Financial Crisis

No More Urban Hype

iStock_000005845250XSmall.jpg

Just months ago, urban revivalists could see the rosy dawn of a new era for America's cities. With rising gas prices and soaring foreclosures hitting the long-despised hinterland, urban boosters and their media claque were proclaiming suburbia home to, as the Atlantic put it, "the next slums." Time magazine, the Financial Times, CNN and, of course, The New York Times all embraced the notion of a new urban epoch.

Yet in one of those ironies that markets play on hypesters, the mortgage crisis is now puncturing the urbanists' bubble. The mortgage meltdown that first singed the suburbs and exurbs, after all, was largely financed by Wall Street, the hedge funds, the investment banks, insurers and the rest of the highly city-centric top of the paper food chain.  read more »

Root Causes of the Financial Crisis: A Primer

iStock_000007508697XSmall.jpg

It is not yet clear whether we stand at the start of a long fiscal crisis or one that will pass relatively quickly, like most other post-World War II recessions. The full extent will only become obvious in the years to come. But if we want to avoid future deep financial meltdowns of this or even greater magnitude, we must address the root causes.

In my estimation two critical and related factors created the current crisis. First, profligate lending which allowed many people to buy overpriced properties that they could not, in reality, afford. Second, the existence of excessive land use regulation which helped drive prices up in many of the most impacted markets.  read more »

Turns Out There's Good News on Main St.

iStock_000000820143XSmall.jpg

As the financial crisis takes down Wall Street, the regular folks on Main Street are biting their nails, watching the toxic tsunami head their way. But for all our nightmares of drowning in a sea of bad mortgages, foreclosed homes and shrunken retirement plans, the truth is that the effects of this meltdown won't be all bad in the long run. In one regard, it could offer our society a net positive: Forced into belt-tightening, Americans are likely to strengthen our family and community ties and to center our lives more closely on the places where we live.  read more »

Beyond The Bailout: What’s Next in the Housing Market?

iStock_000006691668XSmall.jpg

The Emergency Economic Stabilization Act of 2008 (we’ll call it the “Bail Out”) was signed into law on October 3rd. This, combined with the new reality in capital markets and current economic conditions, will result in some major shifts in the outlook for housing over the next few years. It is always possible that the federal government will try to do even more to fix what will be an agonizing housing problem over the next few years, but seems unlikely even Bernake, Paulson or their appointed successors will be able to change the basic story line.  read more »

The American Dream: Alive and Well (Some Places)

iStock_000002936389XSmall.jpg

Even after the burst of the housing bubble, the American Dream of home ownership has remained alive in some places. As it turns out the “bubble” was far from pervasive, and as Nobel Laureate Paul Krugman indicated in The New York Times, the housing price increases were largely limited to the areas of the nation with stronger land use regulation.

In all, at the peak of the housing bubble, 46 of 129 US markets had house prices at or below the historic ceiling of three times household incomes (see 4th International Demographia Housing Affordability Survey. Before the bubble, nearly all markets were at or below that norm, but many have risen to double, triple or even more than three times the standard.  read more »

The Financial Crisis: Bubbles Deflating Worldwide

iStock_000001532384XSmall.jpg

The mortgage meltdown is much more than an American affair. Real estate bubbles have developed in all major English speaking countries - US, Canada, UK, Ireland, Australia and New Zealand.

Over the past year, house prices have dropped 12 percent in the United Kingdom. The annual decline is approaching 10 percent in Ireland, while median house prices have dropped six percent in New Zealand. In each of these countries, the price declines started after the United States.  read more »

Financial Innovation: Wall Street’s False Utopia

iStock_000006077524XSmall.jpg

In the popular media much of the blame for the current crisis lies with sub-prime mortgages. Yet the main culprit was not the gullible homebuyer in Stockton or the seedy mortgage company. The real problem lay on Wall Street, and it’s addiction to ever more arcane financial innovation. As we try to understand the current crisis, and figure ways out of it, we need to understand precisely what, in the main, went wrong.  read more »

Mortgage Credit Crisis: Homeowners Also Need to Look in the Mirror

iStock_000005768107XSmall.jpg

There is more than enough blame to go around for the sub-prime mortgage crisis, and the unraveling financial disaster. But I believe the fundamental blame lies in two places: A purely American NIMBY myth about homeowners being the only genuine contributors to their communities and a capitalistic axiom, presumably started and perpetuated by a troika among realtors, homebuilders, and mortgage lenders, that the only way for middle-income Americans to truly create wealth is through homeownership.  read more »

Bubble Opportunity: A New Life for Public Housing?

iStock_000005999343XSmall.jpg

The globalization of housing markets stood at the center of the vast, now unraveling, economic change of the past decade. The creation of new investment vehicles in the 90s diverted vast amounts of capital into housing markets around the world. The results were many and varied. Design features began to converge, with gated communities following shopping malls into cites in Latin America, China, Turkey and most other countries. Home prices began to rise, with The Economist even publishing a table of global house prices, indicating those with the most inflated costs  read more »

How Low Can House Prices Go?

price_reduced.jpg

There is much speculation among economists and others about how close we are to the bottom of the collapse of housing prices. This is, of course, an important question, and goes to the heart of the wisdom or folly of the proposed $700 billion government bailout of financial markets, which is a consequence of their own profligate lending practices.  read more »