The Beginning of the End of the Bubble

24 MB MP3

People have started viewing their houses as gigantic ATMs. Take out a home equity loan, which the banks are eager to offer you, …and all of a sudden you have an extra $70k to play with. You can put on an addition, you can go through the roof, you can take several trips to Hawaii, and still have large amounts of money left over.

Brad DeLong

When Fed Chairman Alan Greenspan testified before the Senate Banking Committee on July 21 he described the housing market in certain parts of the country as “frothy.” Funny word choice aside, it was the first time Greenspan acknowledged there might be anything unusual about America’s red-hot real estate market, the value of which has increased exponentially over the past several years.

But many observers saw the Fed chair’s testimony as something of an understatement. Frothy doesn’t cover it, they said. America is experiencing a full-fledged real estate bubble, like the stock bubble that preceded the Nasdaq crash, or the tech bubble that preceded the demise of Silicon Valley. Complete with the giddiness of easy money and get-in-the-market-while-you-still-can mindset, or the “irrational exuberance” described by Yale economist Robert Schiller in his book by the same name.

So how did the market get so inflated? And what might happen if (as some new numbers indicate) the bubble’s getting ready to pop? Greenspan assured Congress that even if housing prices were to fall over the next year the damage to the country’s economy “need not be substantial.” But others say that when (not if) the housing bubble bursts, it will take our whole economy down with it. Think people losing their life savings as the value of their house drops by fifty percent. Or the billion dollar construction industry going bust. A devastating recession the likes of which we have not seen for quite some time.

So if there is a bubble, and if it is about to crash, how bad could it possibly be? What would the crash of the real estate market mean for you? (or your family’s investment, or your construction business, or America’s economy as a whole?) We want to hear your fears and predictions of economic armageddon…or your notion that reports of real estate’s impending death have been greatly exaggerated.

Ben Jones

Economic Activist

Blogger, The Housing Bubble 2

from Robin’s pre-interview notes:

The Fed did what a lot of central banks did. Their response to one bust is to start another boom. They did it in ’87 with Black Monday, pumped a bunch of liquidity. They respond to each crash with more money creation. I think this particular movement in housing price started with opening the flood gates after the stock crash, then after Sept 11. We all remember when car loans went down to zero percent.

I do fault them [the Fed] [for this housing bubble]. We have the system we have. Its outside the question of whether we should have a central bank. But in the system we have, theyre in charge of interest rates in the short term. Recession is a natural way of an economy working out bad investments. You cant do it without them. Theyre regrettable, but that is how an economy handles it. So was it a good idea to create this bubble to fix the other one? What Im saying and others are saying, is no, we should have just taken our lumps. Cause now weve got housing, something thats an essential need, likely to fall just at the time we don’t want it to. I think it was a colossal mistake.

Brian Buetler

Author of Seller’s Market column featured weekly in the Washington City Paper

Blogger

from Robin’s pre-interview notes:

When I go out and see a house that’s been upgraded in value, which sold 2 years ago for $200,000, and is now selling for $800,000, I almost always find it’s a rip off. Occasionally I get a lead, like a house that sold for a million dollars that doesn’t have air conditioning. There was one near Georgetown [a posh historic neighborhood in Washington, DC] 1200 sq feet asking $1.1 million. Its price had doubled over the course of a year and a half. It was connected to a run down liquor store, and was maybe smallest house I’d ever seen. In Columbia Heights a guy who showed me the house was also the owner. I felt kind of bad because I was going to pan the house, but then I looked up the house and saw that he bought it 2003, and it was the 14th house in Columbia Heights he’d bought and resold.

Bill Wendel

Real estate consumer advocate

Blogger, Real Estate Cafe

from Robin’s pre-interview notes:

For the past year Bill has been doing oral history style interviews with home buyers and real estate agents, documenting the bubble and its effects on real people buying and selling real homes. He’ll be in the studio playing clips from his audio history project and talking about what he’s seen in the real estate market over the past few years.

Brad DeLong

Professor of Economics at UC Berkeley.

Blogger: Brad DeLong’s Semi-Daily Journal.

[by phone from Berkeley, CA]

From Robin’s pre-interview notes

There are 4 things going on. The first is that land on the coasts is finite. You’d expect prices in boston, la, san fran, seattle to go up over time as the country grows richer.

Second: people now moving back into cities from the suburbs. This makes urban housing more expensive b/c of space limitations.

Third: interest rates are extraordinarily low, so people are taking out huge mortgages

Fourth: bond market and mortgage payments…when interest rates drop, the amount you can borrow goes up. As long as interest rates stay low there’s no problem, but if rates go up a lot, there’s a huge problem for buyers.