The Great Housing Bubble: Why Did House Prices Fall? Review

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The Great Housing Bubble: Why Did House Prices Fall ReviewThe author, Larry Roberts, is best known for his daily posts as IrvineRenter on the Irvine Housing Blog. Long before Lehman crashed, Fannie Mae was taken over, and even before home prices were dropping nationally, he was one of the few voices presenting real information on the housing bubble. I am very interested in finance, and I was drawn to the noncommercial site.
Visitors to the blog avoided many of the hazards of researching real estate elsewhere: 1. Alleged economists from the National Association of Realtors putting out an endless stream of "real estate prices will always go up" press releases. 2. Analysts from rating agencies and the financial industry who frequently did not go to actual open houses, speak with actual realtors, sellers or buyers, or look closely at the crazy mortgage standards which had developed. Remember the "if you can fog a mirror, you can get a loan" mortgages? 3. Reporters from the general media who did not have a deep knowledge of real estate or finance, were under deadline pressure, and did not assume their readers were bright and could be trusted with source data. As the housing and credit crisis has unfolded over the past 18 months, many of these people said "who could have known this was going to happen?" Visitors to the Irvine Housing Blog knew, long before the crash was a lead news story.
The housing blog became a prime example of how real knowledge can be developed. One of the prime problems with the housing bubble was the fragmentation of knowledge among its participants. Home purchasers didn't really understand what happened to their mortgage after they signed the papers. Mortgage brokers often just wanted to crank through huge numbers of customers without much regard for whether they could afford the loans they were getting. Many banks were originating mortgages which would become someone else's problem. Many investors in mortgage backed securities were far away from the actual homes those mortgages were secured by. Professors doing academic analysis were often missing key bits of information, or got access to them far too late.
Into this void stepped blogs. The Irvine Housing Blog showed how a particular market was influenced by people, events and financial forces elsewhere in the world. It showed very clearly how one house might have mortgage payments twice as high as the rent for an identical house down the street. Each day, a new house for sale in Irvine was profiled. Home prices and loan values which would be amazingly high in any other time or place seemed to be accepted as normal and desirable by the media and much of the general public. On the blog, values were more objectively assessed, and the economic disconnects were discussed. Bizarre and unprofessional descriptions and photos were roundly mocked.
Calculated Risk was a blog which had much broader scope (credit markets and real estate nationally and worldwide). Together, they made an excellent set, one focused the other broad, one micro the other macro.
These blogs attracted people who were interested in their own personal purchase or sale, and wanted to make sense of the strange price dynamics and mortgage underwriting standards they were seeing. It also attracted people who worked in mortgage finance, and real estate who were not just trying to sell things. Instead they wanted to understand and explain. They created a knowledge base of stunning scope and depth. Posters could ask very detailed questions and get mostly unbiased answers, quickly, and from a variety of viewpoints. Reporters from the general media almost never get enough uninterrupted time and access to the right people to write something of similar depth. One of the few really good in-depth reports in the general media was NPR's Giant Pool of Money.
The author's background is in new housing development in Southern California. It was a good start to understanding how things worked. Supplemented by knowledge from countless posters at the housing blog, he has been able to show why home prices couldn't stay elevated. Price to income ratios, price to rent ratios, and other factors detailed in the book showed how far out of line prices had become by 2006. A full year before house prices started to crash, he was predicting it, and many of the crash's details. While some people are permanently bullish or bearish on housing, the best are able to understand and explain the mechanisms, tell you what will happen in what sequence. "Must sell" inventory is a good example. Not all sellers are equally motivated. New home builders and banks sitting on empty foreclosed homes are quite motivated. When they have a lot of supply, they are the first to drop prices. Must sell inventory in quantity leads to very fast price drops. The ultimate equilibrium is determined by affordability and the relative cost of renting versus owning.
As Larry has been saying since he started posting, he seeks to help people avoid financial ruin from buying in the bubble. Even in October 2008, there are still plenty of hazards awaiting people who buy as prices are dropping. He has advice for those who are considering buying now, and how to approach purchases. He made a lot of sense and brought in knowledge from others. All of this helped me avoid buying at the peak and losing hundreds of thousands of dollars. It saved me a great deal of grief and money. Even now, with California housing prices down over 30%, declining prices could still quickly consume your downpayment and put you "under water", unable to sell your house for more than the loan value.
An excellent read, and an important one.The Great Housing Bubble: Why Did House Prices Fall Overview

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