no doubt the housing bubble would have burst at some point, but these two types of people are the reason the banks are in such poor shape (along with the banks themselves) and that is the number one problem with the economy. We were headed for a recession, it was made infinitely worse though.

I don't blame the 64%, people like ghostrunner. I blame the other people that went beyond their means...