Wednesday, October 29

It's a speculative bubble

As Prof. Stan J. Liebowitz of the University of Texas points out in his study, “Anatomy of a Train Wreck,” the foreclosure problems began in mid-2006 when the nation’s unemployment rate was holding steady at a mere 4.6 percent. What triggered the crisis were not layoffs but an end of the rise in home prices. By contrast, in the economic slowdown that began earlier in this decade, unemployment started rising in early 2001 and peaked at 6.3 percent in mid-2003 but resulted in only a modest uptick in foreclosures by today’s standards.


The data suggest that speculation was rampant among average Joes and Janes and not something primarily that high-end buyers or ‘yuppie flippers” engaged in (as a hilarious Saturday Night Live skit suggested a few weeks ago). Indeed, one thing that probably accounts for the large number of defaults in lower income and moderate income neighborhoods is that these buyers were most likely to engage in speculation, according to the data that Liebowitz has crunched. He found that speculative purchases during the current bubble were higher as a neighborhood’s average income decreased. In neighborhoods where household income was about $40,000, or about one-fifth below U.S. median family income, speculative mortgages accounted for one-third of all loans, while in census tracts where average income was nearly double the nation’s median, speculative loans accounted for well under 10 percent of all mortgages.

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