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Before the Bust


Richard W. Fisher puts the recent housing market bubble in perspective.

From a recent speech by Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas:

“After several years of startling increases in home prices and financing activity, things began to unravel several quarters ago. But the roots of the current crisis were like those of earlier bubbles. They originated in the seductive power of price escalation—of a ‘whole lot of excess’—and the egocentricity of the present, which led some to believe we had entered a ‘new era.’ We either didn’t notice this elaborate conceit or failed to deal with it. But it was there. Many coastal areas of the U.S. were beginning to see 20 to 30 percent year-over-year increases in house prices, some even as high as 30 to 40 percent. Subprime mortgage borrowing, or lending to less creditworthy individuals by lenders who were eager to finance a ‘sure thing,’ exploded. The good news is that levels of homeownership among the U.S. population reached unprecedented heights, extending the American dream to more people than ever before. The bad news is that the methods used to do so were not sustainable.

“Let me give you some numbers to focus the mind. In 1999, before home prices started to defy gravity, 55 percent of homes sold in the New York metro area were considered affordable to the median-income family by one industry gauge. When home prices peaked at the end of 2006, that percentage had fallen to just 5 percent. In Los Angeles in 1999, 43 percent of homes were affordable to the median-income family, but only 2 percent were by the end of 2006. Two percent! Compare that to Texas. In Dallas in 1999, 64 percent of homes were affordable; by 2006, that percentage had barely slipped to 62 percent. In Austin, home prices actually became more affordable over this period, in contrast to the U.S. as a whole.”