The Annals of Publishing
Via the Economics of Contempt, here’s one book I’m glad I didn’t buy, David Lereah’s 2006 classic Why the Real Estate Boom Will Not Bust – And How You Can Profit from It: How to Build Wealth in Today’s Expanding Real Estate Market.
The author, it seems, is (or was) senior vice president and chief economist of the National Association of Realtors. The book was also blurbed by David Berson, chief economist at Fannie Mae, who said:
An important book, whether you agree with the author (as I do) that housing will remain an excellent investment or are convinced that home prices are poised for a plunge, David Lereah lays out a compelling vision of housing as a continuing positive investment—and how you can profit from real estate if you already own the home you live in, are looking to move from rental housing to an owner-occupied home, or want to use real estate as an investment.
Since the crisis hit, there’s been a lot of talk about complicated financial engineering and the ins and outs of different kinds of derivatives. But it’s worth recalling that at root there was a pretty basic and easy to understand mistake. We had developed an economy where, over a period of years, incomes were more-or-less flat and yet consumption was rising. Consumption was rising because people were going into debt. And people were able to go into debt because of rising asset price values. It was convenient for some people to believe that this was a sustainable trend but it was not, in fact, sustainable. The price of an asset like a home needs to bear some kind of relationship to people’s ability to pay for houses.
56 Responses to “The Annals of Publishing”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
June 4th, 2009 at 4:41 pm
That cover picture is great. Almost like a Freudian slip by the book’s author, describing the reality he denies in the text…
June 4th, 2009 at 4:49 pm
Now you tell me.
June 4th, 2009 at 4:53 pm
I like how the house looks like it’s getting ready to crush the poor homeowners…just like in real life.
June 4th, 2009 at 5:03 pm
Right down to the last clause of the final sentence–sublime.
June 4th, 2009 at 5:18 pm
In the late 1990s I read an analysis of long-range trends the real estate market in the Ann Arbor News that argued that about 2005 housing demand was going to decline. The argument made as i recall was that about that time the vast majority of baby boomers would have settled into their final full-family sized homes. In the end the prediction was not too far off. Indeed, it seems easy to imagine that if had banks not been so set to keep the bubble going that is what would have happened. Meanwhile, I’ve been kicking myself for several years for just filing the article in my mind rather than clipping it and saving it.
June 4th, 2009 at 5:32 pm
“We had developed an economy where, over a period of years, incomes were more-or-less flat and yet consumption was rising. Consumption was rising because people were going into debt. And people were able to go into debt because of rising asset price values.”
I agree that wages have been flat. However, I think you have the cause and effect backwards on the debt/asset prices. People were getting more debt handed to them which meant that asset values were higher. If you took all the equity people have and said you can’t use debt, then clearly houses would be worth a LOT less. In the same way if you say instead of being levered 10-1, we will offer you enough debt to get to 40-1, then the asset values will go up just because there is more debt and equity chasing the same assets.
If the Fed doesn’t monetize the debt and we actually run deficits the way we are projecting, the issuance of government debt is literally going to suck all investable funds out of the stock, commodity and housing markets. The banks are controlled by the government, so there can not be a failure in those debt auctions and the banks will have to make it happen regardless of what it does to asset values.
That house is about to crush those people when it lands.
June 5th, 2009 at 12:24 pm
The price of an asset like a home needs to bear some kind of relationship to people’s ability to pay for houses.
I think I know what you meant, but you need to be more clear here. Credit affects one’s ability to pay for things, and I think what you meant is that house prices should generally track incomes, as opposed to increased debt-to-income ratios.
June 5th, 2009 at 12:25 pm
In the same way if you say instead of being levered 10-1, we will offer you enough debt to get to 40-1, then the asset values will go up just because there is more debt and equity chasing the same assets.
I would think you still have the same asset value, just more debt. The debt and equity doesn’t need to “chase”; it could just sit their.
