Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 16 members and 151 guests online.
And a fresh example lands in the old inbox this morning:
Dessauer also announces that: "We do not have a housing crisis! We are suffering from yet another attack of hype, fear and hysteria. Years ago, Wall Street fell in love with subprime mortgages all $1.45 trillion worth of them. Brokers loved the ease with which such loans could be made, packaged and sold. They loved the high fees and commissions. Now, in an irrational and unnecessary reversal, Wall Street sees subprime mortgages as toxic sludge. Make no mistake: Wall Street's emotional swing from greed to fear is the root cause of today's crisis."
Dessauer argues that real estate activity is "still very healthy," citing eight states that showed double-digit same-price house price gains in 2006.
He also, in a typical emotional aside, observes that, "the critics can moan and groan about imprudent lending to buyers with less than perfect credit or on terms that seem risky now, but the truth is that new mortgage products have opened home ownership opportunities for more people, and that is healthy. Home ownership is the No. 1 wealth-building opportunity for most Americans."
You bet! Putting cash into a home purchase (minimal cash, perhaps, but not relative to these people's liquid assets) and then getting foreclosed on builds wealth!
And I love the idea that "the crisis" involves the Masters of the Universe suddenly backing away from what has pretty obviously been not much more than fee-extraction. Had they the guts to keep the machine going, there would be no problem!
And yes, the last sentence of this piece is comedy gold:
http://www.marketwatch.com/News/Story/Story.aspx?guid={3BF3143E-5494-4C41-9086-4F58374D5EB1}&siteid=mktw&dist=nbs
This whole saga has opened my eyes a bit. My dad always said that to be in business you had to be ruthless but i never believed him. Whatever the real stories behind this mess it must be true that some people have been hurt and hurt real bad. I am still dreaming things can be better.
There is also the predictable claim that regulation of predatory or potentially predatory loan products or brokering relationships would "hurt the poor."
It's interesting to me that most of the proposals have to do with simple disclosure. That the industry would claim that having educated consumers and regulators is a bad thing because it costs more is laughable.
The fact is, a lot of these guys see the regulators (and customers, for that matter) as enemies. Why would you help your enemy?
Will tomorrow be "subprime Tuesday?" http://infohype.blogspot.com
Max, the part that I think we need to hammer on is the extent to which borrowers are here being encouraged to see their interests as aligned more with property sellers and mortgage brokers than with a reputable lender. Let's face it; no one would ever take a loan from a builder-owned mortgage company or a fee-paid broker who is not a fiduciary if that person didn't believe, somewhere, that his interests were going to be furthered by a party who stands to profit if a loan is closed at any terms.
Builders want to sell houses. RE brokers want to sell houses. Mortgage brokers want to close loans. Borrowers' interests align with those parties only to the extent that you think all the borrower wants is to buy a house.
If you think that the borrower also wants a reasonable mortgage deal, wants financial stability, wants to be sure that all contractual obligations of all parties have been fulfilled before signing on the dotted line, then you face the fact that the borrower's interests are not exhausted by the phrase "buy house."
A prudent lender also wants to make a reasonable deal, wants the borrower to remain financially stable after the loan closing, and wants to protect its collateral by making sure that all contractual obligations (completion of the home, results of appraisals and inspections, etc.) have been met before money changes hands. But we are working hard, here, to convince potential homeowners that prudent lenders are "the problem"--the ones who deny the American Dream to the deserving--and the builders and brokers are the solution.
It doesn't get much crazier than that. And the fact that you have actual Real Economists (remember the Goolsbee uproar?) who can't quite see this tells you how much Kool Aid has been under consumption.
...Wall Street's emotional swing from greed to fear is the root cause of today's crisis.
The nugget of truth in your quoted paragraph. Of course from this Dessauer somehow concludes that ANY degree of lessoned interest in MBSs is some irrational panic. It's part of that one sided thinking. ANY increase in house prices, or increase in credit availability is good, and any contraction in the same is bad. The idea that perhaps house prices COULD be too high and credit COULD be too easy is a threat to the great mortgage Ponzi scheme and must be stamped out.
The post linked below reiterates much of what has been stated here at Calculated Risk. We welcome all comments and insights:
Irvine Housing Blog - Irvine Real Estate and Resale Homes - It’s not the Borrowers; It’s the Loans.
