A postscript on the review of the crisis

Upon re-reading my summary of the housing bubble and financial crisis, I suspect some skeptical readers might find my summary lacking because it may seem as if I am writing off what was clearly a boom in residential investment and home building.  It may be worth a clarification.

There certainly was an increase in building from the mid-1990s to the mid-2000s.  But, in terms of either the number of homes per capita or the rate at which they were being built, nothing was outside of historical norms.  Residential investment seemed high, but part of what is accounted for as residential investment is brokers commissions, which don't really add to the housing stock.  Brokers commissions were high, however, because the shortage of urban housing made existing homes too expensive.  Subtracting commissions out of residential investment reveals a long term decline that was briefly interrupted with rates of residential investment similar to the 1970s.

There wasn't really a national building boom.  There was a moderate rise in building.  The reason it seemed so disruptive is that the Closed Access cities can't allow a sustainable amount of building.

That means that any time Americans try to increase our real consumption of housing at the same pace that our incomes are rising, a disruptive migration event must occur, because if the consumption of housing expands and some cities cannot expand their local stock of housing to accommodate it, those cities must depopulate.  That's what happened before the financial crisis.

Policymakers since then, whether they understand it or not, have been trying to avoid this disruption by either keeping incomes low (through tight monetary policy) or by reducing demand for housing (through tight lending standards).  That has reduced the migration out of the Closed Access cities, but it has come at the expense of living standards for Americans everywhere.

A review of the crisis narrative

Over at econlog, a commenter has asked me for a comprehensive review of the standard narrative and my objections to it.  His summary of the standard narrative is clear and concise, but thorough, and I thought it might make a nice template for posting a summary of my new narrative.

His description of the standard narrative is indented, and my responses are not.

A variety of factors (securitization introducing a principal-agent problem, organizational changes in banks/GSEs, regulatory encouragement, etc.) led to much looser standards for lending. This included:
No-documentation loans.
A growth in subprime lending.
Shrinking requirements on down payments.

These factors were all definitely at work.

This led both to an increase in for-occupancy home purchases by people who used to be renters, and in speculative home purchases (which were now easier to finance, and looked profitable as home prices were rising).

The private securitization boom, which is associated with all of these developments, lasted from roughly the end of 2003 to mid 2007.  Homeownership rates had been increasing since the mid-1990s, but they peaked near the beginning of that period, and then declined.  The relatively high level of homeownership was generally due to age demographics.  Homeownership rates for all working-age groups were about the same they had been in the early 1980s, at the high end of their recent ranges, but not unprecedented, and by the end of the subprime boom they were back in the middle of the long term ranges.  American Housing Survey data suggests that this was because, both, the rate of first time homebuyer activity declined, and an increasing number of existing owners sold out.

Of course, someone has to own every home, so this means that investor ownership increased.  In some volatile markets, some of that activity was speculative and ill-considered.  It probably hastened the early defaults in those markets because investors are more likely to default when equity becomes slightly negative than owner-occupiers are.  But, the investor activity was more of an effect of volatile markets than a cause of them.  Prices were nearly topped out by the end of 2005, and most speculative activity happened in 2006 and 2007.

In short, it is implausible to blame speculating investors for the rise in prices from 1997 to 2005 and it is implausible to blame rising homeownership from 1997 to 2004 on the loosening standards of the subprime boom.

So, what did cause rising prices?  In at least 2/3 of the country, prices weren't outside of historical norms relative to rental values.  They were slightly high, which can be explained with low long term real interest rates, but not unusually high.  In 5 primary cities [NYC, LA, Boston, San Francisco (+ San Jose), and San Diego] prices were high because rents were very high and were rising.  Fundamentals fully account for high prices in those cities, and this is more obvious with every passing year.  Their rents are high because they allow an astoundingly low quantity of building.  I call them the Closed Access cities.  Loose lending may have added demand to the buyer market in those cities beyond what was previously possible, but it was generally allowing borrowers with high incomes to buy in cities where rental expenses are also outside historical norms.  Households with lower incomes were flooding out of those cities at the time by the hundreds of thousands each year. 

