The Research Project, Week Twenty Nine, New Hampshire Reality Check

One of the three guiding principles of The Research Project is finding research that brings new understanding to previously held beliefs. The research I’m sharing this week has brought me to a new understanding of one of my beliefs.

For years I wondered why hundreds of people didn’t go to jail when the housing bubble burst, plunging the economy into a recession. My assumption was that the people responsible for creating the housing bubble deliberately led millions of people into making risky real estate investments which, when the bubble burst, led to mass foreclosures and countless bankruptcies.

As it turns out the traders at the heart of the housing bubble did worse than most on their housing investments when the bubble burst. This, according to research done by finance professor Ing-Haw Cheng at the Tuck School of Business at New Hampshire’s Dartmouth University.

This statement by Professor Cheng pretty much sums up what I thought:

Many find it hard to imagine that bankers missed seeing large-scale problems in housing markets before others. Among the worst fears are that bankers knew they were creating toxic mortgage-backed securities but did so anyway because they stood to make a lot of money in fees and bonuses.

Yet according to Professor Cheng’s research of the personal real estate transactions of hundreds of mid-level mortgage securities traders between 2003 and 2006:

“There’s little evidence that these bankers anticipated the broad crash in housing. Instead, we should be asking if bankers themselves got caught up in the hype of the bubble, blinding them to any warning signs they might have been able to see otherwise. Those most heavily involved in the market showed their belief in the unsustainable pace of home price increases through their personal real estate transactions—and lost, just like everyone else.”

Professor Cheng and his co-researchers from the University of Michigan, Ann Arbor and Princeton University then compared the results with the real estate transactions of plausibly uninformed control groups consisting of lawyers and Wall Street stock analysts over the same time period. They found that those who dealt in mortgage-backed securities did worse in timing their own real estate transactions than those in the control groups.

So I guess I have to rethink my assumption that the bankers who helped create the housing bubble deserved to do jail time.

http://www.tuck.dartmouth.edu/newsroom/articles/what-the-bankers-knew

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2232233

And now as a bonus here are some interesting posts that I found on The Housing Bubble Blog:

WTHR in Massachusetts. “If you had $650,000 to spare you could buy a three-bedroom, two-bathroom condominium on East Seventh Street in South Boston. Or, for the same $650,000, you could buy one single parking space in the Brimmer Street Garage in the Beacon Hill neighborhood. That would be all 171 square feet — housing sold separately. But one of many reasons the $650,000 asking price is raising a lot of eyebrows is the last parking space to sell here, just last month, went for $390,000.”

“And per square foot that you’re buying, that makes the Brimmer Street Garage more expensive, inch for inch, than the $37.5 million dollar condo under construction at the top of the Millennium Tower. Once you plunk down the purchase price, you still have to pay a $250 monthly condo fee for the all-valet garage, plus some $2,700 a year in city property taxes. For all those reasons, David Bates, a real estate broker who works nearby, doubts the owners get their $650,000 price. ‘If we were in a situation where we were going to bring in an appraiser,’ Bates said, ‘I think they’d have a tough time coming back with a valuation of $650,000.’”

The Province reports from Canada. “In a recent six-month period about 70 per cent of all detached homes sold on Vancouver’s west side were purchased by Mainland China buyers, an academic case study shows. Even more stunning, the study shows that of all self-declared occupations among owners — on homes worth an average $3.05 million — 36 per cent were housewives or students with little income. And 18 per cent of the 172 homes purchased were not mortgaged by banks. That means roughly $100 million in questionable cash was poured into Vancouver’s west side from August 2014 to February 2015, much of it from China. Total value of all homes sold in the study period was $525 million.”

“David Eby, the NDP MLA for Vancouver-Point Grey, told The Province he helped city planner and researcher Andy Yan undertake the B.C. land-title study because many of his Vancouver west side constituents have complained about hollowed-out neighbourhoods, absentee investors, property flipping, and suspicions of money laundering and unfair tax avoidance. Eby said the study fills a data gap in Vancouver and ‘bears out the anecdotal feelings that people have about Mainland China buyers.’ ‘We’re still at the point where we won’t even admit we have an issue, while other jurisdictions have studied this or taken action,’ Eby said. ‘It’s my hope this data shows that this money has a profound influence.’”

“‘When you see all the homemakers and students on the titles buying $3-million homes with mortgages, it really supports the idea that money from somewhere else is coming in,’ Eby said. ‘The questions that come up for me are: China is an authoritarian state that has lots of issues with corruption. Is the money coming into Vancouver the kind we want to be encouraging? And are we doing everything we can to make sure we leverage this investment to benefit British Columbians as much as possible? Or is this just benefiting the super-car dealerships on Burrard Street?’”

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