I'm a new admirer of your work, Kevin, so please forgive me if this question has been address prior. But as a resident of the American southwest, I noticed that the location of a lot of the housing built in the 2000's was quite remote. For instance, the Lake Las Vegas community is still sub-optimally populated. Since the FC, though I've seen a lot more infill building (there is a lot of room for it in LV), which seems more practical to me. I've seen similar trends in Phoenix and elsewhere. In your opinion, does this relative location play into the boom/bust?
My speculative answer is that the deep drop in construction after 2005 has led to rent inflation, which is mostly land rents due to supply constraints. That has made land relatively more expensive than structures. And, my guess is that it is mostly a simple supply and demand issue on new homes. Limited capital for new homes has to economize on land to make marginal new units feasible.
If municipalities deregulate land use, as they should, there would also be a lot more infill development. I suspect these trends in the southwest happen to also create more density, but for this unrelated reason.
A lot of building in NV were developers building on speculation, cheap money, cheap land, with sky high projections on more business moving to Nevada inviting poor lending and investment practices. Since 1998, the City of Las Vegas and the U.S. Bureau of Land Management (BLM) have been gambling. they auctioning off public land from the BLM for development and used the proceeds to preserve natural areas. The idea in the heads of the policymakers and federal officials bet that development and conservation can go hand-in-hand. Oops. Paul you are right about the sprawl and and its costs.
Reno got the bulk of the growth from CA companies, not Las Vegas. Also Las Vegas is not an easy place to set up a business. It has the images of a gambling town and many businesses do not want that image. Also the questions of water supply, power and working with very strong unions.
I'm sympathetic to your main point that although there was a credit boom, supply constraints led the housing boom prior to 2006 and the credit crunch following was largely behind the housing price collapse and supply constraints lead the ensuing price surge outside of poor urban areas. I think, though, you overstate your case and will try and stick to the empirical data to refute some of your claims or my reading of your claims.
1) There was a supply glut in Nevada post 2007, not in new buildings but in REO/Foreclosures. FNMA alone reported REO acquisitions increasing form 530 properties in 2007 to 9,418 in 2010. AZ, 751 to 20,691. Freddie was likely no different (happy to share the FNMA presentation via email as well as subsequent comments.
2) Easing credit conditions thru 2006 fueled demand and subsequent supply. To quote a John Maudlin newletter from 7/1/2005, https://www.mauldineconomics.com/frontlinethoughts/thoughts-on-the-housing-bubble-mwo070105 "Private market share went from around 30% to over 50% from early 2000’s to 2006. The growth was disportionally [sic] in the lower fico neighborhoods." True, FICO's underwritten by the agencies didn't go up much, but private label mortgages went from a estimated 30% in 2000 to the quoted 50%.
But the agencies were very active in both Alt A and subprime and amassed huge AAA portfolios of both and both made up the majority of new mortgages in places like Nevada. Over a third of homes purchased in 2005 was estimated by the National Association of Realtors as investment properties and second homes.
3) The collapse in credit was almost all private label led. Bear Stearn's and Lehman's respective collapse came as they built up positions in subordinated bonds they couldn't move and certainly weren't financing them for servicers. Banks couldn't securitize as investors went on strike. Both Freddie and Fannie tried creative fixes like simply wrapping subprime, but that proved very costly with hindsight.
4) There was support for the agencies to step in. To quote from a mid-2007 Credit Suisse research piece: "With a dysfunctional non-agency securitization market, all eyes turned towards the GSEs to provide some relief. Lenders are tightening offerings that they cannot sell to the agencies and raising rates in a dramatic fashion on products including even jumbo mortgage loans that are offered to creditworthy borrowers.
To maintain liquidity in the mortgage market, lawmakers like Senator Dodd, are requesting OFHEO, the regulator of Fannie Mae and Freddie Mac, to increase the limit on the amount of mortgages and related MBS the two GSEs can buy.
On a related note, on July 30, Freddie Mac issued a $105.6 million subprime deal, Structured Pass-Through Certificates (SPCs) Series T-074, backed by loans originated by Wells Fargo. This deal is actually a wrapped Wells Fargo Home Mortgage ABS 2007-M09 deal, to which Freddie Mac provide guarantees on four Class A Certificates. It is part of Freddie Mac's $20 billion commitment to Congress to provide liquidity to the subprime market."
