Prices are down again, but are they affordable? That question caused Boston Real Estate Now blogger Scott van Voorhis to draw a stark contrast between the median sales price of single-family homes in Greater Boston during the past month, $417,000 in April 2011 versus $250,000 in 2000. Beyond the numbers in that decade-long retrospective, some buyers — particularly first-time home buyers — should be reminded that the tech bubble had inflated housing values to unsustainable levels in 2000 – 2001 and beyond the Boston Foundation’s concern about “decreased affordability,” more important voices predicted falling prices and warned of potentially devasting impact on banks.
In an article published on August 13, 2001 entitled “Feds Report: Housing Starting to Weaken“, nationally-syndicated columnist Lew Sichelman cautioned that:
Deputy Comptroller of the Currency Nancy Wentzler reminded reporters recently that housing values dropped 8 percent on average during the last recession in 1991. Not only could it happen again, she said, it could “happen rather abruptly.”
In the first federal reserve district, the Boston bank reported that while the overall housing market is still strong, “signs of softening are emerging.”
Housing prices, as the Boston Foundation wrote, had risen to a median sales price of nearly $300,000 in Greater Boston, a jump of more than 50 percent over three years. That defied predictions made in November 1999 by James Smith, former Chief Economist for the National Association of Realtors, that a recession would occur after the Presidential election of 2000, followed by a two to three year downturn in the housing market.
Instead of raising interest rates to cool housing prices, the Fed dropped them fourteen times after 9/11 to stimulate the economy and housing market.
By June 10, 2005 the New York Times ran a graphic counting the number of “major world newspaper” bubble features that had been published in the days of May: 0 in 2001; 18 in 2002; 20 in 2003 (a relative plateau); 35 in 2004; and more than double that to 77 in 2005 (and Fed Chief Alan Greenspan only weighed in with his “froth” concerns on May 20, 2005).
In retrospect, it is clear that the Fed knew that housing prices were inflated and that a price correction could have widespread impact on banks and the economy. Ten years ago this summer, Sichelman reported:
…Deputy Controller Wentzler is worried enough that a crisis could be just around the corner that her office has advised the national banks it oversees to take a look at their book of mortgages to make sure they are not over-exposed.
“What we are suggesting from all the models we are doing is to watch this carefully make sure we stress test for a potential rather steep and decided drop in house prices that could effect collateral values at banks,” she said.
Specifically, Wentzler is concerned that banks could be hit by a double whammy — an increase in delinquencies compounded if appreciation goes flat and an increase in foreclosures if layoffs accelerate.
As Voorhis wrote, “Sound familiar?”