A smaller set of regions had something more akin to a true bubble - prices that were likely to retract at some point in the natural course of things: Arizona, inland California, Florida, and Nevada.  I call them the Contagion cities.  They were the primary landing ground for the Closed Access outmigrants, and the primary cause of their brief positive spike in home prices was that they were generally overcome by in-migration.  The demand was for actual shelter.  Families were moving to these places, in droves, specifically to drastically lower their housing expenses.  Recently, I have been working on preliminary evidence that during the periods where prices were rising in the Contagion cities, there was no unusual rise in borrowing.  That happened after prices and rates of new building in these regions had peaked.  Borrowing at the state level tends to lag both the building booms and the price spikes.

It would be very difficult for these cities to overbuild because they natural have heavy in-migration, and at the time it was higher than normal.  In fact, at the metropolitan area level, in the 2003-2006 period, rates of building were especially correlated with population growth.  Population growth in Contagion cities suddenly collapsed when the migration event out of the Closed Access cities collapsed.  This was happening by the end of 2006.  By then, the Fed should have been trying to stabilize housing markets, not slow them down. Yet, even in late 2008, the main criticism they faced was that they weren't destabilizing housing and financial markets enough.

The shortage of homes in these cities is the fundamental cause of the housing bubble and ill-informed policy reactions to it caused the financial crisis.

This rise in home prices was not sustainable (80% increase in 6 years, much faster than inflation), and eventually slowed/ended, this happened concurrently with raises in the interest rate (and thus in the rates of adjustable mortgages)
This would not have created a crisis by itself (housing markets have had downturns in the past) except for the fact that many homeowners either:
Couldn’t afford their mortgages and could no longer refinance them using new equity from price appreciation.
Had “negative home equity” and lived in no-recourse states, making it cheaper to default than to keep paying their mortgages.

The Fed had inverted the yield curve by the beginning of 2006.  To the extent that monetary policy is communicated through interest rates, the peak of the housing boom coincides with them.  Adjustable rates have little to do with the default crisis.  Defaults were highly sensitive to cohort (how soon after you borrowed did prices begin to collapse).  2007 was the worst, followed by 2006.  The yield curve was inverted and the short term Fed Funds rate was at or near the 5.25% high point throughout the period when those mortgages were taken out.  Rising rates on adjustable mortgages have nothing to do with the default crisis.

Falling prices (negative equity) were by far the largest factor leading to defaults.  Lending standards were tightened sharply during 2007, so it is true that it was harder for borrowers to refinance.  The drop in homeownership in 2007-2008 was mostly among homeowners with high incomes in the "bubble" areas where prices were collapsing the most sharply.  Declining middle income and lower-middle income homeownership rates were a very lagging event, really not happening until after 2008, after lending standards had been sharply and permanently tightened, which caused a largely unacknowledged second housing collapse that was focused mainly on low tier neighborhoods, and which affected nearly every city in the country.  The bottom of prices around 2012 was not a return to normalcy, it was a self-inflicted collapse in credit constrained markets that were now locked out of mortgage access.

This led to a snowballing increase in delinquency rates which started prior to the crisis and lasted through the recession. It was also unique in that it happened in a correlated fashion across the country, unlike prior downturns which tended to be local.
This then impacted the financial sectors as many instruments built on securitized mortgages were discovered to be worthless, and entire companies went bankrupt.

The fact that it was correlated across the country is a solid signal of how wrong the standard narrative of its causes is.  Cities have huge differences in prices, rents, rates of building, vacancy, etc.  It is implausible that overbuilding or unsustainable prices could have done this. It was the result of national policy choices aimed at doing it, first by tight monetary policy that began to limit liquidity and change sentiment (leading to collapsing new building rates beginning in 2006) and continued to push markets into further disequilibrium as it remained too tight until the end of 2008.  By the end of 2008, lending standards had been tightened (average FICO scores of approved borrowers moved from around 710 to 750 over the course of 2008, a huge shift, which largely remains today). So, from the end of 2008 onward, high tier home prices stabilized but low tier prices had their worst declines after that.

A postscript.

Comments on the Quarterly Report on Household Debt and Credit (2019 Q3)

Here are a few updates on the data.

 First, mortgage originations by FICO score.  This continues to remain near levels it has been since 2009.  In fact, the average FICO score of borrowers started moving up in the second quarter of 2007, just before home prices started to collapse.  They basically hit the new plateau in the second quarter of 2009.  As I have shown, much of the devastating loss of equity in entry level homes happened after 2008.