Irvine Housing Blog - Irvine Real Estate and Resale Homes - It’s not the Borrowers; It’s the Loans.
But we are working hard, here, to convince potential homeowners that prudent lenders are "the problem"--the ones who deny the American Dream to the deserving--and the builders and brokers are the solution.
The people who complain that the prudent lenders are racist and won't make a loan to anyone who isn't a member of the country club, are the same people who accuse these no-doc, cold-call, fly-by-night guys of being predatory. I guess that's the problem with the "predatory" meme: you're damned either way.
The subprime industry seems to have figured this out, and they use it to excuse their excesses and hold back regulation. It's really a Sophie's Choice argument, but it forces guys like Goolsbee to take weird positions.
I think buyers know instinctively that when they enter the loan office they're entering a hostile environment. But it's easier to just sign on the dotted line than to prepare beforehand, ask the tough questions, maybe get into an argument, and possibly walk away. People still pay the sticker price for a car
"anyone who believes that "democratizing" homeownership means that the poor are helped most by getting loans at any cost is full of MBS." Classic T.
--
I appreciate you focus on the details, Tanta, but how much time have you devoted to the SOURCE of the problem bankers and financiers of New York City and the Federal Reserve? Do you really believe that any of this got started at the lower levels (your neighborhood lender)?? It would be like the corner drug dealers are the source of the drug problem and not the drug lords and the major smugglers.
Focusing on the root causes and consequences of the Asset Bubbles (collapse of the American econo-political system as the world has known it),
Jas
Anyone care to give odds on how much CDO paper Dessauer is holding in his portfolios?
With Wall Street's only concern being profits, their fear is not irrational at all, subprime loans are not generating quite so high profits any more (or at least there is a little more risk showing up). As the noble Tanta has pointed out more than once, the underlying reason for higher returns on subprime has been the higher risk of default on the loan.
I appreciate you focus on the details, Tanta, but how much time have you devoted to the SOURCE of the problem bankers and financiers of New York City and the Federal Reserve?
I think the point of this discussion was the moral hazard issue, and how that plays against what regulators are trying to do as they "come up to speed".
Everyone around here has heard the "FED caused excess liquidity which moved asset prices to unsustainable levels and will eventually (but not today) collapse the entire world economy" argument a million times.
Of course one of the reasons why home ownership for the poor is considered an unalloyed good thing is that, as we all know, real estate is a sure-fire investment, and not allowing poor people to get in on the game is to deny them wealth forever.
The possibility that what poor people need is not the risks and burdens of home ownership, but, rather, reasonably priced rental housing, and savings accounts that pay interest higher than the inflation rate, seems completely to escape most of the populace.
Except in aberrant times like the recent past, home ownership is a very bad investment for anyone who is not quite sure they will continue to live in the home for many years (transaction costs to sell, risks of expensive unanticipated repairs, etc).
"Dessauer argues that real estate activity is "still very healthy," citing eight states that showed double-digit same-price house price gains in 2006."
The more I think about this comment, the madder I get. The idea that a "very healthy" market means even fewer people can afford to pay a place to live is sick. The whole reason for a market in real estate is for people to be able to buy and sell homes. You know, the wooden cave people like to sue to stay out of the weather. The commissions and fees involved in the transaction do provide a living for a few people, but they are not the reason for the market.
--
"Everyone around here has heard the "FED caused excess liquidity which moved asset prices to unsustainable levels and will eventually (but not today) collapse the entire world economy" argument a million times."
Thanks.
Okay, how about the role of the Wall Street and the big bankers? Do you suppose that the Fed is serving their interests?? Is it a coincidence that bankers and financiers have made more money, as % of GDP, as well as compared to doctors, teachers, rocket scientists, soldiers, firefighters, engineers, you name it???
They have control of the economy and lives of American People as no ruler has ever had before! That is my point. Democracy = Domination of Money (Spengler).
The question is: When they have financially raped the American People, and Housing Bubble is their last act, what happens next? The worst violence and disaster in centuries. The time to stop was decade, or more, ago.
Jas
Someday we'll step back and realize this 'homeownership society' was the meanest and lowest Orwellian con, in addition to being the stupidest.
