by Eric Englund
On September 13, 2006, the Senate Committee on Banking,
Housing, and Urban Affairs invited a panel of experts
to testify on the topic of "The Housing Bubble and Its
Implications for the Economy." With the housing market
dramatically slowing down, there is angst amongst the plutocrats
in Washington D.C. that a nightmare scenario will unfold in
which millions of over-leveraged homeowners struggle to avoid
foreclosure; with many eventually losing the battle. Accordingly,
the bursting of the housing bubble may cause a financial calamity
that will make the S&L crisis, of the early 1990s, pale
in comparison. Not surprisingly, as the Washington Post
the aforementioned experts have concluded that the housing
"…sector is just returning to normal and is not poised
to crash…" Nothing could be further from the truth.
In reading over the testimony, prepared by each expert, it
is clear that there is concern that some regions of the U.S.
have experienced unsustainable real estate price escalations.
As a result, there is a danger that homebuyers in such regions
may have overpaid for houses and condos. Should a significant
pullback occur, in these once-hot housing markets, homeowners
will suffer the consequences of owing more money than their
houses are worth (i.e. being upside down).
To compound this problem, mortgage lending has been reckless,
with homebuyers commonly purchasing homes using exotic mortgages
such as adjustable
rate mortgages (ARM), interest only mortgages, and option
ARMs. With over $3 trillion in ARMs set to adjust in the
next 12 months, there is a degree of nervousness amongst these
experts as to how well homeowners will weather the storm of
higher monthly mortgage payments. The consensus, nonetheless,
is that the slowdown in the housing market will not stop the
juggernaut that is the United States’ economy – even if a
higher rate of mortgage defaults materializes. Such a conclusion
demonstrates that dream-interpretation is a key component
of today’s mainstream economic analysis.
A glaring problem, with this expert-testimony, pertains to
a complete lack of understanding as to how the housing boom
emerged in the first place. A healthy boom must be engendered
by an accumulation of savings. Considering that there is a
savings rate in the U.S., America’s housing boom has been
driven by easy credit as engineered
by the Federal Reserve’s monetary central planning – this
is why the housing boom is more properly deemed a bubble.
And, of course, a credit-induced boom invariably leads to
a bust. For true enlightenment, I would suggest that these
panelists read The
Austrian Theory of the Trade Cycle.
It is also interesting that the panelists focused on the
matter of house-price appreciation and how certain states
saw more of this phenomenon than others. Hence, it is commonly
asserted that all housing booms are strictly "local."
Panelists, predictably, expressed worries about the "overheated"
housing markets in Arizona, California, Florida, Maryland,
Nevada, and Virginia. Real estate speculators, indeed, did
enter these markets looking to "flip" houses and
condos in order to make a quick buck. This denotes, sure enough,
that lenders were shoveling money out the door to all comers
looking for a mortgage loan – be it speculators, permanent
residents, or buyers of second homes.
It is ultra-easy credit that has driven home prices, in many
locales, to stratospheric levels. And the national media reported
breathlessly, ad nauseum, as to how so many people have made
a financial killing in the housing market. Even if frothy
housing markets were local, real estate captured imaginations
from coast to coast. Accordingly, a "bubble-mentality"
emerged, on a national scale, in which Americans sought to
cash in on housing – one way or another. Using this perspective,
and considering that mortgage lending standards dropped to
near zero countrywide, I would argue that the housing bubble
truly became a national phenomenon.
So how did Americans, not living in a rapidly-appreciating
housing market, cash in on the craze? First of all, regardless
of where one lived, the common mantra was "you’d better
buy a home today before they become too expensive." Additionally,
the talking heads on CNBC, and elsewhere, were cackling such
nonsense as "housing is a can’t-miss investment for the
long-run." Is it any wonder that homeownership hit a
in the United States? To be sure, this record homeownership
is a manifestation of the housing-bubble mentality. Secondly,
with the assistance of banks and other lending institutions,
Americans became conditioned to believe that houses were really
ATMs standing at the ready to disburse funds on command. Thus,
nationwide, Americans have borrowed against home equity to
pay for new cars, boats, flat-screen TVs, vacations, home
remodels, you name it. Houses are not only homes, but appeared
to be self-filling piggy banks.
Using these two points, I disagree with the assertion
that all housing bubbles are strictly local. Most assuredly,
there are cities in Florida and California where house-price
appreciation was surreal. Where this assertion falls apart
is that the housing boom was driven by easy credit and not
accumulated savings – and easy credit has been available in
all 50 states. Even if real estate speculators weren’t heading
to Butte, MT or Detroit, MI looking to flip houses and condos,
mortgage loans were still incredibly easy to come by for even
the most unqualified of borrowers. Therefore, a low-wage first-time
homeowner in Detroit (with a 0%-down adjustable rate mortgage)
can incur a financially ruinous level of mortgage debt just
as easily as a high-wage professional in Tampa can do so by
going overboard when extravagantly remodeling a home – 100%
funded by an adjustable rate home equity line of credit (HELOC).
