When asked about Sub Prime Prince Aug 10 said: 12 minutes ago
"as long as the music is playing" we will be dancing and the music is still playing !"
3 days later the credit markets began to implode !!!
S&P's forecast losses for securitized closed end second lien mortgages from 2006 and 2007 were the highest forecast in any non-junior category that I've seen - over 30%. Their forecast losses for securitized HELOCs were bad but much, much lower. I wondered about the huge difference. Is it perhaps a high correlation with the non-recourse distinction?
As I've said before, there will be a day of reckoning for fraudulent borrowers.
Binging on refis, HELOCs, bling-bling-bling, followed by foreclosure, won't get them Scott-free.
If 10 million homeowners walk away, where will they all live? There aren't enough rental vacancies to accomodate 5 % of them. No, they will stay in their homes and renegotiate better terms with lenders who will have no choice but to do so, because they will be unable to sell foreclosed homes.
Ummm, strike that reverse it. In practice the defaulting loans in California regardless of actual legal status are going to be treated as NO RECOURSE loans. Sorry for the typo.
Its not the trillion dollar in potential loss that is scary.
It hundreds of trillion dollars of derivatives and the leverage used to build complex financial products on top of an extremely shaky foundation that is scary (to me).
Most middle class home owners are living on the edge with higher gas and food prices. I believe a fair number will make the rational decision and walk when they figure out they are under water on their mortgage. They have no choice if they can no longer hit the home equity loan button. Gee, I hope I am wrong but continue to look in to survival strategies.
I still think based upon what I am seeing is that for the vast majority of people, walking away will be based upon the affordability of the monthly payment.
In other words, regardless of how upside-down a homeowner is, if they can afford the monthly payment then they will likely continue to pay it.
This may be a smaller number of people than normal...the huge number of ARMS, interest only's, POA, etc will mean that they can't afford the monthly. Also, a recession involving job losses, plus the usual moving, divorce, sicknes, will mean a significant number that will have no choice but jingle mail.
Even if it's socially acceptable to walk, most people wont. Some of course will, but most wont. This is worse for the economy by the way since consumers will be impacted greater by long term higher debt service impacting spending. Those who walk will likely have more to spend.
My previous example: someone who owes $500,000 and houses like theirs are selling for $350,000 probably won't walk if THEY CAN AFFORD THIER MONTHLY for the forseable future (i.e. fixed rate steady job) Why? Because you have to make alot of financial calculations to make it worth it...like where are you going to live...how much is it worth to not have a landlord...how much do you lose to higher taxes....how do you convince your wife to pack up and leave....what if prices rebound quicker than you thought? All these are hard to calculate. It's easier to just keep paying and see what happens.
No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time.
"In practice the defaulting loans in California regardless of actual legal status are going to be treated as NO RECOURSE loans."
Bingo. In this environment, where no one is responsible for anything anymore, I just can't see any significant attempts by banks to go after debtors. Just look how fast the IRS position on phantom income from forgiveness of debt (on short sales) was jettisoned. Any significant attempt by banks to go after assets other than the house would be met with a political (populist) response.
BTW, I think $1T is a good estimate of what the losses will be for lenders and investors. I'm working off a rough estimate that US residential housing will lose $5-7T in real value from these levels (based largely on the growth of the value of residential real estate from about $11-12T total in 2000 to about $21-25T at the peak). $1T for lenders/investors and a $4-6T merde baguette for homedebtors/homeowners sounds about right.
For purchase money, state law determines the recourse vs. non-recourse issue. As Felix noted, refis are always recourse, and there was significant refi activity in recent years. ??
I remember checking this out ages ago and my understanding was that in most states neither purchase nor refi loans were recourse loans. I also remember there being some complicating factors.
Are there any states for which purchase loans have recourse?
To answer your question: The houses that are there now will still be there. There is no shortage of structures to live in, we have plenty of houses..that's the point..there are plenty of places for these people to live....they will just be walking and buying back cheaper or renting from banks or people who buy up the houses they vacated.
No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time.
Well, if there are 10 million jingle mailers, then that means 10 million vacant homes. So the 10 million jingle mailers can all shuffle around and end up in their co-jingle mailers' homes. How about that?
Avg Joe - you keep stealing my responses. I was going to say that middle income families who can still afford their payments are not going to walk willingly even if their values go down, but you beat me to it. Now you beat me to it again. Guess one of us is redundant.
"No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time."
"No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time."
