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that housing loans in the US are only covered by the mortgage on the house and not a loan by the person is something that I was quite shocked to find out and something that indeed did not help prevent a bubble.

Here in Germany, you are always liable for the house loan with your entire personal wealth...

What I still don't understand, though, is how prices could go up so high? Did rents also go up? If developers were selling overpriced housed didn't anyone check what the costs of building a house were compared to buying one from a sleazy developer?

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Aug 24th, 2010 at 05:36:05 PM EST
[ Parent ]
Prices went up because they went up. Galbraith put it well in The Great Crash of 1929:

However, the time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the wide new world of fantasy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 06:05:57 PM EST
[ Parent ]
Oh, it certainly has prevented multiple housing bubbles.

But then banks stopped holding most of the mortgages they originated and in many sectors non-bank lenders became the dominate lenders.

In the main areas of the housing bubble, the presumption was that the housing prices were only going to go higher, so if you found you could not afford a payment, you could always borrow against the capital gain in the interim, or if you found that you could not afford the mortgage entirely, you could always sell out again at a profit.

Now, why were the lenders lending when surely they should have realized that the presumption is nonsense: that when the house price was so far out of line with rental prices that house prices were almost certain to experience a downward correction?

Because they were not expecting to hold the mortgage long term. With CDO's, they bundled the mortages into a stream of repayments, and sold off positions in line to get the money used for repayments. If not enough CDO's attracted an investment grade rating, they were put into a pile and positions in line to get their earnings were sold off.

Since the mortgage originators were not holding the mortgage long term, but rather making their money as income to create the loans, they started acting like shonky used car salesmen.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Aug 24th, 2010 at 09:16:36 PM EST
[ Parent ]
Interestingly enough, Germany is one country in Europe that has not experienced the housing bubble seen in France, the UK, Ireland, Spain,...
Causes are not entirely clear: some people think this is due to the brief asset bubble post-reunification in the early 90's.
by Bernard on Thu Aug 26th, 2010 at 11:58:32 AM EST
[ Parent ]
A monetary policy designed to throw your economy into a permanent state of depressed domestic activity is not conducive to speculative behaviour in the majority of the population.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 26th, 2010 at 12:20:01 PM EST
[ Parent ]
I don't think speculative behavior alone can explain housing bubbles: it has also much to do with cultural attitudes and social status regarding home ownership (property owner vs. simple tenant), property laws vs. renters protection laws, and most of all, shared beliefs and myths about real estate: "safe investment", "never loose value in the long run", "security for the retirement days", etc...

Of course, different monetary policies can add fuel to the fire or siphon-off your tank altogether.

by Bernard on Thu Aug 26th, 2010 at 12:41:37 PM EST
[ Parent ]
Promoting home ownership has historically been little more than an attempt to infect the public with a speculative mentality. In point of fact, this was a deliberate strategy of the Thatcher regime. "Shared beliefs and myths about real estate" is the relevant speculative mentality (or its absence).

But you're right in the sense that speculative bubbles are fragile things: Monetary policy can puncture them, if it is applied with some care; fiscal policy can puncture them with ease; a depressed public mood can prevent them altogether; and even a dose of vigorously voiced pessimism from someone who enjoys a reputation for being Serious can snap some people out of it. So the presence of a speculative bubble indicates failure on several level, from cultural myths to regulatory inaction.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 26th, 2010 at 12:52:28 PM EST
[ Parent ]
There's a more benign explanation for US housing policy to promote ownership too.  The US experience of the Great Depression and earlier recessions were marked by the stirring tragedy of mass homelessness.  People by the millions, with families and children, were pushed out on the streets without homes when they could not pay the ever higher rents.  (Which had to go higher to justify the ever higher costs of building new residences for a growing population.)

The policy solution was to give people more control over their housing through ownership entitlement to their homes instead of through rental contract entitlement, but the problem was that no bank in their right mind would lend more than 5 years out to working homebuyers on modest wages and salaries, and home building prices required mortgages of 20 to 30 years before middle class families could expect to be able to buy and own their own homes.  Thus the federal government created long term mortgages through establishment of secondary market for them by copying the already successful federal farm credit system model of GSEs (government supported enterprises) of a generation earlier, which was itself an adaptation of the 19th century German Landesbank model. Fannie Mae and Freddie Mac were born and to this day remain the only stable market which provides for home mortgages. Despite all the problems such as the recent crisis, mass homelessness has never returned to the pre-1930's levels again.  

by santiago on Fri Aug 27th, 2010 at 06:14:24 PM EST
[ Parent ]
That's a cute story, but it does not explain the recent push to expand the "ownership society."

Besides, there's nothing wrong with increasing rent that can't be solved with better public housing provision.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 27th, 2010 at 07:01:27 PM EST
[ Parent ]
That's a cute story, but it does not explain the recent push to expand the "ownership society."

There is no reason that the "story" should "explain the push to expand the "ownership society." The story explains an honest attempt to create social stability by provision of a financial service by the government. The "ownership society" was a cynical attempt to extend and justify a developing real estate bubble that would produce economic results that would be politically useful in the short term, particularly the 2004 election.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 27th, 2010 at 11:57:07 PM EST
[ Parent ]
Migeru:
You live in the pwn3rship society.

(part of the ET's ClassicalTM Series)

The housing bubble has been indeed very useful: unlike the previous Internet bubble that only enrolled the stock owning people, housing bubble allows to enroll just about everyone. And this "wealth effect" was sorely needed to offset wages than have been stagnant or declining since "Morning in America".

by Bernard on Sat Aug 28th, 2010 at 04:18:50 AM EST
[ Parent ]
Fanny and Freddie had not led to bubbles -- on their own. But in a prolonged low interest rate environment they ended up holding the bag for an enormous amount of fraudulent credit issuance, all disguised with self regulating lipstick and rouge.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 28th, 2010 at 11:25:29 AM EST
[ Parent ]

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