June 5th, 2009 at 12:29 pm
If you read Barry Ritholtz or Calculated Risk, you’d know that David Lereah, and now Lawrence Yun, are so full of crap it is surprising it is not coming out their ears. They are paid to lie by the NAR.
June 5th, 2009 at 12:33 pm
Re #5 (JHHugo): A lot of good that bit of far-sightedness did for the Ann Arbor News!
June 5th, 2009 at 12:35 pm
Cause and effect is key here.
Getting a mortgage depends on funds being available to borrow. Securitization made those funds available. Banks could securitize mortgages, then buy CDSs or obtain AAA ratings which allowed them to not reserve against them and thus increase profit. The lower the quality of the mortgage, the higher the interest income – so banks encouraged risky loans.
The need for more mortgage loans to support ever more income (and thus bonuses) drove brokers to sell ever riskier loans.
June 5th, 2009 at 12:36 pm
If the Fed doesn’t monetize the debt and we actually run deficits the way we are projecting, the issuance of government debt is literally going to suck all investable funds out of the stock, commodity and housing markets.
I see this as unlikely.
The banks are controlled by the government, so there can not be a failure in those debt auctions and the banks will have to make it happen regardless of what it does to asset value
Actually the banks control the government. The new financial regulations will be where the rubber hits the road.
June 5th, 2009 at 12:36 pm
Lereah’s been a contrition tour as of late. I hear about him every so often in Southern California, because he was so widely quoted by the Real Estate Industry, and the Land-Grab Morons believed in his lies. Agents and Brokers used to hand out that book at open houses.
June 5th, 2009 at 12:42 pm
It looks like it hasn’t been updated for a couple months, but there’s a David Lereah Watch blog. Some nice links there to Lereah’s backspinning.
June 5th, 2009 at 12:48 pm
Shouldn’t that Headline read, “The Anals of Publishing?” ‘Cause that author sure looks like an ass now.
That particular book slipped past my attention, but I’ll be saving the link to show people, right next to my 2005 Money Magazine edition dedicated to “How Real Estate Really Builds Wealth” My guests always get a kick out of that one when I pull it out (probably because my guests are all too young to have lost their life-savings in the housing crash).
With “experts” like these, how could we have possibly gone wrong?
June 5th, 2009 at 12:55 pm
Sure it’s embarassing in a general sort of way, but does he go into detail like Kudlow, claiming the best places to invest are S. Florida S. California, and the greater Phoenix and Nevada metro areas?
June 5th, 2009 at 12:57 pm
DTM says: I think what you meant is that house prices should generally track incomes, as opposed to increased debt-to-income ratios.
This point is not stressed enough.
June 5th, 2009 at 12:59 pm
It’s no Dow 36,000!
June 5th, 2009 at 1:03 pm
I hear the argument that this crisis happened because of some sort of fundamental imbalance in the economy, but you looked at what actually happened it is clear that the financial crisis is due to the specific actions of the large investment banks.
Basically the banks figured out you could fraudulently* pass off bad debt as good debt using CDOs and cutting the debt up into different tranches. On top of this they also started making CDSs on this bad debt which had the double benefit of making the debt look even safer since they could pass the CDS off as a type of insurance, (even though this “insurance” was not backed with anything near the necessary reserves), and allowing unchecked speculation and leveraging on top of everything else.
If this had not happened, not as many loans would have been made, the loans that were made would have had more realistic rates and the banks would not have been leveraged out the ass. And of course the worlds financial system would not have fallen apart. There probably still would have been a recession but it would have been on the same scale as recessions of the past 30 years.
I agree that there were imbalances in the global economy between different nation’s consumption and debt loads, and that they were not indefinitely sustainable. However these imbalances are not the fundamental causes of the present financial crisis, and to claim that they are is to let the guilty parties get away scott free.
*I’m using fraudulent in the general sense of “misleading in order to profit”, I have no idea if the actions of the banks meet the definition of legally fraudulent or not.
