Osama Bin Laden Is Materially Responsible for The Affordable Mortgage Depression
The Housing Bubble had several phases. The inflection point which started the Mania portion (2001-2005) was a pivotal event in the decade-long, cascading series of events.
September 11th, 2001 was that inflection point. The attack's planners are indirectly and unintentionally responsible for a material component of the economic damage today that resulted from dependent events which followed. High unemployment, bloated Government spending and falling home prices are partially attributable to Al-Qaeda's attack on America.
A Brief Background
The Housing Bubble, proposed in 1994 and begun in 1995, was 6 years, 8 months old on 9/11. Homeownership had already risen from 64.2% to 67.7% (eclipsing the previous record of 65.8% and achieving the state goal of the NHS). The Case-Shiller 10-City price index had risen by 59% during the same period (versus a decline of 1.5% in the previous 6 years).
A Historical Analysis of Sustainable Home Equity
During the Bubble housing prices increased, driven primarily by rising debt, which created home equity gains. This equity was based on valuations that were unsustainable. As prices have fallen towards a market equilibrium, equity has evaporated because the accrued debt remains.
An interesting prism through which to view the Bubble is to ignore the temporary price appreciation and instead estimate the fair value of U.S. Housing Stock during the decade-long distortion. This rolling estimate combined with historical mortgage figures allow a calculation of sustainable home equity values during the Housing Bubble.
The rationale for this exercise is that housing valuations were sustainable prior to the distortion and are returning to some permutation of "fair value" presently. Temporary price appreciation and resulting paper equity gains simply masked rising leverage on sustainable home values.
The methodology employed to estimate fair value of the U.S. Housing Stock begins with the pre-bubble value of housing and adjusts the figure for inflation and newly constructed homes (a more detailed explanation may be reviewed here).
The following chart is an estimate of U.S. sustainable Home Equity during the Housing Bubble.
I find this analysis to be compelling. While the Housing Bubble, defined by rising homeownership and rapidly accelerating price appreciation, had been smoldering for almost 7 years, it was not until September 11th that sustainable home equity began to erode.
Why is this inflection point so striking and what caused the Mania?
The Affect of September 11th on the Housing Bubble
September 11th was a transformational event in American history. Its impact continues to effect the country in ways that were unimaginable 9 years ago.
Greenspan
In the immediate aftermath of 9/11 the Federal Reserve increased liquidity and lowered interest rates to generational lows. The reaction appeared sound in an environment where the economy was reeling from the collapse of the Internet Bubble and a devastating terrorist attack.
In retrospect the monetary policy was too loose and maintained so for far too long. Had Greenspan been paying closer attention he might have observed a Housing Bubble which was unaffected by the economic downturn, or the attack, and far more impactful than the Dot-Com boom.
Easy credit contributed fuel to an already self-sustaining housing bubble.
Return of the Equity Risk Premium
For years enthusiasm for the stock market had dominated American culture. The NASDAQ had increased from 1,500 to 5,000 and paper fortunes were being made.
When the Internet Bubble collapsed, risk returned to the stock market and wary investors were looking for better risk-adjusted returns on their capital. September 11th further increased the perception of volatility as markets were closed, stocks gapped lower, the economy teetered and a war began.
Housing represented an increasingly attractive alternative.
The "Nesting" Instinct
September 11th had many cultural and social influences. One of these was to focus interest on ownership and improving one's home. In a backdrop of stock market volatility and geopolitical instability housing felt like an attractive "investment".
No Risk and Extraordinary Returns
Housing was viewed as safe because it hadn't declined in a meaningful way in generations. More recently, it had been rising in value consistently and in accelerating fashion since 1997.
The financing environment was favorable with the proliferation of subprime loans and "innovative" affordable mortgage products.
Government and private sector affordability loans financed highly leveraged transactions which magnified financial returns from rising prices.
The Government's stated motivation for promoting homeownership was a belief that homes are wealth-creation engines, and that the poor would benefit from leveraged equity gains if given access to ownership. The post-September 11th environment was precisely what lawmakers had imagined when designing homeownership public policy.
Highly levered mortgages combined with rapidly rising prices to create massive sums of theoretical equity. These equity gains, and expectations of future returns, reshaped American society for the next several years. The fallout from those events persists today and will be visible for decades to come.
Dismal Reality
The Housing Bubble was already a self-sustained, transformational force when September 11th occurred. The distortion would certainly have continued under its own momentum and propelled prices to unsustainable heights without external influence. But the timing and speed of the bubble's acceleration, and the steepness and scale of mortgage debt accumulation appears to have resulted directly from the shocks of September 11th.
The Mania portion of the bubble, well-defined by an erosion of sustainable home equity, was catalyzed by an increase in stock market/geopolitical risk, heighted interest in ownership/home improvement, and loose monetary policy.
It was during the Mania that debt-driven, price appreciation and temporary home equity gains, damagingly distorted economic activity.
It is a sobering thought that some component of today's economic devastation is the indirect result of a terrorist attack 9 years earlier. As someone who was disproportionately impacted by September 11th and finds himself unemployed in the current Depression, it is a particularly distasteful conclusion.
