I'm still a little hung up on the question of who gets to be on the other side of that trade.
Perhaps, the same guys who short CME housing futures, now? You know, hedge funds and speculators.
Anyway, I don't think it is a good idea. What about not blowing bubbles instead starting with including asset prices to central banks inflation considerations? Won't it solve the problem once and for all?
In the end, most of his suggestions are attempts to get rid of the problem using... financial innovation. however financial innovation was the CAUSE of the problem!
Giving homeowners a "home appreciation insurance" would be no different than the investment banks using "Credit Default Swap", no?
in the end, we need a simpler solution:
allow those with crushing mortgage debt to either:
-rework the loans (PRIVATELY between parties)
or
-go bankrupt.
as always, people look at the current generation of OVERSPENDERS and try to figure out how to keep their assets OVERVALUED so that the OVERSPENDERS do ok... (which by the way locks out the next generation due to artificial price support)
This article has forced me to re-think my opinion of Robert Shiller. It is almost as if we are in this mess because he and others taught this tripe to our current lot of financial and banking leaders. Seriously unsound ideas and pre-conceived notions are put forth in this article.
Home Equity Insurance, in 2 flavors, has been around since the 1970's. Oak Park Il has a program created in the 70's to reassure people that brown people moving into the neighborhood won't trash values. Shiller picked up on the equity insurance idea in the 1980's (maybe about 1990?), and has promoted a different flavor than the Oak Park variety. He was part of a program set up in Syracuse (or Rochester? I can't tell them apart) to provide equity insurance. I don't see it as a way out of the current mess, and I don't think he's advocating that. But it isn't a bad way forward.
It is like a credit default swap, and it is more or less the CME futures market at a retail instead of a wholesale level. It also ties in with a post I made here a long time ago, that said a lot of the riskiest lending was just an ugly form of shared appreciation mortgages. Essentially, lenders have been gambling on high HPA to make shaky loans pay off, and the borrower and the lender both get screwed in the complex legal machinery when that assumption fails. A shared appreciation mortgage, or an equity insurance contract, would just make the nature of the gamble more explicit. You buy the insurance (or give up a fraction of the potential appreciation) and if the HPA dematerializes you've paid someone else to take the loss for you. Instead of Joe Sixpack gambling on continued HPA, and getting stuck with a foreclosure when it doesn't happen, whoever was on the other side of the insurance transaction takes the loss. They will, given time, figure out how to price this. Instead of Joe Sixpack getting a lousy interest rate, but getting told "don't worry - HPA will save you" Joe gets a much more standard interest rate, and pays an insurance premium, and Joe doesn't get the foreclosure on his record if things go south. In that sense, it's a lot like mortgage insurance, only a) a lot broader coverage, b) more expensive (see a), and c) lets the borrower out a lot more gracefully.
Counterparty risk was the second problem I noted. The first was equity sharing. Wouldn't that support prices at the present nose-bleed altitude? I hardly see how that is 'kind' to subsequent buyers.
Where is Schiller? WHAT HAVE YOU DONE WITH SCHILLER?
In short Robert is shilling for more bullshit financial engineering ( the hallmark of American capitalism today ) that puts band aids on systemic problems.
Wouldn't that support prices at the present nose-bleed altitude?
You would expect the price of the insurance to increase as the price of housing broke away from fundamentals. As house prices rose in your neighborhood, couldn't you buy additional insurance to "lock in" your gains without having to sell?
This looks like just another way of trying to value a seldom-traded, illiquid asset. Part of a houses value will always be "irrational". When "exuberance" shows up, the fundamentals go out the window.
Shiller, the guy with the good measuring stick on house prices, opines: The radical financial innovations of the 1930s were possible because the real estate crisis and other economic problems of the Depression created a sense of urgency.
and that is so radically different from the consensus that makes no such comparison --this is a "soft patch"; that thinks this economy is driven by so many different elements other than housing --of course even your dog has a RE license, so what?; that is basically aligned with the GOP mindset that governance is a hindrance to your basic laissez faire constitution; that all detractors to these points are homeless future terrorists.
Could be Shiller's point would be that the dark side of that trade would be a lot less dark if those insuring the venture had a real stake...driving those house prices back down to levels that had some connection to incomes --real incomes less tied to speculation: wages.
An argument could be made that the insurance companies might not cover homes at the obviously over-inflated prices of the last few years. This might have injected a bit of rationality and help put the breaks on the HPA bubble.
I realize the Home Asseesor organization that Shiller lauds in this article also should have served this function, but in the case of insurers, they would be looking at massive losses from over-inflated prices.
Do I not understand? I presume home equity insurance would be offered by insurance companies on the equity in your home. If its value fell below that amount insured, the insurance company would guarantee the difference. What is so wrong with that? Insurance companies could assess the risk (that is what they are for) and charge accordingly. If you couldn't afford the insurance or couldn't get any, you would be taking the risk yourself and that might deter you from buying the house at that price and thus help prevent bubbles in real estate. Or do I not understand the whole thing?
Shiller is shilling for MacroMarkets, LLC. People who can barely afford their home payments can surely afford a home equity insurance premium also, I suppose.
Yearning to Learn- "why not let housing clear itself???"
Indeed.
'Liquidate it. All of it. Allow more competent people to pick up the pieces.'
-Andrew Mellon, Secretary of Treasury, in handwritten note to President Herbert Hoover
Approximate copy, but you get the idea.
If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation. Let me repeat that:
THE US ECONOMY WOULD DESTROYED FOR AT LEAST A GENERATION.
The largest source of individual wealth would be vaporized. Do you want that for your country? Do you want that for yourself?
Stanley B. Resor Professor of Economics & Professor of Finance
Robert J. Shiller is the Stanley B. Resor Professor of Economics, Cowles Foundation for Research in Economics, at Yale University. He has written about financial markets, behavioral economics, macroeconomics, real estate, statistical methods, and public attitudes, opinions and moral judgments regarding markets.
Professor Shiller is [ . . . ] a co-founder of MacroMarkets LLC in Cambridge, which promotes securitization of unusual risks.
Achievements and Awards
Research Associate, National Bureau of Economic Research
Fellow, American Academy of Arts and Sciences
Fellow, Econometric Society
Member, Academic Advisory Panel for the Federal Reserve Bank of New York
Recipient, Guggenheim Fellowship
Paul A. Samuelson Award for Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks (Oxford University Press), 1996
Commonfund Prize for Irrational Exuberance (Princeton University Press, 2000, Broadway Books), 2001
Education
PhD Massachusetts Institute of Technology, 1972
SM Massachusetts Institute of Technology, 1968
BA University of Michigan, 1967
Max, Schiller is not describing an insurance program in the NYT piece, whatever he may have advocated in the past.
He's talking about an outside entity taking part ownership of the property so the resident, distressed mortgagee can keep the house, paying on a reduced principal - it's shared ownership and, if I'm not very much mistaken, it would support RE prices right where they are today, i.e., bloated.
Who would underwrite equity insurance? Private mortgage insurance is basically equity insurance for lenders. It insures up to 15% of the home's value. Most pmi underwritten after 6/15/05 is already underwater. The pmi companies are bleeding, and will continue to bleed for years. I can't see any financial entity, in this present economic climate, jumping in to indemnify home buyers' equity positions.
Japan has been dealing with falling home prices for the better part of the last 18 years. Lenders indemnify themselves by forcing borrowers to come up with at least 50% down. With the average price of Tokyo residential real estate, even after falling by as much as 80% in value since 1990, still costing over $1,250 a sq ft, a buyer for a 1,000 sq ft home would have to come up with at least $600,000 cash down. I'm guessing that with an end coming to foreign banks buying US securitized mortgages, the average US citizen, not known for his saving ability, will have to come up with more down payment money then he has. Physical real estate should never have been liquid, and now it will not be.
I think the way this HPA sharing might work is it could cushion the price decline overshoot on the way down. At some point in the price decline it'll be worth gambling on a stabilization and subsequent appreciation over the term of a loan. This won't prevent substantial price declines but it'll perhaps prevent a total meltdown.
BTW - Nice and crisp! The previous post could be rambling, I guess, but I prefer long-winded as a characterization. I like having the option to pick my poison.
I share the disappointment of several posters above in Shiller's thinking.
The root of the current problems lies not in us having too few innovative (==complex) financial products for dispersing risk, it lies in egregious negligence throughout in the lending of other people's money.
Indeed, it was exactly the new, innovative ways to disperse risk that enabled the headlong pursuit of sales commissions and bonuses that embodied that negligence.
If I were younger I'd have been amazed by the number of people who seem to think that dispersing risk away from banks throughout the financial system is a good idea -- especially by the number of people who seem to think that dispersing losses somehow eliminates them. (And I'd have been amazed by how the banks dispersed their risk in ways that didn't really disperse it ... but I digress.)
It's a travesty that people use the term "financial engineering" to describe the creation of financial Franksteins such as CDOs and CPDOs, etcetera, etcetera. They violate the most basic dictum of engineering: Keep It Simple!
The more complex you make a system, the more likely it is that you'll fail to perceive a fatal flaw.
Alas, it was almost certainly the intent of many who created the financial Frankensteins exactly to make their fatal flaws hard to see, so that they could preserve "plausible deniability" to keep out of jail and not have to disgorge their bonuses in the collapse they really knew was likely to follow.
"If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation."
So you want to make sure home prices can boom, but they cannot bust?
If that's the case, there's no free lunch: to keep middle class homeowners from "busting" the money has to come from somewhere. Renters? The rich? Savers?
I don't necessarily disagree with your premise, but its better if you identify who's picking up the tab. Most likely it'll be savers, in the form of another round of negative real interest rates.
David- "I don't necessarily disagree with your premise, but its better if you identify who's picking up the tab. "
In the end, EVERYONE will pick up the tab regardless of the solution.
If housing is allowed to liquidate, the follow-on effects would destroy the economy. I would call standing in a bread line "paying for it," wouldn't you?
Regarding mp's quote above of Mellon's advice to Herbert Hoover, it is extremely important to know that Hoover ignored Mellon's advice, and did just the opposite.
Although it is the conventional wisdom that it was Hoover's having taken Mellon's advice that caused the Great Depression, that simply is not so.
Several decades ago I read a most interesting book by Austrian-school economist Murray Rothbard which made persuasive arguments that the depression would have ended sooner had Hoover taken the advice. But since Rothbard apparently never came up with any rigorous mathematical or statistical analysis to back up his argument, there's no compelling reason to believe he was right.
Since Ben Bernanke's take on the Great Depression is that the government just didn't go far enough and fast enough in the opposite direction, we're not going to try that approach this time, either.
From the earlier thread - "According to ShopperTrak RCT Corp., which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent"
Does anyone here get a little annoyed when a computer modeled statistic is presented with a degree of precision into the 10th of a point, there isn't even an accompanying the margin for statistical error. It sounds like the value was released by the bureau of standards or something.
I think you misunderstand the point. A wealth transfer to save the economy is a good idea. But who supplies the wealth? You're talking about preventing a market from reaching market-clearing prices. You can only do that by raising incomes or lowering payments. Which is it, and who pays?
The tab is bigger than most think, so I say its lower payments through low real interest rates. Who pays is the elderly, as they will face higher inflation and lower income from savings. Greenspan and Boskin, btw, made soak-the-elderly possible by neutering COLA increases.
Will something calamitous happen this time because of housing? Some quotes from Peter Lynch's "one up on wall street" -
"I've been hearing that the 1987-88 market is a rerun of the 1929-30 market and we're about to enter another great depression. So far, the 1987-88 market has behaved quite similarly to the 1929-30 market, but so what? If we have another depression, it won't be because the stock market crashed, any more than the earlier depression happened because the stock market crashed. In those days, only one percent of Americans owned stocks.
The earlier depression was caused by an economic slowdown in a country in which 66 percent of the work force was in manufacturing, 22 percent was in farming, and there was no social security, unemployment compensation, pension plans, welfare and medicare payments, guaranteed student loans, or government-insured bank accounts. Today (1988), manufacturing represents only 27 percent of the work force, agriculture accounts for a mere 3 percent, and the service sector, which was 12 percent in 1930, has grown steadily through recession and boom and now accounts for 70 percent of the U.S. work force. Today, the average household has two wage earners instead of one, and that provides an economic cusion that didn't exist sixty years ago. If we have a depression, it won't be like the last one!
On weekends and weekdays I've been hearing that the country is falling apart. Our money used to be as good as gold, and now it's as cheap as dirt. We can't win wars anymore. We can't even win gold medals in ice dashes. Our brains are being drained abroad. We're losing jobs to the Koreans. We're losing cars to the Japanese. We're losing basketball to the Russians. We're losing oil to the Saudis. We're losing face to Iran."
My solution is to foreclose on the homes and cast the prior owners out into the great outdoors, where they will have to fight over choice heating grates.
Peter Lynch- "Today, the average household has two wage earners instead of one, and that provides an economic cusion that didn't exist sixty years ago. If we have a depression, it won't be like the last one!"
It makes perfect sense. The people who don't mind borrowing 100% also don't haggle too much over the price. The criminal class wants high prices. The days of requiring a down payment and fiscal responsibility are gone forever. The sooner the honest folks come to grips with this fact, the better.
-Equity insurance? trading your future home equity for protection from foreclosure. Sounds like renting. Schiller is being foolish in this instance.
It seems to me that all of these financial problems screaming for government protection and insurance programs are symptomatic of a larger problem. Americans expect to live in a bubble where people do not get sick, hurt, or die. Snobody ever gets hungry or has a caffiene headache. Let's legislate manditory healthcare, seatbelt laws, helmet laws, smoking laws, savings and retirement accounts. After taking the responsability away from our citizens for their actions there can be little suprise at our generally inept decision making.
America's sophisticated ( and leveraged to the max ) financial system created the underlying systemic problems so they should shoulder the burden starting with more stringent regulation.
Otherwise I agree with Roubini stand by for "generalised systemic financial meltdown
mp, note that I didn't write that you were claiming Hoover had taken Mellon's advice -- exactly because you didn't say that. I was just opportunistically expanding on your comment.
