By Justin Lahart
From The Wall Street Journal Online
So much for once burned, twice shy.
Seven years after the stock-market bubble busted, the troubles in the housing market look strikingly familiar. In fact, everything is going according to the textbook -- the textbook in this case being Charles Kindleberger's 1978 classic, "Manias, Panics, and Crashes."
Mr. Kindleberger found speculative bubbles tended to follow similar patterns. First, there is some "displacement" -- such as the development of the Internet or a prolonged period of ultralow interest rates -- that radically improves the outlook for some area of the economy. People take advantage of the opportunity, fueling a boom that is fed by progressively easier access to cash. At the height of the bubble, there's "pure speculation"; assets are bought to quickly sell them again at a higher price -- day-trading in 2000, condo-flipping more recently, tulips long ago.
The speculation eventually runs its course and in the ensuing downturn, swindles come to light. That leads to "revulsion." Lines of credit dry up and regulators, Sarbanes-Oxley style, rush to shut the door of the empty cow barn. In the worst cases, selling panics follow.
Revulsion is where housing appears to be.
Early February, the Federal Reserve reported a sharp increase in the number of banks tightening mortgage-lending standards. On Tuesday, Freddie Mac -- whose main business is repackaging mortgages into mortgage-backed securities -- said it was tightening standards on purchases of risky, subprime mortgages. On Friday, banking regulators proposed stricter mortgage guidance.
As Mr. Kindleberger showed, financial shenanigans in housing are coming to light. A jump in "early defaults," where borrowers stop paying shortly after taking out their mortgage, stems in part from questionable lending practices.
Jon Goodman, a Boulder, Colo., real-estate lawyer with Frascona, Joiner, Goodman & Greenstein, says he has seen dozens of cases where buyers tried to buy a house for more than it was worth in return for a kickback from the seller. The buyer might pay $500,000 for a house that is really worth $450,000 and get $50,000 back from the seller. The kickback gets used as a kitty to make mortgage payments while the buyer waits for someone to buy the house for more than he paid. Works great in a rising market; horribly in a falling one.
It is too early to know the extent of such gimmickry or how tough lenders and regulators will get. But it isn't too early to wonder why, so shortly after the 2000 bust, a bubble cycle repeated itself.
In early 2004, then-Fed Chairman Alan Greenspan said he thought "we don't have to worry much about the emergence of bubbles for a while because it takes a number of years for the trauma of the collapse to wear off." Back then, of course, the Fed's ultralow interest rates were helping to feed the housing boom.
Mr. Kindleberger documented that bubbles frequently come not long after the previous bust. The 1800s included repeated bubbles in canal and rail securities in the U.S. and abroad. Housing wasn't the only place where low rates bred an easy money culture. Emerging-market stocks and bonds, corporate debt and buyouts come to mind.
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-- March 06, 2007