Did the US suffer from a giant Housing bubble?

Not exactly.

In his column this morning, Floyd Norris points to a data point that confirms our long standing argument that the bubble was actually in Credit, not housing. Namely:

“During the great housing bubble boom, it was the least expensive homes whose prices went up the most. And now it is those homes that are suffering the most.

That is where the most creative lending was,” said David Blitzer, the chairman of the index committee at Standard & Poor’s, arguing that the lax lending standards played a significant role in the inflation of prices.” (emphasis/editing added)

Of course, “Lending” is just another word for credit.

This is consistent with what you would expect from a credit bubble. The higher end homes — often purchased for cash, or with a very substantial down payment — appreciated the least in percentage terms.

The abdication of lending standards during the 2002-07 period had three significant factors in terms of impacting the housing market:

1. The impact of the credit bubble was to allow millions of marginal buyers to enter the housing market. These were borrowers low to middle income borrowers, who under normal circumstances, would not qualify for a mortgage.

2. The homes they purchased were in the bottom quartile (and often bottom tenth) of prices.

3. The credit bubble caused a massive dislocation — to prices, sales volume, even  rental vacancies.

Thus, it is not a surprise that the housing sector most dependent upon cheap abundant, indiscriminate lending suffered the most when credit standards reverted to normal.

The data continues to support this thesis. The boom and bust, the price collapses, the underwater homes, and of course, the Foreclosures, are most heavily concentrated in the lower priced homes.

And with the removal of temporary tax credits, lower cost home prices have fallen even further. This week’s Case-Shiller index showed widespread declines in the prices of lower-value homes. Indeed, prices of lower-cost homes have fallen further from the peak in 16 areas tracked by Case Shiller.

And as RealtyTrac noted, the overall housing market is still “gloomy:

• 25% more homes were foreclosed in Q3 vs Q2

• Nonforeclosed homes saw a sequential quarterly sales decline of

• $169,523 is the average sales price of foreclosed properties — 32% below the average for nondistressed properties

• 54% of Nevada home sales were foreclosures in Q3 — worst in the nation
(Source: RealtyTrak, Barron’s)

As goes the low end of the market, so goes all of housing . .  .


click for ginormous graphic

Chart courtesy of NYT


Value Sinking Fastest on Homes Priced Low to Start
NYT, December 3, 2010

Category: Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “More Proof: The Bubble Was in Credit, Not Housing”

  1. foosion says:

    It was both a credit bubble and a housing bubble.

  2. foosion:
    One led to the other, so at root BR is right.

  3. In the US, there were a few selected housing bubbles in a handful of places — California, S Florida, Arizona, Vegas. In the rest of the country, Housing had become an extended asset class, but not a full blown bubble . . .

    The true bubble was credit — caused by ultra-low rates, the abdication of lending standards, new lend-to-securitize business models.

  4. KJ Foehr says:

    Yes, but I thought we have known this since 2008. The underlying problem has been American’s addiction to credit for decades. House prices were only a symptom of that addiction.

    It started, imo, or at least was greatly exacerbated in the ‘80’s (or thereabouts) when the consumer interest tax deduction was eliminated. Gradually an evolution occurred over the next 25 years to people financing consumer purchases via home loans (HELOCs, refinancing, etc.) to still get the tax deductibility of interest paid on purchases of all sorts of consumer goods. This eventually became known as the housing ATM.

    I think the economy has always been tied to the expansion of credit to a certain extent. But there are limits to economic growth dependent on credit expansion, and we reached one such limit circa 2006.

    The second piece of the puzzle is having something to buy with the credit. And that is the problem now. Even as rates are lower and banks are lending, at least a little more freely than in 2008, there is no great engine of consumption / investment to make people want to borrow more. Housing was the last great engine because of interest deductibility, low interest rates generally, and then the bubble mentality of greed that kicked in after the 2001 mini-recession and drove us to housing bubble proportions. (Therefore, we really had two bubbles: an overarching credit bubble, and a secondary, smaller, housing bubble driven by the larger expanding credit bubble.)

