Here's a picture of home mortgage debt:
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| Graph #1: Home Mortgage Debt |
Here's a picture of home mortgage debt in context:
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| Graph #2: Home Mortgage Debt as a Percent of Total Debt |
What is that peak, two percentage points above the normal range?
Looks to me like the context number must have been going up, too. Looks like the growth rate of housing debt was only a little faster or only a little slower than the growth rate of total debt, for a long time. Let's see how that stands up to scrutiny:
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| Graph #3: Growth Rate of Home Mortgage Debt less Growth Rate of Total Debt |
Where the blue line is below the zero line, mortgage debt grew slower than total debt. But here, the difference is pretty well contained by the -5 percent line. Even in the years since the crisis, remarkably, it bottoms out near -5 percent.
Granted, the low in the 1990s is not very low. And the high in the 2000s is higher than the two previous peaks. But not much.
Housing bubble? Mortgage debt bubble?? Total debt bubble, without a doubt.
Hey, if debt was increasing it had to go somewhere. There had to be something the money was being spent on. And yes, maybe it went to into housing this time. But if debt was increasing, the money had to go somewhere.
The problem is not the housing bubble. The problem is excessive debt. Period.
8 comments:
There was absolutely a housing bubble, of gigantic proportions.
You can find the inflation adjusted Case Shiller housing index values here.
The 1953 to 2000 Avg was 124.0. Except for a brief period in '88-9, topping at 139.72 in Q2 '89, the index was never more than 2 Standard deviations away from the mean. St Dev = 6.2.
It hit a multidecade high of 140.28 in Q2, 2000 at the beginning of an exponential trend that wound up at 221.41, in Q4 '05, 15.64 Standard Deviations above the 5 decade mean.
BTW, the index mean for the period 1900 - 2013 is 126.0, not far off the 5 decade mean.
By Q2 '12, the index was at 126 - the century + mean.
It's since climbed quite rapidly to 150. If this historical standard means anything, housing prices are currently over-valued by about 20%.
You can't just discount the enormity of this bubble, and the severe economic dislocation caused by the crash.
JzB
So, explain graph #2 to me, then.
I think we have to look at a couple other things the last 10-15 years that may have amplified the mortgage debt like the CDSs and CDOs which were derived from mortgage contracts. These took mortgages and created all sorts of new products which financial institutions leveraged off of and used as "money" for wealth creation by expanding their balance sheets but the mortgage debt is still the driver I think.
Yes the mortgage share of total credit market levels may not be as high as might be expected in a bubble but those other derivatives show up in the credit markets dwarfing the original mortgages but they would not be there without the mortgages.
Isn't a bubble more about the prices of the assets in question and not the percentage the credit towards that asset occupies in the credit markets?
House prices ran wild and way surpassed the level of income which was typically used to support them through history..... I think that sort of defines a bubble doesn't it?
Graph 2 adresses an entirely different phenomenon, and is only marginally related to the housing bubble.
Here's a bubble definition.
"Bubbles are typically associated with dramatic asset price increases followed by a collapse. Bubbles arise if the price exceeds the asset’s fundamental value. This can occur if investors hold the asset because they believe that they can sell it at a higher price to some other investor even though the asset’s price exceeds its fundamental value."
I'll grant you that fundamental value is hard to evaluate, but a 50 year base line ought to be a good approximation.
The bubble is the bubble. The nature of the underlying financing scheme is the answer to a different question.
Cheers!
JzB
Plus what Greg said.
Greg: "Yes the mortgage share of total credit market levels may not be as high as might be expected in a bubble but those other derivatives show up in the credit markets dwarfing the original mortgages but they would not be there without the mortgages."
Greg, that's a really good insight that I didn't think about. Now I'm thinking that the relative flatness of Graph #2 says that Total debt tends always to be multiplied up, more or less in proportion to Mortgage debt. This pretty much agrees with Sankowski's view that "monetary policy works it magic via real estate lending," per your comment on the following post.
What that says to me is, not so much that mortgage debt is the driver, but that finance is the parasite that survives on it.
Jazz: "There was absolutely a housing bubble, of gigantic proportions."
Jazz, did you think I was saying there was not? What did I say?
I said: Looks to me like the context number must have been going up, too.
I said: Housing bubble? Mortgage debt bubble?? Total debt bubble, without a doubt.
I said: The problem is not the housing bubble. The problem is excessive debt.
I did not say there was no housing bubble.
Note the title I put on the Reddit link to the post: *Of course* there was a housing bubble. And yet...
Jazz: "You can't just discount the enormity of this bubble, and the severe economic dislocation caused by the crash."
You are welcome to argue with the goblins in your head, Jazz, but please don't pretend they are me.
From Yahoo Finance India:
Jeff Gundlach, Robert Shiller, And Nouriel Roubini All Agree That One Housing Market Looks Like A Total Bubble
Gundlach: Take a look at Norway if you want to see a country that really looks out of whack. The housing market there has been so strong, and the debt ratios are so high.
Shiller: There is something about our culture at this point in history. The rise of capitalism all over the world has gotten people in a very speculative mode...
It's speculative, Shiller says. "... and the debt ratios are so high," Gundlach says.
Told you so, I say.
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