IMO they will just live in the foreclosed homes. Think about it. If everyone jungle-mailed at once, this could be a problem. But it will stretch out. The houses are a durable asset (at least in most places - Florida excepted!). The "owners" - banks, vulture investors, bottom-fishers, etc. - will just rent them out. In the Depression - an extreme example - laws were passed requiring banks to rent out the properties foreclosed upon to tenants for "fair" rental value (in some instances to the former "owners" of the foreclosed properties).
IMO, rents will fall on an equilibrium bases, as will prices, because fundamentally there is an oversupply of housing. There might be some adjustment period, where rents could rise, as people are deterred from buying and owners do not want to rent out the properties (holding out for a buyer), but over time supply will be unleashed and rental and purchasing prices both will fall. BTW, this is exactly what is happening on the West Coast of Florida, and Inland Valley of California (where oversupply is most egregios).
walking away from a loan you can afford to pay because the collateral is worth much less means a destruction of your means (credit score) to purchase another. Another question is how fast can you repair your credit and save a downpayment and is that quicker than a rebound in the price of houses?
I think I know the ,but it would take a brave soul to be so sure as to actually do it.
Besides...being upsidedown on a car or a motorhome never meant walking away in great numbers. If they can afford the house payment they will pay it.
The real question is how many people are in loans they can't afford to continue paying. Nearly 100% of them will walk (or do a workout with the lender).
Well, a $1 Tril loss in the value of real estate has already happened. We could estimate a 5% decline on average, if we include non-bubble areas, as of October. Since the sum value of real estate is aroun $21 Tril, that's easily a tril of losses so far, in terms of aggregate value.
So, a $1 Tril mortgage loss wouldn't be that far off the charts. It could be interpreted as, say a $3 Tril net loss of housing values, and $1 Tril of that loss going back to the banks via foreclosure.
Like CR, not a prediction, but really not that unrealistic.
I just posted this on the previous thread, but it seems even more apropos here:
It seems likely that the "new high end" was substantially fueled by people who sold for $500k a place they'd bought for $250k with $50k down and a $200k mortgage, and put the $270k equity down on the biggest home they could swing with an option ARM (per x-man's 2:59 post above), depending on two high incomes even to make those payments. When one or both of those high-income jobs disappears in the coming recession, they'll be wiped out even before the OA recasts, and if not, the recast will wipe them out.
Here in the suburbs of Chicago a large fraction of the housing market (in dollar terms) has been characterized by this sort of thing, and there is now an awesome inventory of spec McMansions and luxury condos sitting vacant. As I posted earlier this year, a hypothetical price-volume demand curve constructed based on actual 2006 sales indicated that about price cuts of about 30% would be necessary to clear the market even if demand remained at 2006 levels. But of course it won't, and even deeper price cuts will be needed.
Meanwhile, local foreclosure and pre-foreclosure listings have exploded in the last few months, now including many $400k+ properties (in summer was rare to see anything even as high as $200k -- just the subprime stuff).
The wheels are coming off the high end already. This is not a subprime problem.
Right on brother. It's the leverage on the loans via alphabet soup derivatives. Housing is through the windshield guaranteed, ergo recession. Big money center banks go through the windshield, see 1929-33.
CR, would be interested in your thoughts on bad housing loans/derivatives/big picture blow ups. You've seen the notional amounts of derivatives written since 2002. How worried are you?
Bailout? How? What does that do to the dollar? I think BW2 is near the tipping point. What's next? Who effing knows...
5-10 yrs from now might be a brave new world. Not to Cassandra this too much, but seriously...
That said, given the current environment including media focus and legislative attention, I suspect that no servicers are pursuing deficiencies except in exceptional circumstances.
Thus I believe the issue of recourse is irrelevant. Walking away from over encumbered homes will be commonplace in 2008-09.
In additioned to the forclosed homes, the NAA is reporting a ~10% apartment vacancy rate. I can't piece together their calculation, but this spreadsheet shows ~4 million apartment units are available. The same spreadsheet lists total vacancies of ~17 million. I could not discern what this number means.
Rental housing appropriate for families is tight most places. Any increase in renters will cause rents to rise rapidly. That will nake it less likely that people will walk. I'm not saying no-one will walk, but it will be WAY less than 10 million.
Well, a $1 Tril loss in the value of real estate has already happened. We could estimate a 5% decline on average, if we include non-bubble areas, as of October. Since the sum value of real estate is aroun $21 Tril, that's easily a tril of losses so far, in terms of aggregate value.
It seems a safe bet that many of the high-end option-ARM buyers were real estate agents and mortgage brokers who had drunk the koolaid, and others in the finance business getting huge bonuses indirectly from the housing boom. Not mailing in the keys is not going to be an option for these people.
Aheadofthecurve, it doesn't happen all at once. If someone walks on their home - that home will eventually be sold. It's a wash except for some temporary issues.