Hmm, how about a thread on predicting in what numbers you can rip off and disinfranchise the poor before you have large-scale, scary social consequences? I'm fartin through the bars on my gated community's windows, baby!
I appreciate you focus on the details, Tanta, but how much time have you devoted to the SOURCE of the problem bankers and financiers of New York City and the Federal Reserve?
My heavens, the word "appreciate" in reference to someone else actually escaped Jas's keyboard. I'm not bubbling over with enthusiasm, but I'm willing to recognize progress.
I have to ask you Jas, how much time have you devoted to actually READING what I write? I have written posts in the last 30 days suggesting that bondholders be held accountable for predatory lending, that REMIC and other securitization vehicles are in some cases causes rather than effects of "exotic" lending, and that the former Federal Reserve Chairman deserves a large part of the blame for encouraging financial institutions to shift risk onto unwary consumers. What part of all that sounds to you like I'm giving Wall Street a pass?
The problem here, I really think, is that you, Jas, like to talk in sweeping generalizations and crudely-drawn caricatures of market participants. You prefer to insult rather than analyze, and seem to think that calling something a "fraud" ends the conversation rather than beginning it. You have zero on offer, as far as I can see, that would help anyone with a more sophisticated approach to the world than simple moralizing and rhetorical bomb-throwing. You call this focusing on "roots." I call it a tedious kind of jeremiad. I guess we'll have to agree to disagree.
What I don't understand is why you keep 1) subjecting yourself to a blog whose discourse you clearly think is stupid and 2) making the same comment over and over again about it. Do you really think that simple repetition of "NY BANKERS ARE CROOKS" is helping anyone? Why do you think this? Honestly, I want to know the answer to that question. I want you to tell us all what actions we can take, based on your sophisticated conclusion that everyone but yourself is either a crook or an idiot, that will begin to solve the economic problems that we face. If in fact there is nothing that the rest of us can do or say that will not just piss you off--because you alone understand that NY BANKERS ARE CROOKS--then why do you waste your time on us?
Someday we'll step back and realize this 'homeownership society' was the meanest and lowest Orwellian con, in addition to being the stupidest.
Don't lose perspective. A mean, low Orwellian con? Yes. The meanest, lowest Orwellian con? Not by a long shot.
Alo, I'm not 100% sure if you're serious, but if you're not and just poking well-deserved fun at Apocalyptic-Jas, you may want to consider some fairly recent precedent.
Those '90s LA riots were at least partly fueled by urban blight that was largely a result of the 90s housing bust. It wouldn't surprise me one bit if LA Riots V2 (or V3 if you count the Watts Riots) are a lot more severe.
I am wondering if SWHC might perform well going forward.
Those '90s LA riots were at least partly fueled by urban blight that was largely a result of the 90s housing bust.
There were (are) a lot of other factors that make LA stand out. The 80s crack epidemic was a huge problem in LA. Combined with a paramilitary police force structure that never heard the term "community policing" and you had a recipe for disaster.
Jas also warned us about the bankers "you can see these people on every street corner in NY".
Jas, that was Rob, Nick and me trying to decide where to go for lunch.
Tanta, while the opinions and emotional rantings of a frustrated middle manager might interest some, I prefer the advantage of a wider knowledge base. I also like my whisky neat, and my women f*ckable, so where does that leave you?
lama, you remind me of the time I took some relatives on their first tour of the National Mall in DC. My aunt said, "Look at those people climbing that fence! Are they terrorists?" I said, "No, I think they're vacationers from Nebraska whose map is upside down."
That's what I thought, Jas. Now that you've shared that opinion with us, you need to find another blog to play on, OK?
...why do you waste your time on us?
Thank you, Tanta! I'm not thrilled with the state of the American sociopolitical system currently, but I've found Jas' rants to be nothing more than highly irritating emotional masturbation. If I wanted to hear it I'd subscribe to Z Magazine, or similar.
Those '90s LA riots were at least partly fueled by urban blight that was largely a result of the 90s housing bust. It wouldn't surprise me one bit if LA Riots V2 (or V3 if you count the Watts Riots) are a lot more severe.
