Housing Bubble Leftovers

We are in the middle of a Great Recession, but someday we will be out of it. It is very easy to focus on the losses, but what did we gain? James Surowiecki has a column where he says:

There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution. Each wave, Philippon shows, was propelled by the need to fund new businesses, and each left finance significantly bigger than before. In all these cases, it wasn’t so much that the bankers had changed; the world had.

The same can’t be said, though, of the boom of the past decade. The housing bubble was unique, and uniquely awful. Each of the previous waves had come in response to a profound shift in the real economy. With the housing bubble, by contrast, there was no meaningful development in the real economy that could explain why homes were suddenly so much more attractive or valuable. The only thing that had changed, really, was that banks were flinging cheap money at would-be homeowners, essentially conjuring up profits out of nowhere. And while previous booms (at least, those of the twenties and the nineties) did end in tears, along the way they made the economy more productive and more innovative in a lasting way. That’s not true of the past decade. Banking grew bigger and more profitable. But all we got in exchange was acres of empty houses in Phoenix.

I think this is true. Look at the last boom, the internet one. A lot of people thought thinks like pets.com deserved a giant market share, and splurged accordingly. In the process, we got a lot of investment in broadband capabilities we are just now beginning to stress, as well as a workforce educated in programming and the web, as well as businesses now focused on the web. Employees out of that boom continued to innovate, producing new goods, and will continue to do so. These are good things, and will continue to provide value as we go forward.

I don’t think that is true now. People who were involved in the selling of mortgages, either at the local level or at the Wall Street level, aren’t any more trained, don’t have more productive human capital, than when they started. When people talk about the finance sector collapsing and unemployment being high, I think they tend to think of Wall Street MBAs – so they look at the graduate degree unemployment numbers. I think of some of the kids at my 10 year high school reunion 2 years ago, who started flipping commercial real estate contracts after completing a year or two of community college. It isn’t clear that they’ll have a lot of value added for the economy as a result of that 5-7 years of work. And that definitely aggregates up to the Wall Street kids who, in the words of a friend of Ezra Klein’s, spent “4-6 years driving CDO deals using someone else’s quant models.”

But what about the housing stock? What about it indeed. I want to show two things. A commenter on seekingalpha sent me this:

A video of two guys in Southern California look at some repossessed houses and show the huge damage previous people caused. That house they look at is only 18 months old and it is trashed. This is what I think of with The Exurbs as Nightmare which I mentioned in the previous post.

I also want to follow up with a This American Life episode Scenes From a Recession. It’s an excellent episode overall, but the first episode about the Chicago neighborhood Roger’s Park condo boom, and now bust, stands out.

They follow the plight of condo owners who moved into condo buildings as they were half sold, and the Realtor went bust or fled. So the empty units rot, their pipes freeze, animals and squatters life in the empty space, and they go unsold by the realtor but also unclaimed by the bank holding the lease (since they don’t want to pay the property taxes, they don’t challenge the owner). Orphan buildings. So the building rots, or to use the accountancy language depreciates, ruining the owner’s investment.

Rodger’s Park was not a very desirable place for people to live in the 2000s, if I remember. I knew a few hippies and artists who lived up there for the very cheap rent – people were insane if they thought they were going to flip that neighborhood. And if memory serves, I think about 5 people I knew up there had to move out of their apartments because they were being turned into condos in the ’04-’06 time frame.

Add to this the huge amounts of investment in housing where people will no longer want to live when oil prices come back (which it already is). A lot of capital, human and housing, has been wasted this past decade as a result of this financial crisis. I hope it can find a better use handling the upcoming health and energy problems we have on our hands…

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8 Responses to Housing Bubble Leftovers

  1. financeguy says:

    What’s ironic is that Wall Street will probably fend off sensible regulations by invoking the specter of too many rules quashing “financial innovation.” That’s rich since it appears that all their innovation in the last decade mainly produced temporary liquidity that promptly vanished once the economy hit the skids. I agree: at least past crises left us with something. The dot-com bubble helped build out the Internet faster; that’s not such a bad thing. I agree completely with your (and S.’s) thesis here, but worry that either Congress won’t see it that way or has become too lobbying-neutered to make needed changes.

  2. Mike says:

    There’s a lot of worry out there about the post-recession regulation. Everyone I know is very skeptical, though the motions they’ve been going through so far has been encouraging.

    Financeguy – did you sense the adminstration split the lobbying efforts with the credit card reform bill by leaving interchange fees intact, giving Visa and Mastercard (who get a cut of interchange and nothing on consumer) and their army of lobbyists and stockholders a pass, and instead just going after the banks? I wonder if, behind the scenes, there was a “go with this and don’t fight it and you can keep your inflated interchange fees” meeting.

  3. donthelibertariandemocrat says:

    “It isn’t clear that they’ll have a lot of value added for the economy as a result of that 5-7 years of work.”

    The housing bubble was supposed to solve a problem: namely, providing for retirement. I don’t mean that people wanted a bubble, but that people were panicked about buying a house to provide for their retirement.

    There has been a twenty year barrage of bad news about social security, pensions, etc. Why did people focus on houses? Because they pay rent, which came to be seen as a sucker’s game. Since they already pay for housing, it made sense to them to try and turn this rent into an investment. There was a panic about buying a house for retirement, followed by a panic that people were going to be left behind. That was the story: Get in now, or be left behind.

    Many people really can manage to save much after they pay expenses. Consequently, it made sense for them to try and turn some of those wages into an investment. Sadly, there were told a story without a happy ending by people who took advantage of that panic and fear of a pauper’s old age and being left behind.

    There is no good investment reason for the housing bubble.

  4. donthelibertariandemocrat says:

    Many people really can(not) manage …

  5. Tom says:

    As a current resident of Rogers Park, I have to say the situation in my neighborhood is not dire as T.A.L. makes it out to be. I actually don’t live too far from the building you pictured in this post. Yes. This developer is a particularly bad apple. Every neighborhood has one or two.

    The building I live in has 44 units. All were purchased during the end of the boom (2007-2008). Only one unit is in foreclosure. Not a bad rate considering. I’ve talked to different persons around the neighborhood. People are uneasy, yes, but no more than anyone from anywhere. Rogers Park is not falling apart.

    As for desirability; sounds like a code word for crime. Rogers Park has the 8th lowest rate among Chicago neighborhoods over the last year. Rogers Park is right on the lake. I have two playgrounds for my daughter to play in less than a block away. Really. My commute to work is only 10 minutes longer than it was from Andersonville. People here are friendly.

    Rogers Park is real.

  6. Mike says:

    Ya know Tom, I was unfair with my criticism as I haven’t been in Chicago in a few years, and only got to Rodgers Park infrequently when I lived there. I’ll hold my tongue. Thanks for sharing this.

    I do miss Chicago. It is an incredibly friendly city.

  7. Pingback: Will Dearman Lifestream » Daily Digest for May 21st, 2009

  8. Another Mike says:


    At the Baseline Scenario, James Kwak has a link to an episode of This American Life about mortgage modifications. Here’s the part I thought might interest you

    “Apparently, most if not all of the big, bank-owned servicers don’t have computer systems (software) that can estimate the net present value of a foreclosure as opposed to a modification, taking into account zip code-specific repair costs, broker’s fees on the sale, closing costs, foreclosure-specific legal costs, and expected sale proceeds.”

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