Relative to rents or median income house prices

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Relative to rents or median income, house prices returned back to their historical average. Alongside the collapse in house prices, residential construction fell off a cliff: a 330% drop from the end of 2005 in residential investment. New housing permits went from 2 million units per year in 2002-2006 to a historic low of 0.5 million in 2009. The collapse in residential investment, alongside the decline in consumption and business investment, plunged the U.S. economy into the worst post-war recession. Real GDP fell four consecutive quarters from mid- 2008 to mid-2009. Since the recession officially started in December 2007, more than 8 million jobs have been lost. Macro-economic risk, as measured by the VIX index or by the volatility of GDP, has returned with a vengeance after nearly 25 years of calm.
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65 In the wake of falling house prices, new mortgage originations dropped sharply. Many of the largest private-label originators, such as Countrywide, either went out of business or were sold in distress to large commercial banks. Essentially the only new mortgages that were issued in the second half of 2008 and in 2009 were mortgages that could be bought by the GSEs or the FHA/VA. The PLS market was essentially dead in 2008 and 2009, accounting for less than 3% of MBS originations, down from 50% in 2006. Freddie and Fannie’s share in new mortgage originations increased back to 75% in 2009 (up from 30% in 2006), with the FHA accounting for 20% in 2009 (up from 3% in 2006). In today’s mortgage market, the government truly is the lender of last resort. The final aspect of the bust was the tidal wave of foreclosures. The initial wave of foreclosures in 2007 and 2008 was tied to the interest rate resets on ARMs and on other exotic mortgages such as option-adjusted ARMs. Such rate resets raised monthly payments at a time when refinancing was not an option due to falling property prices. However, as the economy entered into a full-force recession, increasing numbers of foreclosures came from people who lost their jobs. Foreclosures tend to follow job losses with a 3-6 month delay. In 2009, 2.8 million households received foreclosure filings, up 21% from 2008 and 120% from 2007. 5.2 The Collapse of Freddie and Fannie, and the Conservatorships 5.2.1 Early Warning Signs With nationwide housing markets collapsing, a deep recession, and an increasingly risky mortgage portfolio, the GSEs showed their first losses in 2007. The combined $5 billion loss was due to credit-related expenses of $8 billion. In early July 2008, three months after the mortgage-related collapse of Bear Stearns and with the stock market down 20% from its peak, speculation was rampant that the government would have to rescue Freddie Mac and Fannie Mae – at least in terms of their obligations to their creditors. By then, the GSEs had already lost an enormous amount of stock market capitalization. In 2007, Freddie’s share price fell by 50% from $64 to $32, while Fannie’s stock lost 36% of its value. By July 1, 2008, Freddie’s stock had dropped by another 50% to $16.
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Christopher Reinemann
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