Bubble to Bust to Recovery

    See it again

      1. Bubble to Bust
        to Recovery

      2. No matter how you look at it, the U.S. housing market has been on a wild ride over the past few years.

        The reason is simple: lots of people suddenly had an easy time borrowing money to buy houses — until they couldn't.

        Ample credit boosted prices and overbuilding in certain areas. When lenders pulled back, prices plunged and building stopped. Prices have rebounded recently, but the go-go years aren't likely to come back soon.

      3. Let's start by looking at what happened to house prices.

        Here is the S&P Case-Shiller 20 Cities Index, which represents a diverse range of homebuyers' participation in the housing bubble.

        So, I've grouped them into three urban categories...

        S&P Case-Shiller House Prices (seasonally adjusted, Jan 2000 = 100)
      4. First, bubbly cities. Homes in these locales had huge price spikes.

        Their prices are now about 33 percent below peak levels, on average.

        S&P Case-Shiller House Prices (seasonally adjusted, Jan 2000 = 100)
      5. Second, sane cities. These locales missed the bubble.

        Prices in those cities are only 6 percent below peak, on average.

        S&P Case-Shiller House Prices (seasonally adjusted, Jan 2000 = 100)
      6. And third, other cities. Prices inflated more modestly than the bubbly cities in these locales, but inflate they did.

        Prices are still down about 16 percent from peak levels.

        S&P Case-Shiller House Prices (seasonally adjusted, Jan 2000 = 100)
      7. Consider the extreme divergence between Dallas, which had no bubble, and Las Vegas, where prices are still about half of what they were at the peak.

        Texas and Nevada both have loose building regulations, both had big population increases, and both experienced construction booms.

        What was different?

        S&P Case-Shiller House Prices (seasonally adjusted, Jan 2000 = 100)
      8. Well, people in Las Vegas (and Phoenix, Miami, and elsewhere) borrowed a lot more money than people in Dallas (and Cleveland and Detroit).

        Most of that extra borrowing helped fuel price spikes for houses.

        Total personal debt balance per capita by state (Jan 2003 = 100)
      9. Those who missed the bubble didn't have to cut personal debt much, but bubbly states' residents landed in foreclosure.

        New foreclosures by state (percent of population with a credit report)
      10. Even now, the percentage of Americans behind on their mortgage payments is elevated, especially in Nevada and Florida.

        Percent of mortgage debt 90+ days late
      11. U.S. mortgages come in two basic flavors.

        First are loans guaranteed (or made) by the federal government, which need to be below a certain size and conform to certain lending standards. (Hence the name "conforming mortgage.")

        Stock of mortgage types (billions USD)
      12. Second are private label loans, which cater to people who want something different, traditionally high-income people in expensive cities.

        (Jumbo mortgages are classic examples; balloon mortgages were originally designed for folks with big year-end bonuses to buy beach houses.)

        Financial institutions either hold onto these loans or sell them in bundles of mortgage-backed securities (MBS) to other investors.

        Stock of mortgage debt by type (billions USD)
      13. The temporary popularity of private-label MBS wasn't due to a sudden surge in the number of borrowers lining up to take out big mortgages.

        Instead, lenders were making it easier for more people with dodgy credit histories, insufficient incomes, and minimal documentation to get private-label mortgages — and that's what ignited that boomlet.

        Stock of mortgage types
      14. The boom, bust and tepid recovery can be seen in the big swing in nonprime lending and the subsequent increase in loans guaranteed by the Federal Housing Administration and the Veterans Benefits Administration.

        Gross mortgage issuance, including refinancings (by type, quarterly, billions USD)
      15. So what happened to all that excess mortgage credit in the 2000s?

        The explosion in mortgage lending wasn't just about people paying higher prices for housing, since debt rose much more than home values.

      16. Borrowers also took cash out of their homes by taking on more mortgage debt when they refinanced. These cashout refinancings (along with home equity loans) were used to boost consumption spending when house prices were rising.

        Economists estimate that the additional home equity extraction funded about $1.25 trillion in consumer spending from 2002 to 2006.

        Once prices stopped rising, consumption fell quickly, which helped push the economy into recession.

      17. What's been driving the recent recovery in home prices?

        In general, metro areas that saw the biggest declines in prices have had the biggest rebounds.

        S&P Case-Shiller House Prices (percent change, sorted by greatest peak-to-trough declines)
      18. While there was plenty of regional variation, the national rise in house prices encouraged additional housing construction.

      19. Most of the excess building occurred in the market for single-family homes.

        While that market is still depressed, the pace of apartment-building has returned to a steady rate.

        Housing starts (thousands of units, seasonally adjusted annual rate)
      20. One unusual feature of this recovery is the willingness of investors to purchase distressed properties, rent them out and wait for the market to recover.

      21. These investors have had a noticeable impact on cities such as Atlanta.

        Atlanta-Sandy Springs-Marietta
      22. And Miami:

        Miami-Fort Lauderdale-Pompano Beach
      23. And Las Vegas:

        Las Vegas-Paradise
      24. One way to see how all of these forces have played out is to look at changes in homeownership rates.

        After being relatively flat for many years, the share of Americans who own their home soared during the boom...

      25. ...only to plunge with the bust. As you can see from the decline in the rental vacancy rate, former homeowners are now renters.

        In some cases, they are renting their old house from an investor-turned-landlord.

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