I'm not sure I'm arguing against what you've written; rather, I hope to give some context. As a structured product salesman at the time, I witnessed first hand both the excess and the near disappearance of credit and its affect. As one of my previous libertarian traders told me at the time "Thank God for the agencies".
1) This is a description of excess inventory from a demand shock, not a supply glut.
2) I agree that increasingly homes were purchased by investors rather than owner-occupiers. There was not an aggregate change in credit scores on the average mortgage and the Survey of Consumer Finance shows that generally from the 90s to 2007 homeownership was increasingly among college educated professionals with higher incomes.
3) Yes. Private label collapsed in 2007. Then the GSEs took up the slack, but with much tighter standards than the GSEs had used before. The rise and fall of the private markets was associated with about 8% rise and fall in home values from 2006 to 2007. Then, the tightening at the agencies was associated with highly regressive price collapse in 2008 and after that averaged more than 20%.
4) Definitely the agencies were the backstop, and I suspect if they had not tightened standards, it would not have devolved into a generation-defining crisis.
On this side of the GFC houses were still relatively cheap in Summerlin as late as 2016. So $250k bought you a single family home in a 9/10 school district which was probably the cheapest nice neighborhood in America. Boca Raton single family homes were last $250k in 2012. This is a big iirc but I’m pretty confident I remember this correctly.
Yes, I have a friend that bought a home in Scottsdale in 2009 and now he’s a millionaire just based on the increase in value of his home. Miami and Vegas were the hotspot for condos during the Housing Bubble…does your data include condo towers? I remember speculation on single family homes being a big deal in Henderson and the several articles from Vegas newspapers anecdotally recall “construction booming” during the Housing Bubble…although maybe it was just for condo towers and not single family homes??
Now home ownership rate and home sales did hit records around 2006…and anecdotally that often involved young people that shouldn’t buy a house buying one to make a profit by flipping.
the over 69% goes through Q3 2006. I think of multi family like duplexes and townhomes…Vegas and Miami condo towers weren’t being built with families in mind. It looks like STRs and childless adults and EB5 have made condo towers attractive for more than just speculators at least in Miami. I think Vegas has become more attractive to families after California and Phoenix got so expensive.
1) yes, demand collapsed as loose credit otherwise provided by private markets disappeared, but that led to foreclosures by those in homes they couldn't afford or were hoping to flip and a subsequent "glut" in inventory. That initial credit fueled demand wasn't sustainable. Not sure if we really differ other than our emphasis.
2) I'm suspect that there was not a decrease in aggregate credit scores given subprime by 2006 made up a growing % of overall mortgages, but I don't have data to support this and it never got much higher than 10% so maybe.
Still, "Pay Option Arms" (with negative amortization), 100% LTV or seconds mortgages, "Alternative A" like no income or asset verification, all had decent FICOs but reflected large drops in underwriting standards.
3 and 4) I think you underestimate the cascading effect -- an 8% fall in housing on a very high LTV mortgage led some to walk away which reduced the shame in walking away for others which led to more REO hitting the market place which led to further drops. I have a hard time believing that wiping out ~ 22% of the lending market (best estimates are that by 2006 subprime represented ~ 10% of mortgage debt, Alt A 9%, Prime IO and Option Arms 3%) didn't have more of an impact. The Prime Jumbo private market (5% market share) also collapsed but banks (like First Republic!) and REITs ( collectively ~ 25% of market) picked up much of that slack but with crazy tight lending standards.
That leaves the agencies which undoubtedly tightened their standards. But wouldn't you? Don't they have a fiduciary responsibility to limit losses to the tax payers? The market certainly thought the risk for baring mortgage credit risk was very high. Even in 2013 when Freddie sold their first credit risk transfer deal (STACR), the AA with 1.65% credit enhancement (and 1.35% thick) sold at a spread of 2.35% and that had an average FICO of 766 and a LTV of 73!
I just don't think it was politically plausible or economically sound for them to actually loosen their credit standards to take some of the slack from the private label collapse. Certainly with hindsight they should have. They did create a largely successful HAMP program to allow for loan modifications to stem the foreclosure tied. Loan forgiveness went nowhere. All this seems like a political argument of the role of government/agencies in our housing market.
I appreciate the engagement, too. I really appreciate your work but also want to give a different perspective of the agencies role in the collapse.
I think you’re right that we generally agree on these things.
