Time to buy a house? Experts who sold at the peak now wonder

A few years ago, some economists and others arguing that there was a housing bubble -- often against strong opposition -- acted on their instincts and sold their houses. I caught up with a few of them in The Times today. Dean Baker, a Washington, D.C., economist and one of the prominent early predictors of the bubble, bought a house recently.

Others, such as PIMCO investment fund managing director Mark Kiesel and UCLA professor Mark Kleiman, say prices are still too high for them. But even Kiesel and Kleiman, along with Rich Toscano, producer of the popular Piggington's Econo-Almanac bubble blog, say homes at the low end of the market are now priced reasonably by historical standards, whether or not they've hit bottom. They've only recently begun to say so, as low-end prices have fallen in line with incomes and are favorable compared to rents. (An earlier version of this post inadvertently referred to Piggington's Eco-Almanac instead of Econo-Almanac.)

Princeton University economist and Nobel laureate Paul Krugman, another who warned of overheated house prices, also bought a house this summer. He told the New York Observer, however, that he expects prices to keep falling; he just got a surprise windfall in Nobel Prize money that enabled him to make his purchase.

-- Peter Y. Hong

Return of the 'cramdown'

Mortgage cramdowns -- expanding the power of bankruptcy judges to force loan modifications -- died in the last congress despite broad support among Democrats. Resistance to bankruptcy reform from industry foes has been slowly ebbing. Last month, the National Assn. of Home Builders said it was open to the idea, and now Citigroup is aboard. Here's the Tribune story:

The agreement struck between congressional Democrats and Citigroup Inc. would permit bankruptcy judges to change the terms of mortgages as part of court-ordered debt restructuring. Democrats hope to include the provision in the upcoming economic rescue legislation under negotiation between Congress and the incoming Obama administration.

The suggested change in the nation's bankruptcy laws has been repeatedly proposed -- and defeated -- in recent years.

Under Chapter 13 of the U.S. Bankruptcy Code, judges currently have the right to reduce the principal of auto, credit-card and other loans but cannot reduce the principal on a primary mortgage under any circumstances. As a result, homeowners who go into bankruptcy often wind up with mortgage payments that are even higher than the ones they had before, after skipped payments and other fees are added to the principal.

Some housing experts and many Democrats blame this unwillingness to reduce the principal on mortgages for the difficulty that many homeowners have had as they try to modify their mortgages and avoid foreclosure.

-- Peter Y. Hong

Photo: Sen. Charles E. Schumer of New York speaks during a news conference with fellow Democrats Sen. Richard J. Durbin of Illinois, left, Sen. Christopher J. Dodd of Connecticut, right, and Rep. Brad Miller of North Carolina. They announced Jan. 8 that an agreement was reached with Citigroup on legislation that would allow homeowners at risk of foreclosure to alter the terms of their mortgages in bankruptcy. Credit: Chip Somodevilla / Getty Images

Subprime lending and the housing bubble: Tail wags dog?

That's the title of a provocative and seemingly counterintuitive study by UC Irvine's Paul Merage School of Business Center for Real Estate. It wasn't the selling of home loans to credit-risky borrowers that sparked the phenomenal run-up in prices per se, it was "the changing credit regime" beginning in 2003 that inflated the bubble -- and Fannie and Freddie seem to be have major, albeit unwitting roles.

When Fannie Mae and Freddie Mac pulled back from the credit markets in 2003 and significantly slowed their lending volume in response to internal accounting problems and outside political pressure, the breach was filled by aggressive securities issuers in the private mortgage market.

And helping to fuel them on was an enthusiastic administration pushing the "dream of homeownership" without a whole lot of regulatory restraint. As a result, total mortgage volume skyrocketed and pushed up home prices "with momentum characteristic of a bubble," the study says.

Rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the "tail") of the economic, political, and regulatory environment characteristic of the early- to mid-2000’s (the "dog").

"We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors including the market," says Kerry Vandell, the UCI finance professor and director of its real estate center who was the lead researcher on the study. "But we were really blown away when Fannie's and Freddie's continuing presence in the market was shown to be so important."

Co-authoring the study was doctoral student Major Coleman IV and Michael LaCour-Little, a Cal State Fullerton finance professor who theorized in a provocative 2006 research paper that prepay penalties saved borrowers money.

The latest study was partly funded by the Mortgage Bankers Assn., the National Assn. of Realtors' Subprime Crisis Research Consortium and -- drumroll please -- Freddie Mac.

--Annette Haddad, Times staff writer

Photo credit: Associated Press

Questions? Comments? Tips? E-mail annette.haddad@latimes.com

Retracing the housing bubble: 1997

As promised, the blog is retracing the housing bubble in hopes of better understanding where we are today and how we got here. This is not meant to be a definitive history, but a rough outline for discussion. I'll likely add to these posts with more information, anecdotes, and statistics, partly at your suggestion.

1997: The housing bubble begins to take shape in Southern California as median home prices slowly begin their long rise. In celebrity news, the L.A. Times' Hot Property reports that Brad Pitt (pictured) has bought a two-bedroom, 2,200-square-foot house in the Hollywood Hills for about $400,000.

According to DataQuick's tracking of median sales prices in Southern California, prices bottomed at $146,000 in January of 1996 and again in February 1997, ending a five-year slide. Prices across the region then began a historic, 10-year rise, peaking at $505,000 in March of 2007, a rise of 246%. Had prices over that period only matched inflation, as measured by the consumer price index, median home prices would have peaked at about $189,000 in 2007.

1997 at a glance: Median sales prices rose $12,500, or 9.8%; inflation that year, as measured by the CPI, was 1.7%.

Month   SoCal median sales price     % change y/y     %change from bottom
Jan.              $147,500                                  1.0%                      1.0%
Feb.              $146,000                                -1.0%                       0.0%
March           $152,500                                 1.6%                       4.4%
April              $152,000                                 1.3%                       4.1%
May               $155,000                                 2.6%                       5.5%
June             $156,500                                 2.0%                       7.2%
July               $155,000                                 2.0%                       5.5%
Aug.              $159,500                                 4.6%                       9.2%
Sept.             $160,000                                 5.3%                       9.6%
Oct.               $158,500                                  5.7%                      8.6%
Nov.              $160,000                                  6.7%                      9.6%
Dec.              $162,000                                  8.0%                    11.0%

Your thoughts? Suggestions? Insights? E-mail story tips to peter.viles@latimes.com.

More on Brat Pitt: The home Pitt bought in early 1997, fresh from proposing to Gwyneth Paltrow in Argentina, was the third he had purchased in the same gated enclave.

Photo Credit: CP.