I have recently realized that I could have strengthened the narrative of “Building from the Ground Up” by referencing the Midwest as a sort of control group during the 2008 crisis.
Is it time to retire or modify the designation "Contagion City" given that the data don't seem to support that? There was a contagion of bad interpretation by the Fed, economists, and media pundits in the lead up to 2008 as you have pointed out in your writing, but cities like Las Vegas, Atlanta, Miami---heck, most of the Sun-Belt---were simply operating according to market forces.
Price increases did exceed fundamentals in some places for a period of time in response to the migration impulse caused by the Close Access Cities, which probably spurred over-reaction by the Fed, and consequently lenders. Some of those writedowns in "Contagion Cities" could have been weathered with more measured policy.
The point of the post is that most of the meltdown would have been avoided if obvious standard policy choices had been pursued at marks B and C. The meltdown occurred because it was popular, and policy decisions at marks B and C were the main policy choices intended to create it.
Delinquencies started ticking up Q1 2005. The problem was too many people who couldn’t make the payments had already been given debt. It’s a problem that will happen again, because we make it possible for people to make all the profit on a 30 year loan at closing.
They started ticking up moderately from very low levels in 2005. They were pretty normal until 2007. The vast majority of mortgage defaults happened after 2007 because of policy choices made after 2007. Policy aims to stimulate construction and stabilize home prices by late 2007 would have avoided most of the defaults and financial losses.
Partly why the Midwest makes an interesting control group is that construction had been flat in the Midwest, and in many Midwest cities prices had also been flat until the end of 2007, when they started to collapse.
Absolutely nobody in 2008 would even have dreamed up aiming for looser lending trends or more stimulative monetary policy even though there were cities where prices and construction activity were dropping like a rock from very normal pre-conditions.
I've posted a couple charts in a postscript to highlight these points.
Is it time to retire or modify the designation "Contagion City" given that the data don't seem to support that? There was a contagion of bad interpretation by the Fed, economists, and media pundits in the lead up to 2008 as you have pointed out in your writing, but cities like Las Vegas, Atlanta, Miami---heck, most of the Sun-Belt---were simply operating according to market forces.
Price increases did exceed fundamentals in some places for a period of time in response to the migration impulse caused by the Close Access Cities, which probably spurred over-reaction by the Fed, and consequently lenders. Some of those writedowns in "Contagion Cities" could have been weathered with more measured policy.
I think of “contagion” as referring to their demand being driven by the highly variable migration rates out of the closed access cities.
How can you write that many words about 2008 without mentioning the global financial meltdown—caused by subprime mortgage failures.
With sensible monetary policy there woud have BEEN no global financial meltdown, just few bankruptcies.
The point of the post is that most of the meltdown would have been avoided if obvious standard policy choices had been pursued at marks B and C. The meltdown occurred because it was popular, and policy decisions at marks B and C were the main policy choices intended to create it.
Delinquencies started ticking up Q1 2005. The problem was too many people who couldn’t make the payments had already been given debt. It’s a problem that will happen again, because we make it possible for people to make all the profit on a 30 year loan at closing.
They started ticking up moderately from very low levels in 2005. They were pretty normal until 2007. The vast majority of mortgage defaults happened after 2007 because of policy choices made after 2007. Policy aims to stimulate construction and stabilize home prices by late 2007 would have avoided most of the defaults and financial losses.
Partly why the Midwest makes an interesting control group is that construction had been flat in the Midwest, and in many Midwest cities prices had also been flat until the end of 2007, when they started to collapse.
Absolutely nobody in 2008 would even have dreamed up aiming for looser lending trends or more stimulative monetary policy even though there were cities where prices and construction activity were dropping like a rock from very normal pre-conditions.
I've posted a couple charts in a postscript to highlight these points.