Tuesday, September 14, 2010

Housing Bubble and a dishonest political class---birds of a feather or not connected at all---You decide, I am too tired...

    Homeownership and the Housing Bubble---Is there a correlation?...The graph below shows the Consumer Price Index (Dark Red Line, right scale), the housing price index (pulled from within the CPI--Bright Red Line, right scale) and the Homeownership Rate in the US since 1990 (Blue Line, left scale). For the purposes of this graph, the author (Carpe Diem) used 1990 as the base year (CPI and Housing Index =100).  A housing index high of approx. 225 in 2007 means that housing prices increased 125% over 20 years (225 minus 100= 125).  Over the SAME period prices in general, as measured by the CPI, increased 50% (approx 150 minus 100= 50).  
Source: Carpe Diem

    The layman's definition for inflation is "too much money chasing too few goods".  The demand for housing outpaced the available stock of new and used houses fueled by "easy money" from the Federal Reserve and multiplied by the creative financial instruments developed by Wall Street firms.  All designed to get more money into the hands of more people to buy more housing.
    Three simple observations can be made about the data: (1) homeownership rates increased dramatically since 1995 (a VERY steep increase year over year after 1995), (2) lagging behind, yet increasing at an increasing rate and keeping pace with homeownership rates, is the price of housing in general and (3) while prices as measure by the whole CPI have increased, they have increased at a modest rate over time.
    There have been a myriad of reasons hypothesized for the "bubble" in the housing market which contributed to the meltdown in the banking/financial markets. I believe history will be a much better judge as time passes and more objectivity is inserted into the analysis than there is presently.   However, the President AND Congress are responsible for over-sight in these matters. One cannot underestimate the power these two entities exert over the process. This letter sent to Pres. Bush in 2004 by members of Congress provides some insight into the thinking at the time. There seems to be a suggestion that there is a favorable trade-off between "safety and soundness" of the financial system and "affordable housing".  Please read the whole letter but here is the operable paragraph: (note: GSE are "Government Sponsored Entities" such as "Fannie Mae" and "Freddie Mac".  They hold a majority of mortgages in the US and are implicitly guaranteed by the Federal Govt.--this is a whole other blog entry).
"...We write as members of the House of Representatives who continually press the GSEs to do more in affordable housing. Until recently, we have been disappointed that the Administration has not been more supportive of our efforts to press the GSEs to do more. We have been concerned that the Administration's legislative proposal regarding the GSEs would weaken affordable housing perfonnance by the GSEs, by emphasizing only safety and soundness. While the GSEs' affordable housing mission is not in any way incompatible with their safety and soundness, an exclusive focus on safety and soundness is likely to come, in practice, at the expense of affordable housing....""
There are many parties to blame in the meltdown and I don't blame politicians exclusively, but for the political class to deny any culpability, as some of the signatories have claimed in public forums, is less than disingenuous and borders on dishonesty...I will let you make the call there...
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