One area I would nitpick is to be clear about the difference between risky terms and loose standards. The Urban Institute has a great tracker that helps highlight this issue. The subprime boom was largely about more reckless terms. The GsEs only engaged in a small amount of that. Then, after subprime fell, there was an extreme tightening of borrower standards. The GSEs never changed their customer base during the boom and then massively cut it off during the bust.
There was no cascading. That’s one of the things I’ve discovered in my work. Every conventional narrative has everything backwards. Owners defaulted because prices collapsed. Prices collapsed because prime lending that had been available for decades was pulled away.
These aren’t just vibes. I ran the numbers and was surprised that they told a new story and so now that’s what my work is.
The intuition to accept or encourage the extreme tightening of credit was the cause of the crisis. If the average credit score in September 2008 on GSE mortgages had been the same as it was in, say, 1999, none of the worst things would have happened, and even the GSEs wouldn’t have been taken over.
I think our primary disagreement is in your statement "Prices collapsed because prime lending that had ben available for decades was pulled away" and my observation that prices collapsed as DQ's started to escalate in 2006 causing private mortgage credit to tighten and escalate in 2007. That tightening in private credit was behind the stall in house prices in the hottest markets cascading into a shut-down in private markets by early 2008 and a further increase in DQs then REO in these markets.
I don't have data by month and I'll concede your data might be better than mine, but from the FHGA.gov website in "Date on the Risk Characteristics...from 2001 through 2008..." pdf they published in September of 2010, "...in years 2004 through 2006, such loans [above 660 FICOs] account for 70 percent to 72 percent of the data [total mortgage originations], whereas in other years they account for 78% [roughly pre-2004] to 92% [by 2008]." The GSEs $ volume went up of below 660 FICO originations went up in 2007 while private label orinations collapsed. I don't think you can't refute that the housing crisis started in 2006 and gained pace in 2007, seemingly before the GSE's tightened their guidelines.
To your point, by 2008, private label origination had collapsed and GSE underwriting tightened. But the bulk of the 90+ day DQ bucket was with private label originations, not the GSEs' (e.g., 2006 vintage where GSE's market share (excluding bank retained mortgages) originations share was 67% whereas the DQ shares was only 37%). The ensuring "supply glut" on REO hitting the market as adding to my view of a cascade was also primarily stemming from the private markets (unclear to me how much the agency led HEMP vs the private label servicer led modifications (including loan forgiveness) stemmed that tide but certainly not enough. It seems clear that prior to 2007, the marginal buyer (as defined by subsequently delinquent) was primarily financed largely with private label mortgages and the evaporation of that source of financing was behind the initial collapse in demand. The tightening of standards in 2008 exasperated the problem but the crisis would have happened regardless.
The conclusion that "none of the worst things would have happened' without the GSE tightening also doesn't seem consistent with what happened overseas, especially Spain and Ireland who experienced only a collapse in private funding.
Perhaps we agree to disagree on the origins and eventual extent of the private mortgage market's role relative to the GSEs and agree that the GSEs exasperated and extended the problem by not absorbing some of that lost demand stemming from the marginal buyer.
If you're interested in these questions, I would recommend poking around under the "Research" tab. You may not be satisfied with my answers to these questions, but certainly they are central to the inquiry.
Atlanta is an example of a city where there was basically no price reaction to the rise and fall of subprime from late 2003 to mid 2007, but there was a huge price reaction that started at the beginning of 2008 when credit was tightened at the GSEs. Figure 2 here shows the price/income trends in Atlanta.
I think we may have to agree to disagree. But I'll end by saying that the New York Fed, from which you also gathered some of your data, has some good updated data of FICOs at origination: https://www.newyorkfed.org/microeconomics/hhdc/background.html.
I think page 7 shows a pretty clear loosening of credit after 2002 and a tightening of credit, really post 1Q of 2008 when the build-up of REO (primarily from private label mortgages) had already created the environment for the ensuring collapse of the housing market.
The data shows median FICO scores of 730ish throughout 2002 before spiking in 2003 to the 740s (there was a mini-pause in the private label markets that year) which dipped to 707 by 4Q2006. More telling of impact of private label subprime was the decrease in the 10% decile subprime cutoff from low 600s to 576. By 1Q 2008 it was back to 730 and 600 respectively but by 2Q 2009 it was 770 and 647. By 1Q 2013 it was 780 and 668, respective, so yes, the tightening of agency credit was severe and exasperated the problem, but also largely came after the damage was done.