This is the actual cause of the housing bust (and the financial crisis). The general collapse in home prices came after credit tightening, and the continued additional collapse focused on low tier housing came well after credit tightened, after it settled permanently at the new normal.  To this day, the consensus response to that claim is that it had to happen in order to bring credit standards back to normal.  But, borrower standards were normal.  The typical FICO score of borrowers in 2006 was the same as it had been in 1999.  The squeeze continues.

Total mortgages outstanding seems to be settled at about 3-5% annual growth.  And total number of mortgage accounts outstanding fell from about 98 million in 2008 to 81 million in 2013, where it remains.  That would be a bit laggardly in a fully recovered market, but it is very laggardly in a market with a severe shortage of housing and a rent expense problem.

Second chart shows the balance of debt of different types.  Good job America!  We have managed to push all that borrowing out of HELOCs and into credit cards, because the lesson we all learned from the financial crisis was that unsecured debt is preferable to secured debt. I read the terms on my credit cards and I can't help but shout "Stability! Prudence!"  We're so much wiser now.  Kudos everyone.

Remember, if you sell your house short because you're 30% underwater, that's really bad.  But, if you have to sell your house because you hit a rough patch and nobody will lend on more than 80% LTV and/or perfectly documentable income, that's just being reasonable.  If that happens to you, try being a little gracious about it.  It was for your own good, silly.

Third, debt outstanding by age (adjusted to per capita). Some analysis of the crisis sets it up as rich (savers) vs. poor (borrowers).  But, really, the only reason it looks like that is because the crisis was more a matter of old (savers) vs. young (borrowers).  Borrowing was moving up as much for the old as it was for the young, but older borrowers tend to be less leveraged. The older groups have increased their borrowing since the crisis.  That is because they didn't tend to own homes with high leverage during the boom, so they escaped the housing collapse with less damage.  And, that has allowed them to continue borrowing after the boom, because borrowing scales with wealth and income, to a certain extent.  The younger borrowers took a hit in the foreclosure crisis and are now catching up.

Unless there is a return to looser lending, though, it seems like there is a limit to how much catch up can happen.

Housing: Part 358 - Sometimes the answer is simple

Elizabeth Warren:

"From our trade agreements to our tax code, we have encouraged companies to invest abroad, ship jobs overseas, and keep wages low."

Bernie Sanders:

"Since Trump was elected, multinational corporations have shipped 185,000 American jobs overseas. That is unacceptable."  

City of San Jose:

San Jose has taken the rare step of publicly opposing the project, saying it would add far too many jobs, exacerbating the region’s housing shortage.  

New York City:

It’s only natural that Amazon saw its promise to create 25,000 jobs as a blessing, for creating jobs is most of what we have ever asked of American companies. But given the realities of our economy — an economy that Amazon is relentlessly and ruthlessly transforming according to its narrow self-interest — it’s also only natural that many New Yorkers wanted nothing to do with it.  

These days, things don't make sense.  Things are said in one context that sharply contradict things said in other contexts.  There is confusion and stress.

It is natural to view this confusion and to conclude that things are complicated.  But, sometimes, things are simple.  Sometimes, things seem complicated because we are blinded to the simple nature of the problem.

To Ptolemy, the solar system was very complicated.

If you walked into an elevator with a simpleton and told them, "You know, the reason the sun moves across the sky is because we are spinning on a sphere.", the simpleton would have said, "Huh. Cool.  I did not know that." and happily exited at his floor.

If you walked into an elevator with Ptolemy, you would have a lot of work to do and many things to explain.  When the door opened, he would have exited unconvinced.  Ptolemy simply knew too much.

Here is a good rule of thumb: When things are complicated, inputs are messy, running at cross purposes, and many factors cancel out other factors.  Complicated contexts don't tend to move to extremes.  What tends to move to extremes is a context dominated by a single factor.  (This also works in equity investments.  Finding small cap stocks with large upside potential usually involves finding firms that have some very large single variable at work.  That is why you can outmaneuver professional analysts.  Professional analysts are paid to know everything.  Their job is to understand complexity.  To paint a picture of all the pieces.  Since overwhelming single factors are rarely certain, and speculators must expect to lose frequently, it is reputationally difficult for analysts to predict extreme valuation moves based on single factors.  If the stock they follow is likely to soon quadruple in value, their intuition will be to say, "It's complicated.")

So, the fact that markets and the economy seem to have some really extreme problems and incoherencies is a signal that the problem is not complicated.  The problem is overwhelmingly due to one factor.