    Further, companies don’t want to borrow at high enough levels to be the engine of growth now because supply side economics and globalization over the past 30 years has resulted in excess capacity worldwide, and a decline in exports and a significant loss of high paying jobs here in the US. There simply is not enough need / demand for corporate capital investment in a world of underutilized capacity.

    The result? Stagnation and 9.8% unemployment as far as the eye can see.

    Even easy credit and fiat currency from helicopters won’t restore the glory days now. Happy Holidays!


    BR: Credit has been expanding rapidly since the 1950s.

    The 1980s credit expansion might have been exaggerated by the falling rates, an improving economy, and a new bull market in stocks.

  5. foosion says:


    The credit bubble led to the housing bubble, but BR is saying there was not a housing bubble:

    >>our long standing argument that the bubble was actually in Credit, not housing>>

    notice the “not” before “housing” :-)

    Perhaps BR could clarify

  6. Bruman says:

    To some extent, the point is moot. Mortgages form somewhere around 75% of the entire credit market (at least for consumers), so a bubble in credit basically turns into a bubble in housing.

    Another key issue is that mortgages are one of the few areas where the ordinary consumer can get 5-1 leverage fairly easily… and this leverage rose to 10-1 to (theoretically) infinite, as down payments went to 10% and then finally 0%. So people who were never really taught about leverage got to play with enormous quantities of it, fueling consumption, etc.

    Finally, taking a look at the historical evolution of the credit bubble, the instruments developed to package and securitize debt started in the mortgage market, and then spread to other kinds of markets, autos, revolving debt, etc..

    So yes, it was a credit bubble, but it pretty much started in the mortgage market, causing a housing bubble.

    But great data, and a good way to force us to think clearly. :-)

  7. Fred C Dobbs says:

    The argument in this post is based purely on definitions, things defined in such a way to support the argument. Everyone is right. It was a housing bubble, and a credit bubble, one term does not exclude the other, but it was more than both. The ‘crisis’ was criminal, and lacked any rational basis. You or I would go broke quickly if we lent money to anyone who had no visible means of paying it back on time and as agreed. If we did, it would not be a ‘loan,’ it would be a ‘bet,’ and only the foolish will bet their hard-earned money on the possibility that your borrower may or may not have the ability and the desire to repay your loan at an agreed time in the future. Debt used to be something everyone, even the common man, feared, owing to interest compounding relentlessly and the lender having to collect the loan as a matter of self-preservation. See, for example, Hamlet, written more than 400 years ago, containing the admonition to ‘neither a lender nor a borrower be.’ BR went to a prestigious law school and sure knows the whole thing was a criminal enterprise. It is criminal from the borrowers standpoint for a lender to knowingly lend money on the security of their residence, knowing the borrower will have to default and lose his home. It is an indirect theft of the borrower’s equity. From the standpoint of the lender whose agent lends money to someone who can’t pay it back, it is a criminal gift of the principal’s funds. The whole thing was supported by dishonesty, cold-blooded dishonesty at every level, including the government overseers such as Dodd, and Frank, and those who oversee them. There is no way any of them from top to bottom, from the guy who filled out the loan application to the president of the lender or the regulators or Congressmen and Senators, if placed on a witness stand could truthfully defend the entire scheme and testify that the loans were made rationally and legally. As for the bust, BR fails to note that the bubble included excessive construction loans to merchant builders to overbuild product that, to sell, they had to participate in criminal lending.

  8. foosion says:

    Large lenders who mess up very badly must be bailed out, else we would be deprived of their valuable expertise. By large lenders I mean both the institution and the relevant individuals.

    Loaning to people who can’t pay back the loan is innovation, not a crime as some suggest. Just ask Alan Greenspan.

    Next you’ll tell me GS bankers don’t deserve billions in bonuses just because GS would have gone bankrupt without government help and that Irish citizens shouldn’t pay 10% of GDP to prevent German bankers from losing money on loans to Irish banks. Only a socialist would think such things.

  9. Matt SF says:

    Well said BR. Can’t have a real estate bubble without the (creative) financing to buy the real estate.

