September 19, 2014 · 7 min
From Case to Shiller: on the Bubble
A poetic tribute from Case to Shiller, on the real-estate bubble, of course
- By JASON ZWEIG
At a conference Friday at Yale University in honor of newly minted Nobel laureate Robert Shiller, economist Karl Case of Wellesley College paid tribute to his long-time research partner with an original poem on the lessons of the real-estate bubble and its aftermath. In the 1980s, after many years of research, Case and Shiller together created what are now known as the S&P/Case-Shiller residential real-estate price indexes—the measures that led Shiller, in 2005 through 2007, to predict that home prices would collapse.
While economics professors are not known for their appreciation of rhyme and meter, Case’s poetic tribute received a warm round of applause from the academic audience. We reprint the full text of the poem here, with Case’s permission, a few tiny tweaks and without further commentary.
Reflection on the Housing Market: Seven Years After the Fall By Karl E. Case
For the last dozen years we have shed many tears Living through a recession The world was broke and it was not a joke When we talked of another depression Fifteen million without a job Foreclosures and banks that fail 401k’s became 201k’s And everything’s up for sale How could it be? What didn’t we see That led to all of this trouble? There is little doubt that the proximal cause Was a bursting housing bubble But other than that who can we blame? And what do they lament? Millions of people contributed to This hundred year event
For me it began in ’76 With a house on Cleveland Road At 54 thousand, I thought it a lot, For a small three-bedroom abode But 10 years later that very same house Would sell for five times the price I was glad that I bought … I remember the thought “This may not be fair but it’s nice”
In Boston alone, that boom created 100 billion in wealth We spent more, saved less, and I have to confess It was good for our mental health We had to know that it couldn’t go on Someday prices would fall We knew there were risks – to ourselves and our fiscs If those prices were ever to stall
It all began in 2001
911 … the dot.com bubble The Fed had to act because of the fact A recession would mean big trouble So the Fed Funds Rate, sitting just below eight Was cut to under two And you had to know with rates so low That a refi boom would ensue
The volume of mortgages written back then Stunned imaginations In a single quarter in 2003 A trillion in originations! But something happened late that year That caused long rates to rise And that was the end of the refi boom It came as quite a surprise
With refi’s gone so were big fees But banks still had money to lend And the search for buyers to fill the gap Seemingly had no end The Fed kept pumping through 2005 To keep short rates very low With no sight of inflation across the nation The target was simply to grow
Of course the key for all to see Was a robust housing market Buyers could borrow lots of cash And a house was a good place to park it A summer home … a new big house No one seemed to care Homes were made of bricks and land The value would always be there
It didn’t matter what rate you paid Or what you made in a year For a while liquidity led to stupidity “Just sign and see the cashier” High LTV’s and Option ARMs Negative Am’s and more 2-28’s with teaser rates And ridiculous Fico scores
Competition was the force That made the music play As long as prices didn’t fall Everything was OK People could always sell their homes For more than they had paid That kept foreclosures and defaults low And lots of money was made
Fannie and Fred were always ahead Then Countrywide got in the fray Then Lehman and Merrill and Goldman Sachs Couldn’t be kept away You can guess that MBS Helped make the trading brisk Investors, thought that the paper they bought Was traunched with well measured risk
To that add leverage and default swaps And then house prices fell The intercept shift was very swift And that was the closing bell The very first city to see the drop Was Boston in 2006 Then one by one they began to slip Leaving us in a fix
We tried the tax credit which seemed to work For a few months the markets came back But when it expired the markets got mired Resuming their downward track The inventory of unsold homes Still continued to grow And we’re hardly building any new homes With starts at a 50-year low
A number of problems remained as risks As we wait for markets to turn: The number of loans that still need to be marked Is making stomachs churn Twelve million who want to work Don’t have jobs today And slow is the pipeline of loans in default Since no one wants to pay
In the longer run a lot depends On the rate of household formation That depends in part of course On the rate of immigration It also matters what kids do Like living with Mom and Dad Or doubling up till they get a job To pay for their very own pad
For a while there was talk of a double dip The recovery was in a stall Consumers were down and beginning to frown Jobs hadn’t come back at all The Euro was falling, the banks were appalling As we wallowed in bad sovereign debt Europeans were asking aloud Really … how bad can it get?
The guys at the Fed have repeatedly said That their mandate includes employment But with rates at zero no one’s a hero No weapons are left for deployment QE1 was lots of fun Then along came QE2 We did the “twist” and we took on more risk Not knowing just what they would do
So now we come to the end of this ode Without much to say for certain I hate to say, that’s where we are Not beginning nor final curtain The truth of the matter at the end of the day Is that markets will make you humble Just when you think that it’s time for a drink They will turn and fortunes will crumble
That free markets work to provide what we want Is a notion that’s not in dispute The problem is that once in a while Markets overshoot And when they do in a market so large A lot of people feel pain In the blink of an eye many gave back What it took 10 years to gain
Among those who are getting the blame A few deserve to be flayed But a forecast can only be judged against What we knew at the time it was made Sometimes the future is like the past And sometimes it is not But when it comes to what we know The past is all we’ve got
Of course there is greed and there is a need For moral hazard and rules And for figuring out the effectiveness Of the new financial tools Politicians, of course, are starting to shout That they want more retribution It’s better, I think, if they used their time Helping to find a solution.
LVTfan here – all the questions, but where are the answers? Seems very agnostic, not particularly concerned about what changes in public policy could leave a better situation for the next generation. We can’t leave it to the politicians. By our design, they are available to the highest bidders.