Reflections on the Housing Market

For the last few years, we have shed many tears
Living through a recession.
The economy’s broke and it’s not a joke,
When we talk of another depression.
Fifteen million without a job,
Foreclosures and banks that fail,
401K’s became 201K’s,
And everything’s up for sale.

How can it be? What didn’t we see
That led to all of this trouble?
There is little doubt that the proximal cause
Was a bursting housing bubble.
But other than that, who can we blame?
And what do they lament?
Millions of people contributed to
This hundred-year event.

For me, it began in ’76
With a house on Cleveland Road.
At fifty-four thousand, I thought it a lot
For a small three-bedroom abode.
But ten years later, that very same house
Would sell for four times the price.
I was glad that I bought…I remember the thought,
“This may not be fair, but it’s nice.”

In Boston alone, that boom created
$100 billion in wealth.
We spent more, saved less, and I have to confess,
It was good for our mental health.
We had to know that it couldn’t go on.
Someday prices would fall.
We knew there were risks — to ourselves and our fiscs
If those prices were ever to stall.

It all began in 2001,
9/11, the dot.com bubble.
The Fed had to act because of the fact
A recession would mean big trouble.
So the Fed funds rate, sitting just below eight,
Was cut to under two.
And you had to know, with rates so low,
That a refi boom would ensue.

The volume of mortgages written back then
Stunned imaginations.
In a single quarter in 2003,
A trillion in originations!
But something happened late that year
That caused long rates to rise.
And that was the end of the refi boom.
It came as quite a surprise.

With refi’s gone, so were big fees,
But banks still had money to lend.
And the search for buyers to fill the gap
Seemingly had no end.
The Fed kept pumping through 2005
To keep short rates very low.
And Greenspan gets a share of the blame;
His halo has less glow.

Of course the key for all to see
Was a robust housing market.
Buyers could borrow lots of cash
And a house was a good place to park it.
A summer home…a new big house,
No one seemed to care.
Homes were made of bricks and land,
The value would always be there.

It didn’t matter what rate you paid
Or what you made in a year.
For a while liquidity led to stupidity,
“Just sign and see the cashier.”
High LTV’s and Option ARMs
Negative AM’s and more,
2-28’s with teaser rates
And ridiculous Fico scores.

Competition was the force
That made the music play.
As long as prices didn’t fall
Everything was OK.
People could always sell their house
For more than they had paid.
Defaults and foreclosures stayed quite low
And lots of money was made.

Fannie and Fred were always ahead,
Then Countrywide got in the fray.
Then Lehman and Merrill and Goldman Sachs
Couldn’t be kept away.
You can guess that MBS
Helped make the trading brisk.
Investors thought that the paper they bought
Was traunched with well-measured risk.

To that, add leverage and default swaps,
And then when house prices fell,
“Smart guys” got hosed as the risks were exposed,
And that was the closing bell.
Now where do we go? We really don’t know.
We’ve never been here before.
Only time will tell when the markets will clear
And prices will fall no more.

Some of the data suggest a bottom,
While other data conflicts.
Houses are selling at rates not seen
Since back in 2006.
The inventory of unsold homes
Is down, it no longer grows.
And we’re not building any new homes.
Starts are at 50-year lows.

A number of problems remain as risks
As the market begins to turn:
The number of loans that still need to be marked
Is making stomachs churn.
Fifteen million who want to work
Don’t have jobs today.
And slow is the pipeline of loans in default
Since no one wants to pay.

It could also be that the pick-up we see
Is just from government red.
Lower rates and tax rebates
Buying paper from Fannie and Fred.
All have certainly played a role
And only time will tell.
What will happen when they’re withdrawn,
Still empty units to sell?

So now we come to the end of this ode
Without much to say for certain.
I hate to say, that’s where we are
Not beginning or final curtain.
The truth of the matter at the end of the day
Is that markets will make you humble.
Just when you think that it’s time for a drink
They will turn and fortunes will crumble.

That free markets work to provide what we want
Is a notion that is not in dispute.
The problem is that once in awhile,
Markets overshoot.
Of course there is greed and there is a need
For moral hazard and rules.
You are damned if you do and damned if you don’t.
To be “pure” is a game for fools.

Politicians, of course, are starting to shout
That they want more retribution.
It’s better, I think, if they used their time
Helping to find a solution.