As mentioned in Bailout, the first FDIC bailout was a small minority community bank. The justification for going out on the slippery slope was the vivid imagery of the Watts riots in the mind of the FDIC guy. Something about paving the road to hell comes to mind.
With regards to the whole moral hazard issue, I found some comments from Countrywide Financial CEO Angelo Mozilo in a Bloomberg story rather interesting:
Countrywide's Mozilo Says Regulators May Worsen Subprime Losses - Bloomberg.com
In a nutshell, Mozilo is complaining about how regulatory efforts to tighten standards on subprime loans will cause foreclosures to rise. His argument: That forcing lenders to qualify borrowers using fully indexed mortgage rates, not artificially low teaser rates, will prevent lenders from refinancing borrowers out of the high-risk loans they took out in the past couple of years. He calls it an "inadvertent attack on liquidity exactly when it shouldn't happen."
So let me get this straight: The same mortgage industry that made reckless loans to borrowers with bad credit during the biggest housing bubble in history ... that fought regulators tooth and nail over potentially tightening restrictions in the past couple of years ... that roundly IGNORED the "guidance" issued on high-risk home equity and subprime lending ... and that is now suffering immense losses because of it all ... is complaining about a crackdown. Officials would rather regulators allow them to squeeze even MORE profits out of these hapless borrowers by refinancing them into NEW subprime loans -- thereby artificially propping up asset (home) prices and helping them (lenders, that is) avoid the financial consequences of their inadvisable, past business practices.
My take: The solution to past reckless lending isn't more reckless lending. We have to get back to a place where people can afford homes at sensible prices using sensible financing. We have to let the foreclosure process play out, let the lending industry take its lumps for behaving irresponsibly, and let the market excesses be wrung out. At least, that's my two cents.
Max, I am quite certain those subprime loans on $500K properties are not scarce in thriving inner city communities like Compton, East LA, South LA, Inglewood... There's a whole lot of downside in those areas. You get the picture. The fast easy money is probably over and Barbara Boxter is getting nervous for good reason, I'm sure. The stress cracks in the dam are becoming evident. None of the gang or drug problems have gone away. There's a short fuse on that huge powder keg.
Hi barely -- much as I'd like to have needled Jas (who likes his whiskey neat and his invective sloppy) I am pretty serious about the Orwell bit of how the gospel of homeownership for the poor has had the exact opposite effect of pushing many in to debt and foreclosure, while enriching the fee-takers.
(sad story of this in map form here: Set up for a fall )
So thanks for very interesting bit about LA riots - am thinking the same thing about NYC. Some recent stats I saw in NYC show how few homeowners there actually are here -- 33 percent. The more you take away, the less stable neighborhoods here become. The crime that was here in the 70s and 80s could easily re-infect neighborhoods.
There's a short fuse on that huge powder keg.
I don't disagree that the problems in LA remain and the potential for social unrest is there. I just doubt that it's a national problem. LA has a unique culture and history that makes it prone to such things; the subprime mess is just the latest manifestation.
Max, maybe not so much a problem beyond the coasts, but there rise in gang activity in places like North Carolina kinda gives one pause..
Also very interesting segment on 60 msn last night about the culture of not informing cops about crime -- Omerta, hip-hop style, is going strong. It's caused a spike in # of cold homicices. If housing market is dying in these neighborhoods, along with rule of law, amid a general culture that values debt over savings, well, what do you think this is a recipe for?
Oy my typing-- "the rise in gang activity" - "60 mins"
well, what do you think this is a recipe for?
I saw the 60 minutes report, and I've the show "First 48" where victims and witnesses to crime refuse to cooperate with police. The thing is, this (along with poverty, disease, and drug abuse) isn't a new problem. I just don't see this erupting into major social upheaval.
Jas - I think that was the closest to a white flag or mercy you were ever going to get from Tanta. But you blew it royally with your response. I'm willing to give odds of 100:1 if anyone cares to bet - that you'll never engage Tanta in even semi-serious dialogue again.
BTW, the only one who sounds frustrated (euphemistically speaking, "deranged" would be more frank) here is you, Jas. Honestly, alot of folks around here are very well educated and seen alot of the world - they are therefore able to produce far more useful analyses.
