The Greenspan Housing Bubble Lives On: 20 Million Homeowners Can’t Trade-Up Because They Are Still Underwater

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

One of the most deplorable aspects of Greenspan’s monetary central planning was the lame proposition that financial bubbles can’t be detected, and that the job of central banks is to wait until they crash and then flood the market with liquidity to contain the damage.

In fact, after the giant housing bubble crashed and left millions of Main Street victims holding the bag, Greenspan evacuated the Eccles Building, and then spent nearly a whole chapter in his memoirs explaining how this devastation wasn’t his fault.

Instead, he blamed Chinese peasant girls who came by the millions to the east China export factories where they lived a dozen at a time cramped in tiny dormitory rooms working 14 hour days. According to the Maestro, they “saved” too much, thereby enabling American’s to overdo it on the mortgage borrowing front.  Yes, in so many words he said exactly that!

Lets see. The Maestro was allegedly a data hound. Did he not notice that housing prices in the US rose for 111 straight months from late 1994 to 2006, and during that period increased by nearly 200% on average across US neighborhoods. How in the world could this giant aberration have escaped the notice of the money printers around Greenspan in the Eccles Building?

How in the world could any adult thinker blame this on factory girls in China—that is, a policy regime that caused excessive savings. In fact, it is plainly evident that the People’s Printing Press of China attempted to protect is exchange rate from appreciating against the flood of dollars emitted from the Eccles Building. It did this in mercantilist fashion by pegging the RMB exchange rate and thereby accumulating a massive hoard of US treasury notes and Fannie/Freddie paper.

In short, China didn’t “save ” America into a housing crisis; the Greenspan Fed printed America into a cheap debt binge that ended up impairing the residential housing market for years to come.

So the problem with central bank inflation of financial bubbles is that when they burst the damage is extensive, capricious and long-lasting. On the latter front, new data from Zillow Inc. provide a dramatic case in point.

Here we are 96 months after the housing peak, yet there are still 20 million households which are either underwater on their mortgages or do not have enough embedded equity to cover the transaction costs and down payment needed to move. Since there are only 50 million households with mortgages, that means that as a practical matter 40% of mortgage borrowers  are precluded from trading-up.

It is no great mystery that  historically trade-up borrowers have been the motor force that drove the US housing market. Selling their existing home for a better castle, trade-up buyers vacated the bottom-end of the market so that first time buyers could find a foothold.

Now thanks to Washington’s eternal conviction that debt it the magic elixir of economic growth, first time buyers are few and far between because they are buried in student debt—-about $1.1 trillion to be exact. Each graduating class has more students with loans to carry forward, and in higher and more onerous amounts. Fully 70% of the class of 2014 has student loans, and they average of about $30,000 each. Both figures are triple what they were just a decade ago.

In any event, for those Millennials who do manage to accumulate a down payment by the time they are in their early 30s there is precious little starter home inventory available.  The Greenspan mortgage debt serfs from the previous generation are blocking the way.

Monetary central banking is an economy wrecker.  Here is just one more smoking gun of proof.


 By Conor Dougherty at The Wall Street Journa

Nearly 10 million U.S. households remain stuck in homes worth less than their mortgage and a similar number have so little equity they can’t meet the expenses of selling a home, trends that help explain recent sluggishness in the housing recovery.

At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage—9.7 million households—were “underwater” on their mortgage, according to a report scheduled for release Tuesday by real-estate information site Zillow Inc.

While that is an improvement from 19.4% at the end of last year and a peak of 31.4% 2012, those figures understate the problem.

In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings. Most move-up homeowners typically use their home equity to cover broker fees, closing costs and a down payment for their next home. Without those funds, many homeowners can’t sell.

“It’s a sobering appreciation that negative equity is going to be with us for a while to come,” said Stan Humphries, Zillow’s chief economist. “Negative equity is central to understanding a lot of the distortions in the marketplace right now.”

Those distortions include the inventory of homes for sale, which, while rising, is low by historical standards. It also helps explain why first-time home buyers are having such a hard time cracking the market. Real estate is in some ways like a ladder, Mr. Humphries notes, so when underwater homeowners don’t trade up it makes it harder for newcomers to get in.

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Landotfree's picture

The article is wrong.

