Housing bubble causes and economic consequences

¶ … Housing Bubbles Contagious?

Like the sudden collapse of publically traded internet technology stocks in the year 2000 which was its predecessor, the speculative real estate bubble that peaked in 2006 and deflated with such sudden and devastating scope was viewed by many as a calamitous, but largely unforeseeable, confluence of catastrophic economic circumstances. Economic theorists and other researchers have begun the arduous process of debunking that self-perpetuating myth, however, by precisely analyzing the complex network of financial, social and political variables which dictate the artificial inflation, and resulting drastic deflation, of residential property prices. Mary Riddel, an associate professor in the University of Nevada, Las Vegas' Department of Economics, recently authored a report examining concept of interconnectedness between neighboring urban centers entitled Are Housing Bubbles Contagious? A Case Study of Las Vegas and Los Angeles Home Prices. Published in the scholarly journal Land Economics, Riddel's comprehensive study of the intricate cause and effect governing housing prices in neighboring cities establishes a mathematical model and applies "the model to a pair of cities that experienced rapid price appreciation and dramatic subsequent decline in homes prices: Los Angeles (the urban core) and Las Vegas (the peripheral market)" (2011). Her careful approach and precise methodology produces clear numerical data supporting her initial hypothesis that "models based solely on prices are atheoretical and, as such, fail to adequately capture the dynamics of prices within the market structure from which they originate" and "fail to account for other endogenous market variables that are necessary for cointegration" (Riddel, 2011).

What has come to be known infamously as the housing and foreclosure bubble represents more than a routine market correction, or even a series of anomalous statistical oddities; it has become a lasting monument to the collective hubris and overwhelming avarice of the nation's economic elite. Major banking and lending institutions, including the intact JPMorgan Chase, Bank of America, and the disgraced Sallie Mae and Freddy Mac, knowingly peddled grossly irresponsible mortgages and home loans to unqualified borrowers. While this may appear to the layman as merely an example of poor business management, major lenders made these unsound, adjustable-rate mortgages with the clear intention of packaging and selling the toxic loans as mortgage-backed derivatives. This perfectly planned but imperfectly executed caper resulted in a series of unintended consequences which quickly spiraled out of control. The Federal Reserve lowered interest rates to unheard of levels, families living on their credit cards suddenly qualified for affordable mortgages, and average families turned to "flipping" dilapidated properties for potential profit. The resulting increase in home values in cities like Las Vegas and Los Angeles was built upon a foundation of financial quicksand, and soon the inevitable collapse and foreclosure crisis swept the nation's neighborhoods. While the board members and chief stockholders of these banks cleared billions of dollars in misbegotten returns, they profited at the expense of homeowners simply struggling to maintain their tentative grasp and the fleeting American Dream. In her study, Riddel establishes a clear connection between the reckless gambling of Wall Street investment bankers on the national level, and artificially inflated home values within urban centers, observing "evidence that income and price contagion originating in Los Angeles contributed to the rapid appreciation in Las Vegas home prices observed from 2002 to 2006. More importantly, the results reveal a market subject to severe distortions" and "taken together, reveal a market that was for some time driven chiefly by irrational exuberance and virtually divorced from fundamental market forces" (Riddel, 2011).