The misconception that Hoover took Mellon's advice seems to be nearly universal, and I try to do what little I can to lean against that, as, "It's not what you don't know that hurts you, it's what you know that isn't so."
jm, that's fine, and I appreciate that. I was not intending to be intellectually dishonest. This thread is progressing rapidly and, quite simply, I don't have time to write a national economic estimate, OK?
"If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation."
Yeah, we know. Sadly, like everyone else who's pointed this out in public, you don't provide any solution, except for the destruction of the currency, which won't exactly save the economy either.
Sometimes, there isn't a solution, only a choice of problems.
what if I want to buy a house to live in it ? what if I don't give a damn about price appreciation ?
from what I'm reading here, the proposed 'Home Equity Insurance' is just another mechanism to add more costs onto the process of buying a home. to prop up the various parties that want a continued revenue stream (that would vanish if people we're not flipping or making home 'investments').
maybe something about this concept evades my fundamental understanding. I'm left with the impression that the US has insufficient jobs (real jobs !) to provide steady employment for the population. so the population (those who are not counted as employed or unemployed) have been creating their own income stream by gambling on home appreciation. the party ended. some people are still holding cards and want to play some more. if the US does suffer a recession, and the USD gets whacked back 10 or 20 years, maybe our exports will be competitive enough to generate new jobs. let china worry about china.
THE US ECONOMY WOULD DESTROYED FOR AT LEAST A GENERATION.
remember what I said a couple of thread up (down?) about how long it took Florida to recycle in the 20's-40's ? about 18-20 years... which is roughly a generation.
Jim Driscoll- "Sadly, like everyone else who's pointed this out in public, you don't provide any solution,..."
Unfortunately, any solution I would offer would be unacceptable. A solution requires public debate and a consensus that integrates the best parts of all the proposals.
"proposed in 1994 to make home equity insurance insurance on the market value of a home part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies."
Well maybe, but who is to say that part of the process wouldn't have been corrupted as well? I suspect if a company like Berkshire were writing the policies, the premium increases would have capped the rampant speculation and general mania.
The basic reality is that bubble mentality infections can go quite far. Remember the late '90s when exceptional stock market returns were considered the new norm? This current bubble is not that different. The MBS buyer with a huge appetite for yield ignored numerous warning signs.
Another curious question is whether the long time operators like Mozilo were infected. His stock sales suggest he knew better. His hanging around suggests perhaps not. After all, he could have set a retirement date and no one would have questioned the sales.
Sam Zell - Now there's a guy that knows when to sell. When asked about the "sub-prime" problem, he indicated that problems are to be expected when the borrower has no skin in the game.
So here we are today. We pushed risk to the wall. Lender of last resort? There's not much left except the bag.
As and aside, do the PMIs model HPA or potential HPD in their premium determination? They should and if not, they likely will.
In so far as the sentences can be regarded as proposals and not mere statements of facts, Schiller is proposing BOTH equity insurance AND swapping debt for equity ( by the mortgage holders) e.g.
"....For example, Andrew Caplin, professor of economics at New York University, has proposed that in personal bankruptcy proceedings, the courts should be allowed the latitude to substitute real estate equity a share in the ownership of the property, to be realized when it is eventually sold for first mortgage debt...."
and
"...For example, I and my colleague Allan Weiss (now C.E.O. of Index Capital Advisors) proposed in 1994 to make home equity insurance insurance on the market value of a home part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies..."
The first, well, I don't like a court ordered swap but private arrangements are just fine. Bond holders swap debt for equity in distressed companies all the time.
The second, well, the fact that he uses the past tense suggests that he is aware of the problem of "But who will take the other side of the trade?"
I think Schiller's point is that our current political environment seems to preclude bold actions, and the current situation (if it's as dire as many here see it) requirse bold ideas and bold actions.
I totally agree with him. Look at the responses to the attacks of 9/11, the Katrina debacle and now the housing/credit crisis... all muddled, indecisive, ineffectual, yet plenty expensive...
I think one thing is certain, whoever occupies the White House in 2009 can't but help provide much more thoughtful leadership, and by then it will be sorely needed. In the meantime, I think it's safe to say we have another year of befuddled stumbling ahead of us.
Schiller speaks of Home Equity Insurance only in the past tense ("In 1994....Had our proposal been put into place....") I'm sure he understands that nobody is taking the other end of that deal in a market poised to take a large drop.
In a normal market it might be done somewhat on the order of a Credit Default Swap (with a counterparty with very deep pockets, since the stuff often goes south all at the same time.....).
Chris Tanner and his wife found their dream home last year, a four-bedroom, 3,100-square-foot house
Good Lord, WTF does anyone need with a 3,100-square-foot house? How much money would you need to take out of your phantom home equity in order to furnish it?
Tanner, the Northwest homeowner, said past rapid appreciation in the market made him feel pressured to buy his current home. He wound up in a bidding war for it, which didn't seem like a problem at the time.
"It became apparent that if you didn't buy a house (then), next year it was going to be $50,000 more," he said.
This from an "account exec for a mortgage lender"!!?? I guess the greed impulse sweeps away all prudence.
from the Tucson link above: "High-risk, high-rate loans include subprime mortgages, made to borrowers with lower credit scores, and "Alt-A" loans, which often had looser standards than conventional loans. High-risk, high-rate loans were sometimes marketed to people who didn't understand the potential pitfall,"
Marketed to people who didn't understand understand the potential pitfall, or those that simply chose to ignore it?
Today, the average household has two wage earners instead of one, and that provides an economic cusion that didn't exist sixty years ago. If we have a depression, it won't be like the last one!"
Heh. Of course, consumption has expanded to consume both incomes, to the point that one person losing a job today often puts a household cashflow negative after housing, food and gas. Two earners losing their jobs, with a negative savings rate?
Catastrophic.
I've got a bad short term (defined as 15 years) feeling about this,
prat
"The largest source of individual wealth would be vaporized."
It isn't wealth and never was, it may have provided and illusion of wealth due to a credit bubble and lax lending and inflation but a non income producing assert or as I look at homes as a personal liability cannot of themselves create wealth for most homeowners.
The home equity insurance isn't so bad in that it would let people smooth out the appreciation/depreciation and not have to time the market as much.
Which would be great, as timing the market to buy stocks or bonds is no big deal, but trying to time the market buying a house when life needs dictate otherwise (ex. had more kids, need to retire, spouse died, or whatever) really sucks.
It's a strange shiller
apparently he seems to call for more innovation, massive bailout ...
But the idea underlying the article is basically "real estate is doomed" and we are facing years of constant declines.
As everybody knows a such dust could be a huge drag on the economy for quite some time.
So wake UP now before it gets disastrous we can't stay still, looking at this mess arms crossed.
Find a way to regulate and help
home owners to stay in.
It's not a matter of bailout we urgently need safety nets, there is a denial about what a RE bubble popping can do to the economy.
We have a consumer-led recession in 2008, ARMs resets will last until 2011. The governement is partly responsible for this mess and he
should help with it now or there will be no rebound in 2009.
Shiller forgot something the buyers
of last resort are also fried.
So the main institutional instrument
is broken.
Sounds great let me secure my equity at the expense of future generations. I am sorry don't see a way out of this except to make burger flipping a 30 dollar an hour profession. The dynamics don't work or warrant todays prices.
Basically things work till they don't.
You can't fix stupid if we could we should start in Washington.
"timing the market to buy stocks or bonds is no big deal"
May need to have that discussion with those retiring now or retired and planning on paring those investments for living expenses during the coming 5 year bear market.
--
And in 1938, Congress created Fannie Mae, which eventually led to the huge securitization of mortgages.
And now the time has come to pay the piper! According to former Fed President William Ford, Fannie and Freddie are incompetently run and shouldnt be allowed to do anything more.
We should take full advantage of the innovation opportunities stimulated by our current troubles. We would emerge much stronger and better for it.
We should invite bigger and bigger troubles to open more innovation opportunities! I love Americans optimism.
Some of the worst people in America are solutions-peddlers. Americans love them no matter how bad those solution would be in practice. Prof. Shiller forgets to tell us that all of the New Deal programs ran their course and by 1939 the economy was back to before the New Deal. It was the beginning of the WW II that saved the US economy from continued depression (economic activity due to war picked up way before the US officially entered the war).
Tanta: Perhaps someone can explain the logic of the "home equity insurance" to me. I'm still a little hung up on the question of who gets to be on the other side of that trade.
Why, Tanta, who else but Their Royal Highnesses, aka American People? That is the beauty of democracy the govt. is called upon to intervene on behalf of the irresponsible. After all, we are benevolent people. Nationalization of benevolence if the bitter fruit of democracy.
If those wanting to retire now had sold their stocks or bonds for money market or what have you earlier, they wouldn't have had to move a thing.
If they just don't have enough money (ie. need some mythical high appreciating investment to retire), that's just a didn't save enough problem, not a market timing problem.
--
Do people know who, as a group, did the best and worst, relatively, during 1930-1939?
Large corporations did the best and small businesses did the worst (as a group they lost money, which means many went belly up). Huge concentration of corporations, via mergers, that gives them monopoly-type pricing power, have preceded depressions!
Is there any message from history?
BTW, Prof. Shiller forgot to mention the repeal of the "Depression-era" Glass-Stegall Act and what it portends.
anaon, "If those wanting to retire now had sold their stocks or bonds for money market or what have you earlier, they wouldn't have had to move a thing"
and
"...For example, I and my colleague Allan Weiss (now C.E.O. of Index Capital Advisors) proposed in 1994 to make home equity insurance insurance on the market value of a home part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies..."
I think that if prices are indeed 30% too high, let them fall. Anything that distorts the pricing mechanism, creates a stress in the economy. And currently, any bailout would either require tapping enormous taxpayers' funds or would kill the savers (including elderly) thanks to inflation. If some mortgaes make sense with prices at the fundamental value and require only some temporary assistance, that's OK. Anything that would prevent the rebalancing is worse that the rebalancing itself.
Economic bubbles work like being on speed. They give a illusion of prosperity, they make people think they are invincible and they require higher and higher monetary doses to make it going further. It's not the withdrawal symptoms that are bad. It is the drug itself. The damage to the economy is being made during the boom. It's done. Nothing can undo it. Getting rid of the drug is what should happen. The faster, the better. Anything that prolongs it, will just make it more painful.
In Eastern Europe, the countries that opened the economy for the rebalancing process after the fall of the communism fared better than those that tried to make it as slow and "painless" as possible.
Several decades ago I read a most interesting book by Austrian-school economist Murray Rothbard which made persuasive arguments that the depression would have ended sooner had Hoover taken the advice. But since Rothbard apparently never came up with any rigorous mathematical or statistical analysis to back up his argument, there's no compelling reason to believe he was right.
Two points:
1) About the 'numbers'. I agree that if he can't even do a rudimentary mathematical model of something as mathematical as an 'economic theory' where he gets to pick the assumptions then its just an article of faith. Not necessarily to be ignored but certainly not to be 'believed'.
2) Even if right - a faster deeper depression could just have easily resulted in fascism. Also unprovable with numbers and equally an article of faith.
Interesting hypothetical but all of it hypothetical just the same.
But since Rothbard apparently never came up with any rigorous mathematical or statistical analysis to back up his argument, there's no compelling reason to believe he was right.
Where's Misean when you need him ? Meantime, I'd say that Austrian economics as per von mises ( and cats too at that ) - explicitly states that mathematization of economics is not possible - that there is a massive qualitative aspect to it. Asking them to provide a mathematical model is like, well, asking a polytheist to provide a monotheist model.
And despite( or even because of ) my background in math, I don't have a problem with a non-mathematical theory of economics. There's tons of stuff that can't be mathematicized but can still be analyzed and anyway math has a HUGE hole at the centre of it( cf Godel's theorem).
mp said: "...If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation..."
Well, let's take a real-life example and see what would happen.
My house-price drops by 30%. Okay, now what?
With my house, nothing, since my monthly mortgage payment is already lower than a similar rental house would be. (BTW, original loan--5% down, so it's not like I had a big head-start with a massive down-payment to start with.)
With my consumption? Well, my housing consumption (obviously) stays the same, as does my utility, grocery, gasoline, insurance, car payment, etc. My "core" consumption doesn't change at all. Not sure how that translates into economic destruction that will outlive me.
When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters.
By that measure, it looks like a collective price-drop of -30% in housing would result in a recession that lasts about 4 quarters.
"The American consumer seems to grasp the risks. A growing number of Americans expect the economy to tip into recession in the next year -- 40% last week, up from 31% in October, going by a Reuters/Zogby poll released last week. Rosenberg said government statistics show that 500,000 self-employed workers have lost their jobs since July -- a greater loss than was seen in all of 2001. Reported unemployment figures remain low, but Kasriel says those numbers "smell worse than a week-old fish."
I agree 100%. The fundamental question to ask is
why should we bail out anybody. Liquidate borrowers as well as lenders. LIQUIDATED THE CREDIT BUBBLE/PONZI SCAM. Both lenders and borrowers chose to gamble on this asset class appreciation and they lost. Let them take the hit even if it means a depression. Maybe we should start bailing out the gamblers in Las Vegas too. Morally, I don't see any difference. What kind of message are we sending to the population? Gamble as much as you want and we will always be there to pick up the tab.
Why prudent people like me who saved for years should be punished again. When prices were going up they won, when they are collapsing now we lose. BS. NO BAIL OUT FOR ANYBODY. LET THE MARKET TAKE CARE OF THE CREDIT/RE BUBBLE. LET THE PRICES GO DOWN TO THE LEVEL WHERE PEOPLE WITH 25%-50% DOWN CAN BUY. DEFLATE ALL ASSET CLASSESS. Since financial engineering got us into this mess in the first place, financial engineering can't be a soultion.
Regardless of what these financial geniuses come up with the market will prevail. They can only slow down the dive. The issue is of the loss of trust in the financial system and its solvency not the liquidity. It will take years not months to repair the damage. Who is going to buy mortgage bonds of any issuer? Why do you think banks don't trust each other. Because the know that the counterparty is seating on a pile of toxic waste. Why do you think financial markets around the world are freezing? Because privet people like me don't want to touch anything but the highest quality government paper. So called prosperity of the last 20 years was just an ilusion built on a mountain of debt. It never existed. Now it is the payback time for the excessess. Lets turn the financial clock back 20 years. We need severe depression to restore frugality, morals , work ethic and competitivness. This is the only road for US to retain its world class status. Nobody in the history of the world borrowed or printed their way into a prosperity. Hard work and smarts did.