The Fed can't save America anymore than the Fed can save the system.   All they can do is assist and prolong the system until the system can't expand, then they pack and leave dodge.  Saving the system indefinitely is impossible, all that can be done is make the system as large as possible before it eventually collapses.  

What the article suggests is impossible under the Laws of God.

The Truth always wins, you can't expand exponentially long-term, which is what is required for the system to sustain itself long term.... 60-80 years sure that will work... beyond that... good luck.   There is no spoon.


Spoon boy: Do not try and bend the spoon. That's impossible. Instead... only try to realize the truth. 
Neo: What truth? 
Spoon boy: There is no spoon. 
Neo: There is no spoon? 
Spoon boy: Then you'll see, that it is not the spoon that bends, it is only yourself. 


"Monetary central banking is an economy wrecker.  Here is just one more smoking gun of proof."

Foolish boy, the economic wrecker has nothing to do with central banking.   The only real questions is, when exactly, details of the collapse... and ultimately how many of the walking unfunded liabilties will have to liquidated.   Last time around 100+ million, this time, my guess 1-2 billion, if nukes are used, 7 billion is not out of the question.

Gaius Frakkin' Baltar's picture

They aren't forestalling the decline... they are causing the decline. Like any nasty parasite, they don't understand why the host is dying. It's beyond their capacity. All they know to do is suck, suck, suck.

markmotive's picture

Guess what happens to these underwater homes if rates rise in the slightest?


PT's picture

Can't trade up to another house?  Nothing that 125% LVR can't fix.  What?  Oooooh ... but nothing that a 300% LVR can't fix.  What?  Oooooh ... but nothing that a 600% LVR can't fix.  What? ...




... nothing that a few dumb, rich foreigners can't fix ...



... nothing that a TBTF with free money can't fix ...


Oracle of Kypseli's picture

The problem is that young people want houses to be affordable and maintain some kind of reasonable income to price ratio, where those who own houses and speculators including banks and the RE industry want houses to appreciate into bubble territory so that it builts equity and people feel rich.

The truth lies somewhere in between. If you strictly require 20% down (no gaming) and a reasonably low interest rate, everyone could be accomodated except the very poor and those who squander their paychecks.

But no! The banks need the leverage and exponential growth which is against nature.

Landotfree's picture

Gaius Frakkin' ...

"they don't understand why the host is dying."

They know exactly what is going on, and exactly what is going to happen, why do you think they were created?   To prolong the system, which in the end has a limited shelf life.   It's basic Math, which is why Benny has said the other day that rates will never return to the past norm in his lifetime.   :)  


Excursionist's picture

And a good thing too that rates not return to normal in my lifetime!

The single family home market here in Newport Beach is rockin', and I hear NINJAs may be coming back.  So I gots to get mine and ride this leverage train to Flipville.

Burnbright's picture

I have this funny feeling that new home buyers are stuck with student loan debt, bad credit, and over priced homes compared to incomes.

I would look at reverse mortgages and shadow inventory as a reason to keeping homes out of reach oh new home buyers,  not some bs about current home owners uppgrading.

andrewp111's picture

Actually, nukes are not the deadliest weapon. Advanced drones are.  Think about it. With massive nuclear bombardment, you can kill everyone at the surface within the blast radius, and starvation will get many of the survivors, but you won't get everyone. The survivors can wait in their underground shelters for the radiation to cool down, rebuild and start anew. And nukes are limited in number. They must be used judiciously to have the maximum effect on the enemy, and defenses will reduce the number that atually explode on target.

Now, if you send out your fleet of "flying monkeys" to hunt down and kill every thing that moves within a given territory, you can actually get everyone - especially if the drones are nuclear powered or are able to feast upon the dead to extract fuel from body fat. Cheap sniper drones that can be produced by the billions in totally automated factories, that can hover silently and see with radar, IR and visible  cameras, and kill any living thing with a single rifle shot - this is the ultimate weapon of extermination. If one starts with nukes, the flying monkeys would efficiently eliminate all the survivors. A billion flying monkeys are invincible and unstoppable.

weburke's picture

huh? how did this topic come up? deadliest? you are way too uninformed. nukes are so yesterday. today you can remove a population and leave the city intact. 

