[It's not surprising to read about how ill-prepared the Federal Reserve was back in late-2006 for the aftermath of the bursting of the housing and credit bubbles that, by that time, wasn't much they could do about even if they wanted to. In this item from October 12th, 2006, the Fed meeting minutes noted that "considerable uncertainty was expressed regarding the ultimate extent of the downturn in the housing sector" as central bank policy makers were the proverbial lambs being led to slaughter (along with millions of homeowners).]

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Yesterday’s release of the Minutes of the Federal Open Market Committee from last month’s Fed policy meeting showed continuing concern over rising prices, members indicating a “substantial risk” that inflation may not decline with a slowing economy.

Members were also concerned about housing, though apparently they’re falling a little behind in their reading.

In their discussion of major sectors of the economy, meeting participants focused especially on developments in the housing market. Although the situation varied somewhat across the nation, housing activity was continuing to contract in most regions. Home sales had slowed considerably, and anecdotal reports suggested that more buyers were canceling contracts for purchases. Participants noted that inventories of unsold homes had climbed sharply in many areas and that builders were taking a number of measures to reduce inventories. Both permits for new construction and housing starts had declined significantly. Available measures of home prices suggested that appreciation had slowed considerably but prices in most areas were not falling, although some sellers were reported to be providing various inducements to potential purchasers that reduced effective prices.

Apparently they haven’t seen last month’s report from the National Association of Realtors where both new and existing home prices have fallen from year ago levels – it was in many of the papers. It’s plain to see in the chart from Northern Trust below.
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[By late-2006, after it had become clear that home prices don't necessarily rise in perpetuity, government regulators began to take their first feeble steps at, if not actually regulating the mortgage market, at least making it clear that they've noticed what was going on. Below, five years ago in this piece from October 10th, 2006 it was noted, "Once the default risk was shifted from government sponsored enterprises to Wall Street, government regulators hit the snooze button". As it turns out, that's a pretty good summary of what happened.]

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Amid news that home prices are now falling across the nation, in some places rather precipitously, comes word that a few government regulatory agencies have arrived on the scene, ready to help the process along.

What does this mean for the future retirees of America who have become comfortable with the notion of spending more than they earn, sure that the rising value of their real estate will provide for them, not only in the present, but in the future as well – in their golden years?

It looks like we’re going to find out.

According to this LA Times story yesterday, mortgage lending standards are being tightened and lenders are being advised to ensure that borrowers can actually repay their loans.

A Novel Approach

The standards come in the form of “guidance” from the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision, the Federal Reserve, and other regulators. This is the same regulation that has been flopping around in seemingly endless review and comment cycles since late last year.

Federally chartered lenders are now strongly urged to evaluate borrowers’ ability to repay their loans based on more than just the low payments enabled by interest-only, option-ARMS, and low introductory interest rates.

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[This was a fun post to write five years ago as Stephen Colbert had recently left The Daily Show to begin his own fake news program on Comedy Central and all the new housing bubble blogs were seeing the housing bubble participants just start to get their long awaited comeuppance. Originally published back on October 5th, 2006, this piece is notable for many reasons, one of which is the call for home prices to bottom in 2011, a date that, surprisingly, now looks like it may be a little early.]

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Hi, this is Stephen Colbert of the Colbert Report. I’ve been bugging Tim for a while now about doing a guest post here at his blog, and he finally got me all set up with an account yesterday. It was a bit odd when we spoke on the phone – he mumbled something about oil prices and black helicopters and then the line went dead. I hope he’s OK.

Anyway, he wanted me to talk about housing. I’ve been reading up on housing and this so-called “housing bubble” and I have a few thoughts on the subject.

First of all, housing can’t be “in a bubble”. Houses are much too big for that or bubbles are much too small – take your pick.

Second, those who are calling it a bubble are mostly people who don’t own a house and they just want the bubble to pop so that prices will come down and they can afford to buy one.

Everyone wants to own their own home, in fact, almost everyone does now – at least one … sometimes two, three, or four.

These people who talk about a housing bubble – people who either just sold their home and now rent, or those who never bought real estate because they thought it was crazy to spend so much of their income on housing even though prices were skyrocketing and banks were bending over backwards to lend any amount, for any house, to anybody – these people have taken a keen interest in the nation’s housing market now that prices are going down.

Which brings us to today’s word – Schadenfreude.

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[Another dive back into the archives begins today and, after all the recent news about housing and the latest efforts by the White House and the Federal Reserve to help this market, a look back at the old blog from five years ago - back in the fall of 2006 when it was just starting to become clear that we could have some major problems - seemed like a good idea. First up is an item originally published on September 27th, 2006 that provides a good setup for what will follow in the days ahead.]

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To some, Monday’s report from the NAR (National Association of Realtors) containing news of declining home prices was barely noticed. To others it was quite an event.

In some parts of the country, home prices have been declining since the peak last fall, in certain areas quite dramatically. In other parts of the country, prices are still rising, albeit moderately.

But now that the national figure for the year-over-year change in median home price has gone negative, this seems to be some sort of seminal event. The network evening news gave this an unexpected amount of attention, as did many local and online news organizations.

Even a day or two later, many people are still talking about it, and with prices of new homes dropping by a similar amount as seen in today’s report, even after the thousands of dollars in incentives for each sale, more headlines about home prices are sure to be offered.

It’s enough to give you the jitters.

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Standard & Poor’s reported that home prices were about flat in August and, since I hadn’t gone to the trouble of preparing the chart below in almost a year, I figured I’d give it a try. Now I know why it’s been so long – getting all the labels arranged properly is quite the pain.

But, it does show what’s been going on with the U.S. housing market quite well as areas that were the source of the housing bubble and its subsequent collapse continue to do better than just about anywhere else (note that the labels are arranged from top-to-bottom in the same sequence that the corresponding curves end at the right).

Overall, home prices were up 0.2 percent in August and, when seasonal adjustments are taken into account, prices were flat for  an amazing fifth straight month. Of course, in the nation’s capital, home prices continue to rise, up 1.6 percent from the month prior and one of only two cities with year-over-year gains (basket case Detroit was the other).