I'm glad others see the premise of the Shiller article as flawed. Many of the posts in this thread are more thoughtful and insightful than Shiller's article. The idea of home equity insurance for buyers is just sophmoric.
btw Shiller, real estate appraisers have been acquiescing to lenders for decades, nothing new there.
Federal Reserve officials believe a substantial decline in home prices is a big risk to the economy, according to forecasts released for the first time by the Fed on Tuesday. The Fed's forecasts, combined with the summary of its October meeting, appeared to show more concern about slower growth than higher inflation.[link]
Is everyone clear? House prices will stay up, even if it costs a few trillion$
We should take full advantage of the innovation opportunities stimulated by our current troubles. We would emerge much stronger and better for it.
Financial innovations are what got us into trouble in the first place! Financial innovations lead to troubles and then troubles would lead to innovation (as in govt. intervention)? A perpetual motion machine.
Who do you think fronted the money for the mortgage?
Let me see. Hedge funds, Chinese, oil countries, investment banks, pension funds, savers. It's still better than bailout where hedge funds and investment banks will get the benefit and the savers get ripped off.
There will be pain no matter what is going to happen. I believe letting it clear out is going to cost less in the long run.
Money (a promise) is a symbolic representation of goods & services. When total promises exceed total goods & services, only two things can happen.
All promises are written down in proportion, i.e. inflation.
Enough promises are completely written off to balance the equation, i.e. deflation.
The Feds problem is that they need to disguise which process is taking place, otherwise there will be a general panic dogpile of bets on the perceived direction.
Can we just banish this term? New packaging/marketing schemes for risk isn't innovation. At least to people who don't get sales commissions from the new scheme.
"How many times have we broached the inflation/deflation conundrum here?"
It's purposeful behavior. I watched Greenspan since 1987, but it wasn't until the mid-1990s that I really started to understand.
The Feds knows all this debt is unredeemable. What they try to do now is split the difference, inflating some of it away for stability but also allowing minor credit collapses to ward off moral hazard.
from way above: I note your concern about housing deflation leading to possible depression/severe recession...
however, I'm not sure that Shiller's suggestions are "innovative" enough.
He starts by talking "innovation" and then he brings out antiquated ideas from the 30's. Those may have worked then... but won't now.
Besides... like I said, is it really a good thing keeping housing costs so high that the average american is basically just a sharecropper struggling to hold onto it? keeping housing costs high assures the next generations will have it just as bad if not worse...
As others have said, home price appreciation insurance needs a counterparty... this brings in counterparty risk (like ACA, as example)
and again, it is the dispersal of risk which seams to have lulled us into the belief that risk was ELIMINATED as opposed to simply diversified.
in essence, the risk dispersion has actually CREATED systemic risk where before the risk was more "containable".
I don't know what the "right" answer is. But I do know what is going to happen:
we simply inflate. it's the only way. This will be silent enough that the masses won't realize...
the govt will then have to figure out a way to translate inflation into wage increases despite global wage arbitrage.
this could be accomplished with protectionist laws and new tax policy.
(democrats anyone?)
in doing so, the nominal home values can be saved. We will have CONSIDERABLE amounts of pain nonetheless... most likely skyrocketing COL increases and energy cost increases... and likely loss of the dollar as a world reserve currency...
but have no fear... England and Eurozone are not far behind us. Nor is China.
It WILL be a race to the bottom... but I'm not sure about the timing yet.
<i>Where's Misean when you need him ? Meantime, I'd say that Austrian
economics as per von mises ( and cats too at that ) - explicitly states
that mathematization of economics is not possible - that there is a
massive qualitative aspect to it. Asking them to provide a mathematical
model is like, well, asking a polytheist to provide a monotheist model.</i>
Math does provide a good predictor for populations and multiple events. It's like when you are driving over a heavily travelled bridge and you pass an exit where most of the traffic leaves, making the other lane(s) clear. Now you don't HAVE TO change lanes, but it takes a concious effort not to. There's a mathmetical model that will predict what you will probably do, but your free will is still involved. In fact every driver has free will, but most will perform EXACTLY as predicted. Perhaps this is what is involved in the inpredictability of electrons- do they have free will? I think the only way we can't quantify economics is that we don't include all the variables. Sometimes stuff happens which in hindsight is totally obvious, but at the time is totally opaque to us. Bubbles wouldn't happen were this not so.
"but also allowing minor credit collapses to ward off moral hazard."
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leverage is the "problem" and you are no doubt a moron.
Much of the hedge fund money comes not fromm savers but from leverage.
they get leverage by borrowing from banks.
where do banks get money? clearly not from savers... Most of it (over 90% maybe even 99%) is created "out of thin air" due to fractional reserve lending.
If I recall, there are something like 700+ TRILLION dollars in derivatives out there... you don't honestly believe that people saved that much cash, do you???
There's been a lot of homebuyer bashing in these comments and in comments on previous threads. "How could they not have seen the folly of home prices increasing forever?" (or words to that effect).
But I'd bet that at some time most CR readers bought a home and then held their breath for several years, hoping that "they" didn't catch the wave just before it broke.
CR readers (at least those who are commenting) are the lucky ones. Not to minimize good decision making skills, but making an investment of this magnitude always involves taking a risk. Those of us who have been homeowners long enough that our personal fortunes are insulated from all but total collapse have little justification for dumping on people who wanted what we have and saw it getting further away from them every month.
And the reason it was getting away so fast??? I'l leave the rest of you to debate that, but my two cents is that there was so much free US$ capital both here and abroad that needed a place to be invested, and US real estate seemed safe. In order to invest it, borrowers had to be found and the same sales tactics that are employed in any market (discounts, rebates, deferred payments, high commissions) were used.
And unfortunately, they worked very well. For a while.
Good points. However I'd like to ask you a favor. Reading a screen is hard enough and one reason we capitalize the first letter of a new sentence is to make clear that the preceding period is not a comma. e. e. cummings notwithstanding.
Insurance is, always and everywhere, pooled, prepaid losses.
For insurance to have "helped" in the current "crisis", payments over the years would have to have matched equity losses plus payed the vig to insurance companies.
poszi,
Agreed, lower the boom and let the chips fall where they may.
We need a new start, a meritocracy like it used to be. And discipline.
People can only be legislated into equality at the level of the lowest party.
barely
Market timing is my point too. The point being it's a heck of a lot easier to time when to call your broker and change paper asset X into Y, than it is to try and time when your spouse dies or when your kid is born to conform to the RE markets ups and downs...
Sebastian- "Well, let's take a real-life example and see what would happen."
Sebastian, you're talking "MY house," "MY consumption," "MY mortgage payment."
I'm not talking about YOU, I'm talking about the AGGREGATE, which includes YOU. If the AGGREGATE falls 30%, the follow on effects will most certainly affect YOU.
YOU may be a card-carrying member of the "ownership society," but it's going to end up affecting YOU and all of your fellow members, regardless of whether you own your home outright, financed 100%, have a home equity loan, or used an ARM in anticipation of higher prices.
Many of my first, second and third cousins in India and some brothers, all usurers and sinners (my late father told some of them on their face!), have multiplied their capital by MORE THAN 10,000 times within my adult life-time (some 40 years) in nominal rupees (more than 100 in real terms), after expenses. Where would that end? One guy borrowed at 43% compounded from my brother, secured by prime real estate, to send his son (not very bright) to a third-rate medical school in Nepal. People have turned into morons. I have seen it in India and I see it in America.
I was taught the "magic of compound interest" at the age of seven (I am sure before Einstein learned it). It provided no allure to me.
From the Holiday spending good news is bad news Dept.: ANY INCREASES IN RETAIL SPENDING OVER THE POST-THANKSGIVING HOLIDAY IS ANOTHER NAIL IN THE COFFIN OF MORE DEBT-DRUNKEN US CONSUMERS FALLING FURTHER BEHIND IN THEIR MORTGAGE, CREDIT CARD, AND AUTO LOAN PAYMENTS AND PUSHING THE US ECONOMY INTO AN EVEN DEEPER RECESSION STRAIGHT AHEAD....IMO
The equity insurance may have some good points, but I think that the details would be problematic. Back in the housing boom, it would have been cheap and no one would have been willing to pay. I expect that such insurance would now be very expensive, with the real expectation of continuing home price declines. One big issue--how long can you lock you insurance in for? and can you "refinance" when the price of insurance drops? Normally, futures contracts are for a year or less.
I am pretty much like yourself. I believe we are at the Rubicon...a point of no return. I also believe that the chances of a complete financial and systemic breakdown resulting in a new currency is much closer than most people think.
At this point, the US cannot endure a 30 percent collapse of home and equity values.
I know that there are many intangibles to consider, but how do you see this all playing out? I am anticipating all relevant FCB's implementing a ZIRP in an atttempt to sustain asset values as best possible.
Meantime, I'd say that Austrian economics as per von mises ( and cats too at that ) - explicitly states that mathematization of economics is not possible - that there is a massive qualitative aspect to it.
That in itself is an article of faith. That just because some part of economics is qualitative means that no math can be applied or that nothing can be 'learned' from modeling.
There are lots of things that aren't purely mathematical yet can be modeled through combinations of logic, math and 'game theory'. Just because it can't all be 'canned' doesn't make it all bad.
In fact if that were the test you couldn't use math in engineering or science because there are some qualitative aspects.
I come from an empirical background and distrust mathematicians as much as anyone yet will sill concede the silly stuff can help answer some vexing questions if asked correctly and followed with liberal doses of skepticism.
David Pearson, A wealth transfer to save the economy is a good idea.
Free or forced?
Iraq as analogy -- If US abruptly leaves it will likely be short term horrific with quicker long-term resolution and less total misery than if US stays to avoid short term chaos.
If markets are free to collapse and recover on their own, short term pain however severe will likely be less than total drawn out agony induced by attempts to force avoidance of credit OD withdrawal symptoms.
And if forced, who decides who holds what bayonet at who's throat?
I read this article this morning and did not understand where the insurance was going to come from. Tanta, please explain what Shiller is talking about
Let's assume that though there may not be a "solution" to dealing with the impact of major RE devaluation, that there is in some sense an "optimum" approach. For a starting point, I propose that society debate a basis on how to distribute the pain.
I suggest three factors, the relative weighting TBD.
Pain should be applied to those who committed fraud.
Pain should increase toward those who applied the greatest leverage.
Pain should increase toward those with the greatest financial sophistication.
but, you knew that, I'm sure. I am quite sure you also knew that disclosure amongst the hedge community is beyond reproach (said obviously in a facetious manner).
So, you declare the hedge community the "savers" based on the fact that they are the most levered of any other vehicle, that they provide little to absolutely no disclosure, that they have riddled the pension community with these opaque investment strategies (only to know move to retail due to the declining lemming population), have already suffered losses in the 10's of billions, fudge returns per the study cited above, bill on the inflated returns at 2 and 20 in many cases----
Sebastian- "When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters."
Household portfolio loss in the 2000-2002 stock market collapse is chump change compared to what a 30% loss in housing would be.
And, in terms of your loss effect, it appears to me that you're assuming it would be linear, which is not a wise idea.
Targeted keynesian policy could easily disaggregate a nationwide 30% RE decline.
Particularly in somewhat affordable markets.
If the crux is to simply disaggregate even my simple mind can find a way to avoid a nationwide 30% decline.
I think MP & Shiller are being alarmist and shrill.
30% of homes don't have a mortgage, so there would be no impact to them whatsoever.
If one assumes 10% churn rate of housing stock, if 100% of buyers since 2004 are underwater and foreclosed over 3 years that only doubles RE supply for 3 years.
The economy can do that standing on its head. Remember the bulls favorite meme, RE investment is only 6% of GDP. I don't buy it but even if the RE wealth effect triples the impact just 18% of GDP.
Again, puhleeze, RE corrections have happened before and we all lived through them.
Some of the worst people in America are solutions-peddlers. Americans love them no matter how bad those solution would be in practice. Prof. Shiller forgets to tell us that all of the New Deal programs ran their course and by 1939 the economy was back to before the New Deal. It was the beginning of the WW II that saved the US economy from continued depression (economic activity due to war picked up way before the US officially entered the war).
So going to war in Iraq then was the best economic decision Pres. Bush could make as it will create another outstanding period of prosperity like post-WW2? Or is the current war just not big enough in comparison? If this logic is true, it means you can end any economic downturn with a nice-sized war. If so, why would you ever critisize Pres. Bush for doing exactly the right thing to end the 2000-2003 downturn?
sunsetbeachguy: "Puhleeze, 30% declines happened in TX, CA and FL in that last 30 years. I don't see many devastated boomers. Life goes on, it might represent hardship, but there is always hardship. Remember, we are ALL subprime!"
I lived in SFV during the 29% decline. The BIG difference was LEVERAGE. Another big difference was mortgage payments as % of income. In 1988, I got 5.25% rate mortgage with max adjustment to 2.25% above 11th District. The highest that I paid was 7.375%.
It IS different this time. It Is the Leverage, Stupid!
That in itself is an article of faith. That just because some part of economics is qualitative means that no math can be applied or that nothing can be 'learned' from modeling.
Not wishing to start or continue some petty squabble here.
Anyway I was suggesting that it was unreasonable to expect Rothbard to provide a math model since it IS an article of faith in Austrian economics, von Mises style - picking a quote from one of many sources:
"But unlike other economists, the Austrian never attempts to measure or put these values in mathematical form. The idea that an individual's values, plans, expectations, and understanding of reality are all subjective permeates the Austrian tradition and, along with an emphasis on change or processes, is the basis for their notion of economic efficiency."
To the extent that I've tried to progress things further, then my idea of a math model, Austrian style, would explicitly avoid stuff like general demand, general supply, devoid of individual single transaction decision making - rather I've looked for something that aggregrates in a self-reflective, feedback loop manner all these individual transactions in a mapping that describes the net effect. I've made cursory attempts at using cellular automata principles, more properly stated as "simple programs" as in Stephen Wolfram's "A new Kind of Science" - free online at: Stephen Wolfram: A New Kind of Science | Online - Table of
Contents
1/3rd dont own and rent. Of those that own their residence, 1/3rd have no mortgages, 1/3rd have manageable mortgages, and 1/3rd are in deep dodo primarily due to home equity extraction and highly leveraged purchases (this also included speculators that didnt put down much).
