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US Mortgage Prices in Computer ‘Infinite Loop’

US Mortgage Prices Caught in Computer ‘Infinite Loop’

By Dan Spillane
Citizens for Corporate Accountability

- Ad-hoc computer programs increasingly influence home buying, but are devoid of proper economic study

- "Computer speed" being translated to "home price rises" based on standard economic models; dangerously "amplifying" ultra-low interest rates

(SEATTLE) 05/03/04 - Many reasons have been cited to try and explain the rise of home prices in the US over the past couple of years-double-digit price increases year after year have far outpaced income growth. In fact, some of the reasons given have seemed quite convincing, at least until recently.

For example, demographics are often cited are being key to sustained housing demand. Specifically, based largely on immigration and income statistics related to the 2000 census, it was projected by some that housing demand for immigrants was on the rise, even while up-and-coming US workers enjoyed rising salaries in white-collar fields. Yet more recently, many have come to realize not only are wages not growing in line with house prices, but also the need for immigration is waning, since outsourcing and other productivity improvements are poised to drain hundreds of billions of potential "US housing dollars" away from wages, and into corporate profits (1)(2)(3). Indeed, it's a shame no one has so far figured out how to send a US-built house over the Internet to India--along with the jobs being sent. Regardless, demographics along cannot explain housing prices-the good, high-paying jobs aren't here, and the gap is being bridged by record debt at both the federal and consumer level.

Next, low inflation has played a part for some time. Inexpensive materials have benefited builders for some time. And yet, more recently, reports are coming out of the housing industry of inflation "flames"--sub-contractor bankruptcies due to large price increases, and the passing along of price hikes-unequivocally, the textbook definition of inflation. So now, the housing industry is a truly schizophrenic state; when a loan is made, it is based on a low interest rate, which assumes low inflation--but there could be nothing farther from the truth(4).

And of course, ultra-low interest rates, as well as "creative mortgages" have played a big part in the rise of home prices. It was reported recently by a major US bank that speculative mortgages have increased many-fold in a year--to compromise a majority of new home loan originations (Bank of America). Moreover, the mortgage industry, along with giants such as Fannie Mae, have done everything possible in the area of technology and legislative influence to speed up the approval and processing of loans, to "reduce cost."

Yet ironically, it is precisely here--via the so-called "cost reduction" effort--where, paradoxically, the greatest contributor to housing price hikes has awakened. Indeed, it seems the "cost reduction" has increasingly embodied a series of interacting computer programs to make mortgage loans--which seem to be resulting NOT in lower prices, but higher loan values, and loan volumes. How did this happen? One clue lies in the fact that the recent pronounced rise in housing prices corresponds very closely with the rise of what is best described as the "stock-marketization" of the housing market-the introduction of computer automation, without too much thought of potential consequences (a similar scenario to the introduction of computers prior to the 1987 stock crash)(5).

Maybe it didn't start out that way; with the advent of electronic processing which reduced processing costs. Indeed, a few years ago, programs known as "Automated Valuation Models" ("AVMs") likely reduced loan origination costs to a borrower. The AVM programs are written by private companies, based on various algorithms. AVMs are used where appraisers (humans) formerly were to appraise house prices, for sale, re-finance, or "cash-out." Not only that, the AVM programs, in conjunction with other programs which speed things up, make ever-escalating home bids immediately visible to home market players where such wasn't previously possible. These players include mortgage makers and realtors-who, guess what--have still other programs to speed along loan transactions based on comparable sales--or simply because a home is in the right neighborhood. Finally, another set of programs converts mortgages to securities, which tend to hide the true magnitude of what is going on(6). In effect, the whole system has become geared to instantly issue a loan to ten "Joes" in the neighborhood--just because "Jane" overpaid for a home down the block. But the system is blind to the fact that Jane may be a speculator, or even, an unethical insider planting a phony record-there is no security standard in place. In short, what started out as a good efficiency idea has involved into a kind of endless loop computer network, which quickly maximizes debt.

But so what? Faster, cheaper mortgages, and more visible house prices are better, right? From a myopic, non-economic viewpoint-yes. But the answer is quite the opposite based on formal market models, such as "mathematical economics." In such models, it is understood that the variables of "velocity" and "visibility"-vastly accelerated by the new mortgage computer programs--are important factors leading to rapid price inflation. In fact, when velocity of transactions goes up too high, it can lead to economic break down (7).

How unfortunate then, that there has been no formal review of the "better" automated, securitized mortgage computer system which is generating record debt. Hopefully, the Federal Reserve will get a little more computer savvy, lest we risk a 1987-style meltdown.


(1) Graphic "Shares [of compensation]", J. Bivens, Economic Policy Institute, 12/03; also recent statistics show inflation growth (5 pct) outpacing wage growth

(2) Dean Baker, et. Al, Economic Policy Institute

(3) On its website, Pulte Homes, a major US Home Builder, emphasizes immigration as key (based on census study which pre-dates recent outsourcing projections). "Golden Age of Homebuilding" … "Demographics is the single most important element … in housing equation," "Immigration Fuels Housing Demand" (

(4) "Homebuilders have been able to offset these input-cost increases to a considerable extent by raising the prices to their customers", Federal Reserve Beige Book, 20040421

(5) "Loan processing speeds have greatly improved…due to automated [procedures]" S&P 03/21/01; "Freddie Mac Lifts Appraisal Requirements" 03/22/01, Inman News

(6) "[FDIC Banking] industry exposure [to mortgage risk] has risen markedly since 2001" FDIC "Emerging Issues in Banking" 03/01/04; May lead to collapse (Greenspan 02/2004)

(7) "Individual Behavior is sequential and tends to be local. In particular, when decision times, communication nets and space are considered [,] that which passes for economic optimization without context specified is local myopic optimization"… "Beyond some speed of circulation expectations will degenerate and the economy will break down" The Theory of Money, Martin Shubik, April 2000, Essay from 1999 Volumes, MIT Press

[Dan Spillane, the author of this article, is a former Computer Scientist with a minor in Economics, who lives in Seattle. He is now studying for a second degree in Life Sciences. His analysis set the stage for the 2003-04 expose of problems related to electronic voting machine software and approval, by Bev Harris of, Lynn Landes, and Prof. David Dill of Stanford, Dan's website is read by many, including US Secretaries of State, the Pentagon, and the US Treasury. ]

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