I suspect you've achieved some level of financial success midway through life, retired to a small town, have nothing to engage your mind constructively on a daily basis, and without understanding it have become depressed - not in the sense of being sad, but in the sense of lacking a direction, being enervated etc. You would do yourself a favour and give yourself a chance at achieving something in the remaining part of your life if you saw a therapist for a year.
Max, I hope you're right. Prosperity is a very relative measure. It was meted out in a bizarre way in less well heeled locales, and once the numbers come in, I wouldn't be the least bit surprised if the fraud is highly concentrated in just the areas I am referring to. I am reasonably certain those that took the bait and are holding the bag might get a little hostile and restless. That's the conditioned reponse, along with blame (some actually deserved). Blight will definitely manifest itself there first.
That's the conditioned reponse, along with blame (some actually deserved).
Not to resort too much to psychoanalysis, but I would guess that people who craved home ownership and financial independence would be the least likely to riot.
I do agree that we'll see a higher overall crime rate, as the marginally employed become the unemployed.
Jeez, we're starting to sound like a patrick.net discussion. How about a topic about the geopolitical ramifications of reduced coffee consumption by suburban housewives on the economies of Seattle and Sao Paolo.
Tanta:
Regarding Jas, I can only say that the thread needs to be cleaned up otherwise it becomes a series of weird off topic rants.
Alo. I said somewhere (earlier thread, over at housing bubble blog? I don't know) that I think that the problem is policymakers confusing cause and effect. In general homeowners tend to be more stable, have more savings and be more responsible with their money. But this isn't BECAUSE they're homeowners, those have traditionaly been prerequisites to homeownership. Homeownership was the carrot to encourage saving.
We have to draw a line here between increasing access to the credit for homewonership to those with lower incomes and to those with bad credit. Everyone who isn't homeless consumes housing. You're always paying somebody's mortgage, (Or paying for their opportunity cost on ) yours or your landlord's. This is true for ANY income level. So there is a public benefit for those with low incomes but good credit and stable jobs to have access to credit. THIS is the reason that F&F exist. However, crazy-stupid-suicide loans make sense for very few indeed. Subsidizing loans those with a record of spending beyond their means and getting behind on their bills is not a public good and leads to the misallocation of resources and at its worst creates a modern debe-peonage.
Great point Jim A - would have been so much better for these neighborhoods had the benefits of the homeownership society not been foisted upon them.
This bust is exhibit A of how loans at any cost, by any means have, to any one (without savings) have the net effect of destabilizing neighborhoods -- and homeowners themselves -- many existing homeowners that fell for the siren song of subprime. How many stable homeowners that could have eeked by are now out on their ears for listening to promises of endless price appreciation?
I have a hunch, though, that at least in the NYC neck of the woods, 'debt peonage' isn't the worst we'll see. Max, I'm not talking jas-pocalypse now, but I do think, as you do, that crime will go up.
Some of the posts today emphasize just how small the housing and subprime "problems" really are in relation to the total housing/mortgage markets.
The foreclosures aren't evenly-distributed throughout the nation, and sometimes not even throughout the same metropolitan area.
The subprime "victims" (homeowners taken advantage of by unscrupulous lenders) are almost invariably people of modest means (and education/sophistication). They are far removed from the typical homebuyer, who is more financially well-off, responsible, and knowledgeable about buying and owning a home.
As I've said all along, you can't have genuine housing weakness without serious employment problems. The housing "bust" is a tempest in a teacup.
Sebastia
Parallels: 1980's and 2000's
. Republican Administration
. Trickled-down Economy
. Huge Deficits
. Record # of Millionaires
. Inequity Fissures
. Housing Bubble
. Junk Bond Explosion
History repeats 20 yrs later!
Let's see, we have Doomie posting under 5 aliases, Jas blaming NY bankers for all yet unknown ills to befall mankind, and Sebastian claiming typical homeowners are flush with opulance.
Is there a full moon?
Is there a full moon?
I hope so. That'll go away in a day or two. If it's something in the water supply, there could be a duration problem.
I would like to reiterate that I, at least, am not really prepared to make the subprime = poor equation. Insofar as poor prior credit performance is generally a function of economic vulnerability--let's call that "paycheck to paycheck"--then way more people are vulnerable than they like to think. And not having enough income to support the payments on a $500,000 mortgage is not the same thing as being "poor." Not where I live, anyway.