June 5th, 2009 at 1:12 pm
Golly, who woulda’ thunk that a chief economist at Fannie Mae woulda’ given a blurb to a book written by the Realtors’ chief economist, a book which stated that a bubble in single family housing could inflate forever?
Speculative bubbles are bad enough without the Federal Government actively promoting their formation.
June 5th, 2009 at 1:19 pm
Note Berson, the Fannie Mae chief “economist” agreed with Lereah. Tells you a lot about why Fannie Mae became another taxpayer sink hole.
June 5th, 2009 at 1:28 pm
afu, I don’t disagree per se, but the investment banks were following the lead of Congress. A residential real estate loan, with a tiny to non-existant downpayment from the borrowers, is an inherently speculative instrument, no matter the characteristics of the borrower, since the loan quality greatly hinges on there not being a downturn in value. There has been a decades-long trend by which Congress, primarily through the GSEs, has encouraged higher and higher loan to value ratios on larger and larger mortgages. What we saw in the last decade was simply the logical culmination.
June 5th, 2009 at 1:29 pm
And yet….I wish I’d been able to dump my 401(k) into buying a second house in my current neighborhood in 2006. House prices here are roughly even, and my 401(k)’s down…well…let’s not talk about it.
June 5th, 2009 at 1:45 pm
afu, as far as a reasonable chance that actual criminally fraudulent behavior has occurred, I think some of the internal memos that have been leaked from the ratings agencies point in that direction. I am not a conspiricist by nature, but I wonder if Berkshire Hathaway’s stake with Moody’s has protected all of the ratings agencies.
June 5th, 2009 at 1:58 pm
investment banks were following the lead of Congress
Yes, poor unsophisticated Lehman Brothers tricked by Congress. I think it was Barney Frank’s fault.
June 5th, 2009 at 2:03 pm
Why must people misrepresent what others have written? Is dishonesty really so gratifying?
No, sophisticated investment bankers took advantage of a speculative opportunity created by Congress. Congress should not be creating speculative opportunities.
June 5th, 2009 at 2:10 pm
The problem with Lehman Brothers is that they were too opportunistic. Same for AIG. This is proof that Congress messed up.
June 5th, 2009 at 2:26 pm
Yes, the proof that Congress messed up is that they had the expectation that investment bankers would not behave like investment bankers, and that regulators would not come to adopt the attitudes of those they are charged with regulating, as when the SEC delivered an unanimous, bi-partisan ruling that allowed leverage to be increased to 40-1.
Congress behaves really stupidly and/or corruptly when it creates huge speculative opportunities, and then expects to head off the worst aspects of speculative excess via regulation. Dumb and/or crooked beyond belief.
Congratulations for posting without an outright lie, by the way.
June 5th, 2009 at 2:30 pm
Congress should not be creating speculative opportunities.
But sophisticated investment bankers told them it was a great idea, and made generous campaign contributions to emphasize the point.
June 5th, 2009 at 2:35 pm
Yes they did, Chris, as did the GSE management. In a semi-defense of investment bankers, the creation of secondary market for residential real estate loans with ever smaller downpayments on ever larger mortgages was not originally their idea.
June 5th, 2009 at 2:39 pm
Yes, the proof that Congress messed up is that they had the expectation that investment bankers would not behave like investment bankers, and that regulators would not come to adopt the attitudes of those they are charged with regulating, as when the SEC delivered an unanimous, bi-partisan ruling that allowed leverage to be increased to 40-1.
If what you say is true I would put the blame on the investment bankers and politicians who appoint easily-capturable regulators, i.e. Republicans for the most part. Not the “government.”
June 5th, 2009 at 2:51 pm
Yes, Poptarts you would do this because you are ignorant of the history of regulation. I will again point to the unanimous vote of the SEC to allow the investment banks to increase leverage to 40-1. The chairman of the SEC at that time later declared himself to be an Obama supporter. You may wish to examine, oh, say, lil’ Chuckie Schumer’s voting record.