    I’ve seen a similar chart, believe from the NYT, that showed a credit bubble prior to the Great Depression. Would be a nice correlation for any supporting thesis to this post.

  10. obsvr-1 says:

    Yes indeed don’t forget the underlying fraud and criminal activity perpetrated by the FIRE industry (well said Fred C Dobbs).

    What we have left is the deflation of the house value bubble and the exponential increase in the debt bubble. The later needs to be deflated (restructured) before we can get to a healthy recovery.

  11. MayorQuimby says:


    Yes yes yes and it has only partially deflated/collapsed.

    Ben is attempting to keep inflation rising FROM the PEAK of the bubble. He’s attempting to keep credit expanding.

    All that will result is Buffet’s net worth will double and he will park that wealth in Treasuries which the increasingly poor workers won’t be able to service interest on so Ben will print money to create the appearance of solvency when in fact the entire country and system is bankrupt.

    Eventually the bond market will sell-off and the cost of doing business will rise precipitously into crumbling housing prices, higher corporate borrowing costs, much higher unemployment and starvation for millions out of work.

    So….Happy holidays everyone!

  12. constantnormal says:

    waddya mean, WAS in credit? Don’t we still have near-zero Fed rates?

  13. constantnormal says:

    And leverage — has it been reduced out in the financial world?

  14. MayorQuimby says:

    The truth is right here:


    USA has ALREADY defaulted – 2+ times!

  15. formerlawyer says:

    What about Japan? I seem to recall, theirs was a “land bubble” where land values in Tokyo and the rest of Japan were skyrocketing. One effect of which was to see Japanese buy up land in California and Hawaii.


    BR: Japan has a very different economy (export based) corporate structure (Keiretsu based) and different bubble context

  16. qed says:

    Buying a house was the only choice for many subprime borrowers as they didn’t qualify for renting a home (nor a car)

  17. Joe Friday says:

    “That is where the most creative lending was”

    That is where the most PREDATORY lending was.


  18. Andy T says:

    @KJ Foehr

    Agree with all that. Well stated. Imagine that we allow big deductions on Home Mortgage Interest and it incentivizes people to take on more credit? Who could’ve know’d!?!

    Then in the later 1990′s Clinton essentially eliminated capital gains on most home sales. Amazingly, that incentivized people to get bigger exposure to housing. Who could’ve know’d!?!

    The other piece of “tax law” that was changed in the early 1980s was the 30% Withhold Tax on Interest Paid to Foreign Investment (1984). This really opened the flood gates for foreign investment in Fannie/Freddie debt who were attracted to the superior “risk free” returns with the implicit USG guarantee.


    It’s very easy to blame “easy money” and “easy credit,” but let’s face it….we’ve got some lopsided tax laws in the U.S. that greatly favor homeownership and “investment” in homes. We’ve wasted hundreds of billions of dollars pumping up a sector of the economy that PRODUCES very little. Homes are a depreciating asset and produce no real economy yield.

    Oh well….


    BR: You are drawing a correlation-based conclusion that is unsupported. We had the mortgage deduction for a century, without a credit bubble. Only once we abdicated lending standards did we end up with a credit bubble.

    There is a tendency to blame pet issues that have existed for decades without problems. No, it was not the mortgage deduction, nor the CRA, nor the Iraq war or Barney Frank that caused the problems.

    In order to demonstrate some causality, you must show an input, a mechanism for transmitting that input, why X begat Z this time instead of Y. There needs to be a logical explanation of what occurred.

    Not only do you need to prove the positives — “X caused Y” — but you must also explain the non-correlated negatives “No X but Y anyway.”

    The Home Mortgage Interest deduction fails all these tests.

  19. Andy T says:

    @qed 12:59 pm

    “Buying a house was the only choice for many subprime borrowers as they didn’t qualify for renting a home.”

    What are you talking about? I don’t understand that comment at all. Can you please give a single example of someone that could NOT rent a house but could buy a house?

