Mobs, Messiahs, and Markets

What Goes Up Must Come Down

In September 2006, the median price of a new house dropped to $217,100—down 9.7 percent from a year before, erasing two years’ worth of housing gains. Not since 1970 had a yearly decline been that sharp.¹⁵

Owners were cutting prices and throwing in appliances, automobiles, and other incentives. Sellers were willing to bargain. But buyers knew that they might be even more willing to bargain in a year or two, and inventories began sitting at near‐record levels. And waiting in the future were still millions of ARMs that needed to be twisted and reset higher.

Billions of dollars of American housing wealth were going up in smoke. All we needed were marshmallows.

Default rates on subprime loans doubled in 2006—to 8 percent of the total, on track to be “the worst‐performing loans ever.”¹⁶ In 2006, total foreclosure rates ran 42 percent greater than the year before, according to RealtyTrac's year‐end report.

In November, some of the packaged securities backed by subprime mortgage loans were downgraded by Moody's an unheard‐of six months after origination.¹⁷

“More homeowners going into default,” said the Los Angeles Times. The number of Californians at risk of losing their homes to foreclosure more than doubled in the three months ending September 30, 2006.¹⁸

In the winter of 2007 came word that New Century Financial Corporation—the nation's second largest provider of subprime mortgages—was having a rough time of it. When its mortgages go bad, it is supposed ...