Therefore, roughly 25% of households/speculators are in heavy mortgage burden trouble. The gross numbers hide this distributional fact. Just imagine 10% of the housing units being defaulted!
"If aggregate prices drop 30% . . . The largest source of individual wealth would be vaporized"
mp | 11.25.07 - 12:06 pm
How are we to stop it? Oh wait, a massive government program to bulldoze all existing and foreclosed homes, thus limiting the supply to support prices at > 3.8 * median income. Hmmm. Maybe still not enough. I know! A government program to pay homebuilders not to build, like they pay farmers not to grow crops.
sk - If I were to attempt to model it I'd want to do something like what 'statistical mechanics' does for physics. Model small & 'sum up' rather than start large and divide. Testing small pieces of theory vs empirical results from 'small experiments'.
But then the only econ I really liked when in school was micro econ so maybe its just my bias.
Anyway if there are no numbers or attempts at empirical results to test against numbers - I see it as being little different from religion... and fervent adoption of one theory or the other as a type of 'economic evangelical fundamentalism'.
The TX, CA & FL events you cite did not occur simultaneously. Add on leverage, and we have a calamity in the sense that our economic life will be altered for a generation.
Are we talking 30% REAL or 30% NOMINAL price declines.
I agree with MP that we as a nation would be hard pressed to weather a 30% REAL decline in homes. It would cause a major credit contraction, and we don't have the savings needed to withstand that. It could in essence be Great Depression II.
On the other hand, 30% NOMINAL losses spread over a few years are very doable in my opinion.
which is why I believe the answer is already staring us in the face.
Inflation.
run inflation at 7-8% per year but report that it is 2-3%... after 4-5 years that's 30% real loss...
my guess is that the government directly or indirectly (taxpayers) would foot the bill ulimately. Who else?
It is very suspect that while the huge party is in progress there is little or nil talk of provisions reqired to end the party early because it may get out of hand. NOPE..none of that.
HOWEVER, after the huge party has turned into a massive hangover....suddenly experts everywhere. SUSPICIOUS
National declines of 30% will devastate the economy. That kind of national decline translates to upwards of an 80% decline here in SoCal -- put that in your pipe and smoke it.
BTW, I said "will" because it's a done deal, and there's nothing that can be done to stop it. Anything the government tries at this point will only aggravate the situation.
p.s.: Sebastian will realize the impact of 30% declines when it costs him his job.
My question is... let us say I am a renter saving for a decent downpayment for a future purchase. I want a healthy downpayment so I can withstand a downturn.
Now can I buy insurance to protect myself if prices go higher while I am saving? Or is this insurance only for people own and their prices going down?
pc- this has been debated in a variety of places and from what I understand, it is, to use a term someone pithier than I coined, a giant nothing-burger. The lenders have agreed to do. . . what they are already doing. Essentially a little pre-holiday shopping feel good PR stunt.
Of course, I have no idea what I'm talking about. . . I just read a lot of stuff.
Falcor and mp,shiller is undoubtedly more intelligent and much better educated than I.I describe his position as Academic Hubris for 2 reasons.First he proposes a simple solution to a problem of immense complexity.In my experience such simple answers arouse Murphy and invoke the Law of Unintended Consequences.Secondly,given the ACTUAL structure of the governments and institutions involved,even if they ALL bought into the idea promptly...mmmm...be nice,Tom,be nice...the implementation might perhaps be suboptimal.Wow,i WAS nice,think i'll strangle a bunny to restore my balance.
Sebastian writes, When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters.
By that measure, it looks like a collective price-drop of -30% in housing would result in a recession that lasts about 4 quarters.
But a 30% drop in home prices equates to a drop of more than $6 trillion, and, moreover, a drop in assets bought on average with far more leverage than anyone is allowed to buy stocks or bonds with.
Tom Stone- "...he proposes a simple solution to a problem of immense complexity."
Tom, I'm not thrilled with Shiller's offering either, but I do respect his opinion enormously because he is a genuine expert on housing. Frankly, the fact that he even considers a 30% price drop possible scares the hell out of me.
Any acceptable solution to the housing problem, whatever its final dimensions, will be the result of public debate and consensus. Unfortunately, the debate really hasn't started yet.
Shiller's piece may start the debate. If it does, it served a useful purpose and we should thank him for it.
mp,I agree with you on shiller,he is a very bright boy,and calls it as he sees it."any acceptable solution to the housing problem,whatever its dimensions,will be the result of public debate and consensus.Unfortunately,the debate hasn't started yet".You make my point for me.We do not have the time needed for public debate,which would take years,public policy makers are still in denial about the nature and extent of the problem,and as far as "consensus",look at the players involved...no matter how sensible or practical shiller's proposals may be,they probability of their enactment approaches zero.THIS is the world we live in.BTW the Bunny was tasty.
Whenever otherwise intelligent academics start writing op-ed pieces for the NY Times, they seem to start taking dumb pills and making suggestions that would normally be expected from mental patients.
Has Schiller noticed that all the "bold" ideas from the 1925-1933 period-- FHLB chief on the list-- are alive and well and in full operation during the last 6-7 years? Either the institutions he lauds are failures (which would undermine his argument) or else they aren't nearly the panacea he tries to suggest (which would undermine his argument). Either way, this guy should not be allowed out of the classroom.
And in the sky is falling department, he says housing prices have "already fallen 5%" which he somehow tries to draw parallels to the depression era 30% drop... I think the ability to differentiate between 5% and 30% should be a requirement to graduate high school-- certainly one should have it mastered before you get a PhD.
Speaking of "dumb pills" And in the sky is falling department, he says housing prices have "already fallen 5%" which he somehow tries to draw parallels to the depression era 30% drop. ordinary mental patients might take his concern to be that we are headed for more than 5%..."already fallen 5%" being the clue Jen... FHLB chief on the list-- are alive and well and in full operation during the last 6-7 years? the mere existence of the body may not tell the entire story about how well it is funded and by whom...sorta like FEMA.
Time to sharpen your pencil and make distinctions between smart academics like Shiller and bought and paid for academics...like Mankiw.
And in the sky is falling department, he says housing prices have "already fallen 5%" which he somehow tries to draw parallels to the depression era 30% drop... I think the ability to differentiate between 5% and 30% should be a requirement to graduate high school-- certainly one should have it mastered before you get a PhD.
Ummm Jen, I think he said IF the decline gets to 30% it would be a good idea to have some plans in place prior to that. People can argue whether that's a good idea or not but the concept that a 5% decline (where he says we are now) comes before a 30% decline (where he suggests we MIGHT be heading in the future) is not inconsistent with his piece. You know 5% first THEN 30% later... I think he got that part mastered pretty well, probably sometime prior to getting his PhD.
Besides his obnoxious insistence on using the Latin plural of premium, his most obvious problem is his assumption that an insurer will be able to construct reliable actuarial tables from historical data. The current problem is largely a function of the failure of models based on historical markets that looked very different from the one we have to predict outcomes involving a plethora of new mortgage products and a massive influx of capital via securitization.
If you think about it, a 100% LTV lender is really an equity insurer of last resort. I see no reason why Shiller's insurers would be likely to have any better a crystal ball than the lenders we've got.
Fascinating discussion of Shiller's "let's start thinking up radical price support/ bail-out plans" article.
MP perhaps best captures the passionate desire for a price support/ bail-out plan. To paraphrase him shamelessly, "you'll all die economically unless you bail out the homeowners and lenders."
On the other side, I like David Pearson's pithy analysis (12:31pm) the best. All of this discussion about various insurance options and so on just boils down to this: Who can we force into paying when past and future bets on HPA go south?
A bunch of people, mostly homebuyers and lenders, sat down to the poker tables and made some giant bets on home prices going up, and face losses. None of them was forced into it. Any homebuyer could have rented instead. Now they are eyeing the spectators to see which ones they can force to pay some of their losses. So who, besides the bettors, can be talked/forced into paying? All for the common good, you understand.
Another comment on Sebastian's
When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters.
At the peak of the stock bubble, total margin lending on the NYSE was, I believe, in the neighborhood of $250 billion. But US mortgage debt increased about $5-6 trillion during the bubble years, and we know that well over a trillion of that was equity withdrawal in cash-out refinancings. The much greater leverage employed by the general public in real estate will make the impact of falling home prices much more damaging than the stock market crash.
I also am disappointed to see this from Shiller. A previous poster said that this would amount to glorified renting. Well put. A 30% decline in home prices could be very bad for our country, but I don't see how ensuring a perpetual class of renters and giving control of an even larger amount of geography and wealth to an even smaller number of people (or institutions) could be better in the long term. Our democracy is already in a very fragile place.
I'm still a little hung up on the question of who gets to be on the other side of that trade.
Perhaps, the same guys who short CME housing futures, now? You know, hedge funds and speculators.
Anyway, I don't think it is a good idea. What about not blowing bubbles instead starting with including asset prices to central banks inflation considerations? Won't it solve the problem once and for all?
Correction to the above: "who are long CME housing futures".
I usually applaud what Shiller has to say...
but reading this article makes me cringe!
In the end, most of his suggestions are attempts to get rid of the problem using... financial innovation. however financial innovation was the CAUSE of the problem!
Giving homeowners a "home appreciation insurance" would be no different than the investment banks using "Credit Default Swap", no?
in the end, we need a simpler solution:
allow those with crushing mortgage debt to either:
-rework the loans (PRIVATELY between parties)
or
-go bankrupt.
as always, people look at the current generation of OVERSPENDERS and try to figure out how to keep their assets OVERVALUED so that the OVERSPENDERS do ok... (which by the way locks out the next generation due to artificial price support)
why not let housing clear itself???
This article has forced me to re-think my opinion of Robert Shiller. It is almost as if we are in this mess because he and others taught this tripe to our current lot of financial and banking leaders. Seriously unsound ideas and pre-conceived notions are put forth in this article.
Home Equity Insurance, in 2 flavors, has been around since the 1970's. Oak Park Il has a program created in the 70's to reassure people that brown people moving into the neighborhood won't trash values. Shiller picked up on the equity insurance idea in the 1980's (maybe about 1990?), and has promoted a different flavor than the Oak Park variety. He was part of a program set up in Syracuse (or Rochester? I can't tell them apart) to provide equity insurance. I don't see it as a way out of the current mess, and I don't think he's advocating that. But it isn't a bad way forward.
It is like a credit default swap, and it is more or less the CME futures market at a retail instead of a wholesale level. It also ties in with a post I made here a long time ago, that said a lot of the riskiest lending was just an ugly form of shared appreciation mortgages. Essentially, lenders have been gambling on high HPA to make shaky loans pay off, and the borrower and the lender both get screwed in the complex legal machinery when that assumption fails. A shared appreciation mortgage, or an equity insurance contract, would just make the nature of the gamble more explicit. You buy the insurance (or give up a fraction of the potential appreciation) and if the HPA dematerializes you've paid someone else to take the loss for you. Instead of Joe Sixpack gambling on continued HPA, and getting stuck with a foreclosure when it doesn't happen, whoever was on the other side of the insurance transaction takes the loss. They will, given time, figure out how to price this. Instead of Joe Sixpack getting a lousy interest rate, but getting told "don't worry - HPA will save you" Joe gets a much more standard interest rate, and pays an insurance premium, and Joe doesn't get the foreclosure on his record if things go south. In that sense, it's a lot like mortgage insurance, only a) a lot broader coverage, b) more expensive (see a), and c) lets the borrower out a lot more gracefully.
Counterparty risk was the second problem I noted. The first was equity sharing. Wouldn't that support prices at the present nose-bleed altitude? I hardly see how that is 'kind' to subsequent buyers.
Where is Schiller? WHAT HAVE YOU DONE WITH SCHILLER?
In short Robert is shilling for more bullshit financial engineering ( the hallmark of American capitalism today ) that puts band aids on systemic problems.
Wouldn't that support prices at the present nose-bleed altitude?
You would expect the price of the insurance to increase as the price of housing broke away from fundamentals. As house prices rose in your neighborhood, couldn't you buy additional insurance to "lock in" your gains without having to sell?
This looks like just another way of trying to value a seldom-traded, illiquid asset. Part of a houses value will always be "irrational". When "exuberance" shows up, the fundamentals go out the window.
There ain't no Hubris like Academic Hubris.
Shiller, the guy with the good measuring stick on house prices, opines:
The radical financial innovations of the 1930s were possible because the real estate crisis and other economic problems of the Depression created a sense of urgency.
and that is so radically different from the consensus that makes no such comparison --this is a "soft patch"; that thinks this economy is driven by so many different elements other than housing --of course even your dog has a RE license, so what?; that is basically aligned with the GOP mindset that governance is a hindrance to your basic laissez faire constitution; that all detractors to these points are homeless future terrorists.
Could be Shiller's point would be that the dark side of that trade would be a lot less dark if those insuring the venture had a real stake...driving those house prices back down to levels that had some connection to incomes --real incomes less tied to speculation: wages.
An argument could be made that the insurance companies might not cover homes at the obviously over-inflated prices of the last few years. This might have injected a bit of rationality and help put the breaks on the HPA bubble.
I realize the Home Asseesor organization that Shiller lauds in this article also should have served this function, but in the case of insurers, they would be looking at massive losses from over-inflated prices.
Do I not understand? I presume home equity insurance would be offered by insurance companies on the equity in your home. If its value fell below that amount insured, the insurance company would guarantee the difference. What is so wrong with that? Insurance companies could assess the risk (that is what they are for) and charge accordingly. If you couldn't afford the insurance or couldn't get any, you would be taking the risk yourself and that might deter you from buying the house at that price and thus help prevent bubbles in real estate. Or do I not understand the whole thing?
Shiller is shilling for MacroMarkets, LLC. People who can barely afford their home payments can surely afford a home equity insurance premium also, I suppose.
Yearning to Learn- "why not let housing clear itself???"
Indeed.
'Liquidate it. All of it. Allow more competent people to pick up the pieces.'