And there are plenty of vacant units all around the country ...
Bob_in_MA, I'm trying to get the specifics for each state. California is non-recourse for purchase, recourse for refis (but probably mostly non-recourse for both in practice).
REBear, I think the economy is close to stagnate right now (December, SA) ... but without some major revisions, I'd say there was no recession in November. December is still too early to tell.
I have made an argument that jingle mail will be mostly isolated to those who have no choice, they can't afford the debt. I think this number is high enough to hit $1T because of the prevelance of the type of loans out there and the coming job losses due to recession.
Are you also implying that a significant number of people who would otherwise be able to service their debt will choose to walk away simply because the collateral is 30-50% below their debt level?
I just want to clarify so I'm not arguing a point on which we all agree.
Rental housing appropriate for families is tight most places.
Not here in the suburbs of Chicago. The MLS and CraigsList have hundreds of nice places for rent. A beautiful 4-bedroom home near me is up for rent at $2000/mo -- on the market since the summer, when they started out asking $3000, then dropped to $2300. A beautiful 2000+sqft 3-bedroom condo, likewise asking $3000/mo in the summer, has been down to $2400 for many months -- bet they'd jump at $2000 if you offered. There is a significant number of splendid McMansions asking $3000-$3500.
What's "appropriate" for families is highly flexible. I mean, simply imagine living with fewer than one entire bathroom per person! Sheer Barbarism. I mean, it was only the norm until recently - certainly could never happen again.
Counter questions. What's going to happen to those suddenly vacated homes? They'll just stand there immaculate, empty, untouched and unrented for how long? Will it become the expected norm for all new housing whooshing out the pipeline to sit there with the cellophane wrappers on everything? --- I rather like this image of the immaculate construction, actually. Not expecting to see it before the second coming, but well, live and learn.
Essentially all of the above borrowers will profit from jingle mail. Collectively they have borrowed well over $4 TRILLION in mortgage debt.
A 10%, $400B, total loss on this is a rock-solid lower bound. 30% ($1.2T) is a reasonable upper bound, the total losses may in fact come in at 20%, or $800B.
Note that total VC investment 1995-2000 was ~$250B. This country misallocated 3-4 tech booms' worth of capital in this mad tulip chase.
REBear, I think the economy is close to stagnate right now (December, SA) ... but without some major revisions, I'd say there was no recession in November. December is still too early to tell.
You mean no contraction, right? Only the NBER gets to decide when to use the R-word.
Rentals are available everywhere. This country has millions of vacant homes and builders are still building. Do some searches. It is a buyers / renters market.
Home inventories are way understated. They do not include all the people who put their house on the market and pulled due to no sale or even interest. Where I live I have 4 homes off the market but "for sale", with in a few feet of me.
I asked this a while back...Who do i have to shoot to get a 10% vacancy rate ??? I just rented a place Sunday and it bumped us above 60% occupancy. I'm gonna say we are better situated than 99% of rental owners. My parents have owned the units for close to 20 years...
Oh and current rents are 1999/2000 and may need to be cut again.
The comment that the jinglers will exchange homes with other jinglers, assuming they become rental units makes me wonder. As a landlord I would be very skeptical about renting my place to someone that walked away from the home. I would not only raise my rent due to higher demand but add a risk premium in the case they walk away from me.
For those who is interested, a link to a very detailed analysis of law preemption with respect to recourse vs non-recourse status of refinanced loans. 14 pages.
Look, I don't have data on how many will walk, but neither does anyone else. It's all conjecture. I simply don't believe in a 30% fall in prices nationwide, because many markets are not terribly overpriced even today. In my area (Albany, NY) the median house is just over 200K and median income of homeowners is around 60-65 K. So how would you justify a 30 % fall? If the median house were 140k, why would anyone rent?
Maybe a more interesting question would be, in what percent of foreclosures have owners been held liable beyond the value of the home?
A deficiency judgment is typically for the difference between the loan amount (plus expenses) and the fair market value of the property, when FMV is the lower of the two.
If fair market value of the property is more than the loan amount, the court generally considers that the lender has been paid all it is due by taking title.
America of 2007 in that we think that 2 to 5 people need 1500-5000 square feet of house to live in.
One possibility for those foreclosed upon to move in with relatives.
I know of situations already where parents are sheltering two of their children, and their spouses and clildren due to foreclosures and financial hardship. And this ball has only just now started rolling.....
As a landlord I would be very skeptical about renting my place to someone that walked away from the home. I would not only raise my rent due to higher demand but add a risk premium in the case they walk away from me.
