Barry Ritholtz is wrong in so many ways that it would be difficult to discuss all of them within a short space. Anyway here are some problems:
1) What exactly is Barry's definition of a bubble? he seems to imply that price decline should approach 80%, they should be rapid. Why and how he comes up with this metric is not exactly clear.
2) He suggests that houses have "intrinsic" value? Defining intrinsic value in a "market" economy is meaningless. In subsistence farming or pastoral economy you can define basic needs. Not so in a modern market economy where we are so far beyond basic survival. I know that shelter is the third leg of food and clothing. But people can shack up together (household formation drops), live in shanty towns, even become homeless. There is nothing intrinsic about a 5000 sqaure feet home, with a pool and 5-car garage.
3) The demographic support is all bunk. The growth in the number of households over the last decade is dwarfed by what happened in the 1970s or even the 1980s. Even over the last 5 years, household growth has been far from strong, let alone spectacular. Comparing houseohld growth in the US to that in Japan or Europe is beside the point. Those countries have stagnant, if not declining, populations.
3) Legal immigration has been falling, especially since 9/11.
4)The interest rate argument is of course fallacious. If rates fall, while you can afford more for the same monthly payment, why should monthly payment have gone up as a proportion of your income. ANyway you look at it, people's share of income devoted to mortgage payments has gone up in the last few years. That needs some explaining.
5) If the low interest rates reflect i) low inflation and ii) low wage growth, then the current mortgage actually looms large in relation to future expected incomes. That is why in the 1950s, 60s and 70s, when there was rapid wage growth, it was possible for people to grow their way out of intially tight mortgage situations. That is hardly the case now.
peoples mortgage payments as a percentage of income has continued to go up but what is even scarier is that this is happening when the percentage of ARM and interest only mortgages has ballooned.
Thats the key difference. Lower interest rates combined with new mortgage products and lax lending limits has combined for a perfect storm.
The big question for me is, to which extent will the Fed/Govt be able and willing to support the moral hazard bet "recent" homebuyers have been making? That is, offloading some people's (deliberate or accidental) profligacy on the backs of everybody else?
From muck... I think in some areas, falling from 2005 levels to 2000 levels might be quite dramatic.
I agree... except I'd call it TRAUMATIC more than dramatic... And it really depends on how heavily leveraged the owners are... if they bought a home in 2000 that was say $400K and had $200K down with equity from a previous home sale... and the house is now worth $600K... then falling back to $400K might depress them but won't put them 'under water'...
However if they bought the same home that was $400K in 2000 but the home owner bought it in late 2004 for $550K with zero down, no interest ARM... and it falls back to $400K... that person is in serious trouble.
And if there are a lot of people like them out there then we are all in serious trouble.
Personally I think a lot of regions will go under 2000 price levels but it will take a number of years for 'the market' to fully fathom this. Because it will likely happen slowly, it is hard for me to fully grasp the outcome for the economy as a whole... could be very ugly or only moderately so... hard to call, at least for me.
cm wrote... The big question for me is, to which extent will the Fed/Govt be able and willing to support the moral hazard bet "recent" homebuyers have been making? That is, offloading some people's (deliberate or accidental) profligacy on the backs of everybody else?
I hope the Fed Gov't does NOT bail them out... and if so retains claims to the homes future capital gain potential as a price for the aid...
Nor do I want the banks bailed out - and if so then the gov't again should lay claim to any and all future gains... maybe take full ownership of the companies, clean up the bad loans then resell via somekind of IPO to reclaim the bailout cost...
My fear is the management who ran these 'financial' firms and the stock holders who bought into them and the investors who bought their MBEs from the agencies & GSEs... my fear is they all skate free and we never learn a damned thing.
They all need to be reminded of the Boreman principal...
"Capitalism without bankruptcy is like Christianity without Hell..."
dry fly: Hey, I damn well expect that FDIC/NCUA bails out my accounts should their operators be hit by the mortgage default wave.
The impact of not bailing out troubled homeowners should be similar to not bailing out earthquake, hurricane, or flood victims. Only that there is a slight difference between natural disasters and reckless debt, and the associated notions of fairness etc.
CM - I live in the Mississippi River Valley - I live 200 feet above the river... for a reason... that is because the river always floods, always has... people who live in the valley KNOW this... so do the people on the flood plain... only they expect you and me to bail them out every spring.
