Housing Charts: Genesis of a Crisis

Front page WSJ article today makes for intriguing reading: U.S. Mortgage Crisis Rivals S&L Meltdown

For those of you w/o access, check out the informative  collection of charts at WSJ.com (public) on:   Home Ownership, House Price-to-Rental Ratio, Commercial Paper, Prices of Subprime Mortgage Tranches.

As this chart reveals, starting in late 2001, the price ratio of renting vs. buying broke out of a multi-decade range. Cheap money, and an apparent lack of lending standards put millions of renters into houses that, based on today’s foreclosure levels, they could not service (i.e., afford).

Hence, the massive unwind as these home owners return to renting status . . .


Ratio of OFHEO house price index to personal consumption expenditures on rent


Fascinating stuff . . .


U.S. Mortgage Crisis Rivals S&L Meltdown   
December 10, 2007; Page A1

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What's been said:

Discussions found on the web:
  1. Chief Tomahawk commented on Dec 10

    Looks like UBS was the ultimate holder of that renter-turned-buyer-turning-back-to-renter paper. $10 billion writedown announced and cash dividend changed to a stock dividend. Yet the financials probably go higher today because the Fed is going to cut rates soon.

  2. ken h commented on Dec 10

    The thing is as a J6P Supermodel,….I knew this about 2003. Am I supposed to believe the Fed and Greenspin didn’t? Is this just part of a grand senario and I am missing something? I mean, Greenspin was PUSHING adjustables just a couple years back??? WTF? Can someone explain that to me?

  3. Stuart commented on Dec 10

    This would imply a 25% drop in home values to get the index down to 25x. Possibly a 5 Trillion in reduced home values. A reduction of “collateral” at this scale would be fatal to the credit markets.

  4. Michael Donnelly commented on Dec 10

    Pending home sales, September revised up and October up as well. And most importantly NAR says all is well now.

    Good times are here!

    Or most likely just another dead cat bounce on the way down.

  5. GRG commented on Dec 10

    The economy is better than ever – just read the newspapers and look at Wall Street. Please don’t ask 98% of the population, though.

  6. RW commented on Dec 10

    What Yves Smith (and Scott) said.

    And, oh yes, the so-called sub-prime crisis (credit and liquidity crunch) is much worse than the S&L debacle as shall be seen if it unwinds significantly faster than the 6-7 years typical of real estate led collapses generally.

  7. michael schumacher commented on Dec 10

    all just fine as UBS looses $10 billion and decided to sell watches out the back door ala Citigroup in the dead of night.

    BTW on the heels on the ETFC deal (at .27 onthe dollar ofr it’s crap CDO’s) we now have UBS at .45

    But I’m sure it will be dismissed as an another “one off” sale. We’re getting a lot of these One-offs latley

    Yea that’s worth a hundy on the Dow….


  8. Joe Klein’s conscience commented on Dec 10

    I didn’t know the clip was from 2005. I wonder what Kudlow and Cramer have to say about Volcker. That would be interesting to know.

  9. ef commented on Dec 10

    If they could barely pay the mortgage before, how did they ever manage to maintain a house at all. Say the roofing or furnace needs to be replaced, or air condition, water heater. There’s $5k to $10k. They’ll need a lawn mover, maybe a snow blower, etc. Not to mention insurance, property taxes, utilities on a larger home, and all those things that need repairs in a house.

    Two other trends going against the housing bubble, aging population and declining wages from global competition.

    This situation should never have happened.

  10. michael schumacher commented on Dec 10

    and the lying continues….

    “The write-downs and capital raising represent a dramatic U-turn from guidance given by Chief Financial Officer Marco Suter just three weeks ago,”

    So three weeks ago they didn’t know they were going to have a write-off and “suddenly” someone appears with an amount to off-set that write off and provide some “allowance” to get them to the end of the year.

    That is what is wrong with our financial system…the outright lying and deception that masquerades as “advice” and the only thing that the SEC can say is “caveat emptor”

    The MBI deal just announced is akin to yet more desperation to prop up stocks that really should be much lower but hey just float a rumor that BX will buy you and poof there you go…. instant volume to allow an institutional exit. (like BX is ever going to buy Rio Tinto…BX is just the latest version of “warren Buffet to buy _______”*
    *insert beaten down stock here

    how do these people sleep at night….


