Sept. 11 and the foreclosure theory
NEW YORK -- Trundling a suitcase and a computer bag in piercing cold, I head into an office building on 55th Street. I am immediately stopped by an array of security turnstiles and watchful guards. One calls to confirm that I am actually scheduled to visit a particular person in a particular office on a particular floor. Then he copies my driver's license and hands me a sticker/pass.
Welcome to post-Sept. 11 New York. I am not visiting the United Nations, the New York Federal Reserve or virtually any firm on Wall Street. They've all been drum-tight for decades. No, I am visiting a literary agent in an obscure and slightly decrepit Manhattan office building.
Having just spent five days in the disaster that is Florida real estate, it makes me wonder: Is it possible that the Sept. 11 terrorist attack is the root cause of declining home values? Is it possible that sub-prime loans and speculative building/buying were no more than tools, the equivalent of hijacked airliners?
If so, the eventual economic cost of that single attack may run in the trillions. It may also help us find the unity to gird our country against the biggest threat since World War II. Here's the case.
We were in the second year of a brutal three-year stock market decline when radical Islamic terrorists destroyed the World Trade Center. Even so, borrowed money wasn't dirt cheap. The federal funds rate, down from nearly 6 percent during the Internet boom years, was 3.65 percent in August 2001.
It fell to 1.75 percent within weeks of the attack. Policy makers struggled to keep the economy from coming to a standstill.
The federal funds rate continued to drop, hitting a low of 0.98 percent in December 2003. That was more than two years after the attack. We were well into a powerful stock market recovery. The federal funds rate stayed around 1 percent long enough to set off a boom in low-cost mortgages and in home prices.
Home buyers discovered that very ordinary paychecks could now buy extraordinary homes. People with cash to deposit learned that their money earned virtually nothing.
Interest rates on home mortgages dropped fast enough that the National Association of Realtors' well-known housing affordability index showed that almost anyone could buy and own a house somewhere in America, even if they couldn't do it in Santa Barbara, Palm Beach or Manhattan. As a practical matter, borrowed money was virtually free.
Small wonder home prices soared. According to the Office of Federal Housing Enterprise Oversight, the national index of home values rose 46.9 percent in the five years ending Sept. 30, 2007. That's an annualized appreciation rate of 8 percent -- enough to make us all think owning a home was way better than the stock market or actually working for a living. Buying and owning a home was literally a cheap thrill.
During the same period, the CPI rose at only 2.9 percent annualized.
We could, of course, blame the Federal Reserve for keeping interest rates too low for too long. We could also blame Wall Street. Or mortgage lenders and their brokers. And we could blame the borrowers for being foolish. We certainly can't take any pride in the greed-driven decisions that fueled the problem.
But one big fact remains: None of this misery would have happened if 9/11 hadn't happened first.
Is there a bottom line here?
I think there is. As opponents, the terrorists have played us painfully well. They bleed us internally with financial upheaval. They bleed us externally with the cost of oil and military expenditures. Our leaders -- political and business -- have underestimated both our vulnerability and the strategic smarts of our opponent.
© 2008, Universal Press Syndicate