REO liquidations take a good year or more to work their way through the pipeline and the final leg (REO to liquidations) peeked in 2009, largely from a combination of 2007/08 DQs and increased use of mods. REO build-up at the agencies almost doubled between 2009 and 2010 at the agencies as they were less aggressive in liquidating.
I don’t have data specific to Atlanta, but Freddie Mac reported in an analysis I kept that Georgia home prices dropped 12.4% in 2010 leaving them down 19.9% since end of 2006 (bad, but not nearly as bad as NV, CA, AZ and FL which were all down closer to 50%). It seems that we wouldn't have had such disparate outcomes across states if this was mainly the result of a tightening of national credit standards.
As for Ireland and Spain, I agree that their bubbles weren't primarily based on international flows and a "glut of capital". As you point out, Ireland was another poster child of the pro-cyclical choices post-2010. But my understanding was that was really the rational choice of their banks (or their creditors) as they don't have anything comparable to Fannie and Freddie (let alone GNMA). Our private label market was equally rational to stop lending until the dust settled.
We both agree that the tightening of credit standards by the agencies exasperated the problem. Given that didn't really occur until 2Q of 2008 in any real force and after the buildup of REO and DQs, I don't believe they were either the trigger or the main culprit.
I'm also not convinced they should have stepped in given the uncertainty at the time and the wariness of more tax payer money exposed to the crisis. I suppose that depends on your view of government's optimal role in housing. I will say private markets did come back, this time by funding private equity to buy up the excess inventory for rentals.
The US needs 10 million additional housing units, maybe 20 million. Imagine how much credit that would take.
Stiglitz may, indirectly, have one concern sorta-kinda right: There is so little new construction, that the average age of housing units in the US is aging by nearly one year in every year.
At some point, this will begin to take a toll. Plumbing goes bad, wiring, new roofs are needed, termites etc. Windows do not keep out rain and so on.
I'm a new admirer of your work, Kevin, so please forgive me if this question has been address prior. But as a resident of the American southwest, I noticed that the location of a lot of the housing built in the 2000's was quite remote. For instance, the Lake Las Vegas community is still sub-optimally populated. Since the FC, though I've seen a lot more infill building (there is a lot of room for it in LV), which seems more practical to me. I've seen similar trends in Phoenix and elsewhere. In your opinion, does this relative location play into the boom/bust?
Thank you!
My speculative answer is that the deep drop in construction after 2005 has led to rent inflation, which is mostly land rents due to supply constraints. That has made land relatively more expensive than structures. And, my guess is that it is mostly a simple supply and demand issue on new homes. Limited capital for new homes has to economize on land to make marginal new units feasible.
If municipalities deregulate land use, as they should, there would also be a lot more infill development. I suspect these trends in the southwest happen to also create more density, but for this unrelated reason.
A lot of building in NV were developers building on speculation, cheap money, cheap land, with sky high projections on more business moving to Nevada inviting poor lending and investment practices. Since 1998, the City of Las Vegas and the U.S. Bureau of Land Management (BLM) have been gambling. they auctioning off public land from the BLM for development and used the proceeds to preserve natural areas. The idea in the heads of the policymakers and federal officials bet that development and conservation can go hand-in-hand. Oops. Paul you are right about the sprawl and and its costs.
Reno got the bulk of the growth from CA companies, not Las Vegas. Also Las Vegas is not an easy place to set up a business. It has the images of a gambling town and many businesses do not want that image. Also the questions of water supply, power and working with very strong unions.
All good analysis. Thank You
CPI hit 5.5% YoY in 2008…everything you’ve been told about 2008 is wrong.
I'm sympathetic to your main point that although there was a credit boom, supply constraints led the housing boom prior to 2006 and the credit crunch following was largely behind the housing price collapse and supply constraints lead the ensuing price surge outside of poor urban areas. I think, though, you overstate your case and will try and stick to the empirical data to refute some of your claims or my reading of your claims.
1) There was a supply glut in Nevada post 2007, not in new buildings but in REO/Foreclosures. FNMA alone reported REO acquisitions increasing form 530 properties in 2007 to 9,418 in 2010. AZ, 751 to 20,691. Freddie was likely no different (happy to share the FNMA presentation via email as well as subsequent comments.
2) Easing credit conditions thru 2006 fueled demand and subsequent supply. To quote a John Maudlin newletter from 7/1/2005, https://www.mauldineconomics.com/frontlinethoughts/thoughts-on-the-housing-bubble-mwo070105 "Private market share went from around 30% to over 50% from early 2000’s to 2006. The growth was disportionally [sic] in the lower fico neighborhoods." True, FICO's underwritten by the agencies didn't go up much, but private label mortgages went from a estimated 30% in 2000 to the quoted 50%.