  11. Adam commented on Dec 10

    This chart means everything. Most people don’t understand that you can calculate a valuation for real property in a similar way to doing so for equities. The PE ratio for real property has reached unsustainable levels (much like tech stocks in 1999). Either (a) real property prices must fall significantly, (b) rents increase significantly, or (c) most likely a combination of both to bring PE ratios back to a historically reasonable range.

  12. Mike G. commented on Dec 10

    I still want to know what happens when the UK housing market goes south as it is now just starting to do. Did they collateralize those loans? Were they doing a lot of subprime loans? Who bought that crap?

    The UBS # is medium in size, but I found it interesting that in addition to tossing out the $10B subprime hit they are selling another $11B (?) stake of the company to someone (Singapore?). Does that mean that ’08 will have more write downs of one kind or another and they know they need a helping hand cash infusion? Are RBS and others in the same boat?

    The non-US, non-Europeans of the world (those flush with cash) are going to have continued fire sale shopping in the West. Good time for a country to set up a sovereign fund! Stupid, they aren’t.

  13. ron commented on Dec 10

    Actually it was part of the great refi boom in America. The subprime mortgage was 85% refi, consolidations loans, home equity loans became cash out 1st lien. A large part of the crisis is that the bankers and investors are stuck with huge 1st liens vs the past were they could throw off the 2nd, now you have huge 1st liens added to the mix many went out and got equity lines on top of the cash out refi’s and these folks had high FICO scores, i.e. Wells Fargo problem.

  14. VJ commented on Dec 10


    Bank of America freezes money market fund for institutional investors.

    $12 billion in assets, and nobody can take any money out.

  15. michael schumacher commented on Dec 10


    That was my initial reaction however the powers that be will somehow convince the institutional traders that it’s a good thing that people can’t get access to money.

    News like that ,at one point, could have crippled the market…but not in the let’s influence an election world we are currently in now.

    We are the only place in the world where reality is not allowed into our financial lives…..ignorance is truly bliss (for this administration)


  16. Joe Klein’s conscience commented on Dec 10

    “Despite over-exaggerated negative coverage on the housing conditions, many local markets are actually seeing price increases,” Yun said at a press briefing. “Mortgage availability is improving”

    Another brilliant piece of analysis from Lawrence Yun. Sounds like he learned his lesson well from Nareth(sp?).

  17. jefff commented on Dec 10

    One thing I wonder is what these rent to price ratios look like in a highly unequal society. Brazil, Russia, etc.

    Perhaps they are a natural result of inequality as most of the population cannot afford to pay much for housing, but the rich can afford to pay a lot to own land?

    This would not rule out a bubble existing on top of an inequality driven change in the ratio, even if one does exist, but it makes me wonder if it will go back down to the 22-25 range, or stabilize at some higher rate.

    Anybody know what this ratio was like during the first 1/4 of the last century in the US?

  18. David commented on Dec 10

    Meltdown will be bad, sorry!

  19. Mr_Dave_O commented on Dec 12

    Volcker would never have let us get into this mess to begin with. He did what was right in the late 70s and early 80s to curb inflation and attract foreign investors, by raising interest rates to high levels. The short-term pain of those high interest rates was greatly outweighed by the long-term benefit to our economy. I wish Greenspan and Bernanke would think like Volcker does. I’ll never understand why the current Federal Reserve has such short-sightedness nowadays.

  20. kng863 commented on Jan 7

    I’ve live in New Jersey for over 20yrs and this subprime mess has closely destroyed neighborhoods. People cannot afford to pay the highest property taxes of the nation and still live decent living standards. About every block has at least 1 for sale sign which wasn’t the case a year ago. I wonder why? I have a decent job and yet I was asking where did people get all this money? Was there sustainable new jobs/income somewhere? The answer is no, and people used credit and uped the values of the houses. Now to a retired citizen, this forced them out of their homes cause property taxes shot up! Meanwhile the new person that moved in had everything paid by credit even the property tax. Now they are trying to sell and guess what no buyers. What makes me furious about this is the assessments. Why does the guy next door who paid more for his house affect how much I should pay in property taxes? If he wants to overpay, that’s his problem, but why does that affect my property tax? Assessments are screwed up and bias. If all else, they should underestimate the assessments by 100k so that people just dont get a spike in taxes. Taxes went up 25% which has been the highest since my 20yrs living in the house. Why do people use credit? can’t they just save up for a house over several years and not depend on the bank?

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