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More broadly national house prices peaked in the late

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Unformatted text preview: More broadly, national house prices peaked in the late spring of 2006. Since then, they have fallen back to levels not seen since 2003. Specifically, the 10-city Case-Shiller index fell from 227 in April 2006 to 152 in May 2009. The three-year 40% decline is by far the largest on record. The previous decline, which started in 1990, also lasted three years but was only 9% from peak to trough. The states of Nevada, California, Arizona, and Florida were especially hard hit. Las Vegas, Phoenix, Miami, and San Francisco saw declines of 60% or more. The Freddie Mac conventional mortgage house price index shows a more modest 17% nationwide decline. 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. 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....
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