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Old 11-08-2011, 09:12 PM
 
Location: Old Bellevue, WA
18,782 posts, read 16,419,312 times
Reputation: 7983

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There have been a few threads about 'who caused the housing collapse' of 2007-2008. The usual suspects are the banks, the predatory lenders, the Fed, and the GSE's (Fannie & Freddie), along with other ancillary villains.

One guy had a totally different take on it--economist Randal O'Toole, who now works for the Cato instutute. But it turns out that he was one of the very few who not only did a post-mortem, but predicted the bubble, the collapse, and the resulting recession. This article, entitled Why do Houses Cost so Much?" appeared in the Feb, 2006 issue of Liberty magazine.
http://www.libertyunbound.com/sites/...ruary_2006.pdf
(edit: upon testing the link I found that you have to click ahead to page 18 to read the article)
His concluding paragraph proved to be uncannily on the money:

Quote:
Originally Posted by O'Toole, Feb 2006
When prices deflate, consumer spending will decline, banks will falter, and economic growth will slow or stop...If the next recession really hurts, blame the urban planners.
What's amazing was that in Feb 06, everything was looking rosy. Unemployment was 4.7 percent, and the Dow was around 11,000. The crunch of Aug, 2008 was more than two-and-a-half years in the future.

O'Toole's basic thesis is that the housing bubble and resulting collapse was mostly caused by 'growth management,' which creates artificial shortages of land and housing, and thus drives up the price of housing. As he notes, housing is an 'inelastic good,' one effect of which is that a small change in supply causes a large change in price. Here's a fairly basic summary of elasticity:
Economics Basics: Elasticity

O'Toole points out the the run up in housing prices varied dramatically by region. Houston, Atlanta, and Dallas, which never enacted growth management, had no run-up.

Quote:
Originally Posted by O'Toole
According to Coldwell Banker, in 2005 you could by a foru-bedroom, two-bath, 2,200-square foot home with a two-car garage in Houston for less than $152,000. That same house would cost twice that amount in Portland and four times the amount in San Jose.
You can google around and find some of O'Tooles other writings on the same theme. He did an early bubble post-mortem article in the Sept 08 Liberty called 'The Dog that didn't bark' (referring to the lack of a bubble in places like Houston). I also noticed that he takes no credit for having predicted it two years earlier. I wouldn't have been able to resist that.

http://www.libertyunbound.com/sites/...ember_2008.pdf
(click ahead to p. 23 to read the O'toole article)
He also did a big paper for Cato on the topic, and you can find various on-line interviews where he lays out his case.
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Old 11-08-2011, 09:18 PM
 
Location: Central Florida
1,329 posts, read 762,369 times
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That makes no sense because places like Florida also had housing bubbles and Florida isn't noted for alot of urban planning. I think the author is just being selective in what he studies to support his ideology of blaming government oversight vs. the suppossedly free market.
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Old 11-08-2011, 10:04 PM
 
Location: Old Bellevue, WA
18,782 posts, read 16,419,312 times
Reputation: 7983
O'Toole specifically mentions Florida:

Quote:
Originally Posted by O'Toole
Oregon and Florida also passed growth-management laws in the 1970's, requiring all cities to have urban-growth boundaries...Most Florida communities treated urban-growth boudaries with generous flexibility, so housing in that state remained affordable until 2000 or so.
The effects varied from place to place. California was perhaps the worst. Prop 13 limited revenue that could be raised through property taxes, so cities and towns competed with each other to bring in commercial development in order to get sales tax revenue. One way to encourage commercial: drive out residential. The policies required to do that meant even higher housing prices than in, say, Oregon or Washington. That's one reason why the worst effects were in California, which remains in god-awful shape.
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Old 11-08-2011, 10:21 PM
 
4,736 posts, read 4,082,262 times
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Christ, how many times do we have to go through this. There was no single person who predicted the housing crisis; many did. It's just that until 2007, it didn't happen.
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Old 11-08-2011, 10:32 PM
 
5,113 posts, read 5,595,438 times
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The housing market collapse was caused because people started defaulting on the loans they could not afford.

The housing bubble was caused from buyers flooding the market and creating a sellers market. It was typical to see multiple offers on a property and people paying over the asking price in a bidding war driving up price. These buyers did not qualify for the loans as they did not have the income to support the mortgage ... but they got the loan anyways.

The banks approved the loans because no one stopped them. The federal and local government agencies responsible for regulating the real estate mortgage industry stopped doing their job a
nd actually encouraged this illegal activity. The lack of regulation covered all aspects of the real estate sector.

Most loans were eventually sent to a government-sponsored enterprise (GSE) like Freddie Mac or Fannie Mae who turned the mortgages into derivatives (mortgage backed securities) which were sold around the world as investments by the big banks and Wall Street. The government agencies also did not act to regulate or prevent the illegal activity. Once the mortgages started defaulting the investments went bad which triggered the economic collapse.
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Old 11-08-2011, 11:06 PM
 
1,027 posts, read 1,193,587 times
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The reason for the housing collapse is simple: too many people viewing houses as investments and get-rich-quick schemes, as opposed to viewing them as homes.
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Old 11-08-2011, 11:10 PM
 
Location: Old Bellevue, WA
18,782 posts, read 16,419,312 times
Reputation: 7983
Can't disagree with 'thefix' but in turn why did people begin to view houses as investments? Because the prices were skyrocketing, of course. And why were prices skyrocketing....?
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Old 11-09-2011, 01:01 AM
 
Location: Central Florida
1,329 posts, read 762,369 times
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Here in Florida developers overbuilt "McMansions" instead of affordable housing that people could actually pay for.

I don't think it is fair to blame anything for the housing bubble except for deregulation that allowed banks to engage in irresponsible business practices. Otherwise most of the "causes" like a desire to hold back urban sprawl, a desire to extend home ownership to more people; these are not bad in themselves but they coincided with a deregulated financial market. It was only a matter of time then, until the market chose something to create a bubble... first in tech, then in housing, finally in fuel, then everything crashed.
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Old 11-09-2011, 09:06 AM
 
Location: Fiorina "Fury" 161
3,295 posts, read 3,377,373 times
Reputation: 6214
Circa 2002 - 2003

Me: "Something is wrong [with the housing market]."

Other Person: "You're wasting your time saving money. You'll never catch up to home prices."

Me: "You're out of your mind."

This is paraphrasing a real conversation for which I certainly wish I had been wrong.
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Old 11-09-2011, 09:10 AM
 
31,367 posts, read 35,389,428 times
Reputation: 15002
Quote:
Originally Posted by wutitiz View Post
he was one of the very few who not only did a post-mortem, but predicted the bubble, the collapse, and the resulting recession.
All other things aside, I always get a chuckle out of these claims that this or that person was "one of the few" who predicted the financial collapse.
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