Alan Greenspan, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”Read the entire thing.
But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.
I saw the same thing on a local level. I saw housing prices going up and up, well past the level that most people could afford to buy into a home at a reasonable mortgage rate, unless they already owned a home and were using the equity in that to trade up (or unless they were taking the foolish bet of an adjustable-rate mortgage). I know what the real estate taxes are like in the NY Metro area and it boggled my mind that people could afford those homes.
My failing, of course, was that I did not see a way to make money off what I saw, other than not jump onto the merry-go-round.
2 comments:
I realized real estate was in a bubble in mid-2004, when I realized that fixed-rate mortgage payments on an average townhouse here in the Silicon Valley were higher than the median family income here -- and that median family income was double what it is in flyover country, so we ain't talkin' no small amount. Cardboard townhouses that had been thrown up in the early 70's in the south San Jose area, that lacked air conditioning (in a part of the Valley where summer temperatures reach the 90's!) and were totally thrashed inside, were selling for $500K+ (with $7500/year property taxes!), and because of the poor construction the HOA dues were outrageous too (as in, $350+ per month), due to all the repairs necessary to keep them weathertight. No way, no how was any of that reasonable, and I settled in to rent.
I might buy soon -- but that's because housing prices have finally fallen to the point where buying a nice little house, I'd pay less than the rent on a class A apartment (class A apartments here in the Valley are large air-conditioned apartments with all appliances including laundry appliances and "luxury" features such as wine racks and crown moulding). That has not been true here in the Valley for a *long* time...
- Badtux the Bubbly Penguin
WTF. Terry Gross did an interview with Michael Lewis on Fresh Air about two weeks ago, about the book ("The Big Short") Lewis had written about all the people who'd made incredible amounts of money short-selling banks and mortgage companies -- because they knew what was about to happen. The author said that every one of the people he was writing about had said, loudly and at length, that the mortgage industry was completely unstable and heading for a crash; several of them had engaged in lengthy written correspondence with the SEC and the boards of directors of many of the mortgage companies prior to short-selling them.
It's not that nobody knew. It's that everyone was making money by ignoring what was happening.
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