Monday, September 18, 2006


Boom and Bust Repeats Itself

Boom-and-bust: the story of the West. Mining, silicon and computer electronics, land, logging, railroads, chinchilla farming, ostrich farming...Out here in our western states, the hills alive with the sound of—ghost towns. Within forty miles of here there are probably two dozen town-sites that are nothing but grazing land or scrub timber. Lamonta, Grizzly, Cloverdale, Shevlin, Opal City, and Plainview are the first five I can think of. Logging, railroad construction boom-towns, dry-land farming, homesteading. The farther east you go, out into the high desert, the more ghost towns. Same to the south. It's been the history since 1849.

It won't quit being our history, either. It's like the lottery: the hope of "getting in on the ground floor" is the dream. Pretty much the way the American Dream has turned out. These days, the dream has most recently been about making money off the housing market. Buy cheap, sell dear. People always need housing. As Mark Tramant points out in his essay, though, housing prices have climbed three times faster than median wages. Scores of forked tongue mortgage brokers and real estate sales people have hustled people into buying homes way way beyond their incomes—the idea being the market and demand would forever climb... New homes, built on spec, have been sprouting like weeds after a rain. There are dozens and dozens of them available around here, all new ones. People built and bought them for investments.

Uh-oh. What if you built a house and nobody bought it? It's the same all over the place: Portland, Seattle, Bend, name a fair-sized western city and think "subdivisions." They built, it would seem, too many. In Bend, the only growing sector of the job market is tactfully called service. Janitors, maids, restaurant staff, clerks. Used to be logging and sawmills Waitresses and waiters can't afford three hundred thousand dollar houses; they can barely afford five hundred dollar a month apartments. Redmond, the next city downstream, less than twenty miles away, the median home price is maybe fifty thousand less. I'm still trying to figure out what the economy is around Redmond: Bend is, I guess. Redmond used to be potato farms. Neither city seems to have an industrial base. They're both built on speculation, really, in the housing market.

Uh-oh, again (and again).


Today's bust is all about credit

Sunday, September 17, 2000

I love listening to the stories people tell.

A few years ago: It was a yarn about the instant wealth won in the stock market. People like me, wage earners, were sharing the supposed inside information from their brokers. We knew something special; we could get in on a first stock offering before the crowd. We owned hundreds of shares in The Best-Ever-Investment Co. It was a sure bet, the promise of an early retirement. Thank you very much.

But life is funny. Dot-com riches morphed into a very old regional story.

Not long after the stock market bubble burst in 2001, a woman by the name of Gertrude Murphy died. She was 99 years old -- and the last resident of Lester, Wash.

Murphy moved to Lester in 1929 to work as a teacher. "The town was the largest community along the upper Green River," according to "Like nearby settlements, Lester was developed in the 1880s to house crews needed to help trains climb the steep grade to the Stampede Tunnel. Later, logging operations helped the small communities grow."

Lester, like so many other Northwest timber, railroad or mining towns, once had a bright future. Or so it seemed.

This region ought to be one where we are comfortable with the boom-and-bust cycle. It is inevitable -- and it is reflected in our stories. Yet when we are in the cycle (or nearing the end), we think this time it's different.

I certainly thought that in 2000 and 2001. I couldn't see the end of the cycle -- and even when it started to turn I kept thinking that any losses would be temporary. The boom was just in a temporary interruption, soon to return.

Last week the U.S. Senate heard testimony on "The Housing Bubble and Its Implication for the Economy."

"For the past five years, the housing market has been a steadfast leader in the U.S. economy," Thomas Stevens, president of National Association of Realtors, testified. "After five years of outstanding growth, the housing market is undergoing a period of adjustment and becoming more and more of a balanced market between buyers and sellers."

And make no mistake, he said: "Contrary to many reports, there is not a 'national housing bubble.' We were seeing home prices and mortgage debt servicing cost-to-income ratios increase to unhealthy levels in some housing markets, which precipitate an adjustment."

But what if it's not a housing bubble at all? What if we've been living through a credit bubble? I would define the credit bubble as an era when slick mortgage packages make the unaffordable home seem within reach no matter how much we've saved or how much we earn. (And savings is a twisted word here -- since Americans have a negative savings rate right now.)

At the same Senate hearing, Richard Brown, chief economist for the Federal Deposit Insurance Corp., had another take on the bubble.

What stands out in this housing boom is that average U.S. housing prices grew three times faster than disposable incomes.

How could that be? It became easier to tap into loans with adjustable rate mortgages or ARMS.

"Over 30 percent of all conventional mortgages closed in 2004 and 2005 were ARMs. The ARM share moderated to 25 percent by the second quarter of 2006," Brown said.

But among poorer-credit borrowing, or subprime loans, Brown said, "the share of ARMs was far higher, closer to 80 percent."

In other words: Eighty percent of the loans of the people who can least afford a house are facing enormous risk, escalating payments and possible defaults.

On top of that, a lot of loans were interest-only or worse, fixed payment plans that increased the principal owed on a house.

Brown said it's difficult to measure how many of these loans are out there -- but they "appear to have made as much as 40 to 50 percent of all loans securitized by private issuers of mortgage-backed securities during 2004 and 2005."

The FDIC economist says there are only two possible outcomes: A period of stagnation and weak housing prices or a sharp decline in housing prices "with severe adverse consequences for homeowners, lenders and the real estate sector as a whole."

Brown testified that the second alternative is "unlikely" for a variety of reasons. But before you celebrate, consider that a long period of price stagnation will be painful, too.

What stories do we tell about all this? For the past few years many people talked about how real estate investment was easy, profitable and certain. It was a sure bet, the promise of an early retirement. That's why this is not a housing bubble -- or a housing bust. We'll always need places to live. This is a credit bust. And, once again, this time the cycle matches our history.

Mark Trahant is editor of the editorial page. E-mail:

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