The notion that Congree can create speculative opportunities and then effectively regulate them is utterly ridiculous. To embrace that notion is to be uttery disinterested in observing how Congress behaves.
June 5th, 2009 at 3:01 pm
This is an interesting new spin on the free market, where business opportunities are created out of thin air by politicians, who are then incapable of properly regulating market actors.
June 5th, 2009 at 3:10 pm
Barbar:
This is an interesting new spin on the free market, where business opportunities are created out of thin air by politicians, who are then incapable of properly regulating market actors.
In some cases counterintuitive theories turn out to be correct, but in this case it’s counterintuitively incorrect.
June 5th, 2009 at 3:10 pm
Well, it would be a spin on the free market, if it was not a market which would not exist absent Congressional action. Free markets refers to exchanges of value between people who would engage in them without any government action. That doesn’t refer to secondary markets in mortagages with small to nonexistent downpayments.
June 5th, 2009 at 3:13 pm
“Shouldn’t that Headline read, “The Anals of Publishing?” ‘Cause that author sure looks like an ass now.”
What’s funny is that there was a non-trivial chance that that’s what Matt would write.
June 5th, 2009 at 3:19 pm
Ridiculous. Free-market arguments do not depend on “zero contamination” by government action. Corporations don’t exist without government action, for example.
From the point of view of a financial institution buying or selling financial instruments, the ultimate origin of the underlying assets is irrelevant. Underwriters have a job, to evaluate risk. The idea that they can’t possibly do their job if the government played any role in creating the risk is nonsense. Risk is risk. This “government cooties” argument is truly absurd.
June 5th, 2009 at 3:22 pm
Will Allen, we’ve been around this merry-go-round a few times, but I still find it odd that your entire narrative of the crisis, in which the GSEs are primarily to blame, rests upon this point:
“In a semi-defense of investment bankers, the creation of secondary market for residential real estate loans with ever smaller downpayments on ever larger mortgages was not originally their idea.”
How, exactly, can one believe in the innovative power of markets, fully appreciate the disastrously creative mechanisms used by financial firms and ratings agencies to pass mortgage-backed debt around like pandemic flu, but simultaneously believe that no one in the private sector would have invented the secondary market for residential real estate loans if Fannie and Freddie didn’t exist.
Particularly given that the “ever smaller downpayments on ever larger mortgages” part of this scenario was largely pioneered by private-sector firms with the GSEs and their corrupt friends on the Hill mostly playing catch-up.
Seriously. The corruption of the GSEs was a contributing factor to the crisis, and the secondary real estate market might not have hit the scene until the 1980s, but it strains credulity to suggest that this mess would NEVER HAVE HAPPENED in a market unsullied by government regulation or intervention.
June 5th, 2009 at 3:25 pm
Barbar, you tend to hallucinate. For example, you read the letters “CRA” where they do not exist. Now you appear to be hallucinating that something in your last post bears a relationship to something I’ve written. It does not.
June 5th, 2009 at 3:35 pm
We have financial institutions that are supposed to manage risk and allocate capital properly. They apparently did not do so.
In this thread you write:
1. the investment banks were following the lead of Congress
2. Congress should not be creating speculative opportunities.
3. the proof that Congress messed up is that they had the expectation that investment bankers would not behave like investment bankers
4. In a semi-defense of investment bankers, the creation of secondary market for residential real estate loans with ever smaller downpayments on ever larger mortgages was not originally their idea.
5. The notion that Congree can create speculative opportunities and then effectively regulate them is utterly ridiculous.
6. it would be a spin on the free market, if it was ot a market which would not exist absent Congressional action.
Your point is that Congress started it. But Congress did not force financial institutions to do anything. Your “semi-defense” thereby misses the mark badly. If financial institutions cannot manage risks generated by a market created partly by the government, then what sorts of risks can they manage? Apparently none at all.
Here I am again, trying to explain to a moron why he is dumb. It never seems to work.
