Tuesday, August 30, 2005

Lost In Translation

A television news station in North Carolina has a story today quoting one source, Mark Vinter, a senior economist with Wachovia Bank. While there is certainly nothing wrong with Mr. Vinter offering his opinion for a news story, news organizations should not present one-sided stories to readers and/or viewers without any critical reaction, or analysis. Consider this excerpt:
Wachovia senior economist Mark Vitner says Greenspan’s comments may have been “a bit over interpreted.”

“What he was warning against was speculation in housing which is different than buying a home for your own personal use,” he said. “If you’re going out and you’re buying five condos or you’re buying five tract homes, he’s suggesting the price gains we’ve seen in recent years just simply can’t continue.”

Vitner says homeowners who decide to refinance are not risking anything unless they are taking out all of their equity and then some.

“As long as you’re intending to occupy your house for a considerable number of years, there really isn’t a problem,” he said. “Houses tend to appreciate between 4 and 5 percent a year.”

First of all, Greenspan said that house prices could not only stop rising, but drop. And if that happens, it is a problem for some home owners and buyers, particularly those who have a high-risk loan product like a bubble mortgage or an interest-only loan. Those are loans that people typically plan to bail out on by refinancing in a few years. But, you only get to bail out IF housing prices continue to rise. If they drop, you don't build equity. "Interest-only." It's not rocket science, but it is a gamble.

Here's what Greenspan said Friday:
Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

TRANSLATION: Greenspan wasn't talking about investors who buy houses. He was talking about investors who buy and sell long-term bonds and mortgage-backed securities. Those investors are the reason mortgage interest rates are still so low. If they get cautious, Greenspan says, they'll start to expect more money for the risk they're taking in buying long-term bonds and mortgage-backed securities. That could drive up mortgage interest rates. If mortgage interest rates go up, it could most certainly drive down the cost of housing. That's where the speculators come in. If mortgage rates were to go up quickly, consider what a flipper is going to want to do? He'll likely want to unload that house as fast as possible, even if it means lowering the price. And that's one way the bubble could pop.

Here's what Greenspan said Saturday:
Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely.
TRANSLATION: Once again, Greenspan is not singling out speculators. He's talking about millions of home owners, and not just those who bought a house in the past few years. He said that increases in the cost of housing will eventually slow down, possibly so much so that they could stop rising altogether, or even drop. He also said fewer people will be refinancing to take equity out of their homes, which means there will also be fewer people buying things like boats, new cars, and other nice things people have been using that equity to buy.

I don't blame the spokespeople who make these kinds of comments. They're only doing their jobs. But news organizations must prosecute the story before putting it into print or on the air. Everybody makes mistakes, but at least make one while you're endeavouring to present a fair story. One-source stories are called "opinion pieces," or "press releases." They most certainly aren't news.

— The Boy in the Big Housing Bubble