    I think what you might be suggesting is that due to very cheap credit on the front side of the loan, it was “cheaper” for people to buy than to rent an equivalent-sized home. Thus, subprime borrowers made the economic decision that it was better to own than rent. That’s a much different statement then suggesting someone couldn’t “qualify” to rent.

  20. kmckellop says:

    More importantly, I think the fact that people are beginning to understand that this is a multi-generational credit bubble (which continues to contact, deflate). To me this indicates that we are quickly approaching what Robert Prechter Jr. has termed ” the point of recognition”.

  21. redline21 says:

    Although the credit boom is related to more than just low interest rates, this finding shows that lending and lower interest rates were not correlated.



    BR: I frequently find myself disagreeing with Tyler Cowen (Recall his column “Predatory Borrowing Is The Bigger Problem”).

    IMO, that reflected a misunderstanding of bank lending in general, the fiduciary obligations of lenders, and historical credit/lending standards. He also kinda missed the entire Lend-To-Securitize Business model.

    I am always cautious with economic analysis of the Chicago School, and indeed, any ideology. Avoid the Kool Aid drinkers . . .

  22. rudy d says:

    I certainly agree with the argument but have a problem with using the fact that low-end housing gained more than high end to support it. The law of diminishing returns would also seem to be at play. A low-priced house has a lot more room for appreciation than an already high-priced house.

    As prices have declined, low-end houses may have lost more in percentage terms but the high end may have lost a lot more in actual dollars. Obviously, a 10% decline in value of a $500k home exceeds a 30% decline in a $100k home in actual dollars that have evaporated.

  23. Christopher says:

    So can someone explain why Alan Greenspan is still pulling down six figure appearance fees these days??

    In a sane country he would be burned in effigy and banished from society.

    I’d happily tie the sonofabitch to 4 horses and draw and quarter him over some broken glass….
    But I’m theatrical like that….

  24. Christopher says:

    There was never a “bubble” out here in flyover land.
    However there were pockets of residential developers overbuilding….hard to blame them really….

  25. MayorQuimby says:


    Yup. Then again – I want him to see the destruction he’s wrought first hand and then croak.

  26. MayorQuimby says:


    Ahem….what is a”lending standard”?


  27. qed says:

    @ Andy T
    In order to rent a house or lease a car you had to provide proof of income for buying a house you did not. You could just state it or lie

  28. formerlawyer says:

    This paper would seem to set out some of the Japanese “bubble context”:


  29. cognos says:

    BR – your first comment above is 100% incorrect. The credit environment was simply a minor side effect of the world wide real estate bubble. You seem ignorant to the level, magnitude and pervasiveness of real-estate specualation in the 2000-07 period. There are many $10B plus winners from this period. Literally hundreds of $1B level winners. A number of these were started with relatively minor investments and fortunes were made in under 10yrs.

    Dot-com redux. It’s will happen again shortly. Classic human behavior pattern.

    Over-extended credit is a consequence of successful asset price appreciation. Right? Leverage works, so more people want it, those willing to extend credit now, and until the late part of the cycle simply print money. Very few people seem to be able to think counter-cyclically. Regulators, politicians, and the sheep-like masses are the worst afflicted.

  30. cognos says:

    I have to comment again. This article has just zero factual basis.

    Diversifed investments in credit, high-yield credit, and mortgage credit have done fine over the last 10yrs.

    If diversified investors over the entire 10yr period have earned 5-8%, doesn’t it seem that credit was fairly priced?

    You guys seem to live in a world of “should”s. Sometimes investments lose money. Sometimes there is a boom. Sometimes a bust. It has all happened 100x before and will 100x again. Each time, it’s different.

  31. farmera1 says:

    The root problem is debt. Notice how the graph peaks in the early thirties and then drops to a relatively low level all the way to 1980s then goes parabolic.

    Notice the debt/gdp peaked in the early 1930s.

    The subprime crisis term was a branding exercise. How else you gone to blame the collapse on Fannie, Freddie, CRA and those lowly scum subprime borrowers.

    Here is a more current graph that doesn’t go back only to 1946.

    Bill Gross has included this graph in some of his writings; just couldn’t find it.