In a sentence, that factor is:  The economy and the housing market of 2005 were what a highly successful economy looks like if our leading economic centers refuse to build more houses, and that economy is almost universally feared and actively avoided.

Mid month Yield Curve Update

Enough has happened in credit markets that I figured it was time to update charts.  The long end of the curve has moved up a bit, which has led to some expressions of relief.  I'm not sure we're totally out of the weeds.

The entire curve has moved up from its lows by about 1/2%.  That's mildly bullish.  It suggests that the market doesn't think the Fed has to react quite as strongly to maintain stability.  But, what would really be bullish is if short term rates were at more like 1% and the long end of the curve would be at 3%+ (circa 2003).  That was a yield curve of a marginally neutral central bank creating stability.  But, because of the housing bubble, very few people believe that about 2003, so it still seems to me that the pressure will be to take a hawkish posture, and eventually, the yield curve will move back down.

The second graph here compares the Fed Funds rate and the 10 year yield from 2004 to the present.  The diagonal lines are my estimation of a functionally inverted yield curve.  While the recent uptick is reassuring, for it to really signal that we are out of the woods, the 10 year yield needs to move up to 3% or more without being followed up by the Fed Funds rate.  Until then, I consider these recent movements to be noise while we are still basically inverted (circa 2006-2007).

One thing to check is housing markets.  The more recovery we see there, the more likely we are to be safe.  That is growth in price, sales, and borrowing.  Rising prices and rising borrowing would signal that the channel for capital to react to low yields by flowing into real estate is operating (though it is hobbled at best in today's regulatory environment).  Rising new sales would signal that financial capital is capable of funding real investment.  In other words, strong home prices would show that prices can react to fundamentals, strong housing starts would show that real investment can react to changing prices, and rising borrowing is the connective tissue for these market responses.  I suspect that an inverted yield curve reflects a breakdown in those mechanisms, which is why it is a good predictor of recessions.

This is not to say that home prices have to move in an ever-rising cycle in order to maintain economic growth.  The problem with housing is constrained supply, through local regulations and now through disastrously tight federal mortgage regulation.  These factors drive up rents, and I suspect also put downward pressure on interest rates, since residential investment should, but can't, be a moderating influence on long term real yields, keeping them from being persistently too high or low.  Building lots of homes would bring down home prices. 

The third graph shows the Fed Funds rate and 10 year yield from 1994 to 2002.  In 1996, the curve flirted with inversion, and the Fed responded by lowering the Fed Funds rate, which was followed by recovery in long term rates.  This happened again in 1999, and at first, the Fed stayed put as long term rates rose, but then it followed them up too aggressively.  By 2000, the recessionary signal was starting to develop.  First, a rising Fed Funds rate pushed the curve to inversion, which became stronger as long term rates declined.  Then, the tepid response meant that the Fed Funds rate declined over the next couple of years, remaining contractionary enough to keep long term rates from rising.  The same thing happened in 2007-2008.

It seems as though, in the 1970s, the Fed generally erred on the dovish side, inflation was getting too high, and the long end of the curve would rise while the Fed deeply inverted the curve.  Since 1980, the Fed has generally erred on the hawkish side, inflation has remained moderate, and recessions have been avoided when the long end was allowed to rise, but have followed when the long end has remained level during inversions.

Of course, this whole tightrope could be avoided if the Fed abandoned interest rates as a communication device and policy tool and instead targeted forward domestic income growth.

Going forward, if the 10 year doesn't rise much from here, then I would expect a typical descent into a contraction, with the Fed following the yield curve back down to zero.  If it does rise from here, up to something above 3%, then either 1996 or 1999 will be a good guide, and either we will avoid contraction altogether or yields will follow the clockwise path similar to the 1999 to 2002 path, and a contraction will eventually happen, but we will get another year or two of expansion first.

I continue to fear that a misunderstanding of the causes of the financial crisis will create pressure both on and off the FOMC to be too hawkish, but I must admit that the Fed was more willing to reverse their recent rate hikes than I had expected them to be, to our benefit. There is some hope that the Fed might continue to be responsive.

A look at trends in homeownership.

Here's a new post I have up at the Bridge, at Mercatus.

Here's a chart from it:

The brief summary is that there hasn't been any recovery in homeownership rates at all from the bottom of the housing bust for middle aged households.  The small amount of recovery we have seen recently is all among young households - generally households that were young enough to miss the crisis.