I wouldn't mind doing it IF the premiums the morons on the flood plains paid were soundly based on actuarial stats - they aren't... it is based on political pork... it eventually results in a transfer of money from me & you to them everytime it rains. Plus of course the financial institutions that finance the buildings in the flood plains...
There has been talk about correcting this - bringing back moral hazard for those in the bottoms... same with folks living in hurricane prone regions on the coast... make the premiums reflect the risk they choose to take. If that happens then the system becomes sustainable again... and I quit bitching.
Now the GSEs with their MBEs are behaving EXACTLY like the people who build multi-million dollar palaces on shifting barrier sand islands or flood plains and then expect us to bail them out when the storms hit.
It has to stop - people all know better. If not they need lessons to learn. No better time then now.
My guess is there is nowhere near enough money in the 'insurance funds' of Fanny & Freddy and the other GSEs to come close to covering the losses. And my understanding is there is even less coverage for individual's mortgage protection... folks are going to get burned and badly... I don't see individuals bailed out at all institutions only partially. It will be far too politically unpopular to bail out all those 'flippers' and 'speculators'... even if they are the minority of the people who get hurt...
I'd prefer better regulation and STOP people from doing stupid things BEFORE they do them... if not then let them get burned so others never repeat the same mistakes... at least those within living memory of this insanity.
I'm not saying 'let them starve'... I wouldn't want them in boxes on the street... but I don't mind seeing them lose all their wealth... and especially the million dollar spec homes...
dry fly: I can sympathize with your sentiment very well.
However the issue with flooding in general, maybe not precisely in your situation, is more complicated than that. Yes, people have developed flood planes, but have taken countermeasures (e.g. building dykes and fortifications, rerouting the river bed) that seemed sufficient at the time (let's say within the last century). The problem is that flooding countermeasures upstream shift the severity of flooding downstream, begetting a cascade of countermeasures effectively offloading the problem on people who cannot possibly build dykes high and long enough to protect themselves. They may be those that you call idiots, and who keep living there because they or their family committed to the place at a time when it was safer (and of course because they are baild out and not left in the rain).
There are of course always free-riders, just as now some people are free-riding on the accomodation of housing credit.
Barry Ritholtz is wrong in so many ways that it would be difficult to discuss all of them within a short space. Anyway here are some problems:
1) What exactly is Barry's definition of a bubble? he seems to imply that price decline should approach 80%, they should be rapid. Why and how he comes up with this metric is not exactly clear.
2) He suggests that houses have "intrinsic" value? Defining intrinsic value in a "market" economy is meaningless. In subsistence farming or pastoral economy you can define basic needs. Not so in a modern market economy where we are so far beyond basic survival. I know that shelter is the third leg of food and clothing. But people can shack up together (household formation drops), live in shanty towns, even become homeless. There is nothing intrinsic about a 5000 sqaure feet home, with a pool and 5-car garage.
3) The demographic support is all bunk. The growth in the number of households over the last decade is dwarfed by what happened in the 1970s or even the 1980s. Even over the last 5 years, household growth has been far from strong, let alone spectacular. Comparing houseohld growth in the US to that in Japan or Europe is beside the point. Those countries have stagnant, if not declining, populations.
3) Legal immigration has been falling, especially since 9/11.
4)The interest rate argument is of course fallacious. If rates fall, while you can afford more for the same monthly payment, why should monthly payment have gone up as a proportion of your income. ANyway you look at it, people's share of income devoted to mortgage payments has gone up in the last few years. That needs some explaining.
5) If the low interest rates reflect i) low inflation and ii) low wage growth, then the current mortgage actually looms large in relation to future expected incomes. That is why in the 1950s, 60s and 70s, when there was rapid wage growth, it was possible for people to grow their way out of intially tight mortgage situations. That is hardly the case now.
tea, I will probably post why I think both articles are incorrect, but for now I just thought I'd say I think there is a bubble.
Thanks for the feedback.
Best Regards!
peoples mortgage payments as a percentage of income has continued to go up but what is even scarier is that this is happening when the percentage of ARM and interest only mortgages has ballooned.
Thats the key difference. Lower interest rates combined with new mortgage products and lax lending limits has combined for a perfect storm.
Did you read that conclusion, that even if rates rise, houses should stay above 2000 price levels?
I think in some areas, falling from 2005 levels to 2000 levels might be quite dramatic.
The big question for me is, to which extent will the Fed/Govt be able and willing to support the moral hazard bet "recent" homebuyers have been making? That is, offloading some people's (deliberate or accidental) profligacy on the backs of everybody else?