But the agencies were very active in both Alt A and subprime and amassed huge AAA portfolios of both and both made up the majority of new mortgages in places like Nevada. Over a third of homes purchased in 2005 was estimated by the National Association of Realtors as investment properties and second homes.
3) The collapse in credit was almost all private label led. Bear Stearn's and Lehman's respective collapse came as they built up positions in subordinated bonds they couldn't move and certainly weren't financing them for servicers. Banks couldn't securitize as investors went on strike. Both Freddie and Fannie tried creative fixes like simply wrapping subprime, but that proved very costly with hindsight.
4) There was support for the agencies to step in. To quote from a mid-2007 Credit Suisse research piece: "With a dysfunctional non-agency securitization market, all eyes turned towards the GSEs to provide some relief. Lenders are tightening offerings that they cannot sell to the agencies and raising rates in a dramatic fashion on products including even jumbo mortgage loans that are offered to creditworthy borrowers.
To maintain liquidity in the mortgage market, lawmakers like Senator Dodd, are requesting OFHEO, the regulator of Fannie Mae and Freddie Mac, to increase the limit on the amount of mortgages and related MBS the two GSEs can buy.
On a related note, on July 30, Freddie Mac issued a $105.6 million subprime deal, Structured Pass-Through Certificates (SPCs) Series T-074, backed by loans originated by Wells Fargo. This deal is actually a wrapped Wells Fargo Home Mortgage ABS 2007-M09 deal, to which Freddie Mac provide guarantees on four Class A Certificates. It is part of Freddie Mac's $20 billion commitment to Congress to provide liquidity to the subprime market."
I'm not sure I'm arguing against what you've written; rather, I hope to give some context. As a structured product salesman at the time, I witnessed first hand both the excess and the near disappearance of credit and its affect. As one of my previous libertarian traders told me at the time "Thank God for the agencies".
1) This is a description of excess inventory from a demand shock, not a supply glut.
2) I agree that increasingly homes were purchased by investors rather than owner-occupiers. There was not an aggregate change in credit scores on the average mortgage and the Survey of Consumer Finance shows that generally from the 90s to 2007 homeownership was increasingly among college educated professionals with higher incomes.
3) Yes. Private label collapsed in 2007. Then the GSEs took up the slack, but with much tighter standards than the GSEs had used before. The rise and fall of the private markets was associated with about 8% rise and fall in home values from 2006 to 2007. Then, the tightening at the agencies was associated with highly regressive price collapse in 2008 and after that averaged more than 20%.
4) Definitely the agencies were the backstop, and I suspect if they had not tightened standards, it would not have devolved into a generation-defining crisis.
Thanks for engaging!
On this side of the GFC houses were still relatively cheap in Summerlin as late as 2016. So $250k bought you a single family home in a 9/10 school district which was probably the cheapest nice neighborhood in America. Boca Raton single family homes were last $250k in 2012. This is a big iirc but I’m pretty confident I remember this correctly.
There is no reason to assume that lower prices were the result of oversupply.
Low tier home prices collapsed after 2007 in every city, regardless of the previous rate of new building.
Yes, I have a friend that bought a home in Scottsdale in 2009 and now he’s a millionaire just based on the increase in value of his home. Miami and Vegas were the hotspot for condos during the Housing Bubble…does your data include condo towers? I remember speculation on single family homes being a big deal in Henderson and the several articles from Vegas newspapers anecdotally recall “construction booming” during the Housing Bubble…although maybe it was just for condo towers and not single family homes??
Now home ownership rate and home sales did hit records around 2006…and anecdotally that often involved young people that shouldn’t buy a house buying one to make a profit by flipping.
It was more single family homes being built instead of multi-family.
The homeownership rate declined in 2005 and 2006.
Looking at for home ownership rate
https://fred.stlouisfed.org/series/RHORUSQ156N
the over 69% goes through Q3 2006. I think of multi family like duplexes and townhomes…Vegas and Miami condo towers weren’t being built with families in mind. It looks like STRs and childless adults and EB5 have made condo towers attractive for more than just speculators at least in Miami. I think Vegas has become more attractive to families after California and Phoenix got so expensive.