And, of course, I revisit the basic point that it is a myth that there was excessive or unsustainable homeownership during the housing boom.

Here is a Jed Kolko piece at Trulia that adds some interesting details to the story.

October 2019 Yield Curve Update

The yield curve still seems to be following the bearish timeline.  My axioms here are:

1) The true measure of inversion isn't a slope of zero.  At the zero lower bound, it is a slope of a little more than 1% (10 year minus Fed Funds), which declines as the base yield rises.  (At about 5%, meaningful inversion happens at a slop of zero, and higher than that, the slope will tend to become more negative the higher yields are.)

2) The neutral rate is a moving target.  If the Fed drops its target rate too slowly, long term rates will tend to stabilize but not rise, and this usually ends in some sort of contraction.  If the Fed gets ahead of the dropping short term rate, then long term yields will pop up like they did a couple times in the 1990s, and contraction will be avoided.  So, if the scatterplot keeps moving to the left as it did this month, that's bearish.  If it moves up, that's bullish.

The second graph is the Eurodollar yield curve, which continues to move up and down a bit but with a negative short term slope and a pretty flat long term slope.  I expect the short end of this curve to eventually drop below where it was in late August.  It will be good news if it doesn't.

September 2019 CPI Inflation and Yield Curve Updates

Sorry, I have been a little slow posting this month's update. This month was a return to the longer-term form. Shelter inflation moved up to 3.5% and non-shelter core CPI inflation moved down to 1.5%. Not much to add. I continue to think that the slower the Fed is to lower short term rates, the lower they will eventually go. I still think the yield curve is effectively inverted because the zero lower bound should bias long term yields higher. Normally, one might suspect that real estate and residential investment are important factors in the inverted yield curve. I would speculate that inverted yield curves lead recessions because they are signs of disequilibrium. Long term yields can't go as low as they need to. And one reason is that in order for yields in real estate to decline, prices need to rise, but rising prices require expanding money and credit. A similar point could be made with bonds. Cash is required to bid bond prices higher. But, the oddity with this cycle is that real estate borrowing has been repressed during the expansion. A loosening of regulatory pressure would probably release credit into low tier housing markets, raising prices, and triggering residential investment. Leading cyclical indicators in real estate will probably be most useful in high tier markets this cycle because those markets have not faced such unusual regulatory obstacles to funding. And, as AEI housing measures show, for instance, high tier prices have leveled off and inventories of homes for sale have grown.


I'm not sure what to expect other than continuing low long term yields, though.   Equity risk premiums are already at high levels.  Stocks could dip from declining growth expectations, but I'm not sure that we should expect much of a dip in equity prices.

Because homebuilders are both a defensive and a speculative position from here, they might offer some opportunities.  Hovnanian (HOV) was so low this summer that it received a warning from the NYSE that it might be delisted.  It has recovered sharply from those lows and makes an interesting position to follow as a reflection of the potential for pent up demand to emerge for new homes.  Increases in revenues should have a magnified effect on their market capitalization.  There was a recent paper that made a good statistical case that market concentration in homebuilding was holding back housing starts and pushing prices higher.  The executives at Hovnanian must have had a laugh about that, as, a decade after the crash they are still working to get revenues high enough to bring their financial and operational leverage back to more sustainable levels.

Otherwise, among equities, I think we're more in a period of keeping dry powder ready than we are in a period of excessive downside risk.  In spite of low yields, a bond position probably still isn't the worst position to have in the world, tactically, although they don't offer much benefit as a long term portfolio allocation.

Housing: Part 357 - The subtext behind the crisis is spoken aloud.

I have developed a framework for understanding the housing bubble and the financial crisis which attributes the pre-crisis market upheavals to fundamental structural issues (an urban housing shortage that triggered a migration event out of the coastal urban centers), and the financial crisis to a series of politically popular policy errors based on passionately held beliefs about the causes of the bubble.

Because the errors were so passionately and universally held, they are frequently stated explicitly. I am working on a follow up book to Shut Out where I frequently make seemingly crazy claims like that the country was clamoring for a financial crisis or that there was a consensus in favor of imposing pain. It’s not really a claim I intended to make or wanted to make. And I don’t feel like I’m particularly skilled at communicating this history. Yet, when I attempt to construct a narrative history of the crisis, I keep running into powerful people saying these horrible things explicitly and uncontroversially.  People had taken too many risks and public policy reactions to a recession couldn’t be so successful that they allowed those people to avoid losses.