I am pointing out, rather, that when certain industry or Street participants bring up this "what about the poor" thing, they are being at best disingenuous and at worst dishonest. I am not saying I buy the idea that all median-income or better borrowers are responsible and all lower-income borrowers are irresponsible. In fact, I'd say that's nonsense.
Sebastian, For your bull case to be successful some huge market force - a silver bullet - that leads to long term prosperity and deep investment which needs to materialize in a hurry that short circuits the housing bust - A replacement for oil for example (biofuels and ethanol don't qualify since they're both a joke). I'm basically a bull so I'm willing to listen.
Otherwise I am afraid your simplistic view that the housing downturn is confined to the poor is going to disappoint you in a big way. All mortgage finance is closely linked in the credit continuum. All housing is also linked. I look at it like sludge. Water finds its level quickly where sludge eventually finds its level with some degree of latency. There won't be a lot of latency this time however because of chronic MEW and RE-Always-Goes-Up gambling.
There isn't a lot of time for this silver bullet. What's it going to be?
lama said: "... Let's see, we have Doomie posting under 5 aliases, Jas blaming NY bankers for all yet unknown ills to befall mankind, and Sebastian claiming typical homeowners are flush with opulance.
Is there a full moon?..."
Well, at least I'm the Devil you know.
The typical homebuyer doesn't need to be flush with opulence, just the normal level of assets that he/she would have.
The typical homebuyer only moves about 12 miles from where they already live, and already owns a home. That means that the recent years of high price appreciation in the house they want to buy is matched by similar appreciation in the house they already own.
A homebuyer moving from Omaha to San Diego might have "sticker-shock", but the typical homebuyer is staying in his own region, so affordability isn't an issue...he rolls his undeserved windfall equity from one massively-overpriced house into another massively-overpriced house.
Affordability (was) a serious issue for the people who are now in trouble with their subprime mortgage loans...but they aren't typical, there are damn few of them by comparison with the rest of the homebuying/homeowning public.
Sebastia
There are a lot of homeowners of every class who have now been made poor by taking out loans they could not afford, based on promises of future appreciation. You don't get foreclosure rates like we've had based on poor folks alone.
That said, the human shields the lending industry has held up to protect its profits have, as of late, been poor people --whom the industry says will be "hurt" if they can't access those high-fee, high-risk loans. This is, as Tanta rightly points out, preposterous. Risky loans hurt whatever neighborhood they come to. As NYC NEDAP map shows, though, it's the poorer areas that seem to be prime territory for mortgage loan sharks.
I asked this question once before and it seems to me that it was kind of danced around and not analyzed so I figured as it goes along with what Sebastian has commented, I'd ask it again.
In a given area, will the price decrease in lower priced housing by a higher percentage than in higher priced housing?
I understand the argument that tightened liquidity means less money to buy a house and therefor lower housing prices. I also agree that it's true and that prices on lower priced housing in an area will take a hit. But with higher priced housing, I would assume that the people in the market would not be affected by a credit crunch or raised standards as they would have significant ready funds and good cash flow. The result of that, would be a much lower decline in housing prices on the high end.
Stupid/not stupid?
Jeff, I don't think that's stupid.
I do think, though, that it minimizes the impact of the "transaction chain." High-end borrowers can qualify even in tighter credit environments because they can put down payments on the property. But they tend to get those down payments from the sale of a previous home. (Most high-end purchases are not first-time homebuyers.) So eventually, if the bottom end of the market tanks, there won't be enough buyers of the moderate properties to propel those owners into the high end. That just takes a while to become visible.
Jeff, here's my reading. At some level, the price distribution for housing should parallel income distribution. There are limits to this: at the lower levels, people tend to rent rather than buy which affects things, and I don't think that those with 99th percentile incomes spend as high a proportion of their income on housing but there it is. And of course in expensive areas, (say, NYC) people tend to spend a higher percentage of their income on housing than those living in Omaha. But within an area it generally holds.
