There's a widely held view that the Fed, under Alan Greenspan, created the housing bubble thanks to loads of "cheap money." The evidence seems to say this claim is rather dubious. At best it may show that home sales and prices were influenced by lower rates, but the correlation is spurious.
Rates have basically been falling for 30 years while home sales have been rising, falling, rising, falling, rising again and then really falling.
17 comments:
The biggest cause was the wholesale abandonment of prudent loan underwriting. Offering free money with no strings attached couldn't possibly have worked out well.
I don't know... from that chart it seems like rates had a direct effect on sales. They're pretty much in lock-step. Can't see how you read any ambiguity into that.
Yea, I have to agree with Broll. I suspect that some further statistical analysis would show that there is some correlation. Visually I would defn say there is correlation, not entirely strong but its there.
It's not the interest rate. It's the leverage. The interest rate is one aspect of leverage in the terms, and in the crisis it was a relatively small part, certainly not enough to influence speculative fever very much at all.
I was on the ground in CA at the time in an area where most loans were Ninja. No one was concerned with the low rates, when they could borrow with nothing down and no questions asked if you paid an extra point.
Prices were accelerating so rapidly that the interest rate is virtually irrelevant. The only thing that would have doused the fire was more skin in the game and tighter standards.
So I would say that on a scale of 1 to 10 that low rates were at maybe a 3 as a factor in decision making.
PaulJ:
Agreed. At least in that very last climb.
From 1981 to 1992, interest rates fell ginormously, but home sales basically bounced around--up and down. Sales took off in the mid-90s; a period that period saw financial deregulation including a repeal of Glass-Steagall as well as an economic boom.
If other factors not described on the graph are going to be used to explain the graphs, what is the point of the graphs?
Also 1997 saw the passage of the "Tax Payer Relief Act" which resulted in § 121. Exclusion of gain from sale of principal residence
Quote:
(a) Exclusion
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.
(b) Limitations
(1) In general
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns
In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A) $500,000 Limitation for certain joint returns
Paragraph (1) shall be applied by substituting “$500,000” for “$250,000”
The immediate impact of this law can be seen in a stagnation of the sale of "new houses" from 1998 to 2001, as "old houses" were sold, and profit taken. Note the two year residency required for taking the tax deduction.
Damm Clonal, How do you find such stuff?
G.J.
@Shaun - "If other factors not described on the graph are going to be used to explain the graphs, what is the point of the graphs?"
Exactly... I appreciate that there were many other contributing factors, but this graph shows a near perfect correlation with a title that screams "LOOK NO CORRELATION." There may very well be no connection, if so its just a poorly chosen graph and headline.
Sorry guys, I have to disagree. Rates collapsed from 1981 to 1992 and housing bounced around. Show me the "near perfect" correlation.
What happens if you look at leads and lags; not just the cross-sectional relationship? After all, the hypothesis is Have you tried various time lags to test the hypothesis?
Tom, so you're saying that it's the offering of Ninja loans, rather than just the low rates that does it. Any regressions of data testing this? Any causal models?
Looking at the entire data set for existing home sales, and new home sales, I would say that both of these numbers stayed in a flat trend until 1997. There was an upsurge in both time series starting 1997, leading finally to the housing collapse in 2005-2006. I strongly believe that the Tax Payer Relief act was responsible for the housing surge. After all, who could refuse a tax exempt windfall up to $250,000per year?
Anecdotal, Joe. No one was talking low interests rates at all. The buzz was how simple it was to get a mortgage on high leverage in the expectation of either flipping or refinancing in two years and pocketing the equity gain. No one was buying because rates were low. They were either buying to make a quick buck or else for fear of being shut out of the market.
Everything is is the monthly. Brokers were structuring "affordable" loans that people could make the monthly on, even if it involved paying interest only . At the end, some were even down to only part of the interest, since it was all they could afford at the astronomical prices.
The full expectation was higher prices rather than low rates. If rates have been a somewhat higher, I think that the deals would have been structured around that.
I was tempted to get in several times when good deals came along but it was obvious to me that this could not last and the exposure was too great. Actually, my assessment was a couple of years early and some enterprising friends took a chance and did very well, although some got caught, too.
I did manage to call the top pretty correctly at the time, though. But it is a lot easier when you aren't in yourself.
How about this :
Reagan spending was bigger than Obama spending and there were no funny names for it like "QE" and all that.
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