From muck... I think in some areas, falling from 2005 levels to 2000 levels might be quite dramatic.
I agree... except I'd call it TRAUMATIC more than dramatic... And it really depends on how heavily leveraged the owners are... if they bought a home in 2000 that was say $400K and had $200K down with equity from a previous home sale... and the house is now worth $600K... then falling back to $400K might depress them but won't put them 'under water'...
However if they bought the same home that was $400K in 2000 but the home owner bought it in late 2004 for $550K with zero down, no interest ARM... and it falls back to $400K... that person is in serious trouble.
And if there are a lot of people like them out there then we are all in serious trouble.
Personally I think a lot of regions will go under 2000 price levels but it will take a number of years for 'the market' to fully fathom this. Because it will likely happen slowly, it is hard for me to fully grasp the outcome for the economy as a whole... could be very ugly or only moderately so... hard to call, at least for me.
*
cm wrote... The big question for me is, to which extent will the Fed/Govt be able and willing to support the moral hazard bet "recent" homebuyers have been making? That is, offloading some people's (deliberate or accidental) profligacy on the backs of everybody else?
I hope the Fed Gov't does NOT bail them out... and if so retains claims to the homes future capital gain potential as a price for the aid...
Nor do I want the banks bailed out - and if so then the gov't again should lay claim to any and all future gains... maybe take full ownership of the companies, clean up the bad loans then resell via somekind of IPO to reclaim the bailout cost...
My fear is the management who ran these 'financial' firms and the stock holders who bought into them and the investors who bought their MBEs from the agencies & GSEs... my fear is they all skate free and we never learn a damned thing.
They all need to be reminded of the Boreman principal...
"Capitalism without bankruptcy is like Christianity without Hell..."
*
dry fly: Hey, I damn well expect that FDIC/NCUA bails out my accounts should their operators be hit by the mortgage default wave.
The impact of not bailing out troubled homeowners should be similar to not bailing out earthquake, hurricane, or flood victims. Only that there is a slight difference between natural disasters and reckless debt, and the associated notions of fairness etc.
CM - I live in the Mississippi River Valley - I live 200 feet above the river... for a reason... that is because the river always floods, always has... people who live in the valley KNOW this... so do the people on the flood plain... only they expect you and me to bail them out every spring.
I wouldn't mind doing it IF the premiums the morons on the flood plains paid were soundly based on actuarial stats - they aren't... it is based on political pork... it eventually results in a transfer of money from me & you to them everytime it rains. Plus of course the financial institutions that finance the buildings in the flood plains...
There has been talk about correcting this - bringing back moral hazard for those in the bottoms... same with folks living in hurricane prone regions on the coast... make the premiums reflect the risk they choose to take. If that happens then the system becomes sustainable again... and I quit bitching.
Now the GSEs with their MBEs are behaving EXACTLY like the people who build multi-million dollar palaces on shifting barrier sand islands or flood plains and then expect us to bail them out when the storms hit.
It has to stop - people all know better. If not they need lessons to learn. No better time then now.
My guess is there is nowhere near enough money in the 'insurance funds' of Fanny & Freddy and the other GSEs to come close to covering the losses. And my understanding is there is even less coverage for individual's mortgage protection... folks are going to get burned and badly... I don't see individuals bailed out at all institutions only partially. It will be far too politically unpopular to bail out all those 'flippers' and 'speculators'... even if they are the minority of the people who get hurt...
I'd prefer better regulation and STOP people from doing stupid things BEFORE they do them... if not then let them get burned so others never repeat the same mistakes... at least those within living memory of this insanity.
I'm not saying 'let them starve'... I wouldn't want them in boxes on the street... but I don't mind seeing them lose all their wealth... and especially the million dollar spec homes...
JMHO
*
dry fly: I can sympathize with your sentiment very well.
However the issue with flooding in general, maybe not precisely in your situation, is more complicated than that. Yes, people have developed flood planes, but have taken countermeasures (e.g. building dykes and fortifications, rerouting the river bed) that seemed sufficient at the time (let's say within the last century). The problem is that flooding countermeasures upstream shift the severity of flooding downstream, begetting a cascade of countermeasures effectively offloading the problem on people who cannot possibly build dykes high and long enough to protect themselves. They may be those that you call idiots, and who keep living there because they or their family committed to the place at a time when it was safer (and of course because they are baild out and not left in the rain).
There are of course always free-riders, just as now some people are free-riding on the accomodation of housing credit.