In areas where there has been significant bubble driven overbuilding, the biggest proportionate declines are likely to be in the least desirable (lowest priced) housing. This is complicated by the fact that the two main factors of desirability (location and size) are somewhat in opposition. The biggest houses tend to be build in distant subburbs and downtowns are dominated by condos. People tend to "upfill" the housing supply from best to worst. The prices for any given level of desirability tend to be the highest that people can pay. The housing that is least desirable, either because it is older/smaller/rundown/in a crappier school district or because it is farthest away are at most at risk of being going empty and being a total loss, income wise.
High-end borrowers can qualify even in tighter credit environments because they can put down payments on the property. But they tend to get those down payments from the sale of a previous home. (Most high-end purchases are not first-time homebuyers.) So eventually, if the bottom end of the market tanks, there won't be enough buyers of the moderate properties to propel those owners into the high end. That just takes a while to become visible.
It depends on how 'high' high-end is. In the really high-end they don't need to sell anything - just have James write the nice man a check.
Another thing about CRs chain of transactions... there is no doubt a 'flux' of buyers either moving up or down the value chain as he described. But more importantly there is also a 'cycling' of transaction within the same level. Think of it as same class churning.
So even if the bottom is 'falling out'... the top might be doing 'smashingly well'... or the vice versa... if the larger preponderance of transaction is 'in class' rather than 'trans class' (either top, bottom or in-between).
This btw would be exacerbated if there really is a 'bifurcated' economy. The more bifurcated it gets the more churning you would expect.
I mean luxury homes in places like Brazil sell well even if millions of people still live in (real) hovels... There is a pretty significant social & economic 'wall' between those two communities & enough wealthy & super wealthy to keep the top of the market frothy.
But more importantly there is also a 'cycling' of transaction within the same level. Think of it as same class churning.
dryfly, I just don't see that. I can see "same class" transactions when you're talking relocation--city-to-city or downtown-to-exurbs or what have you--but that will end up a problem for a market that is net out-migration.
But a bunch of upper middle-class twits buying each other's McMansions just to rotate views of the golf course or something? Don't think it has much impact, if it exists.
And super-luxury-class high-end purchasers aren't the issue in my analysis. I don't think of "high end" as top 1%.
dryfly, I just don't see that. I can see "same class" transactions when you're talking relocation--city-to-city or downtown-to-exurbs or what have you--but that will end up a problem for a market that is net out-migration.
I think there is a lot more of it than you realize Tanta...
We've all heard the story that people own a home an average of seven years... Incomes don't go up enough nor do people's equity increase relative to the cost of the new home to allow them to jump class every new transaction.
Fact is most of us maybe move one or two 'classes' at most in a whole lifetime. The rest are same class new location transactions.
So if the average family moves every seven years and you have an adult life of 50 years (say 75 minus 25)... that is an average of about seven transactions. Maybe two of them are outside current classes (say a move up from starter to family then family to mini-McMansion)... and five are just 'churns' (say family to family, different location). That results in a ratio of 2-3 churns per trans-class transaction. Something like that.
And with flat incomes & tighter credit - look for the churn ratio to increase. Fewer jumping up class anyway.
When I first saw CR's chart, that was the thing that jumped out at me... not considering the same class recycling of homes. It can help explain why sales don't zero out even though there is a lot of market stress.
Yes, but!
I think we agree that what we're calling "same class" is highly likely if not exclusively "between location."
Once it's not the same market, then it might be the same "class" from the perspective of qualities of the property, but not necessarily from the perspective of price bracket within the specific local market. Further, it isn't always clear that these "same class" transactions in any given period are equalizing in- and out-migration. So maybe people who are selling in Fairfax and buying in Loudon are buying in the same class of property, but if migration to the exurbs is more popular than migration to the close-in suburbs, then the market in the close-in is going to deteriorate relative to the exurb in the same general price bracket.
In other words, I'm still not convinced that this is a real round-robin. Sure, lots of people will sell one four-bed three-bath two-car colonial and buy another in a different area or city or state. But that doesn't mean that the buyer of the old property was also an owner of a four-bed three-bath two-car colonial, or that the seller of the new one is going to buy a four-bed three-bath two-car colonial.
Sebastian,
There is truth to those statements. I think they are far outweighed by a coming cummulative cash flow problem by millions of recent home buyers.
I don't normally agree with your opinions, but thanks for using logic and facts in your arguements.
Now fess up. You never actually bought any NEW, did you?
lama said: "...You never actually bought any NEW, did you?..."