-Andrew Mellon, Secretary of Treasury, in handwritten note to President Herbert Hoover
Approximate copy, but you get the idea.
If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation. Let me repeat that:
THE US ECONOMY WOULD DESTROYED FOR AT LEAST A GENERATION.
The largest source of individual wealth would be vaporized. Do you want that for your country? Do you want that for yourself?
Is that good for you?
Tom: There ain't no Hubris like Academic Hubris.
Yale School of Management - Faculty - Robert J. Shiller
[excerpts]
Stanley B. Resor Professor of Economics & Professor of Finance
Robert J. Shiller is the Stanley B. Resor Professor of Economics, Cowles Foundation for Research in Economics, at Yale University. He has written about financial markets, behavioral economics, macroeconomics, real estate, statistical methods, and public attitudes, opinions and moral judgments regarding markets.
Professor Shiller is [ . . . ] a co-founder of MacroMarkets LLC in Cambridge, which promotes securitization of unusual risks.
Achievements and Awards
Research Associate, National Bureau of Economic Research
Fellow, American Academy of Arts and Sciences
Fellow, Econometric Society
Member, Academic Advisory Panel for the Federal Reserve Bank of New York
Recipient, Guggenheim Fellowship
Paul A. Samuelson Award for Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks (Oxford University Press), 1996
Commonfund Prize for Irrational Exuberance (Princeton University Press, 2000, Broadway Books), 2001
Education
PhD Massachusetts Institute of Technology, 1972
SM Massachusetts Institute of Technology, 1968
BA University of Michigan, 1967
Max, Schiller is not describing an insurance program in the NYT piece, whatever he may have advocated in the past.
He's talking about an outside entity taking part ownership of the property so the resident, distressed mortgagee can keep the house, paying on a reduced principal - it's shared ownership and, if I'm not very much mistaken, it would support RE prices right where they are today, i.e., bloated.
Two dissimilar ideas being aired here.
Who would underwrite equity insurance? Private mortgage insurance is basically equity insurance for lenders. It insures up to 15% of the home's value. Most pmi underwritten after 6/15/05 is already underwater. The pmi companies are bleeding, and will continue to bleed for years. I can't see any financial entity, in this present economic climate, jumping in to indemnify home buyers' equity positions.
Japan has been dealing with falling home prices for the better part of the last 18 years. Lenders indemnify themselves by forcing borrowers to come up with at least 50% down. With the average price of Tokyo residential real estate, even after falling by as much as 80% in value since 1990, still costing over $1,250 a sq ft, a buyer for a 1,000 sq ft home would have to come up with at least $600,000 cash down. I'm guessing that with an end coming to foreign banks buying US securitized mortgages, the average US citizen, not known for his saving ability, will have to come up with more down payment money then he has. Physical real estate should never have been liquid, and now it will not be.
"There ain't no Hubris like Academic Hubris."
If you don't like the message, kill the messenger.
I think the way this HPA sharing might work is it could cushion the price decline overshoot on the way down. At some point in the price decline it'll be worth gambling on a stabilization and subsequent appreciation over the term of a loan. This won't prevent substantial price declines but it'll perhaps prevent a total meltdown.
BTW - Nice and crisp! The previous post could be rambling, I guess, but I prefer long-winded as a characterization. I like having the option to pick my poison.
Second attempt - he does indeed describe an insurance program, but I wasn't discussing insurance in the quote which Max used.
I share the disappointment of several posters above in Shiller's thinking.
The root of the current problems lies not in us having too few innovative (==complex) financial products for dispersing risk, it lies in egregious negligence throughout in the lending of other people's money.
Indeed, it was exactly the new, innovative ways to disperse risk that enabled the headlong pursuit of sales commissions and bonuses that embodied that negligence.
If I were younger I'd have been amazed by the number of people who seem to think that dispersing risk away from banks throughout the financial system is a good idea -- especially by the number of people who seem to think that dispersing losses somehow eliminates them. (And I'd have been amazed by how the banks dispersed their risk in ways that didn't really disperse it ... but I digress.)
It's a travesty that people use the term "financial engineering" to describe the creation of financial Franksteins such as CDOs and CPDOs, etcetera, etcetera. They violate the most basic dictum of engineering: Keep It Simple!
The more complex you make a system, the more likely it is that you'll fail to perceive a fatal flaw.
Alas, it was almost certainly the intent of many who created the financial Frankensteins exactly to make their fatal flaws hard to see, so that they could preserve "plausible deniability" to keep out of jail and not have to disgorge their bonuses in the collapse they really knew was likely to follow.
mp,
"If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation."
So you want to make sure home prices can boom, but they cannot bust?
If that's the case, there's no free lunch: to keep middle class homeowners from "busting" the money has to come from somewhere. Renters? The rich? Savers?
I don't necessarily disagree with your premise, but its better if you identify who's picking up the tab. Most likely it'll be savers, in the form of another round of negative real interest rates.
mp,
BTW, when I say "savers", I really mean "the elderly".
David- "I don't necessarily disagree with your premise, but its better if you identify who's picking up the tab. "
In the end, EVERYONE will pick up the tab regardless of the solution.
If housing is allowed to liquidate, the follow-on effects would destroy the economy. I would call standing in a bread line "paying for it," wouldn't you?
Kind of funny that radical financial innovation is the cure for what got us into this mess which was radical financial innnovation.
"I'm still a little hung up on the question of who gets to be on the other side of that trade."
May I suggest Mish's Madame Merriweather's Mud Hut in Malaysia?
The real question is: would aggregate prices fall 30% if the system is allowed to clear itself?
If not, then to hell with the little people and let's have the mother of all recessions. Let it clear.
If so, the shit is going to hit the fan, and you're going to get some on yourself regardless of where you're standing.
Regarding mp's quote above of Mellon's advice to Herbert Hoover, it is extremely important to know that Hoover ignored Mellon's advice, and did just the opposite.
Although it is the conventional wisdom that it was Hoover's having taken Mellon's advice that caused the Great Depression, that simply is not so.
Several decades ago I read a most interesting book by Austrian-school economist Murray Rothbard which made persuasive arguments that the depression would have ended sooner had Hoover taken the advice. But since Rothbard apparently never came up with any rigorous mathematical or statistical analysis to back up his argument, there's no compelling reason to believe he was right.
Since Ben Bernanke's take on the Great Depression is that the government just didn't go far enough and fast enough in the opposite direction, we're not going to try that approach this time, either.
Why not just come up with something as radically preventative as "better enforcement of regulations" ?
From the earlier thread - "According to ShopperTrak RCT Corp., which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent"
Does anyone here get a little annoyed when a computer modeled statistic is presented with a degree of precision into the 10th of a point, there isn't even an accompanying the margin for statistical error. It sounds like the value was released by the bureau of standards or something.
8.3% +/- 100%
jm, I was using the Mellon quote to answer Yearning to Learn's question. Let's be clear on that.
mp,
I think you misunderstand the point. A wealth transfer to save the economy is a good idea. But who supplies the wealth? You're talking about preventing a market from reaching market-clearing prices. You can only do that by raising incomes or lowering payments. Which is it, and who pays?
The tab is bigger than most think, so I say its lower payments through low real interest rates. Who pays is the elderly, as they will face higher inflation and lower income from savings. Greenspan and Boskin, btw, made soak-the-elderly possible by neutering COLA increases.
The problem with this thinking is a blind obedience to private sector capitalism as our only tool for solving problems.
There is no other reason to create a jackassed solution like this except to create a profit opportunity for someone.
David- "I think you misunderstand the point. A wealth transfer to save the economy is a good idea. But who supplies the wealth?"
David, I understand. In answer to your question, my response is:
I have no idea in hell who's going to pay for it, but someone had better start figuring it out, AND FAST, otherwise we could be overtaken by events.
Will something calamitous happen this time because of housing? Some quotes from Peter Lynch's "one up on wall street" -
"I've been hearing that the 1987-88 market is a rerun of the 1929-30 market and we're about to enter another great depression. So far, the 1987-88 market has behaved quite similarly to the 1929-30 market, but so what? If we have another depression, it won't be because the stock market crashed, any more than the earlier depression happened because the stock market crashed. In those days, only one percent of Americans owned stocks.
The earlier depression was caused by an economic slowdown in a country in which 66 percent of the work force was in manufacturing, 22 percent was in farming, and there was no social security, unemployment compensation, pension plans, welfare and medicare payments, guaranteed student loans, or government-insured bank accounts. Today (1988), manufacturing represents only 27 percent of the work force, agriculture accounts for a mere 3 percent, and the service sector, which was 12 percent in 1930, has grown steadily through recession and boom and now accounts for 70 percent of the U.S. work force. Today, the average household has two wage earners instead of one, and that provides an economic cusion that didn't exist sixty years ago. If we have a depression, it won't be like the last one!
On weekends and weekdays I've been hearing that the country is falling apart. Our money used to be as good as gold, and now it's as cheap as dirt. We can't win wars anymore. We can't even win gold medals in ice dashes. Our brains are being drained abroad. We're losing jobs to the Koreans. We're losing cars to the Japanese. We're losing basketball to the Russians. We're losing oil to the Saudis. We're losing face to Iran."
My solution is to foreclose on the homes and cast the prior owners out into the great outdoors, where they will have to fight over choice heating grates.
Peter Lynch- "Today, the average household has two wage earners instead of one, and that provides an economic cusion that didn't exist sixty years ago. If we have a depression, it won't be like the last one!"
"Yeah," says Conjure Bag.
"They'll both be out of work."
It makes perfect sense. The people who don't mind borrowing 100% also don't haggle too much over the price. The criminal class wants high prices. The days of requiring a down payment and fiscal responsibility are gone forever. The sooner the honest folks come to grips with this fact, the better.
-Good point barely.
-Equity insurance? trading your future home equity for protection from foreclosure. Sounds like renting. Schiller is being foolish in this instance.
It seems to me that all of these financial problems screaming for government protection and insurance programs are symptomatic of a larger problem. Americans expect to live in a bubble where people do not get sick, hurt, or die. Snobody ever gets hungry or has a caffiene headache. Let's legislate manditory healthcare, seatbelt laws, helmet laws, smoking laws, savings and retirement accounts. After taking the responsability away from our citizens for their actions there can be little suprise at our generally inept decision making.
America's sophisticated ( and leveraged to the max ) financial system created the underlying systemic problems so they should shoulder the burden starting with more stringent regulation.
Otherwise I agree with Roubini stand by for "generalised systemic financial meltdown
that was me 12:54
I'm not sure the elderly will consent to pay. Capital flight comes readily to mind as one effective dodge.
We've already got "home equity insurance" via Ben Bernanke's Printshop and Helicopter Tour Company.
Why doesn't anyone understand here that all this debt just doesn't translate into real goods & services?
It's not real, it never existed.
Somebody's getting screwed big-time.
Guaranteed.
The only question is who.
mp, note that I didn't write that you were claiming Hoover had taken Mellon's advice -- exactly because you didn't say that. I was just opportunistically expanding on your comment.
The misconception that Hoover took Mellon's advice seems to be nearly universal, and I try to do what little I can to lean against that, as, "It's not what you don't know that hurts you, it's what you know that isn't so."
jm, that's fine, and I appreciate that. I was not intending to be intellectually dishonest. This thread is progressing rapidly and, quite simply, I don't have time to write a national economic estimate, OK?
"If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation."
Yeah, we know. Sadly, like everyone else who's pointed this out in public, you don't provide any solution, except for the destruction of the currency, which won't exactly save the economy either.
Sometimes, there isn't a solution, only a choice of problems.
what if I want to buy a house to live in it ? what if I don't give a damn about price appreciation ?
from what I'm reading here, the proposed 'Home Equity Insurance' is just another mechanism to add more costs onto the process of buying a home. to prop up the various parties that want a continued revenue stream (that would vanish if people we're not flipping or making home 'investments').
maybe something about this concept evades my fundamental understanding. I'm left with the impression that the US has insufficient jobs (real jobs !) to provide steady employment for the population. so the population (those who are not counted as employed or unemployed) have been creating their own income stream by gambling on home appreciation. the party ended. some people are still holding cards and want to play some more. if the US does suffer a recession, and the USD gets whacked back 10 or 20 years, maybe our exports will be competitive enough to generate new jobs. let china worry about china.
THE US ECONOMY WOULD DESTROYED FOR AT LEAST A GENERATION.
remember what I said a couple of thread up (down?) about how long it took Florida to recycle in the 20's-40's ? about 18-20 years... which is roughly a generation.
All of this discussion here, quite frankly and at the end of the day, could end up being so much bullshit. Much ado about nothing.
However, if the price drop could go to 30%, and I respect Shiller's opinion, then someone had better start planning contingencies, FAST.
Jim Driscoll- "Sadly, like everyone else who's pointed this out in public, you don't provide any solution,..."
Unfortunately, any solution I would offer would be unacceptable. A solution requires public debate and a consensus that integrates the best parts of all the proposals.
That is not happening.
"proposed in 1994 to make home equity insurance insurance on the market value of a home part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies."
Well maybe, but who is to say that part of the process wouldn't have been corrupted as well? I suspect if a company like Berkshire were writing the policies, the premium increases would have capped the rampant speculation and general mania.
The basic reality is that bubble mentality infections can go quite far. Remember the late '90s when exceptional stock market returns were considered the new norm? This current bubble is not that different. The MBS buyer with a huge appetite for yield ignored numerous warning signs.
Another curious question is whether the long time operators like Mozilo were infected. His stock sales suggest he knew better. His hanging around suggests perhaps not. After all, he could have set a retirement date and no one would have questioned the sales.
Sam Zell - Now there's a guy that knows when to sell. When asked about the "sub-prime" problem, he indicated that problems are to be expected when the borrower has no skin in the game.
So here we are today. We pushed risk to the wall. Lender of last resort? There's not much left except the bag.
As and aside, do the PMIs model HPA or potential HPD in their premium determination? They should and if not, they likely will.
Do you want that for your country? Do you want that for yourself?
Is that good for you?
YES!
The torpid addiction to consumption needs to be squashed like a bug.
In so far as the sentences can be regarded as proposals and not mere statements of facts, Schiller is proposing BOTH equity insurance AND swapping debt for equity ( by the mortgage holders) e.g.