June 5th, 2009 at 3:50 pm
Ah the idiot Will Allen blames the failures of the market on the Federal Government, wow, there’s a shocker. A free-market fundamentalist can never see when their ideology has failed, only that it has been failed.
But at least it is better than his cheerleading for mass murder.
June 5th, 2009 at 4:17 pm
Seriously. The corruption of the GSEs was a contributing factor to the crisis, and the secondary real estate market might not have hit the scene until the 1980s, but it strains credulity to suggest that this mess would NEVER HAVE HAPPENED in a market unsullied by government regulation or intervention.
Will Allen has a point about the economist of Fannie Mae writing the blurb for this book. “Not as Stupid as Will Allen” can grant him that.
June 5th, 2009 at 5:19 pm
In a semi-defense of investment bankers, the creation of secondary market for residential real estate loans with ever smaller downpayments on ever larger mortgages was not originally their idea.
That’s not much of a defense. Wasn’t it their job to see that it was a bad idea, given that in fact it *was* a bad idea? And even to refuse to participate in it? So did they lack the competence to do their job, or did they correctly conclude that they could collect huge bonuses until the market collapsed?
June 5th, 2009 at 5:24 pm
Babar, when financial institutions were managing risks, absent government incentives to engage in certain activities, they generally did not make home loans with tiny to non-existent downpayments, because underwriters, who you appear wish to be underwriting, determined that such loans were inherently too speculative. Congress decided that they didn’t like the underwriters behaving in this way, so it created entities which made sure that underwriters didn’t underwrite adequately with regard to loan to value ratios.
Over time (by the way, a secondary market in residential real estate loans goes back to the 1930s, although the underwriting really didn’t take a sharp downturn until about 20 years ago) those entities became ever more lax with regard to loan to value ratio, mortgage size, the relationship of those two elements to income and credit history, etc. Those entities did this because Congress told them to, and Congress was receiving large campaign contirbutions from those entities, while those entities were managed by people who paid themselves huge bonuses.
Investment banks, now observing a giant speculative market created via government action, decided to speculate some more. Morons like you are surprised by this, and think that Congress can encourage speculation on one hand while getting, via regulation, just the right amount of speculation. Four year olds believe in Goldilocks, and adult imbeciles like yourself believe in regulation occurring juuuuusssssst right. Regulation is hard, espcially over time, which is why it is dumb for government to create speculation where it had previously not happened, and then try to regulate it.
It takes an imbecile of titanic preoportion, or a dishonest hack, to look at this chain of events, and conclude that it is an example of a free market run amok. It is akin to saying that cost overruns in defense contracting are due to the limitations of free markets.
June 5th, 2009 at 5:47 pm
chris, people tend to pursue what they have incentive to pursue. There is a real principal/agent problem in publicly traded corporations, wherein management’s incentives are not aligned with shareholders’. It is a damned difficult problem to solve without large unintended negative effects.
It is really, really, really (really) stupid for government to encourage speculation where it does not already exist, for speculation is usually something that is not in in the interests of shareholders, but can deliver huge compensation for management.
June 5th, 2009 at 6:01 pm
In other words, investment banking is just a really bad idea — it’s all just speculation — and it’s the government’s fault for allowing investment banks to do stuff. If only we had a free market!
June 5th, 2009 at 6:08 pm
Or, I’m Still Making Money Off You Suckers.
June 5th, 2009 at 6:28 pm
Re: And people were able to go into debt because of rising asset price values.
I am skeptical about this. Were homeowners more likley than other people to run up their credit card debt? Aamong my own circle of acquaintances that doesn’t seem to have been the case. To the extent people took on debt voluntarily (not because of job loss, medical bills etc) it seems rather that most of them were expecting their income to grow enough to support that debt– they’d get a bonus or a raise, or find a better paying job, marry someone with a good job, inherit something when their aunt died, even win the lottery.
