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Monday, January 20, 2014

Is Another Housing Bubble Growing?

Peter Wallison, a conservative voice in the world of fiscal policy, recently wrote a much-commented-upon opinion piece in the New York Times entitled "The Bubble is Back."  But unlike his most of colleagues on the 2011 Fiscal Crisis Inquiry Commission, Wallison blames government housing policy for the last bubble. (Bernard Weil/Toronto Star via Getty Images)

Peter Wallison is a conservative voice in the world of fiscal policy. (Bernard Weil/Toronto Star via Getty Images)

Peter Wallison, a conservative voice in the world of fiscal policy, sees signs of another housing bubble. He points to the growing gap between owning versus renting, and to a return to no-money-down mortgages.

He recently wrote a much-commented-upon opinion piece in the New York Times entitled “The Bubble is Back.” But unlike his most of colleagues on the 2011 Fiscal Crisis Inquiry Commission, Wallison blames government housing policy for the last bubble.

The government-sponsored and government-bailed out entities Fannie Mae and Freddie Mac still dominate the housing market, buying up loans and selling them to investors — just like they did before the bubble burst in 2007.

Wallison joins Here & Now’s Meghna Chakrabarti to discuss the potential housing bubble.


  • Peter Wallison, senior fellow at the American Enterprise Institute.




Are we on the way to another housing bubble? Peter Wallison, a conservative voice on fiscal policy, thinks so. He sees signs of a bubble and wrote about it in a much-commented upon opinion piece in The New York Times entitled "The Bubble is Back." Now, Wallison was a dissenting member of the 2011 fiscal crisis inquiry commission, and he says that key lenders haven't changed much since then, specifically government-sponsored and taxpayer bailed out entities Fannie Mae and Freddie Mac that are buying and selling mortgages right now in much the same way they were doing when the last housing bubble burst. Peter Wallison joins us from Washington. Peter, welcome.

PETER WALLISON: Well, thanks.

CHAKRABARTI: So first of all, you say that there's a housing bubble out there right now. Make your case as to why.

WALLISON: How do you measure a housing bubble? And one of the ways to measure a housing bubble is to look at what rental costs are and then whether the cost of owning a home is higher or lower than the rental cost. And theoretically, if the cost is higher, then people will start to rent. And if the cost is lower, then people will start buying homes. And for many years, between 1983 when rental costs were look at carefully by the Bureau of Labor Standards at the Labor Department, the housing costs and rental costs tracked one another almost perfectly.

CHAKRABARTI: Tracked one another in terms of their rate of increase was roughly the same.

WALLISON: If you made a chart, you would find that the two lines were completely congruent, that is one and the other were together on any chart until 1997. And in 1997, housing started to depart from that steady line. Well, why was that? Many of us believe - I believe certainly - that one of the reasons was a very sharp decline, beginning in the mid-'90s in underwriting standards and, in particular, in down payment standards for homes.

And if you think about it, when someone has a 10 percent down payment, which was the traditional standard until about middle 1990s, you could buy a home of a certain cost. Let's assume it's $100,000 home. You'd have to put down $10,000. But underwriting standards began to decline in that period and especially down payments. And so people who wanted to buy homes, say $100,000 home, if they were only required to put down $5,000, well, the answer is they could buy a more expensive home.

CHAKRABARTI: Well, there was a - if I may, there was a lot of pressure from not just the world of real estate and not just from, say, government underwriters in terms of Fannie Mae and Freddie Mac, who were buying these mortgages, but, you know, the financial world as a whole. I mean, we saw no-money-down loans. We saw interest-only loans. The whole subprime crisis emerged from all of these. That is what you're describing is the stew that led to the financial crisis.

WALLISON: Exactly. Exactly. And it hasn't really changed. That was the point of the article that you saw in The New York Times.

CHAKRABARTI: But what's driving it this time around because I would say, a lot of buyers would say, credit for the average would-be homeowner credit is still pretty tight.

WALLISON: Well, there is talk about credit being tight. But, in fact, Fannie Mae, Freddie Mac, the FHA, that is the Federal Housing Administration, and other government agencies are making loans with down payments of 5 percent or less. And as I said in the article, about 53 percent of all of the loans that are being made in the United States today are loans for purchase of homes of 5 percent or less. We want to warn people that if that continues, if housing underwriting standards are kept low and if down payments are kept low, we are going to have another bubble. It might take several years. It might take as long as 10 years. And we'll find a lot of people will suffer when that bubble collapses.

CHAKRABARTI: Mm-hmm. Now, interestingly, in your article, you pointed out a fact which, I have to say, was a surprise to me. That before 1992, when down payments on average were 10, 20 percent, that the rate of homeownership in America wasn't all that different than it is today.

WALLISON: That's right. The rate did go up when these lower underwriting standards came into effect in 1992 and 1997. When housing prices collapsed, as will happen, when these bubbles developed and many, many of those people lost their homes, and that's the tragedy.

CHAKRABARTI: Now, this is a glass-half-empty or half-full question, because you see a housing bubble, but others see a recovery.

WALLISON: Yes. And, in fact, one of the extraordinary things about bubbles in general - and not just in housing, in the stock market, for example, we also have had bubbles. But one of the extraordinary things about them is that it's very hard to tell whether you are actually in a bubble. That's why I used rental standards, because then you can tell when, in fact, a bubble is developing.

