Here it is. From early 2007 to the present, delinquencies have followed price with about a 6 to 12 month lag, even falling with the same lag and scale as prices have rebounded.
|Source: Calculated Risk|
So, during previous housing downturns, inflation was around 5%, so nominal home prices remained level. Yet, in this downturn, the Fed wouldn't give us any inflation. Core minus shelter inflation (estimated here by treating shelter inflation as 40% of core CPI and subtracting it) had not been persistently above 2% since 1997. By the fall of 2007, it was down to 1.0%.
In the next graph, there are more general real estate delinquency measures that go back far enough to compare to the 1991-1992 episode. They didn't reach the peaks of that period until the end of 2008 or 2009.
Yet, we describe this period as one where reckless lenders were bailed out by the Fed? This narrative was already in place. It would have been the Fed's job to create stability. But, the country basically has the position (and here I can really say "we" - practically everyone seems to feel this way) that, "If the Fed does it's job, how will we ever learn?". And, again, I truly mean "we". Several people I know who firmly believe this bought homes in the 2004-2007 time frame. These are smart people. And, as I have tried to show in other posts, the prices they paid were reasonable, given their investment alternatives.
So, first, delinquencies didn't come any faster than they had come before. And, second, home prices were orders of magnitude outside any previous experience before banks began to have widespread problems.
Bear Stearns had to extend credit to two subprime mortgage hedge funds in June 2007. By that time, nominal home prices were down about 3% - about the worst of any housing corrections in previous decades. They would fall more than 10% more in the following 6 months. They would, by some measures, eventually fall by 40%.
In theory, there are systemic risks from lending with low downpayments. If we had seen 10% delinquencies in 2007, after nominal home prices had bottomed out at 3% or even 10%, this episode might have lent evidence to that theory.
In theory, there are systemic risks from securitizing loans with low down payments and less documentation. (Although, (1) typical FICO scores did not decline during this period, and (2) as the rough measure in this graph shows, banks were still holding plenty of real estate loans on their books. The notion that banks were suddenly giving out mortgages without any standards and unloading them on the MBS market, in some sort of frenzy, is greatly overstated.) If nominal home prices had bottomed out at 3% or even 10%, and some other funds had followed those Bear Stearns funds into trouble, this episode might have lent evidence to that theory.
But, this episode saw real home prices fall by 40%! What this episode proved - the only thing this episode proved was that when home prices fall by 40%, bad things are going to happen. This was beyond unprecedented. Standard deviations can't even really describe the Fed's failure here.
Oh, so you think that the formulas for the CDO securities "devastated the global economy"? Please, Mr. Hindsight 20/20, please show me where you, or anyone, was saying that these models needed to be able to take a 40% hit to real home prices. Don't give me any nonsense about how these greedy speculators thought home prices could never go down. That is not remotely a description of what happened. Show me any skeptic who, before 2007, said models should be able to handle a 40% downturn. How about 20%?
The blame game here is absurd. This Wikipedia article on the "Causes of the Great Recession" would be funny if it wasn't so sad. Among dozens of causes discussed, monetary policy is barely mentioned, and then, only to blame it for being too accommodative (!) before the collapse. (Who knew that 6% NGDP growth was the path to hell? Is the 20th century completely expunged from the economic history books?) And one sentence about how increased interest rates might have contributed to lower home prices. The 40% fall in home prices is simply treated as inevitable. This is especially outrageous, considering that home prices are climbing back to the pre-recession levels, without any credit growth whatsoever. People just refuse to believe that home prices could be efficient. Our intuition regarding prices is useless, yet we insist on believing it. Here we have a black swan the size of an elephant, and it's in the room.
Next is a graph from the Richmond Fed that breaks out delinquency rates for subprime and adjustable rate loans. Even adjustable rate subprime loans didn't have a delinquency rate higher than delinquency rates in 2001 until 2Q 2007. But, keep in mind, look at the home price graph again. There was no housing slump in that cycle. Delinquency rates booked at domestic banks, as shown in the graph above, topped out at 2.4% in that recession. The Richmond Fed graph doesn't go back far enough to compare to the 1982 or 1992 housing dips, but clearly, none of these delinquency rates reached the levels we would see from those earlier corrections in home prices until the end of 2007. The behavior of delinquencies doesn't appear to have been different than it had been in those cycles.
PS. I was trying to find a paper I had seen that discussed the finding that FICO scores for mortgage borrowers didn't really fall below typical levels during the boom. I didn't find the one I was looking for. But, google has page after page of this kind of nonsense:
July 8, 2014—Mortgage bankers fear another real estate bubble, according to the latest quarterly survey of North American bank risk managers conducted for FICO (NYSE:FICO), a leading predictive analytics and decision management software company. In the survey, 56 percent of respondents directly involved in mortgage lending expressed concern that “an unsustainable real estate bubble is inflating.”