Revisiting the Defining Chart of “The Affordable Mortgage Depression”

In 2007 CSFB released a chart that in my opinion represents the single best piece of research to date which clearly demonstrated the impact of Affordable Mortgages on the economy. What this analysis did is reveal the overwhelming influence of ARMs on the future of housing prices, and in doing so, served as catalyzing event for objective analysts interested in understanding the economic origins of the Housing Bubble. Individuals and news sources continue to rediscover this chart and discuss its implications.

It has been two years since the chart’s release and yet few people seem to grasp the reality that Affordable Mortgages represent an institutionalized impediment to housing price stabilization or an economic recovery.

To briefly review their historical impact, Affordable Mortgages were the mechanism by which homeownership rates expanded rapidly. They fueled unsustainable property appreciation by dramatically increasing demand and removing all sensitivity to price. Affordable Mortgages allowed prices to decouple from the fundamentals of value and rise to extraordinary levels. They enabled buyers to put extreme amounts of debt on overvalued housing, both in gross and percentage terms. Finally, they enabled “owners” to refinance mortgages, monetize theoretical equity gains and dramatically distort consumer consumption for a decade.

CSFB’s chart was about the future though. The chart demonstrated that Affordable Mortgages, as damaging as they had been, would also act like economic time bombs strewn out through 2012. These financial land mines would explode by the thousands every day for years to come. Mortgage resets would inevitably trigger a steady, growing and unavoidable source of defaults and foreclosures. This overwhelming source of foreclosures would cause collateral damage throughout the global economy and make the prospect of housing price stability impossible.

Economists, politicians and prognosticators continue predict a rapid economic recovery. Policy makers appear willing to gamble our financial viability on the prospect of a quick turnaround. According to reports, there are no credible economists presently predicting that the recession will still be with us on January 1st, 2011. Since the day I saw this chart I understood that there was no prospect of the housing market stabilizing or a broad based economic recovery occurring until at least 2012.

Maybe these economists, politicians and prognosticators should revisit this prescient chart and reassess their perceptions of the future. This one piece of research could be more valuable in productively shaping economic policy than the demonstrated wherewithal of the Federal Reserve, U.S. Treasury, FDIC, Congress and Two Presidents combined.