Otherwise, it's extremely difficult to differentiate between a recovery and a bubble. And if we want to avoid bubbles, we ought to change our methods of looking at and using underwriting standards. And the way to do that is to cause the government to change its standards.

CHAKRABARTI: How fair is it to place the bulk of the blame on the government? Because there is an entire financial system separate from the government that has its hands all over the housing market. It did before 2008, and it continues to do so despite, you know, for example, the Dodd-Frank financial reform. I mean, I take your point that underwriting standards are a part of this picture, but certainly, it's not the whole of the picture.

WALLISON: It isn't perhaps the whole of the picture, and it isn't always the government, or only the government in this case. Right now, yes, the private sector is making loans that do require much stronger underwriting standards, because, in many cases, they have learned their lesson. From the standpoint of people who wanted to regulate the government, the Dodd-Frank Act does that in spades.

But it really doesn't do anything to control the lower underwriting standards that I think were the cause of the financial crisis. So I'm not surprised that we are seeing a bubble developing now. I would not be surprised to see if we had another financial crisis in 10 or 15 years, because we are following exactly the policies - from my perspective - that produced the financial crisis in 2008.

CHAKRABARTI: Well, Peter Wallison is a senior fellow at the American Enterprise Institute and a former member of the congressionally mandated Financial Crisis Inquiry Commission. Peter Wallison, thank you so much.

WALLISON: My pleasure. Thanks for inviting me.

CHAKRABARTI: Well, what do you see where you are? Is there a housing bubble forming around you? And if so, what do you think we ought to do about it? Let us know at hereandnow.org. This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.

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  • Joshee

    There’s a clear housing bubble in the Seattle, Bellevue region where houses listed 1 day ago get bought out within a day at over listing price. The rents in some areas are lower than mortgage payments. Even after tech hiring goes up this kind of pricing pressure is unsustainable.

  • Roger

    I don’t think Mr Wallison’s portrayal of a new bubble delves deeply enough. There are more factors that go into a bubble than 10-15 years and the amount of money one puts down. If you have $10,000 to put down its a 10% if you buy a $100,000 home or its 5% if you buy a $200,000 home. We don’t automatically lose all buyers by raising down payments nor do we automatically increase risk by having a lower down payment. Education of the Buyers is a huge factor that needs to be addressed. As a country we need to have a serious discussion about the 30 year loan. Maybe people should qualify at a 10 or a 15year loan, and then be given a 30 afterwards. If people stayed long enough to build equity or made improvements to add value that’d go along way to future sale price. The story was very interesting but like my post, only addresses part of the Problem. -Roger Cleveland Ohio

  • nick sodano

    I would debate Wallison’s notion that rental rates did not come down. They did. They didnt CRASH like housing values, but they came down. I reduced my rates during 2010 because the market rates had come down by 10% or so and didnt want to lose my tenants. I think one of the reasons rental has stayed more stable than housing is that for tenants who keep their jobs, which mirrors the over employment rate – those tenants have STICKY wages, a well known economic concept… so the rent doesnt really have to retreat so far cause wages didnt really retreat that far.

  • Gary

    After selling homes for fifty years I knew there would be problems when 100% loans were made and even 125% loans. Re-fi’s were really heavy with too many folks borrowing more money than their home was worth. When the market changed too many folks had mortgages that were higher than the homes were worth. We could not sell them for what they needed to just break even. Also, the sub-prime loans were horrible with folks paying too high in interest rates. A lot of lenders were just pushing money out the door and making loans that did not make sense. appraisers were giving too much value to homes that did not justify what their appraisal was. FHA and VA loans have had low down payments for as long as I have been selling but foreclosures were not very high until the market changed and folks had no equity and just let their homes go back. With very little new construction going on there are too many chasing too few homes so the prices go up. It is a complex market but do not take away FHA and VA loans.

  • Ken

    The bubble was created by separating the originator of a loan from the responslilty to collect. The changes in the guidelines stated by Peter were target to low income area. The problem was the banks pushed to allow these low and no doc loans to anyone. Speculators jumped in and ran the home prices up and the banks made billions and turned a blind eye. The new bubble is driven not by home buyers but investors using hedge funds to purchase the homes from the banks and drive prices up. The banks are now lending money to the hedge funds (2 billoin by BOA). If you look at the high volume markets seventy percent of the homes under $200,000 are purchased by investors. The real home buyers can not compete with the hedge funds because there is no one buying large blocks of mortgages except the Fed. Yes there is a bubble and it is being created by speculators not home buyers. I work in one of the hardest hit areas Southwest Florida ground zero for the highest percentages of foreclosure. I am both a housing counselor for a non profit and a Real Estate Broker and was shocked that you gave this person air time and asked no hardball question. He is only looking at one small piece of a very complex puzzle. Safe and Affordable Housing is a fundamental human need and not a wealth building tool for hedges funds. A recent Havard study puts 30 million families spending 50% of their monthly income for housing. I wish you would interview the numerous non profit housing counselors that help save people homes and educate low and moderate income people on responsible homeownership. Their the real heros.

  • Wud he say

    Another financial crisis in10 or 15 years? I’ll put money on 3 years.

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