June 5th, 2009 at 8:31 pm
Really, Barbar, if you can’t read, why do you visit this site?
June 5th, 2009 at 9:46 pm
Will, the fact that I can summarize your points and make them sound remarkably stupid is a reflection on you, not me. You are saying that investment banks simply cannot be relied upon to manage risk, because they are short-sighted speculators. So the natural takeaway is that the real villains are politicians who contributed to financial innovation (at least seven comments in this 50-comment thread making that point).
You know, because if the government hadn’t created Fannie Mae in 1938, then there would just be no way for investment bankers to do any damage. I mean, they’re complete morons with bad (free-market) incentives and the ability to amplify a housing bubble into a global financial meltdown, but only the government could trigger a disaster.
June 6th, 2009 at 2:14 am
No, barbar, I didn’t say that at all. You hallucinated it, as you frequently hallucinate about the CRA, Barney Frank, and many other things. You are out of your mind, I fear.
Look, if you to fantasize about a world where people can be “counted on” to ignore incentives, and do what you prefer to “count on” them to do, 100% of the time, which is the rate required to prevent catastrophe, you just go right ahead. It’s as nuts as the rest of your posts, after all. Meanwhile, in the world people actually live in, it is extremely well advised to pay very close attention to what incentives are created, and how large those incentives are, because as sure as it is that you will babble pointlessly, real, live, human beings will tend to, over time, pursue the large incentives which have been created, quite often regardless of the potential danger to others.
Investment bankers can cause all sorts of trouble, as people in nearly every profession on earth can. Which is precisely why it is a very bad idea to give anyone extra incentive to do that thing that one wishes will be avoided.
June 6th, 2009 at 2:24 am
By the way, you might want to clear something up, in that void which is your mind. Above, you seemed to indicate that you had the expectation that underwriters at financial institutions would, well, underwrite, and thus assess risk sensibly, and adopt policies accordingly. Now, you call it “financial innovation” to take action which modifys the risk assessment underwriters have developed, and thus increase systemic risk. What do you want, sound underwriting, or what you call “financial innovation”?
June 6th, 2009 at 12:27 pm
I was struck by how the Will Allen against the world arguments developed.
Will Allen has determined that the current financial meltdown is the logical (thereby predictable) culmination of government intervention, in the form of “incentives” and that’s that.
The wonk-fest that followed is dependent on accepting the possibility of his ridiculously simplistic premise being true. The entire financial system was built and on, and is dependent upon continuous government intervention in the form of various “incentives.” You may as well be arguing against someone blaming the fucking 5th fleet for enabling Wall Street’s lesser but oh so human instincts. After all, if pirates terrorized the shipping lanes, cheap imports wouldn’t be cheap and China wouldn’t have had the money to sponsor the GSE’s wicked incentives.
Once you comment on the make-up or capabilities of the Navy, you’ve opened the door to arguments that appear reasonable.
June 6th, 2009 at 4:12 pm
KLS, yes, in your tiny little mind, this forum comprises “the world”. I know it strikes you as simplistic to say that when the government strongly encourages reckless gambling, lots of reckless gambling will tend to take place, so it is best that the government not encourage reckless gambling. It takes a simple mind to get as far as you have. Congratulations.
June 6th, 2009 at 5:55 pm
It’s utterly pointless, KLS; you’d have a better chance of educating a brick wall. That Allen thinks he’s smarter than everyone else can only be explained by his stupidity, but you have to just smile and move on with your life. Time is limited.
June 6th, 2009 at 6:56 pm
Will,
You’re nothing if not consistent. As to your point, yes and again, if pirates infested the open seas, the price of imports would undoubtedly rise. Both statements are fairly self evident, unfortunately, the larger conclusion you attempted to extrapolate from yours is evident only to yourself. But cheer up, maybe you can find a typo and unleash your rapier-like wit, or summon your inner 4th grade teacher for some fresh and entirely laughable ad hominem.
Barbar,
Duly noted and thanks, I’m moving on.