RIP KARL CASE 1946 – 15 JULY 2016

Reflection on the Housing Market: Seven Years After the Fall

By Karl E. Case

For the last dozen years we have shed many tears
Living through a recession
The world was broke and it was not a joke
When we talked of another depression
Fifteen million without a job
Foreclosures and banks that fail
401k’s became 201k’s
And everything’s up for sale.

How could it be? What didn’t we see
That led to all of this trouble?
There is little doubt that the proximal cause
Was a bursting housing bubble
But other than that who can we blame?
And what do they lament?
Millions of people contributed to
This hundred year event

For me it began in ’76
With a house on Cleveland Road
At 54 thousand, I thought it a lot,
For a small three-bedroom abode
But 10 years later that very same house
Would sell for five times the price
I was glad that I bought … I remember the thought
“This may not be fair but it’s nice”

In Boston alone, that boom created
100 billion in wealth
We spent more, saved less, and I have to confess
It was good for our mental health
We had to know that it couldn’t go on
Someday prices would fall
We knew there were risks – to ourselves and our fiscs
If those prices were ever to stall

It all began in 2001
911 … the bubble
The Fed had to act because of the fact
A recession would mean big trouble
So the Fed Funds Rate, sitting just below eight
Was cut to under two
And you had to know with rates so low
That a refi boom would ensue

The volume of mortgages written back then
Stunned imaginations
In a single quarter in 2003
A trillion in originations!
But something happened late that year
That caused long rates to rise
And that was the end of the refi boom
It came as quite a surprise

With refi’s gone so were big fees
But banks still had money to lend
And the search for buyers to fill the gap
Seemingly had no end
The Fed kept pumping through 2005
To keep short rates very low
With no sight of inflation across the nation
The target was simply to grow

Of course the key for all to see
Was a robust housing market
Buyers could borrow lots of cash
And a house was a good place to park it
A summer home … a new big house
No one seemed to care
Homes were made of bricks and land
The value would always be there

It didn’t matter what rate you paid
Or what you made in a year
For a while liquidity led to stupidity
“Just sign and see the cashier”
High LTV’s and Option ARMs
Negative Am’s and more
2-28’s with teaser rates
And ridiculous Fico scores

Competition was the force
That made the music play
As long as prices didn’t fall
Everything was OK
People could always sell their homes
For more than they had paid
That kept foreclosures and defaults low
And lots of money was made

Fannie and Fred were always ahead
Then Countrywide got in the fray
Then Lehman and Merrill and Goldman Sachs
Couldn’t be kept away
You can guess that MBS
Helped make the trading brisk
Investors, thought that the paper they bought
Was traunched with well measured risk

To that add leverage and default swaps
And then house prices fell
The intercept shift was very swift
And that was the closing bell
The very first city to see the drop
Was Boston in 2006
Then one by one they began to slip
Leaving us in a fix

We tried the tax credit which seemed to work
For a few months the markets came back
But when it expired the markets got mired
Resuming their downward track
The inventory of unsold homes
Still continued to grow
And we’re hardly building any new homes
With starts at a 50-year low

A number of problems remained as risks
As we wait for markets to turn:
The number of loans that still need to be marked
Is making stomachs churn
Twelve million who want to work
Don’t have jobs today
And slow is the pipeline of loans in default
Since no one wants to pay

In the longer run a lot depends
On the rate of household formation
That depends in part of course
On the rate of immigration
It also matters what kids do
Like living with Mom and Dad
Or doubling up till they get a job
To pay for their very own pad

For a while there was talk of a double dip
The recovery was in a stall
Consumers were down and beginning to frown
Jobs hadn’t come back at all
The Euro was falling, the banks were appalling
As we wallowed in bad sovereign debt
Europeans were asking aloud
Really … how bad can it get?

The guys at the Fed have repeatedly said
That their mandate includes employment
But with rates at zero no one’s a hero
No weapons are left for deployment
QE1 was lots of fun
Then along came QE2
We did the “twist” and we took on more risk
Not knowing just what they would do

So now we come to the end of this ode
Without much to say for certain
I hate to say, that’s where we are
Not beginning nor final curtain
The truth of the matter at the end of the day
Is that markets will make you humble
Just when you think that it’s time for a drink
They will turn and fortunes will crumble

That free markets work to provide what we want
Is a notion that’s not in dispute
The problem is that once in a while
Markets overshoot
And when they do in a market so large
A lot of people feel pain
In the blink of an eye many gave back
What it took 10 years to gain

Among those who are getting the blame
A few deserve to be flayed
But a forecast can only be judged against
What we knew at the time it was made
Sometimes the future is like the past
And sometimes it is not
But when it comes to what we know
The past is all we’ve got

Of course there is greed and there is a need
For moral hazard and rules
And for figuring out the effectiveness
Of the new financial tools
Politicians, of course, are starting to shout
That they want more retribution
It’s better, I think, if they used their time
Helping to find a solution.

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