Even today, the most common complaint against the Fed and Treasury is that they didn’t inflict more pain.  When I point that out, the reply is that the pain was earned. And that is why the corrective against the terrible policy choices that were well in place by 2008 goes back to identifying the correct factors behind the housing bubble. The explicit justification for choices throughout the development was that risk takers needed to learn a painful lesson. It’s a pretty low bar to establish that financial collapse wasn’t a productive or reasonable tool for economic management.

Consider the common observation that a disruption like the Great Recession or Great Depression affects financial behavior for a generation. Young people have systematically been turned off risk taking behavior. That observation is correct, and under the presumption that crisis was inevitable or necessary, it seems like it is just a sort of natural fact. But changing those presumptions highlights the horrible realization that the generational scar was a disastrous and popular public policy decision. We have engineered a lot of damage.

One of those generational shifts has been the turn away from homeownership and from home building. Here is an example from the Pew Center of seeing these huge cultural shifts as inevitable or exogenous rather than as a result of our self imposed financial damage.  Seeing the housing bust as inevitable, the Pew Center asks, Why are housing trends that date to the Civil War suddenly reversing?  But realizing that it was a self-imposed policy choice, the question should become, "My God, what have we done?"  Maybe I’ll revisit that link in another post.

A similar reaction to the Pew article is the idea that the deep depths of the housing collapse in 2011 or 2012 were just the last inevitable gasps of the corrective housing bust.  Many reviews of the crisis rest on this presumption.  Today Bill McBride at Calculated Risk had an update about housing sales. Unlike many of the explicit positions about Fed and Treasury policy in 2007 and 2008, the idea that collapsing housing markets in 2010 or 2011 were ok isn’t held passionately and it isn’t based on malice. Here is a quote from the post:

When the YoY change in New Home Sales falls about 20%, usually a recession will follow. The one exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession.   Note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 - and was just a continuation of the housing bust.

So, there is a chart of home sales that shows that 20% contractions are almost always associated with a recession, and that chart shows a second wave of 20% contraction in starts after the worst contraction since the Great Depression and it’s “just a continuation of the housing bust”.

Frequently, I am directed to read Calculated Risk as a source of documentation about the excesses of the pre-crisis mortgage market, and rightly so. The site is full of detailed descriptions of many problematic characteristics of the market at that time. Post after post of detailed analysis.

Then, in 2010, a secondary contraction happened that was of notable size. I have documented how that late contraction was not an unwinding of anything that had happened before.  The losses were concentrated in credit constrained markets that had not had housing booms and who were locked out of newly stingy mortgage markets.

As I have documented, the collapse of prices in many of those markets was worse after mid 2010 than it had been in 2008. McBride is correct that the tax credit ended about then. Surely that was one factor that led to a brief stabilization then secondary collapse.  But even with the tax credit, mortgage markets were clearly tighter than they had been in decades.  Homeownership rates were well below long term ranges for all age groups younger than 65 and were still falling precipitously. The housing contraction in 2010 had nothing to do with the housing boom of 2005 and everything to do with public policy choices from 2008 onward.

An event that registers as one of the seven worst housing contractions since the early sixties has triggered practically no analysis.  It barely registers any attention at all. It reminds me of the Salt River Canyon in Arizona, which would be a wonder of the local geography of it was located in Indiana, but in Arizona, at most, merits a slight squiggle on the map where the highway winds through it.

Hundreds of billions, if not trillions, of dollars in home equity was sucked out of homes in working class neighborhoods because it just seemed so convincingly prudent to trigger such losses.  As far as I can tell, there was never an explicit justification for it, because nobody bothered to notice it.  Occasionally, the scale of it rears it’s ugly head, as it does in the chart at calculated risk, and it demands to be explicitly justified.  Is it justified with hundreds of posts about the state of lending in 2010? No. That phase of the crisis is still neglected, but it is neglected explicitly.  A contraction in new home sales of 20% is usually a big deal, but this time, by presumption, let’s say it wasn’t.

When Americans were passionately looking for financial losers to be the scapegoats for our housing sins in 2008, it is hard to miss them saying it out loud.  But the neglect of the post 2008 collapse was a quiet neglect and the explicit statements of neglect only bubble to the surface accidentally.