"....For example, Andrew Caplin, professor of economics at New York University, has proposed that in personal bankruptcy proceedings, the courts should be allowed the latitude to substitute real estate equity a share in the ownership of the property, to be realized when it is eventually sold for first mortgage debt...."
and
"...For example, I and my colleague Allan Weiss (now C.E.O. of Index Capital Advisors) proposed in 1994 to make home equity insurance insurance on the market value of a home part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies..."
The first, well, I don't like a court ordered swap but private arrangements are just fine. Bond holders swap debt for equity in distressed companies all the time.
The second, well, the fact that he uses the past tense suggests that he is aware of the problem of "But who will take the other side of the trade?"
-K
"...someone had better start planning contingencies, FAST."
I've been watching re-runs of Survivorman and Man vs Wild.
Jr.
Jr.- "I've been watching re-runs of Survivorman and Man vs Wild."
That's nice. I hope you enjoy them.
I think Schiller's point is that our current political environment seems to preclude bold actions, and the current situation (if it's as dire as many here see it) requirse bold ideas and bold actions.
I totally agree with him. Look at the responses to the attacks of 9/11, the Katrina debacle and now the housing/credit crisis... all muddled, indecisive, ineffectual, yet plenty expensive...
I think one thing is certain, whoever occupies the White House in 2009 can't but help provide much more thoughtful leadership, and by then it will be sorely needed. In the meantime, I think it's safe to say we have another year of befuddled stumbling ahead of us.
Tucson situation:
Foreclosure surge hits every corner of Tucson | Welcome to StarNet - Tucson, Arizona ®
BobInMA- "In the meantime, I think it's safe to say we have another year of befuddled stumbling ahead of us."
Well said.
Schiller speaks of Home Equity Insurance only in the past tense ("In 1994....Had our proposal been put into place....") I'm sure he understands that nobody is taking the other end of that deal in a market poised to take a large drop.
In a normal market it might be done somewhat on the order of a Credit Default Swap (with a counterparty with very deep pockets, since the stuff often goes south all at the same time.....).
Chris Tanner and his wife found their dream home last year, a four-bedroom, 3,100-square-foot house
Good Lord, WTF does anyone need with a 3,100-square-foot house? How much money would you need to take out of your phantom home equity in order to furnish it?
Tanner, the Northwest homeowner, said past rapid appreciation in the market made him feel pressured to buy his current home. He wound up in a bidding war for it, which didn't seem like a problem at the time.
"It became apparent that if you didn't buy a house (then), next year it was going to be $50,000 more," he said.
This from an "account exec for a mortgage lender"!!?? I guess the greed impulse sweeps away all prudence.
from the Tucson link above: "High-risk, high-rate loans include subprime mortgages, made to borrowers with lower credit scores, and "Alt-A" loans, which often had looser standards than conventional loans. High-risk, high-rate loans were sometimes marketed to people who didn't understand the potential pitfall,"
Marketed to people who didn't understand understand the potential pitfall, or those that simply chose to ignore it?
Today, the average household has two wage earners instead of one, and that provides an economic cusion that didn't exist sixty years ago. If we have a depression, it won't be like the last one!"
Heh. Of course, consumption has expanded to consume both incomes, to the point that one person losing a job today often puts a household cashflow negative after housing, food and gas. Two earners losing their jobs, with a negative savings rate?
Catastrophic.
I've got a bad short term (defined as 15 years) feeling about this,
prat
"The largest source of individual wealth would be vaporized."
It isn't wealth and never was, it may have provided and illusion of wealth due to a credit bubble and lax lending and inflation but a non income producing assert or as I look at homes as a personal liability cannot of themselves create wealth for most homeowners.
The home equity insurance isn't so bad in that it would let people smooth out the appreciation/depreciation and not have to time the market as much.
Which would be great, as timing the market to buy stocks or bonds is no big deal, but trying to time the market buying a house when life needs dictate otherwise (ex. had more kids, need to retire, spouse died, or whatever) really sucks.
It's a strange shiller
apparently he seems to call for more innovation, massive bailout ...
But the idea underlying the article is basically "real estate is doomed" and we are facing years of constant declines.
As everybody knows a such dust could be a huge drag on the economy for quite some time.
So wake UP now before it gets disastrous we can't stay still, looking at this mess arms crossed.
Find a way to regulate and help
home owners to stay in.
It's not a matter of bailout we urgently need safety nets, there is a denial about what a RE bubble popping can do to the economy.
We have a consumer-led recession in 2008, ARMs resets will last until 2011. The governement is partly responsible for this mess and he
should help with it now or there will be no rebound in 2009.
Shiller forgot something the buyers
of last resort are also fried.
So the main institutional instrument
is broken.
Sounds great let me secure my equity at the expense of future generations. I am sorry don't see a way out of this except to make burger flipping a 30 dollar an hour profession. The dynamics don't work or warrant todays prices.
Basically things work till they don't.
You can't fix stupid if we could we should start in Washington.
"timing the market to buy stocks or bonds is no big deal"
May need to have that discussion with those retiring now or retired and planning on paring those investments for living expenses during the coming 5 year bear market.
--
And in 1938, Congress created Fannie Mae, which eventually led to the huge securitization of mortgages.
And now the time has come to pay the piper! According to former Fed President William Ford, Fannie and Freddie are incompetently run and shouldnt be allowed to do anything more.
We should take full advantage of the innovation opportunities stimulated by our current troubles. We would emerge much stronger and better for it.
We should invite bigger and bigger troubles to open more innovation opportunities! I love Americans optimism.
Some of the worst people in America are solutions-peddlers. Americans love them no matter how bad those solution would be in practice. Prof. Shiller forgets to tell us that all of the New Deal programs ran their course and by 1939 the economy was back to before the New Deal. It was the beginning of the WW II that saved the US economy from continued depression (economic activity due to war picked up way before the US officially entered the war).
Tanta: Perhaps someone can explain the logic of the "home equity insurance" to me. I'm still a little hung up on the question of who gets to be on the other side of that trade.
Why, Tanta, who else but Their Royal Highnesses, aka American People? That is the beauty of democracy the govt. is called upon to intervene on behalf of the irresponsible. After all, we are benevolent people. Nationalization of benevolence if the bitter fruit of democracy.
Jas
If those wanting to retire now had sold their stocks or bonds for money market or what have you earlier, they wouldn't have had to move a thing.
If they just don't have enough money (ie. need some mythical high appreciating investment to retire), that's just a didn't save enough problem, not a market timing problem.
--
Do people know who, as a group, did the best and worst, relatively, during 1930-1939?
Large corporations did the best and small businesses did the worst (as a group they lost money, which means many went belly up). Huge concentration of corporations, via mergers, that gives them monopoly-type pricing power, have preceded depressions!
Is there any message from history?
BTW, Prof. Shiller forgot to mention the repeal of the "Depression-era" Glass-Stegall Act and what it portends.
Jas
anaon, "If those wanting to retire now had sold their stocks or bonds for money market or what have you earlier, they wouldn't have had to move a thing"
that's my point - market timing.
and
"...For example, I and my colleague Allan Weiss (now C.E.O. of Index Capital Advisors) proposed in 1994 to make home equity insurance insurance on the market value of a home part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies..."
i've seen this contract before...
i think they called it Rent
I think that if prices are indeed 30% too high, let them fall. Anything that distorts the pricing mechanism, creates a stress in the economy. And currently, any bailout would either require tapping enormous taxpayers' funds or would kill the savers (including elderly) thanks to inflation. If some mortgaes make sense with prices at the fundamental value and require only some temporary assistance, that's OK. Anything that would prevent the rebalancing is worse that the rebalancing itself.
Economic bubbles work like being on speed. They give a illusion of prosperity, they make people think they are invincible and they require higher and higher monetary doses to make it going further. It's not the withdrawal symptoms that are bad. It is the drug itself. The damage to the economy is being made during the boom. It's done. Nothing can undo it. Getting rid of the drug is what should happen. The faster, the better. Anything that prolongs it, will just make it more painful.
In Eastern Europe, the countries that opened the economy for the rebalancing process after the fall of the communism fared better than those that tried to make it as slow and "painless" as possible.
Several decades ago I read a most interesting book by Austrian-school economist Murray Rothbard which made persuasive arguments that the depression would have ended sooner had Hoover taken the advice. But since Rothbard apparently never came up with any rigorous mathematical or statistical analysis to back up his argument, there's no compelling reason to believe he was right.
Two points:
1) About the 'numbers'. I agree that if he can't even do a rudimentary mathematical model of something as mathematical as an 'economic theory' where he gets to pick the assumptions then its just an article of faith. Not necessarily to be ignored but certainly not to be 'believed'.
2) Even if right - a faster deeper depression could just have easily resulted in fascism. Also unprovable with numbers and equally an article of faith.
Interesting hypothetical but all of it hypothetical just the same.
============================
But since Rothbard apparently never came up with any rigorous mathematical or statistical analysis to back up his argument, there's no compelling reason to believe he was right.
Where's Misean when you need him ? Meantime, I'd say that Austrian economics as per von mises ( and cats too at that ) - explicitly states that mathematization of economics is not possible - that there is a massive qualitative aspect to it. Asking them to provide a mathematical model is like, well, asking a polytheist to provide a monotheist model.
And despite( or even because of ) my background in math, I don't have a problem with a non-mathematical theory of economics. There's tons of stuff that can't be mathematicized but can still be analyzed and anyway math has a HUGE hole at the centre of it( cf Godel's theorem).
-K
mp said: "...If aggregate prices drop 30%, as Shiller says is possible, all of the arguments here will be absolutely moot. The US economy would be destroyed for at least a generation..."
Well, let's take a real-life example and see what would happen.
My house-price drops by 30%. Okay, now what?
With my house, nothing, since my monthly mortgage payment is already lower than a similar rental house would be. (BTW, original loan--5% down, so it's not like I had a big head-start with a massive down-payment to start with.)
With my consumption? Well, my housing consumption (obviously) stays the same, as does my utility, grocery, gasoline, insurance, car payment, etc. My "core" consumption doesn't change at all. Not sure how that translates into economic destruction that will outlive me.
When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters.
By that measure, it looks like a collective price-drop of -30% in housing would result in a recession that lasts about 4 quarters.
Sebastia
any bailout would either require tapping enormous taxpayers' funds or would kill the savers
Kill savers?
Why do you think that "letting prices fall 30%" will NOT kill savers?
Who do you think fronted the money for the mortgage?
"The American consumer seems to grasp the risks. A growing number of Americans expect the economy to tip into recession in the next year -- 40% last week, up from 31% in October, going by a Reuters/Zogby poll released last week. Rosenberg said government statistics show that 500,000 self-employed workers have lost their jobs since July -- a greater loss than was seen in all of 2001. Reported unemployment figures remain low, but Kasriel says those numbers "smell worse than a week-old fish."
Jittery consumers seem likely to trigger a recession - Nov. 25, 2007
RayOnTheFarm
I agree 100%. The fundamental question to ask is
why should we bail out anybody. Liquidate borrowers as well as lenders. LIQUIDATED THE CREDIT BUBBLE/PONZI SCAM. Both lenders and borrowers chose to gamble on this asset class appreciation and they lost. Let them take the hit even if it means a depression. Maybe we should start bailing out the gamblers in Las Vegas too. Morally, I don't see any difference. What kind of message are we sending to the population? Gamble as much as you want and we will always be there to pick up the tab.
Why prudent people like me who saved for years should be punished again. When prices were going up they won, when they are collapsing now we lose. BS. NO BAIL OUT FOR ANYBODY. LET THE MARKET TAKE CARE OF THE CREDIT/RE BUBBLE. LET THE PRICES GO DOWN TO THE LEVEL WHERE PEOPLE WITH 25%-50% DOWN CAN BUY. DEFLATE ALL ASSET CLASSESS. Since financial engineering got us into this mess in the first place, financial engineering can't be a soultion.
Regardless of what these financial geniuses come up with the market will prevail. They can only slow down the dive. The issue is of the loss of trust in the financial system and its solvency not the liquidity. It will take years not months to repair the damage. Who is going to buy mortgage bonds of any issuer? Why do you think banks don't trust each other. Because the know that the counterparty is seating on a pile of toxic waste. Why do you think financial markets around the world are freezing? Because privet people like me don't want to touch anything but the highest quality government paper. So called prosperity of the last 20 years was just an ilusion built on a mountain of debt. It never existed. Now it is the payback time for the excessess. Lets turn the financial clock back 20 years. We need severe depression to restore frugality, morals , work ethic and competitivness. This is the only road for US to retain its world class status. Nobody in the history of the world borrowed or printed their way into a prosperity. Hard work and smarts did.
I'm glad others see the premise of the Shiller article as flawed. Many of the posts in this thread are more thoughtful and insightful than Shiller's article. The idea of home equity insurance for buyers is just sophmoric.
btw Shiller, real estate appraisers have been acquiescing to lenders for decades, nothing new there.
Federal Reserve officials believe a substantial decline in home prices is a big risk to the economy, according to forecasts released for the first time by the Fed on Tuesday. The Fed's forecasts, combined with the summary of its October meeting, appeared to show more concern about slower growth than higher inflation. [link]
Is everyone clear? House prices will stay up, even if it costs a few trillion$
--
More...
We should take full advantage of the innovation opportunities stimulated by our current troubles. We would emerge much stronger and better for it.
Financial innovations are what got us into trouble in the first place! Financial innovations lead to troubles and then troubles would lead to innovation (as in govt. intervention)? A perpetual motion machine.
Who do you think fronted the money for the mortgage?
Let me see. Hedge funds, Chinese, oil countries, investment banks, pension funds, savers. It's still better than bailout where hedge funds and investment banks will get the benefit and the savers get ripped off.
There will be pain no matter what is going to happen. I believe letting it clear out is going to cost less in the long run.
Perpetual motion machine? At least a self-reinforcing cycle, though Kondratieff insists it will not continue endlessly.
Does anyone here credit 'economic winter', or are the Austrians mistaken?
"Bankers are pretty hush-hush about auction results,'' Pan said.We just can't get the information we need to evaluate the risks.''
AND, the MLEC would be different cause?????
