The Collected Works of Author and Blogger Larry Roberts

Archive for October, 2008

The Bubble Bursts When a bubble in a financial market pops, it does not explode in spectacular fashion like a soap bubble; it is more comparable to a breached levee which releases water slowly at first. [1] Once the financial levee is ruptured, the equity reservoir loses money at increasing rates. It washes away the imagined wealth of homeowners who bought late in the rally or used home equity lines of credit to fuel consumer spending until the reservoir is nearly empty and the torrent turns to a trickle. Ultimately, the causes of failure are examined, the financial levee is repaired, and the reservoir again holds value, but not until the dreams and equity of many homeowners are washed away. Denial runs…[READ MORE]

The Housing Bubble Affordability Limits Affordability is a measure of people’s ability to raise money to obtain real estate. It is often represented as an index that compares the cost to finance a median house price to the percentage of the general population with the income to support this house price. For instance, in Orange County, California, in 2006, only 2.4% of the population earned enough money to afford a median priced home. When affordability drops below 50%, there is a problem in housing; when it drops to 2.4% there is either a severe shortage of housing, or a housing price bubble. Most often, it is the latter. Figure 23: Affordability / Demand   One way to envision affordability is through supply and…[READ MORE]

The Housing Bubble Prices went up a large amount during the Great Housing Bubble, but what makes this price increase a bubble? To answer this question it is necessary to accurately measure price levels and review historic measures of affordability to establish these price levels are not sustainable. [1] Measuring house prices is not a simple task, and there are many methods market watchers use to evaluate market prices. These include the median, the average cost per square foot, and the S&P/Case-Shiller indices. Price levels in financial markets represent the collective result of individual actions. There are techniques to measure the actions of the individual market participants and their impact on house prices. These measures are debt-to-income ratios and price-to-income ratios.  The amount of…[READ MORE]

The Credit Bubble Visualizing the Bubble With a huge influx of capital into the secondary mortgage market when the Federal Reserve lowered interest rates in 2001-2004, the industry was under tremendous pressure to deliver more loans to hungry investors seeking higher yields. This caused the already-low loan standards to be all but eliminated. All of the worst “innovations” in the lending industry occurred during this period: Negative Amortization loans, Stated-Income loans (Liar Loans,) NINJA loans (no income, no job, no assets,) 100% financing, FICO scores under 500, and one-day-out-of-bankruptcy loans among others. The joke was if borrowers could “fog a mirror” or if they “had a pulse,” they could get a loan for as much as they wanted to buy a house. It is…[READ MORE]

The Credit Bubble The Great Housing Bubble was not really about housing; it was about credit. Most financial bubbles are the result of an expansion of credit, and the Great Housing Bubble was no exception. Housing just happened to be the asset class into which this capital flowed. It could have been stocks or commodities just as easily, and if the government gets too aggressive in its actions to prevent a collapse in housing prices, the liquidity intended to prop up real estate prices will likely flow into some other asset class creating yet another asset price bubble. The root causes of the Great Housing Bubble can be traced back to four interrelated factors: Separation of origination, servicing, and portfolio holding in the…[READ MORE]

Page 3 of 512345