September 11th, 2001 was that inflection point. The attack's planners are indirectly and unintentionally responsible for a material component of the economic damage today that resulted from dependent events which followed. High unemployment, bloated Government spending and falling home prices are partially attributable to Al-Qaeda's attack on America.
A Brief Background
The Housing Bubble, proposed in 1994 and begun in 1995, was 6 years, 8 months old on 9/11. Homeownership had already risen from 64.2% to 67.7% (eclipsing the previous record of 65.8% and achieving the state goal of the NHS). The Case-Shiller 10-City price index had risen by 59% during the same period (versus a decline of 1.5% in the previous 6 years).
A Historical Analysis of Sustainable Home Equity
During the Bubble housing prices increased, driven primarily by rising debt, which created home equity gains. This equity was based on valuations that were unsustainable. As prices have fallen towards a market equilibrium, equity has evaporated because the accrued debt remains.
An interesting prism through which to view the Bubble is to ignore the temporary price appreciation and instead estimate the fair value of U.S. Housing Stock during the decade-long distortion. This rolling estimate combined with historical mortgage figures allow a calculation of sustainable home equity values during the Housing Bubble.
The rationale for this exercise is that housing valuations were sustainable prior to the distortion and are returning to some permutation of "fair value" presently. Temporary price appreciation and resulting paper equity gains simply masked rising leverage on sustainable home values.
The methodology employed to estimate fair value of the U.S. Housing Stock begins with the pre-bubble value of housing and adjusts the figure for inflation and newly constructed homes (a more detailed explanation may be reviewed here).
The following chart is an estimate of U.S. sustainable Home Equity during the Housing Bubble.
I find this analysis to be compelling. While the Housing Bubble, defined by rising homeownership and rapidly accelerating price appreciation, had been smoldering for almost 7 years, it was not until September 11th that sustainable home equity began to erode.
Why is this inflection point so striking and what caused the Mania?
The Affect of September 11th on the Housing Bubble
September 11th was a transformational event in American history. Its impact continues to effect the country in ways that were unimaginable 9 years ago.
Greenspan
In the immediate aftermath of 9/11 the Federal Reserve increased liquidity and lowered interest rates to generational lows. The reaction appeared sound in an environment where the economy was reeling from the collapse of the Internet Bubble and a devastating terrorist attack.
In retrospect the monetary policy was too loose and maintained so for far too long. Had Greenspan been paying closer attention he might have observed a Housing Bubble which was unaffected by the economic downturn, or the attack, and far more impactful than the Dot-Com boom.
Easy credit contributed fuel to an already self-sustaining housing bubble.
Return of the Equity Risk Premium
For years enthusiasm for the stock market had dominated American culture. The NASDAQ had increased from 1,500 to 5,000 and paper fortunes were being made.
When the Internet Bubble collapsed, risk returned to the stock market and wary investors were looking for better risk-adjusted returns on their capital. September 11th further increased the perception of volatility as markets were closed, stocks gapped lower, the economy teetered and a war began.
Housing represented an increasingly attractive alternative.
The "Nesting" Instinct
September 11th had many cultural and social influences. One of these was to focus interest on ownership and improving one's home. In a backdrop of stock market volatility and geopolitical instability housing felt like an attractive "investment".
No Risk and Extraordinary Returns
Housing was viewed as safe because it hadn't declined in a meaningful way in generations. More recently, it had been rising in value consistently and in accelerating fashion since 1997.
The financing environment was favorable with the proliferation of subprime loans and "innovative" affordable mortgage products.
Government and private sector affordability loans financed highly leveraged transactions which magnified financial returns from rising prices.
The Government's stated motivation for promoting homeownership was a belief that homes are wealth-creation engines, and that the poor would benefit from leveraged equity gains if given access to ownership. The post-September 11th environment was precisely what lawmakers had imagined when designing homeownership public policy.
Highly levered mortgages combined with rapidly rising prices to create massive sums of theoretical equity. These equity gains, and expectations of future returns, reshaped American society for the next several years. The fallout from those events persists today and will be visible for decades to come.
Dismal Reality
The Housing Bubble was already a self-sustained, transformational force when September 11th occurred. The distortion would certainly have continued under its own momentum and propelled prices to unsustainable heights without external influence. But the timing and speed of the bubble's acceleration, and the steepness and scale of mortgage debt accumulation appears to have resulted directly from the shocks of September 11th.
The Mania portion of the bubble, well-defined by an erosion of sustainable home equity, was catalyzed by an increase in stock market/geopolitical risk, heighted interest in ownership/home improvement, and loose monetary policy.
It was during the Mania that debt-driven, price appreciation and temporary home equity gains, damagingly distorted economic activity.
It is a sobering thought that some component of today's economic devastation is the indirect result of a terrorist attack 9 years earlier. As someone who was disproportionately impacted by September 11th and finds himself unemployed in the current Depression, it is a particularly distasteful conclusion.
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