I should be insulted, but given the nature of Internet discussions I guess I don't blame you for asking.
Believe it or don't believe it, but I'm always being honest when I post. I bought NEW twice, just as I said, for a miniscule profit once and a small loss the second time.
Sebastia
In other words, I'm still not convinced that this is a real round-robin.
Tanta, it kind of has to be round-robin for many of these trades - if the seven year rule applies. There are just too many transactions over peoples lives and too little real class mobility to be anything else but a whole lot of near identical 'swaps'...
I mean we all like to believe the meme of American upward mobility... or the 'neo-meme' of Gen-X downward mobility... But the fact is near class stasis is the norm for most people over the majority of their lives.
They might make a small jump up (or down) with income growth/decline over their working careers & family life cycle... but not a whole lot. Yet many folks still move and buy/sell homes... So a lot of those transactions just have to be 'lateral moves'.
We can argue about the ratio of laterals to jumps up or down... but it doesn't change the fact that many moves just have to be lateral moves & aren't effected much by activity above or below their 'level'.
I don't think CRs model is 'wrong' per se, just incomplete... Entry level buyers definitely put some upward pressure on all levels above them. Remove them & the upward pressure is greatly reduced. But that is only part of the transaction picture... there are also a lot of lateral transactions... that are commissionable & comp setting.
This intra-level activity is why a large decline in entry level buyers will have some but might not have as large an impact on the overall market as a simple linear 'pass through' bottom to top model would imply.
And it will drive the people crazy who are looking for big quick RE price drops... because there maybe enough lateral activity to hold prices higher far longer than folks can imagine.
That is why the damned thing is so complex to grasp & predict.
BTW - to give Sebastien credit - he was suggesting this earlier & could very well be right. I just don't know - we'll see.
Jeff said: "...Stupid/not stupid?..."
Not only "not stupid", but downright perceptive.
The real estate market, whether on a national or local level, isn't defined by the extremes. Homebuyers are a blend, from people who pay all cash for a house (I was shocked to find out how many do this) to the people who can't genuinely afford one but can finagle a mortgage loan, anyway.
This is why I focus on the "typical", the "average" or the "median" when I post about the housing market. Those pieces of data can sometimes be misleading, but focusing only on the extremes (subprime, foreclosures) and assuming they define the entire market will always be misleading.
Sebastia
I mean we all like to believe the meme of American upward mobility... or the 'neo-meme' of Gen-X downward mobility... But the fact is near class stasis is the norm for most people over the majority of their lives.
I agree with you in general, there, dryfly, but I don't think that means that there is no longer an earning curve over the course of anyone's lifetime, or that the current vogue of "borrowing forward" has always been the case. In other words, most people aren't going to go from the studio condo to the estate in their lifetimes. But on average, people do start out in studio condos and then buy a two-bed ranch and then a four-bed colonial as they get older and more married and make more money. It is not historically typical that a first-time homebuyer buys a new four-bed three-bath two-car colonial, and then keeps trading that for another identical one several times over his lifespan, unless he is relocating.
But I thought we were talking about the dynamics of individual RE markets, not across RE markets. Once we're across markets, then it's awfully hard to compare apples to apples. A four-bed three-bath two-car colonial will cost you a lot more in Fairfax than in Olewein, even if you're in the median in both markets. A lot of people end up with "the same house" by spending a lot more of their monthly income on house payments.
CR's point with the move-up chain is that you have to have either move-ups or in-migration. You don't have just musical houses.
Are we talking about the same thing yet?
Sebastian writes, "The real estate market, whether on a national or local level, isn't defined by the extremes."
But that really isn't so. In markets like housing where there's not much short-term elasticity of supply, a relatively small increase or decrease in the number of buyers can greatly affect pricing. Once the market tightens past a certain point, you get a "musical chairs" effect. And with a tight market, the presence of even a relatively small number of people willing to bid ridiculously high thanks to availability of easy credit can kick off an upward price spiral.
In some areas, upward price spirals have fed upon themselves by spurring McMansion construction on teardown lots. Until the McMansions are completed, the teardowns remove units from the market and make it even tighter. (In my area the supply reduction continues even after the McMansions are finished, as the asking prices are so ridiculous they remain vacant.)