Rigged Bids, SEC Help Dealers as Auction Bonds Fail (Update2) - Bloomberg.com
"Does anyone here credit 'economic winter'"
Money (a promise) is a symbolic representation of goods & services. When total promises exceed total goods & services, only two things can happen.
All promises are written down in proportion, i.e. inflation.
Enough promises are completely written off to balance the equation, i.e. deflation.
The Feds problem is that they need to disguise which process is taking place, otherwise there will be a general panic dogpile of bets on the perceived direction.
"Financial innovation"
Can we just banish this term? New packaging/marketing schemes for risk isn't innovation. At least to people who don't get sales commissions from the new scheme.
Well, so far the Dept. of Bafflement is doing a terriffic job, BH. How many times have we broached the inflation/deflation conundrum here?
The hedge funds ARE the savers. As are the Chinese. And oil countries.
Oh, you thought that "savers" meant "elderly US citizens with money in savings deposits in a bank"?' Where do you think that bank put their money?
There is not magical "savers" to be plundered without ill effect.
Damn.
It's just so annoying to see that even 90% of the readers are clueless about the nature of what's happening.
How many times have we broached the inflation/deflation conundrum here?
dont know but we can securitize it and issue insurance, we will be rich xD
Broward Horne-
"The hedge funds ARE the savers."
That is hysterical!!!!
ROTFLMAO
nimrod
Nice, Revro, but I think everyone ends by constructing some personalised version of a straddle - knowing they're going to be only partly right.
"How many times have we broached the inflation/deflation conundrum here?"
It's purposeful behavior. I watched Greenspan since 1987, but it wasn't until the mid-1990s that I really started to understand.
The Feds knows all this debt is unredeemable. What they try to do now is split the difference, inflating some of it away for stability but also allowing minor credit collapses to ward off moral hazard.
China accuses Clinton of slander
China accuses Clinton of slander
If this goofy bitch gets elected you can kiss those dollars and US hegemony goodbye.
"this is hysterical"
Ah, yes, it's all the fault of the E-ville Hedge funds, right? Where do you think the hedge funds got their seed money from?
"Oh, gee whiz, golly, Mr. Wizard, I never gave it much thought, I just know that the E-ville hedge funds caused all our problems".
Unreal.
One of the problems with growing a readership is that it invariable moves closer and closer to "average" as it grows.
Broward, I see it similarly, subject to new information.
mp:
from way above: I note your concern about housing deflation leading to possible depression/severe recession...
however, I'm not sure that Shiller's suggestions are "innovative" enough.
He starts by talking "innovation" and then he brings out antiquated ideas from the 30's. Those may have worked then... but won't now.
Besides... like I said, is it really a good thing keeping housing costs so high that the average american is basically just a sharecropper struggling to hold onto it? keeping housing costs high assures the next generations will have it just as bad if not worse...
As others have said, home price appreciation insurance needs a counterparty... this brings in counterparty risk (like ACA, as example)
and again, it is the dispersal of risk which seams to have lulled us into the belief that risk was ELIMINATED as opposed to simply diversified.
in essence, the risk dispersion has actually CREATED systemic risk where before the risk was more "containable".
I don't know what the "right" answer is. But I do know what is going to happen:
we simply inflate. it's the only way. This will be silent enough that the masses won't realize...
the govt will then have to figure out a way to translate inflation into wage increases despite global wage arbitrage.
this could be accomplished with protectionist laws and new tax policy.
(democrats anyone?)
in doing so, the nominal home values can be saved. We will have CONSIDERABLE amounts of pain nonetheless... most likely skyrocketing COL increases and energy cost increases... and likely loss of the dollar as a world reserve currency...
but have no fear... England and Eurozone are not far behind us. Nor is China.
It WILL be a race to the bottom... but I'm not sure about the timing yet.
I was referring to Fed machinations, and not to commentary Browning Movement phenomena.
<i>Where's Misean when you need him ? Meantime, I'd say that Austrian
economics as per von mises ( and cats too at that ) - explicitly states
that mathematization of economics is not possible - that there is a
massive qualitative aspect to it. Asking them to provide a mathematical
model is like, well, asking a polytheist to provide a monotheist model.</i>
Math does provide a good predictor for populations and multiple events. It's like when you are driving over a heavily travelled bridge and you pass an exit where most of the traffic leaves, making the other lane(s) clear. Now you don't HAVE TO change lanes, but it takes a concious effort not to. There's a mathmetical model that will predict what you will probably do, but your free will is still involved. In fact every driver has free will, but most will perform EXACTLY as predicted.
Perhaps this is what is involved in the inpredictability of electrons- do they have free will?
I think the only way we can't quantify economics is that we don't include all the variables. Sometimes stuff happens which in hindsight is totally obvious, but at the time is totally opaque to us. Bubbles wouldn't happen were this not so.
"but also allowing minor credit collapses to ward off moral hazard."
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leverage is the "problem" and you are no doubt a moron.
Broward:
I'm sorry but I believe you to be in error.
Much of the hedge fund money comes not fromm savers but from leverage.
they get leverage by borrowing from banks.
where do banks get money? clearly not from savers... Most of it (over 90% maybe even 99%) is created "out of thin air" due to fractional reserve lending.
If I recall, there are something like 700+ TRILLION dollars in derivatives out there... you don't honestly believe that people saved that much cash, do you???
sk,
And modern finance has a huge cancer eating away at it: the compound interest formula. I believe Jas is aware of this problem.
ytl-
you're correct. we wouldn't have a MLEC proposal had the leverage not have been to the extremes in the SIV universe.
Financial innovation is a farce and broward is a blowhard.
The smartest guy in the room alright, again-
ROTFLMAO
There's been a lot of homebuyer bashing in these comments and in comments on previous threads. "How could they not have seen the folly of home prices increasing forever?" (or words to that effect).
But I'd bet that at some time most CR readers bought a home and then held their breath for several years, hoping that "they" didn't catch the wave just before it broke.
CR readers (at least those who are commenting) are the lucky ones. Not to minimize good decision making skills, but making an investment of this magnitude always involves taking a risk. Those of us who have been homeowners long enough that our personal fortunes are insulated from all but total collapse have little justification for dumping on people who wanted what we have and saw it getting further away from them every month.
And the reason it was getting away so fast??? I'l leave the rest of you to debate that, but my two cents is that there was so much free US$ capital both here and abroad that needed a place to be invested, and US real estate seemed safe. In order to invest it, borrowers had to be found and the same sales tactics that are employed in any market (discounts, rebates, deferred payments, high commissions) were used.
And unfortunately, they worked very well. For a while.
When engineers get innovative, expect new fancy gizmos.
When bankers get innovative, they have simply discovered a completely new way to lose your money.
RayOnTheFarm | 11.25.07 - 1:04 pm
Good points. However I'd like to ask you a favor. Reading a screen is hard enough and one reason we capitalize the first letter of a new sentence is to make clear that the preceding period is not a comma. e. e. cummings notwithstanding.
Thanks.
Insurance is, always and everywhere, pooled, prepaid losses.
For insurance to have "helped" in the current "crisis", payments over the years would have to have matched equity losses plus payed the vig to insurance companies.
poszi,
Agreed, lower the boom and let the chips fall where they may.
We need a new start, a meritocracy like it used to be. And discipline.
People can only be legislated into equality at the level of the lowest party.
barely
Market timing is my point too. The point being it's a heck of a lot easier to time when to call your broker and change paper asset X into Y, than it is to try and time when your spouse dies or when your kid is born to conform to the RE markets ups and downs...
Sebastian- "Well, let's take a real-life example and see what would happen."
Sebastian, you're talking "MY house," "MY consumption," "MY mortgage payment."
I'm not talking about YOU, I'm talking about the AGGREGATE, which includes YOU. If the AGGREGATE falls 30%, the follow on effects will most certainly affect YOU.
YOU may be a card-carrying member of the "ownership society," but it's going to end up affecting YOU and all of your fellow members, regardless of whether you own your home outright, financed 100%, have a home equity loan, or used an ARM in anticipation of higher prices.
Jesus.
"I believe Jas is aware of this problem."
Many of my first, second and third cousins in India and some brothers, all usurers and sinners (my late father told some of them on their face!), have multiplied their capital by MORE THAN 10,000 times within my adult life-time (some 40 years) in nominal rupees (more than 100 in real terms), after expenses. Where would that end? One guy borrowed at 43% compounded from my brother, secured by prime real estate, to send his son (not very bright) to a third-rate medical school in Nepal. People have turned into morons. I have seen it in India and I see it in America.
I was taught the "magic of compound interest" at the age of seven (I am sure before Einstein learned it). It provided no allure to me.
Debt, more often than not, is a dirty business.
Jas
From the Holiday spending good news is bad news Dept.: ANY INCREASES IN RETAIL SPENDING OVER THE POST-THANKSGIVING HOLIDAY IS ANOTHER NAIL IN THE COFFIN OF MORE DEBT-DRUNKEN US CONSUMERS FALLING FURTHER BEHIND IN THEIR MORTGAGE, CREDIT CARD, AND AUTO LOAN PAYMENTS AND PUSHING THE US ECONOMY INTO AN EVEN DEEPER RECESSION STRAIGHT AHEAD....IMO
The equity insurance may have some good points, but I think that the details would be problematic. Back in the housing boom, it would have been cheap and no one would have been willing to pay. I expect that such insurance would now be very expensive, with the real expectation of continuing home price declines. One big issue--how long can you lock you insurance in for? and can you "refinance" when the price of insurance drops? Normally, futures contracts are for a year or less.
mp-
I am pretty much like yourself. I believe we are at the Rubicon...a point of no return. I also believe that the chances of a complete financial and systemic breakdown resulting in a new currency is much closer than most people think.
At this point, the US cannot endure a 30 percent collapse of home and equity values.
I know that there are many intangibles to consider, but how do you see this all playing out? I am anticipating all relevant FCB's implementing a ZIRP in an atttempt to sustain asset values as best possible.
Meantime, I'd say that Austrian economics as per von mises ( and cats too at that ) - explicitly states that mathematization of economics is not possible - that there is a massive qualitative aspect to it.
That in itself is an article of faith. That just because some part of economics is qualitative means that no math can be applied or that nothing can be 'learned' from modeling.
There are lots of things that aren't purely mathematical yet can be modeled through combinations of logic, math and 'game theory'. Just because it can't all be 'canned' doesn't make it all bad.
In fact if that were the test you couldn't use math in engineering or science because there are some qualitative aspects.
I come from an empirical background and distrust mathematicians as much as anyone yet will sill concede the silly stuff can help answer some vexing questions if asked correctly and followed with liberal doses of skepticism.
David Pearson, A wealth transfer to save the economy is a good idea.
Free or forced?
Iraq as analogy -- If US abruptly leaves it will likely be short term horrific with quicker long-term resolution and less total misery than if US stays to avoid short term chaos.
If markets are free to collapse and recover on their own, short term pain however severe will likely be less than total drawn out agony induced by attempts to force avoidance of credit OD withdrawal symptoms.
And if forced, who decides who holds what bayonet at who's throat?
Best regards,
I read this article this morning and did not understand where the insurance was going to come from. Tanta, please explain what Shiller is talking about
Let's assume that though there may not be a "solution" to dealing with the impact of major RE devaluation, that there is in some sense an "optimum" approach. For a starting point, I propose that society debate a basis on how to distribute the pain.
I suggest three factors, the relative weighting TBD.
Comments?
one more thing blowhard, you asked where the hedgies get their seed money-
well the IB's of course, you know, the ones that practice the "quant that cannot fail strategy"-
Institutional Investor
and while you "insist" on supporting the hedge world where NAV's are often created out of thin air per this study-
Paper not found
but, you knew that, I'm sure. I am quite sure you also knew that disclosure amongst the hedge community is beyond reproach (said obviously in a facetious manner).
So, you declare the hedge community the "savers" based on the fact that they are the most levered of any other vehicle, that they provide little to absolutely no disclosure, that they have riddled the pension community with these opaque investment strategies (only to know move to retail due to the declining lemming population), have already suffered losses in the 10's of billions, fudge returns per the study cited above, bill on the inflated returns at 2 and 20 in many cases----
you really are a moron.
Comments?
Who decides?
Wow, I agree with Sebastian, must mark the calendar.
I am surprised that no one else debunked the myth that 30% RE declines would devastate a generation.
Puhleeze, 30% declines happened in TX, CA and FL in that last 30 years.
I don't see many devastated boomers.
Life goes on, it might represent hardship, but there is always hardship.
Remember, we are ALL subprime!
U.S. Consumers Spent 3.5% Less on Holiday Shopping During Post Thanksgiving Weekend
U.S. Consumers Spent Average of 3.5% Less on Shopping (Update4) - Bloomberg.com
Sebastian- "When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters."
Household portfolio loss in the 2000-2002 stock market collapse is chump change compared to what a 30% loss in housing would be.
And, in terms of your loss effect, it appears to me that you're assuming it would be linear, which is not a wise idea.
sunsetbeachguy- Puhleeze, 30% declines happened in TX, CA and FL in that last 30 years.
AGGREGATE, AGGREGATE!
Shiller is talking AGGREGATE, not REGIONAL!
I've been watching re-runs of Survivorman and Man vs Wild.
Jr.
Just be sure to follow their example, don't leave home without your Motel 6 Card
Whatever there is always some sort of Economic Death Star with us in its target the sooner we get on with our pithy little lives the better.
There is no solution, there is nothing you can do about it. It will be painful.
Odds of getting hit while crossing the street still high.
Overall mortality rate holding steady at 100%
Good luck! or So long and thanks for all the fish?
MP:
Targeted keynesian policy could easily disaggregate a nationwide 30% RE decline.
Particularly in somewhat affordable markets.
If the crux is to simply disaggregate even my simple mind can find a way to avoid a nationwide 30% decline.
I think MP & Shiller are being alarmist and shrill.
30% of homes don't have a mortgage, so there would be no impact to them whatsoever.
If one assumes 10% churn rate of housing stock, if 100% of buyers since 2004 are underwater and foreclosed over 3 years that only doubles RE supply for 3 years.
The economy can do that standing on its head. Remember the bulls favorite meme, RE investment is only 6% of GDP. I don't buy it but even if the RE wealth effect triples the impact just 18% of GDP.
Again, puhleeze, RE corrections have happened before and we all lived through them.