CFPB: Get rid of the "Ability to Repay" Rule

During the financial crisis, many new rules and mandates were put in place to make it more difficult for lenders to issue mortgages.  This was based on the false notion that the housing bubble happened - that houses doubled in price or more in several regions - because marginal households were pressed into expensive mortgages they couldn't afford.

Those rules have made it very difficult for many qualified borrowers to buy affordable homes.  The effect has been to make homes less affordable, not more, while also damaging working class balance sheets.

Here are a couple of excerpts from my comment to the CFPB:

But after the passage of Dodd-Frank, low-tier prices in many metropolitan areas dropped by 10 percent or more, compared to high-tier prices. The metropolitan areas that had the least negative price shock after Dodd-Frank were the very expensive cities. The negative shock that followed Dodd-Frank hit the hardest in the cities where there hadn’t been a positive shock during the bubble. The cities that fed the premise that led to the passage of Dodd-Frank were the cities where prices were least affected by it (see figure A6).

Housing markets in the expensive cities have not changed much from the precrisis boom. Homes are still expensive because rents are high, and rents are high because of limited building. In all other cities, there has been a systematic change in housing markets since the crisis. Rent affordability has become worse but mortgage affordability has become better.
The demand shock created by limits to new lending has compressed price-to-rent ratios, pushing prices below replacement cost. So rents are rising, mortgage affordability in most cities is better than at any precrisis point of comparison, and supplies are stagnant because prices are too low to induce new building, especially in the most affordable markets where credit constraints are the most binding and affordability is most important. According to data from Zillow.com, the rent on the median American home claims about 28 percent of the median household’s income. In the period since the crisis, rent has generally claimed a larger portion of household income than it had at any time for decades before the crisis. But a conventional mortgage on that same home would only claim about 16 percent of the median household’s income. In contrast to rent affordability, mortgage affordability since the crisis has been better than at any time for decades before the crisis. And these shifts are most extreme in the most affordable cities. The less expensive housing is, the better a mortgage payment stacks up against the rent payment on a typical house. This is not the time to add regulatory obstacles to potential new homeowners.

Here is figure A6 and notes:

FIGURE A6. THE DIFFERENCE BETWEEN 1ST-QUINTILE PRICE APPRECIATION AND 5TH-QUINTILE PRICE APPRECIATION, DECEMBER 2000 TO THE DATES SHOWN IN EACH COLUMN

Note: This heatmap uses the median home value at the ZIP-code level, estimated by Zillow. First, metropolitan areas were sorted into five quintiles according to metropolitan area home prices at the peak of the housing boom in 2006. Quintile 1 contains the least expensive metropolitan areas and quintile 5 contains the most expensive metropolitan areas. Next, within each metropolitan area, ZIP codes were sorted by median home price into five quintiles. And price appreciation of the lower quintiles from December 2000 to the later dates shown was compared to the price appreciation of the higher quintiles. For instance, from December 2000 to August 2007, in the least expensive metro areas (quintile 1), the least expensive ZIP codes saw an average price appreciation of 37 percent while the most expensive ZIP codes saw an average price appreciation of about 33 percent. Low-priced homes appreciated, on average, by 3.3 percent more than high-priced homes, as shown in the figure. From December 2000 to December 2013, the least expensive ZIP codes in the least expensive metro areas saw an average price appreciation of about 28 percent, compared to 36 percent for the highest-priced homes in those metro areas. So low-priced homes appreciated, on average, 6.1 percent less than high-priced homes, as shown in the figure. The figure highlights two key issues: First, the unusual and extreme rise in low-tier homes within metropolitan areas was largely confined to the most expensive cities, which allow very little building. By the time Dodd-Frank passed in July 2010, that phenomenon had reversed, and so from December 2000 to June 2010, among all types of cities, there was remarkably little variation in home price appreciation between high-tier and low-tier markets. After Dodd-Frank, low-tier prices in the expensive cities, which had previously seen extreme price appreciation during the boom, were not greatly affected. But low-tier prices in the more affordable cities, which never had extreme price appreciation, were pushed down more than 10 percent. Source: Zillow, “Economic Data,” accessed August 29, 2019, https://www.zillow.com/research/data/. The particular data series used was the median home price by ZIP code for all homes (ZIP_ZHVI_AllHomes).