I Write Code's picture

what article are you commenting on?

sessinpo's picture

Landotfree        The Fed can't save America anymore than the Fed can save the system.   All they can do is assist and prolong the system until the system can't expand, then they pack and leave dodge.  Saving the system indefinitely is impossible, all that can be done is make the system as large as possible before it eventually collapses. 


You should think of it this way. They are the system. They are only saving themselves (and getting out of dodge). They view us as the parasites.

NoDebt's picture

You wanna know what you can do to hurt the banks?  Walk away from an underwater mortgage.  Yeah, it'll screw up your credit for a while, but nobody's attaching wages any more to make up for any shortfall.  And if you're living in a "regular guy" price-range home you will likely NEVER see your property appreciate in value again.  The cavalry is NOT coming.


It's your civic duty.  This is one where the reward outweighs the pain.  WALK.

Oldwood's picture

You can not hurt the banks by defaulting on your loans. The last five years should prove that to you. If you want to stop the banks, stop borrowing. Borrowing to buy shit ultimately we typically don't need only benefits a fake economic growth that enriches our government. Stop borrowing to buy shit we don't need and can't afford. The government gets multiple "tastes" of every dime we spend and they are using that money to corrupt what's left of our world. And we know debt is servitude, so why do it? Do we "need" this shit that bad? Is the engrained urge so strong we can't resist? Defaulting loans will ultimately be passed back to the always. Instead, just say no.

duo's picture

In reality, single family homes are a huge, maybe the largest, misallocation of capital in the country.  Unless you have a sweatshop in the basement, they are only a sink for resources and capital (think utilities, water, taxes, etc.)  Yes, to the very rich they are a way to insulate oneself from the hoipolloi if you can get a house big enough or with a moat.  But for the average schmo, an overpriced sinkhole for their earnings.

So when you're shopping for a house, don't think of it as an "investment", but a "sinkhole for resources and capital", in which case it's not the most house you can afford, but the most house you will be stuck maintaining and paying taxes on.  Over the last century, single family homes have pretty much kept up with the growth in money supply, like M1.  Hell, gold can do that.

NoDebt's picture

In this case, I'm talking about the "what's done is done" part of debt servitude.  Obviously, don't borrow more (repeating the same mistake- I didn't choose my screen name at random!).  But if you're in over your head on a house, there's never been a better time to walk.

Hurt the banks, don't hurt the banks... don't care.  Help yourself.  Taxpayers aren't being hurt since taxes have LONG since fallen short of covering the government budget deficit (of which Fannie and Freddie aren't even a part).

sessinpo's picture

NoDebt           Taxpayers aren't being hurt since taxes have LONG since fallen short of covering the government budget deficit (of which Fannie and Freddie aren't even a part).


I beg to differ on the part that taxpayers aren't being hurt.

fonzannoon's picture

as long as you did not refi or modify your mortgage in some way and have the loan become a non recouse loan or whatever the hell they call it. If you did, and many did, you are screwed.

NoDebt's picture

The reality is, not many did.  Not many qualified for those programs in the first place and even fewer put up with the BS to get through those processes.  

fonzannoon's picture

From everything I saw, it was the the ones in the most distress that got a modification. Once you missed a payment, the banks came in "to help". With that said I am scrolling around the internet to try to find some idea of how many people did this for some perspective. Not much luck so far.

NoDebt's picture

I'll save you the research.  A few hundred thousand out of ten(s) of millions.

"Modification" = strapping your ass firmly to the electric chair, just turning down the voltage a little.

buzzsaw99's picture

moving up? that's funny. many of those 10M will be moving into cardboard boxes.

dipping into their savings? savings? what savings? that's funny too. in fact, stay, don't pay, keep your cash out of the banks and you'll be better off in many cases.

Duke Dog's picture

I hate David Stockman. He was an instrumental tool 30 years ago, and large part of the reason we are in our current predicament.

Now, the POS tries to re-write history, write a bunch of books, make a fortune, and attempt to cleanse himself.

Little too late Davy Boy - you cocksucker.

Fuck Him!

samsara's picture

Being a cocksucker is irrelavent actually. Is his points correct or not is what I look at. Not whether he's a cocksucker.

No offence.