Jas:
Some of the worst people in America are solutions-peddlers. Americans love them no matter how bad those solution would be in practice. Prof. Shiller forgets to tell us that all of the New Deal programs ran their course and by 1939 the economy was back to before the New Deal. It was the beginning of the WW II that saved the US economy from continued depression (economic activity due to war picked up way before the US officially entered the war).
So going to war in Iraq then was the best economic decision Pres. Bush could make as it will create another outstanding period of prosperity like post-WW2? Or is the current war just not big enough in comparison? If this logic is true, it means you can end any economic downturn with a nice-sized war. If so, why would you ever critisize Pres. Bush for doing exactly the right thing to end the 2000-2003 downturn?
O-Joe
dissident, does meritocracy include confiscation of trust funds?
sunsetbeachguy: "Puhleeze, 30% declines happened in TX, CA and FL in that last 30 years. I don't see many devastated boomers. Life goes on, it might represent hardship, but there is always hardship. Remember, we are ALL subprime!"
I lived in SFV during the 29% decline. The BIG difference was LEVERAGE. Another big difference was mortgage payments as % of income. In 1988, I got 5.25% rate mortgage with max adjustment to 2.25% above 11th District. The highest that I paid was 7.375%.
It IS different this time. It Is the Leverage, Stupid!
Jas
re: dryfly
That in itself is an article of faith. That just because some part of economics is qualitative means that no math can be applied or that nothing can be 'learned' from modeling.
Not wishing to start or continue some petty squabble here.
Anyway I was suggesting that it was unreasonable to expect Rothbard to provide a math model since it IS an article of faith in Austrian economics, von Mises style - picking a quote from one of many sources:
"But unlike other economists, the Austrian never attempts to measure or put these values in mathematical form. The idea that an individual's values, plans, expectations, and understanding of reality are all subjective permeates the Austrian tradition and, along with an emphasis on change or processes, is the basis for their notion of economic efficiency."
Redirect
To the extent that I've tried to progress things further, then my idea of a math model, Austrian style, would explicitly avoid stuff like general demand, general supply, devoid of individual single transaction decision making - rather I've looked for something that aggregrates in a self-reflective, feedback loop manner all these individual transactions in a mapping that describes the net effect. I've made cursory attempts at using cellular automata principles, more properly stated as "simple programs" as in Stephen Wolfram's "A new Kind of Science" - free online at:
Stephen Wolfram: A New Kind of Science | Online - Table of
Contents
But, its kinda hard, well actually its VERY hard.
-K
sunsetbeachguy- "Targeted keynesian policy could easily disaggregate a nationwide 30% RE decline."
Please, tell us how.
The Rule of 1/3rd
1/3rd dont own and rent. Of those that own their residence, 1/3rd have no mortgages, 1/3rd have manageable mortgages, and 1/3rd are in deep dodo primarily due to home equity extraction and highly leveraged purchases (this also included speculators that didnt put down much).
Therefore, roughly 25% of households/speculators are in heavy mortgage burden trouble. The gross numbers hide this distributional fact. Just imagine 10% of the housing units being defaulted!
Jas
Shiller is talking AGGREGATE, not REGIONAL!
mp | 11.25.07 - 4:40 pm | #
I agree mp - if we see nationwide declines that large its gonna have a big effect.
Please, tell us how.
And define 'targeted'... I want to be near that target.
"If aggregate prices drop 30% . . . The largest source of individual wealth would be vaporized"
mp | 11.25.07 - 12:06 pm
How are we to stop it? Oh wait, a massive government program to bulldoze all existing and foreclosed homes, thus limiting the supply to support prices at > 3.8 * median income. Hmmm. Maybe still not enough. I know! A government program to pay homebuilders not to build, like they pay farmers not to grow crops.
Apologies in advance if this plan doesn't work.
Seriously, best regards to Conjure Bag.
- Dave
all existing homes
all empty homes
Grrrrr. (stolen from dryfly)
sk - If I were to attempt to model it I'd want to do something like what 'statistical mechanics' does for physics. Model small & 'sum up' rather than start large and divide. Testing small pieces of theory vs empirical results from 'small experiments'.
But then the only econ I really liked when in school was micro econ so maybe its just my bias.
Anyway if there are no numbers or attempts at empirical results to test against numbers - I see it as being little different from religion... and fervent adoption of one theory or the other as a type of 'economic evangelical fundamentalism'.
I'm not big into fundamentalism of any kind.
I don't have much time but for 5 minutes of contemplation here are a few.
Bonuses for re-populating flyover land and the affordable homes there.
Don't fix the AMT and de-populate CA.
Drought in the West causing de-population.
Blow and even bigger cleantech/greentech bubble to replace the housing bubble.
Bulldoze homes.
Hyperinflation.
No different that the FED blowing a RE bubble to bailout the tech bubble.
Dryfly, I agree the whole key is to be near the next flood of liquidity.
Still, MP and Shiller are being shrill and alarmist.
Sunset beach guy,
The TX, CA & FL events you cite did not occur simultaneously. Add on leverage, and we have a calamity in the sense that our economic life will be altered for a generation.
Am I the first, or the last, to notice that "leveraged hedge" fund is an oxymoron.
Note: Googled "leveraged hedge" and got 20,700 hits.
Mortgage Slump Could Derail Economy
Expired
Are we talking 30% REAL or 30% NOMINAL price declines.
I agree with MP that we as a nation would be hard pressed to weather a 30% REAL decline in homes. It would cause a major credit contraction, and we don't have the savings needed to withstand that. It could in essence be Great Depression II.
On the other hand, 30% NOMINAL losses spread over a few years are very doable in my opinion.
which is why I believe the answer is already staring us in the face.
Inflation.
run inflation at 7-8% per year but report that it is 2-3%... after 4-5 years that's 30% real loss...
the debts owed are in USD... so it works.
my guess is that the government directly or indirectly (taxpayers) would foot the bill ulimately. Who else?
It is very suspect that while the huge party is in progress there is little or nil talk of provisions reqired to end the party early because it may get out of hand. NOPE..none of that.
HOWEVER, after the huge party has turned into a massive hangover....suddenly experts everywhere. SUSPICIOUS
sunsetbeachguy,
National declines of 30% will devastate the economy. That kind of national decline translates to upwards of an 80% decline here in SoCal -- put that in your pipe and smoke it.
BTW, I said "will" because it's a done deal, and there's nothing that can be done to stop it. Anything the government tries at this point will only aggravate the situation.
p.s.: Sebastian will realize the impact of 30% declines when it costs him his job.
My question is... let us say I am a renter saving for a decent downpayment for a future purchase. I want a healthy downpayment so I can withstand a downturn.
Now can I buy insurance to protect myself if prices go higher while I am saving? Or is this insurance only for people own and their prices going down?
What do you think of this latest deal by our Governator to avert a meltdown? Anyone know what the terms are?
FT.com / In depth - California homes deal to avert defaults
Thanks,
One more question - who are the bag holders if the introductory rates are extended?
FT.com / In depth - California homes deal to avert defaults
Thanks,
3 things in life (used to be 2) that are guaranteed:
"which is why I believe the answer is already staring us in the face. Inflation."
The patient is very sick, but better late than never. ** play opening scene of MASH here **
pc- this has been debated in a variety of places and from what I understand, it is, to use a term someone pithier than I coined, a giant nothing-burger. The lenders have agreed to do. . . what they are already doing. Essentially a little pre-holiday shopping feel good PR stunt.
Of course, I have no idea what I'm talking about. . . I just read a lot of stuff.
Falcor and mp,shiller is undoubtedly more intelligent and much better educated than I.I describe his position as Academic Hubris for 2 reasons.First he proposes a simple solution to a problem of immense complexity.In my experience such simple answers arouse Murphy and invoke the Law of Unintended Consequences.Secondly,given the ACTUAL structure of the governments and institutions involved,even if they ALL bought into the idea promptly...mmmm...be nice,Tom,be nice...the implementation might perhaps be suboptimal.Wow,i WAS nice,think i'll strangle a bunny to restore my balance.
Sebastian writes,
When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters.
By that measure, it looks like a collective price-drop of -30% in housing would result in a recession that lasts about 4 quarters.
But a 30% drop in home prices equates to a drop of more than $6 trillion, and, moreover, a drop in assets bought on average with far more leverage than anyone is allowed to buy stocks or bonds with.
Tom Stone- "...he proposes a simple solution to a problem of immense complexity."
Tom, I'm not thrilled with Shiller's offering either, but I do respect his opinion enormously because he is a genuine expert on housing. Frankly, the fact that he even considers a 30% price drop possible scares the hell out of me.
Any acceptable solution to the housing problem, whatever its final dimensions, will be the result of public debate and consensus. Unfortunately, the debate really hasn't started yet.
Shiller's piece may start the debate. If it does, it served a useful purpose and we should thank him for it.
The patient is very sick, but better late than never. ** play opening scene of MASH here **
touche | 11.25.07 - 7:25 pm | #
Is that a reference to the theme song: "Suicide is Painless",...it brings on many changes, and I can take or leave it if I please.
mp,I agree with you on shiller,he is a very bright boy,and calls it as he sees it."any acceptable solution to the housing problem,whatever its dimensions,will be the result of public debate and consensus.Unfortunately,the debate hasn't started yet".You make my point for me.We do not have the time needed for public debate,which would take years,public policy makers are still in denial about the nature and extent of the problem,and as far as "consensus",look at the players involved...no matter how sensible or practical shiller's proposals may be,they probability of their enactment approaches zero.THIS is the world we live in.BTW the Bunny was tasty.
Whenever otherwise intelligent academics start writing op-ed pieces for the NY Times, they seem to start taking dumb pills and making suggestions that would normally be expected from mental patients.
Has Schiller noticed that all the "bold" ideas from the 1925-1933 period-- FHLB chief on the list-- are alive and well and in full operation during the last 6-7 years? Either the institutions he lauds are failures (which would undermine his argument) or else they aren't nearly the panacea he tries to suggest (which would undermine his argument). Either way, this guy should not be allowed out of the classroom.
And in the sky is falling department, he says housing prices have "already fallen 5%" which he somehow tries to draw parallels to the depression era 30% drop... I think the ability to differentiate between 5% and 30% should be a requirement to graduate high school-- certainly one should have it mastered before you get a PhD.
Schiller has lost it.
Speaking of "dumb pills"
And in the sky is falling department, he says housing prices have "already fallen 5%" which he somehow tries to draw parallels to the depression era 30% drop. ordinary mental patients might take his concern to be that we are headed for more than 5%..."already fallen 5%" being the clue Jen... FHLB chief on the list-- are alive and well and in full operation during the last 6-7 years? the mere existence of the body may not tell the entire story about how well it is funded and by whom...sorta like FEMA.
Time to sharpen your pencil and make distinctions between smart academics like Shiller and bought and paid for academics...like Mankiw.
Jen Levine- "Schiller has lost it."
What's your book?
And in the sky is falling department, he says housing prices have "already fallen 5%" which he somehow tries to draw parallels to the depression era 30% drop... I think the ability to differentiate between 5% and 30% should be a requirement to graduate high school-- certainly one should have it mastered before you get a PhD.
Ummm Jen, I think he said IF the decline gets to 30% it would be a good idea to have some plans in place prior to that. People can argue whether that's a good idea or not but the concept that a 5% decline (where he says we are now) comes before a 30% decline (where he suggests we MIGHT be heading in the future) is not inconsistent with his piece. You know 5% first THEN 30% later... I think he got that part mastered pretty well, probably sometime prior to getting his PhD.
I'm not sure he's the one who has lost it.
Shiller's paper is here: Home Equity Insurance .
Besides his obnoxious insistence on using the Latin plural of premium, his most obvious problem is his assumption that an insurer will be able to construct reliable actuarial tables from historical data. The current problem is largely a function of the failure of models based on historical markets that looked very different from the one we have to predict outcomes involving a plethora of new mortgage products and a massive influx of capital via securitization.
If you think about it, a 100% LTV lender is really an equity insurer of last resort. I see no reason why Shiller's insurers would be likely to have any better a crystal ball than the lenders we've got.
Fascinating discussion of Shiller's "let's start thinking up radical price support/ bail-out plans" article.
MP perhaps best captures the passionate desire for a price support/ bail-out plan. To paraphrase him shamelessly, "you'll all die economically unless you bail out the homeowners and lenders."
On the other side, I like David Pearson's pithy analysis (12:31pm) the best. All of this discussion about various insurance options and so on just boils down to this: Who can we force into paying when past and future bets on HPA go south?
A bunch of people, mostly homebuyers and lenders, sat down to the poker tables and made some giant bets on home prices going up, and face losses. None of them was forced into it. Any homebuyer could have rented instead. Now they are eyeing the spectators to see which ones they can force to pay some of their losses. So who, besides the bettors, can be talked/forced into paying? All for the common good, you understand.
Another comment on Sebastian's
When the stock market collapsed (2000-2002), the total value of all stock-market mutual funds fell by -45%. In a dollar-amount that was $2 trillion, peak-to-trough. Outcome? A recession that lasted two quarters.
At the peak of the stock bubble, total margin lending on the NYSE was, I believe, in the neighborhood of $250 billion. But US mortgage debt increased about $5-6 trillion during the bubble years, and we know that well over a trillion of that was equity withdrawal in cash-out refinancings. The much greater leverage employed by the general public in real estate will make the impact of falling home prices much more damaging than the stock market crash.
patientrenter- "To paraphrase him [mp] shamelessly, "you'll all die economically unless you bail out the homeowners and lenders.""
That is a totally unfair characterization of what I wrote. I said no such thing.
touche:
"which is why I believe the answer is already staring us in the face. Inflation."
The patient is very sick, but better late than never. ** play opening scene of MASH here **
I think the phrase is "the patient is already on life support, but in for a dime, in for a dollar".
As for me, I'm going to canned goods, the civilian equiv of MRE...
I also am disappointed to see this from Shiller. A previous poster said that this would amount to glorified renting. Well put. A 30% decline in home prices could be very bad for our country, but I don't see how ensuring a perpetual class of renters and giving control of an even larger amount of geography and wealth to an even smaller number of people (or institutions) could be better in the long term. Our democracy is already in a very fragile place.