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‘It’s the End of Subprime as We Know It'
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Tom Lawler | Dressed provocatively as a farmer and carrying a big stick to liven up his after-lunch presentation at NAHB’s Fall Construction Forecast Conference on Oct. 24, Tom Lawler of Lawler Economic Housing & Consulting, said that the housing industry will have to “get back to basics” and return to a “normal lending world” before a sustainable housing recovery can begin.
That means no more subprime purchase loans in their current configuration — a system that he said was “built to fail” ― and a return to a more “prudently tight” mortgage lending environment and more balanced homeownership rate by age cohort. Too many younger households were able to buy into the housing market during the booms years, Lawler said, which helped fuel the boom and feed the bust.
Lawler said that he had been raising the housing market alarm during appearances at earlier construction forecast conferences and elsewhere since at least 2005 and showed a slide documenting his warnings.
“The investor share of the purchase market has increased dramatically,” he told conference attendees in 2005.
“You had to be on something not to see bubbles in some areas,” he said a year later.
The warning signs were always there, he told last week’s attendees. But not too many people pointed them out until the housing downturn took hold. “I’m now in the mainstream,” he said, waving his stick emphatically.
Among the unheeded warnings he focused on were dramatic increases in home prices in the super-heated markets across the country, in investors/speculators in those same markets and in the rise of vacant homes for sale.
People at the time claimed these increases were caused by population growth, Lawler said. “No, it wasn’t,” he said, while raising his stick to point to a chart showing a 45% or more increase in single-family home prices in Phoenix and Las Vegas in less than two years.
But Lawler said his biggest beef was with how lending got out of control in the subprime and Alt-A markets.
Calling the subprime market in 2006 “the worst ever,” he said delinquency rates were two times the historical norm — for good reason.
Subprime mortgages, he said, were risky products with risky underwriting and limited flexibility. Too many subprime mortgages required little or nothing down, too few required income verification and two-thirds of the mortgages provided no escrow for taxes and insurance.
As the housing market overheated, the ARM share of subprime loans moved from less than 75% in 2001 to more than 90% in 2005 and 2006. Subprime loans requiring full documentation during the same time period decreased from just over 70% to less than half by 2006. “Pathetic,” he said, “absolutely pathetic.” He noted that Alt-A loan purchases followed similar patterns from 2001 to 2006.
“They were performing okay when house prices were going up,” Lawler said. “But they were built to fail.”
Lawler would not predict how far real home prices or home sales would fall. In economics, unprecedented rises are always followed by “unprecedented drops,” he said.
Near the close of his presentation, Lawler also hawked three imaginary CD recordings of what he called the “Greatest Hits of Subprime” ― not available in stores:
- “Imagine (There’s No Subprime),” by John Lender
- “You’re Subprime (I bet you think this bond is about you),” by Carly Subprime
- “It’s the End of Subprime as We Know It — and I Feel Fine,” by REM (Real Estate Mortgage)
Photo by Morris Sematin
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