Cugel's picture

He came in to cut taxes and quit when they wouldn't cut spending to match. What more do you want?

At worst, replacing '70s inflation with '80s debt was a wash. But at least the average citizen could put a number to the damage.

samsara's picture

Let's get CNN reporter Andrea Mitchell do an in depth report on Alan, and give America an unvarnished look of the "Greenspan Bubble"


new game's picture

ok, now it is inventory. ha, and with rates falling via stealth fed buying of treasuries via begium, now we get another 10 percent appreciation and yet another bubble forming. if rates continue falling as they appear, and need to to keep 17.5 trillion of debt  afoat, moar anguish, and moar dispair via bubble yet again poping as cali is forshadowing. still as i've said, buy a home and live there and get the fucker paid off and ignore the price til retirement...if it all goes haywire and dollar dies well, nobody gonna be taking anybodies home unless they want to die trying...maybe a few lampost will be the proper


nink's picture

When you took away my house you promised me a motor home => Trailer Park => Tent  when what you really meant was a prison sentence for being homeless and a new economy based on prison slave labor.

andrewp111's picture

I did not see a housing bubble starting in 1994. 1995 was actually a house price bottom in the DC area, and prices seemed quite stable until about 1999. That was when the county assessments started rising, then started soaring after the dot com bubble imploded in 2000. It almost seemed like when the tech bubble burst, the baton was passed to residential real estate.

Then in 2008-2009, the baton was passed to bonds - and then to junk bonds. The ultimate and final bubble. When this one blows, it's over.

Notsobadwlad's picture

The investment funds, particularly Blackrock that the government gave 30% incentives to buy housing and prop the market up are also blocking the way for the next generation of Americans to enjoy mortgage debt serfdom. Then again, renting from the rentier class is worse.

yellowsub's picture

I wouldn't be so sympathetic if you bought a house without dropping 20%.  I see those who put little skin in don't plan on living there long or those who are not financially responsible to purchase a home.  

Am I reading this article wrong that those who can't sell becuase they can't afford the closing cost trading up to another home that they think they can afford?!

I Write Code's picture

When someone writes a history book of America and the World in this time frame, Greenspan, Bernanke, and Obama are going to be The Dark Trinity, with Bubba Clinton and Dubya Bush as their prophets, and Hillary hitting her head for comic relief.

Did Greenspan say that about Chinese girls?  I know Paulson tried to blame it all on the Chinese, but I didn't know he got it from Greenspan.  Of course there *is* a tiny bit of truth in this - the Chinese* allowed themselves to be snookered, muppetized, by Goldman Sachs and company.  If Greenspan had a problem with things the real culprits were right here at home and he could find the primeval evil right in his mirror - that is if he saw any reflection at all when he looked in the mirror.

*Not just the Chinese of course but everyone who attempted to save and especially those who purchased any MBO or CDO derivatives.

I did some work at Megabank in the darkest hours of this thang and I always wanted to get a count of underwater loans, but I couldn't get my tentacles on the data.  But without that data, it didn't much matter what I did with the Megabank database.  What a bunch of yoohoos.

Note that the remaining homes underwater are mostly those below the median.

I suppose, given what the Fed and the Obamanation have already done, they could do it One More Time and in one swell foop forgive** all loans underwater.  It wouldn't be fair and it wouldn't be pretty but it would be better than a lot of shit they've already done.

**That is offer refinancing that forgives enough principle to bring it at least current, and arguably even grant some calculated equity.  Say, 20% of 20% of the smallest loans.  It might cost about one trillion bucks plus transaction costs, when we've already spent somewhere between four and eight trillion.

Rellorellin's picture

Forget the underwater honeowners. Yes, it is a big problem, but an even bigger problem is millions of foreclosures still in the judicial pipeline (shadow inventory). On top of that, there are also millions of modifications out there that are failing daily. In Chicago alone, We have over 100 thousand foreclosures working their way through the system with only 11 judges hearing these cases. As one IL Bar Assoc Attorney put it.."The problem is Astronomical!" Yet, inventory is lagging and prices in areas of Chicago are aporoaching 2007 bubble peaks. Yet the Fed is still hell bent on keeping this re-inflated bubble going by whatever means necessary. If it didnt work under Greenbag, it aint gonna work under Yeller.

blue gkm's picture

crazy!! im in chicago and indeed home prices are close to the previous peek. on the same block a rehabed house is 140,000 and a foreclosure 25,000 shit is all fucked up. pardon my language but there is no nice way to say what is happening to the first time home buyer.

user2011's picture

I thought real estate is hot.    All the automakers are buying land to stuff the channel.   Housing should be going up...   less available land... $$ should go up..