1) yes, demand collapsed as loose credit otherwise provided by private markets disappeared, but that led to foreclosures by those in homes they couldn't afford or were hoping to flip and a subsequent "glut" in inventory. That initial credit fueled demand wasn't sustainable. Not sure if we really differ other than our emphasis.
2) I'm suspect that there was not a decrease in aggregate credit scores given subprime by 2006 made up a growing % of overall mortgages, but I don't have data to support this and it never got much higher than 10% so maybe.
Still, "Pay Option Arms" (with negative amortization), 100% LTV or seconds mortgages, "Alternative A" like no income or asset verification, all had decent FICOs but reflected large drops in underwriting standards.
3 and 4) I think you underestimate the cascading effect -- an 8% fall in housing on a very high LTV mortgage led some to walk away which reduced the shame in walking away for others which led to more REO hitting the market place which led to further drops. I have a hard time believing that wiping out ~ 22% of the lending market (best estimates are that by 2006 subprime represented ~ 10% of mortgage debt, Alt A 9%, Prime IO and Option Arms 3%) didn't have more of an impact. The Prime Jumbo private market (5% market share) also collapsed but banks (like First Republic!) and REITs ( collectively ~ 25% of market) picked up much of that slack but with crazy tight lending standards.
That leaves the agencies which undoubtedly tightened their standards. But wouldn't you? Don't they have a fiduciary responsibility to limit losses to the tax payers? The market certainly thought the risk for baring mortgage credit risk was very high. Even in 2013 when Freddie sold their first credit risk transfer deal (STACR), the AA with 1.65% credit enhancement (and 1.35% thick) sold at a spread of 2.35% and that had an average FICO of 766 and a LTV of 73!
I just don't think it was politically plausible or economically sound for them to actually loosen their credit standards to take some of the slack from the private label collapse. Certainly with hindsight they should have. They did create a largely successful HAMP program to allow for loan modifications to stem the foreclosure tied. Loan forgiveness went nowhere. All this seems like a political argument of the role of government/agencies in our housing market.
I appreciate the engagement, too. I really appreciate your work but also want to give a different perspective of the agencies role in the collapse.
I think you’re right that we generally agree on these things.
One area I would nitpick is to be clear about the difference between risky terms and loose standards. The Urban Institute has a great tracker that helps highlight this issue. The subprime boom was largely about more reckless terms. The GsEs only engaged in a small amount of that. Then, after subprime fell, there was an extreme tightening of borrower standards. The GSEs never changed their customer base during the boom and then massively cut it off during the bust.
There was no cascading. That’s one of the things I’ve discovered in my work. Every conventional narrative has everything backwards. Owners defaulted because prices collapsed. Prices collapsed because prime lending that had been available for decades was pulled away.
These aren’t just vibes. I ran the numbers and was surprised that they told a new story and so now that’s what my work is.
The intuition to accept or encourage the extreme tightening of credit was the cause of the crisis. If the average credit score in September 2008 on GSE mortgages had been the same as it was in, say, 1999, none of the worst things would have happened, and even the GSEs wouldn’t have been taken over.
I think our primary disagreement is in your statement "Prices collapsed because prime lending that had ben available for decades was pulled away" and my observation that prices collapsed as DQ's started to escalate in 2006 causing private mortgage credit to tighten and escalate in 2007. That tightening in private credit was behind the stall in house prices in the hottest markets cascading into a shut-down in private markets by early 2008 and a further increase in DQs then REO in these markets.
I don't have data by month and I'll concede your data might be better than mine, but from the FHGA.gov website in "Date on the Risk Characteristics...from 2001 through 2008..." pdf they published in September of 2010, "...in years 2004 through 2006, such loans [above 660 FICOs] account for 70 percent to 72 percent of the data [total mortgage originations], whereas in other years they account for 78% [roughly pre-2004] to 92% [by 2008]." The GSEs $ volume went up of below 660 FICO originations went up in 2007 while private label orinations collapsed. I don't think you can't refute that the housing crisis started in 2006 and gained pace in 2007, seemingly before the GSE's tightened their guidelines.
To your point, by 2008, private label origination had collapsed and GSE underwriting tightened. But the bulk of the 90+ day DQ bucket was with private label originations, not the GSEs' (e.g., 2006 vintage where GSE's market share (excluding bank retained mortgages) originations share was 67% whereas the DQ shares was only 37%). The ensuring "supply glut" on REO hitting the market as adding to my view of a cascade was also primarily stemming from the private markets (unclear to me how much the agency led HEMP vs the private label servicer led modifications (including loan forgiveness) stemmed that tide but certainly not enough. It seems clear that prior to 2007, the marginal buyer (as defined by subsequently delinquent) was primarily financed largely with private label mortgages and the evaporation of that source of financing was behind the initial collapse in demand. The tightening of standards in 2008 exasperated the problem but the crisis would have happened regardless.