  32. Andy T says:

    BR@1.55 comment:

    It’s always interesting to see the rhetoric one uses to retort a statement or an argument. For instance, you wrote this:

    “There is a tendency to blame pet issues that have existed for decades without problems. No, it was not the mortgage deduction, nor the CRA, nor the Iraq war or Barney Frank that caused the problems.”

    What’s fascinating is that I never mentioned the CRA or the Iraq War or Barney Frank or any “pet issues.” In fact, I’ve never once written that the CRA was responsible for anything–it’s a bullshit issue. So, basically, you threw that statement at me in order to “put me in the same box” as those who bring up the bullshit issues.

    Here’s the crux of the deal:

    In regard to Fannie Mae/Freddie Mac….

    The fraction of TOTAL outstanding home mortgage debt that was either held or guaranteed by the GSEs (known as their “total book of business”) rose from 6% in 1971 to 51% in 2003. Book of business relative to annual GDP went from 1.6% to 33%.

    Those are facts. GSEs, with implicit government guarantees, grew their mortgage business from 1.6% of GDP in 1971 to 33% by 2003. If you cannot understand how those credit pushing behemoths, backed by the USG’s policies to support home ownership, were not responsible for home price appreciation throughout the 1980s and 1990′s, then I’m not sure what else can be said here. It seems “obvious.”

    Yes, there was predatory and reckless lending in the middle-2000s that created the “blow off” top in the housing bubble. No doubt about that! But, IT’S ALWAYS the dumb money that comes in at the end of a bubble. Government policies, favorable tax treatment for homeowners/speculators, favorable tax treatment for foreign investors who lent money to FNM/FRE, and Fannie/Freddie themselves laid the ground work for a massive housing bubble. The idiot lenders/borrowers added the extra juice that blew it out in the tail end.

    In regard to this statement from your thread:

    “Floyd Norris points to a data point that confirms our long standing argument that the bubble was actually in Credit, not housing.”

    If an average household’s largest percentage of debt is the mortgage note, then what is the distinction between a credit bubble and housing bubble?

    I agree that the term that we should all be using is “credit bubble.” But, the housing debt is the single largest component of the consumer’s credit bubble and home price appreciation (ponzi economics) was a driver in the creation of other consumer credit.

  33. Expat says:

    Is there really a debate on this? In December 2010? Any other fresh, breaking news like “Japanese Attack Pearl Harbor”? Or “CONFIRMED: Earth oribts Sun, not other way around!”

    The credit bubble was responsable for inflating all assets prices including houses. Houses were different from other assets, though, in that housing was turned into a credit generator itself, reinforcing the underlying bubble and reinforcing the feed-back loop on house prices. But let’s face it, it was all one huge credit bubble which inflated everything.

    Today we are still inflated, and Bernanke and Geithner are manning the pumps night and days to overcome the leaks. Unfortunately the fresh injections are making noise at the margins and given rise to an appearance of wealth creation rather than real growth. Rising stock prices are not an indication of anything other than higher valuations of stocks.

    This marginal pumping is also finding its way into the third world, Asia and the Middle East where small amounts of cash have a very signifigant effect on local economies. Take, for example, Singapore where the “miracle” continues. Well, real estate prices are sky-rocketing anyway. Why? Because of hot money from massive Chinese “printing” and US “printing”. Ten billion in the US economy is pointless; ten billion in Singapore adds 2% to the cost of a new condo.

    And while I am ranting, can we please stop moaning about the Irish. They now owe about €30k each. big furry deal. That is nothing compared to the high life they lived for fifteen years as they enjoyed the bubble. Seriously, it’s a joke. People are acting as if the Irish are losing real wealth.

  34. BennyProfane says:


    “The higher end homes — often purchased for cash, or with a very substantial down payment — appreciated the least in percentage terms.”

    Do you have data here? I find this very hard to believe. Yes, the lower end is displaying a more pronounced curve, but, really, sounds like somebody is making the same old assumption that the people with some money were smarter. I don’t think so. Have you seen how some of these “high end” properties are being sold for half of ’07 asking prices these days?