I am confused !

newbie vampire's picture

Gawd..................... you really gotta admire The Maestro.  If each of the 20 million homeowners who are underwater, were to spit at the Maestro, he would receive a most fitting end to his illustrous career.

cobra1650's picture

Homes are income streams for banks, governments and insurance companies.

SmittyinLA's picture

I want one of those Chinese broads that works too hard and saves too much, screw idiot socialist American tramps.

FreeNewEnergy's picture

On July 15, 2014, it will be five years since my father died and left me the family home, complete with "shitty" (thank you Goldman Sachs, Daniel Sparks and especially, Carl Levin) Cuntrywide mortgage that I immediately stopped paying.

Since then, I've lived in the home, kept it up, done basic repairs, gone into foreclosure, countersued Bank of America (heir to the Cuntrywide "fortune"), rented out my former home, repaired my credit and laughed my ass off every time I see that the taxes have been paid by BofA (thanks, Warren). It's so absurd, I don't even get the tax bills. They are sent directly to the bank.

Now, thanks to the Supreme Court of NY State (I know, I am thanking lots of people), both lawsuits are stalled out, the foreclosure because the lawyers know there is a phony assignment of mortgage and I have a copy of it, meaning that under the rules of the court, the lawyers can be sanctioned, fined and/or imprisoned for knowingly submitting false documentation. With my countersuit in hand, I just sit and wait, accumulate cash, silver, maybe a piece of land here or there, grow my garden and begin doing a little more extensive rehab work on the property, since I don't want the town or neighbors to think I am bringing property values down (hint: I am).

It's like Christmas and Thanksgiving every day here in Bankster Paradise™ (thanks Coolio and Michael Jackson). In fact, I think I'll make up a nice sign of that and hang it over the back door.

God bless Angelo Mozilo, President Obozo and especially Alan Greenspan, Ben Bernanke and Mr. Janet Yellen. You have made my life so fucking easy, you twits! And, since the countdown to me qualifying for a reverse mortgage (I have no heirs) is down to 19 months, I await your buyout offer.

Thank you, thank you, thank you.

highwaytoserfdom's picture

Hey property taxes based on valuation did not go down leaving education funding for public schools in place...

17th in education   USA USA USA ....     

wait until bond interest rates go up ... the plan is complete   we don't have a government of public servernts  BUT WE ARE SERVENTS TO GOVERNMENT...  



Chuck Knoblauch's picture



RaceToTheBottom's picture

I think I saw that same Chinese saver buying a house in my neighborhood. 

Whew, we are saved by that peasant Chinese saver....

kenezen's picture

You realize that corporate industrial money is not coming back (Blue Collar middle class jobs) because of "Federal Government's" hostility to Industry. (Mexico and China's wage differential has closed considerably and Germany still retains MFG even with higher wages). This president with "Executive Action" has empowered EPA to insure that outcome of no industry!

Our Mortgage situation was caused under the less than intelligent Bush when he refused to understand over an eight year term that Glass Steagall needed reinstated. Then he doubled down on allowing housing to be sold using the vaunted "Mirror Test. This president upon his taking the reigns immediately set forth on producing a far larger and more powerful and Executive loyal Federal Government. The president has debilitated State Government as much as possible and tried to infuse illegal immigration preparing for amnesty as soon as necessary for the coming elections. Picture ID necessary for mundane activities are fought by his Attorney General which is an obvious sign of intentions. 

Our last two presidents, one not smart enough to see the economic eventualities of his actions and inaction and this Socialistic President that wants and admits to desiring singular authority and who publishes facts that are disturbingly inaccurate like unemployment of 6% which forgets to mention at the same time the 12-18% minimum, many of our young, who have walked away.

We are close to depression and there is no real recovery under this leadership. Is that the plan? They do Prevaricate extremely well. No wonder they legalized Propaganda!