Both Michigan and Florida, as a matter of fact, are in the
top-ten list of states with the highest foreclosure
rates in the United States. Interestingly enough, Florida
ranked 2nd in the U.S. for house-price appreciation
while Michigan ranked 51st – this information
was compiled, for the one-year period ending June 30, 2006,
by the Office of Federal Housing Enterprise Oversight and
includes the District of Columbia.
Let’s juxtapose the top-ten foreclosure states with each
one’s latest ranking in house-price appreciation – both rankings
use figures compiled as of June 30, 2006:
for House Price Appreciation
In examining this table, it is evident that there is not
(yet) a correlation between a high rate of foreclosures and
a high rate of house-price appreciation. At the moment, the
above-mentioned experts and the U.S. Senators seem obsessed
with the danger that "bubbly" real estate markets
are populated with homeowners who are over-leveraged and may
be likely candidates for mortgage defaults and, correspondingly,
foreclosure proceedings. Yet, what about the rest of the country?
Perhaps a better way to look at this table is to understand
that trillions of dollars of mortgage loans have been originated
during the past five years and that there is a national housing
and mortgage-debt bubble. Consequently, even without
living in a hot real estate market, people everywhere could
mortgage themselves into financial trouble. With seven of
the top-ten foreclosure rankings attached to states with house-price-appreciation
rates in the bottom half of the rankings, it seems obvious
that these households would become financially tapped out
earlier in this housing/borrowing craze.
Had Colorado experienced California-like house-price appreciation,
it most likely would not rank 1st in the foreclosure
ranking. In such a scenario, Coloradoans would have had the
"luxury" of being able to continue strip-mining
ever-growing home equity and borrow more money to make ends
meet – such as borrowing a large lump-sum in order to make
future house payments, car payments, and grocery purchases
while still having funds left over for an extravagant vacation.
Alas, the borrowing binge ended all too soon, for many Coloradoans,
and the debt hangovers have proven to be ruinous.
Be assured that there will be a rotation in the state-by-state
foreclosure rankings. As the mortgage-debt binges come to
an end in California, Hawaii, Maryland, and Oregon, count
on Colorado being knocked from the top of foreclosure-ranking
list. Soon, over-leveraged homeowners, in these once-hot states,
will experience the pain of rising mortgage payments, declining
home values, and no more home equity against which to borrow.
It makes sense that most of the frothiest states will rise
to the top of this shameful list later in the borrowing cycle
– which was set in motion by Alan Greenspan’s panicky interest
rate policy culminating in a 1% Fed Funds rate in June of
If members of the Senate Committee on Banking, Housing, and
Urban Affairs had any clue, they would be investigating the
criminal enterprise known as the Federal Reserve – a privately
owned bank legally sanctioned to counterfeit money. Since
the founding of the inflation-happy Federal Reserve, in 1913,
the U.S. dollar has lost over
95% of its purchasing power. Heck, during the reign of
Alan Greenspan, the dollar’s value depreciated by over 40%.
In the context of the housing/borrowing bubble, the Senate
Committee would deduce the following:
- Fiat inflation encourages consumption and debt accumulation
while discouraging savings.
- In order to stave off a post-9/11 recession, the Federal
housing as a monetary transmission mechanism – generation-low
interest rates saw to that.
- By targeting housing, the Federal Reserve succeeded in
seeing to it that trillions of dollars were loaned into
existence (via mortgage debt) and, not surprisingly, stimulating
the "animal spirits" of Americans to borrow and
consume as if there were no tomorrow.
- With trillions of dollars of mortgage debt coming into
existence in a compressed time-frame (about 5 years), some
housing markets became hotter than others while Americans,
from coast to coast, found ways to tap into the mortgage-lending
frenzy in order to participate in the real estate party.
After deducing these important points, one would hope that
our Senators would seek out information in order to paint
a financial picture of the average American household. Martin
Weiss, of the Safe Money Report, has done so and discovered
"According to Federal Reserve data, the typical American family
today has a balance of only $3,800 in cash in the bank, has
no retirement account whatsoever, owes $90,000 on their mortgage,
and owes $2,200 in credit card debt." In other words, due
to the Federal Reserve’s harebrained monetary central planning,
typical Americans have virtually no savings and are heavily
mortgaged. Intelligent Senators – if any exist – would then
conclude that the present-day American economy is a debt-laden
house of cards built upon the sands of fiat inflation.
Ultimately, the panel of experts completely missed the point
in that the housing bubble is most certainly all about debt.
Whether or not a local real estate market was hot, a record
number of Americans took the real-estate-debt plunge. Houses
supplanted dot.com and telecom stocks as the next surefire
wealth-building "investment." Americans,
now, are more deeply in debt than ever. With so little
savings to fall back upon, countless American families are
one paycheck away from foreclosure and financial ruin. Once
again, just look at the horrifying financial profile of the
typical American family.
the intellectual tools of Austrian economics, there is little
doubt that the debt-fueled housing bubble will turn into an
economic bust of epoch proportions. Perhaps when the bust
becomes painful enough, a superior panel of experts
will be summoned by the Senate advocating the abolition of
the Federal Reserve…one can always dream…as we are on the
cusp of an economic nightmare.