The conclusion that "none of the worst things would have happened' without the GSE tightening also doesn't seem consistent with what happened overseas, especially Spain and Ireland who experienced only a collapse in private funding.
Perhaps we agree to disagree on the origins and eventual extent of the private mortgage market's role relative to the GSEs and agree that the GSEs exasperated and extended the problem by not absorbing some of that lost demand stemming from the marginal buyer.
If you're interested in these questions, I would recommend poking around under the "Research" tab. You may not be satisfied with my answers to these questions, but certainly they are central to the inquiry.
Atlanta is an example of a city where there was basically no price reaction to the rise and fall of subprime from late 2003 to mid 2007, but there was a huge price reaction that started at the beginning of 2008 when credit was tightened at the GSEs. Figure 2 here shows the price/income trends in Atlanta.
https://kevinerdmann.substack.com/p/the-great-recession-was-caused-by
I discuss Ireland and Spain here:
https://kevinerdmann.substack.com/p/housing-in-ireland-the-us-and-australia
https://kevinerdmann.substack.com/p/housing-in-ireland-the-us-and-australia-217
I think we may have to agree to disagree. But I'll end by saying that the New York Fed, from which you also gathered some of your data, has some good updated data of FICOs at origination: https://www.newyorkfed.org/microeconomics/hhdc/background.html.
I think page 7 shows a pretty clear loosening of credit after 2002 and a tightening of credit, really post 1Q of 2008 when the build-up of REO (primarily from private label mortgages) had already created the environment for the ensuring collapse of the housing market.
The data shows median FICO scores of 730ish throughout 2002 before spiking in 2003 to the 740s (there was a mini-pause in the private label markets that year) which dipped to 707 by 4Q2006. More telling of impact of private label subprime was the decrease in the 10% decile subprime cutoff from low 600s to 576. By 1Q 2008 it was back to 730 and 600 respectively but by 2Q 2009 it was 770 and 647. By 1Q 2013 it was 780 and 668, respective, so yes, the tightening of agency credit was severe and exasperated the problem, but also largely came after the damage was done.
REO liquidations take a good year or more to work their way through the pipeline and the final leg (REO to liquidations) peeked in 2009, largely from a combination of 2007/08 DQs and increased use of mods. REO build-up at the agencies almost doubled between 2009 and 2010 at the agencies as they were less aggressive in liquidating.
I don’t have data specific to Atlanta, but Freddie Mac reported in an analysis I kept that Georgia home prices dropped 12.4% in 2010 leaving them down 19.9% since end of 2006 (bad, but not nearly as bad as NV, CA, AZ and FL which were all down closer to 50%). It seems that we wouldn't have had such disparate outcomes across states if this was mainly the result of a tightening of national credit standards.
As for Ireland and Spain, I agree that their bubbles weren't primarily based on international flows and a "glut of capital". As you point out, Ireland was another poster child of the pro-cyclical choices post-2010. But my understanding was that was really the rational choice of their banks (or their creditors) as they don't have anything comparable to Fannie and Freddie (let alone GNMA). Our private label market was equally rational to stop lending until the dust settled.
We both agree that the tightening of credit standards by the agencies exasperated the problem. Given that didn't really occur until 2Q of 2008 in any real force and after the buildup of REO and DQs, I don't believe they were either the trigger or the main culprit.
I'm also not convinced they should have stepped in given the uncertainty at the time and the wariness of more tax payer money exposed to the crisis. I suppose that depends on your view of government's optimal role in housing. I will say private markets did come back, this time by funding private equity to buy up the excess inventory for rentals.
Egads.
Too much credit going to housing construction?
The US needs 10 million additional housing units, maybe 20 million. Imagine how much credit that would take.
Stiglitz may, indirectly, have one concern sorta-kinda right: There is so little new construction, that the average age of housing units in the US is aging by nearly one year in every year.
At some point, this will begin to take a toll. Plumbing goes bad, wiring, new roofs are needed, termites etc. Windows do not keep out rain and so on.
Check out AutoZone stock over the last 20 years.