Keith | 12.28.07 - 4:49 pm | #
Nope,I have a couple of tennants right now. They were straight up and told me they bought to much house. Came upon hard times. I wil only check current employer. Heck my dad won't even run a credit check. After 20 years he has come to the conclusion it is basically worthless...
The only reason i do this is i can have a delinquint tennant out in less than a month here in Florida. 6 weeks is the longest...
The big difference here is leverage and dispersion of the losses. Dotcom stocks - for all the glam - were held by relatively few people (as a percent of population). And the $$ didn't have to be repaid (by and large - of course, there was some margin there...).
Houses are a different story. 60-70% of the population owns one. For many (if not most) it is their sole source of wealth, other than their labor. My guess is that the negative wealth effects will be very different from the dotcom debacle - and much worse.
If I make $50k per year, have $10k in credit card bills, and my house is underwater and expected to go further, I walk. No, I run. And I don't spend the extra time to mail in my keys. Jingle mail will be light, but mortgage abandonment will be strong.
What's "appropriate" for families is highly flexible. I mean, simply imagine living with fewer than one entire bathroom per person!
For about a year when I was growing up we had an outhouse and no hot water. I don't want to get back to that but I feel that is my real ace in the hole if things get too ugly. Been there, done that.
It's really not that bad except when the spiders are in season.
satchel- It wasn't just dotcom stocks that fell. The Dow and S & P fell 40% or so and there were no dotcom stocks in those indices. And 50% of workers have 401k s, not to mention pension plans and other holdings.
"Back in 2006, I estimated the excess housing inventory at 1.1 million to 1.4 million units. The number is higher now since the home builders have continued to build too many homes. Note: of course price is a factor. With the rental vacancy still above the normal range, there are probably 700 thousand excess rental units in the U.S. (assuming the vacancy rate falls back to 8%).
Stock prices where set at the margin...If I buy one share of IBM at $500, then all IBM stock is worth $500 a share instantly. However this is obviously fake wealth since if everyone tried to get their $500 a share at once the price would obviously drop.
Now if you owned a bunch of IBM and then when it went up to that "fake" $500 a share level you borrowed against it and spent the money, well when it went back down to reality, or even half-way back down..you still have debt service.
Also if everyone else who bought IBM at $500 did so with borrowed money..(i.e virtually all houses are bought with borrowed money) then the debt is still there even when IBM price isn't.
The loss from the stock crash wasn't monitized. You only lost money on the stocks that you bought during the boom. For the average 401ker, that wasn't much more than $10,000 (since you can only buy so much stock in a 401k in a given time.)
two things: conjure is not the only one here that thinks what Mr Buffet just did was absolutely ruthless, but brilliant. It was a perfect move, and everyone honestly should have seen it coming. Look for similar moves by others into the IB and banking sectors. The business side of my brain is still in standing ovation mode over it.
Now, on jingle mail...who is going to walk? Well in my estimation like averagejoe, it is not simply the fact of being underwater that will be the deciding factor. There is also rent to consider. Wherever you are, if you are paying 4k a month and struggling, and could rent a similar place for 2k a month, what would you do? And as far as the credit hit goes...you need to do this while everything is cratering to get forgiven...and it won't matter to landlords because empty units talk. I'd rent to someone like this in a second. They are in repair mode and will be very, very good about payments actually. Much better than someone in other circumstances.
So in the most bubbly areas it will make all around sense. Walk away, file BK, rent and repair while plenty of others are in the same boat. A reverse of what everyone just did, if you think about it.
No one answered my question-where are 10 million jingle mailers going to live.
If you don't have an answer for that then this whole discussion is a complete waste of time.
Two words: occupancy rates.
In the depression, several relatives moved in with my grandparents when
they lost everything.
My cousin and his wife are still nursing along those $1.1M worth of loans on two homes that are dropping in price. Both loans have gone through refinancing, which I hear makes them recourse in CA, but...they have the two homes with negative equity, a big truck, a little suburu, and two kids...there isn't much asset to grab, and my aunt would not let them set up a tent in the park,
even if she did get cranky about it.
The entry level home buyers just don't have many assets, and I suspect they're a large chunk of who bought in 2003-7.
I would also wager that the HELOC & SPEND crowd lives large, but has little to grab on BK day.
The 1/3rd who own outright could probably ride out 50% declines with zero change besides lower property taxes, but they aren't going to be buyers.
This is probably going to unravel back to the point where a home is a good deal over renting (cost + life style). We know what the real loss is going to be, but the nominal loss part is not going to be known until it's over.
"Conjure knows who owns majority of stock in Moody's."
Actually, he only owns 19%, but he's the biggest investor, and that does create a rather large conflict of interest. I wonder if he'll just ignore it, or if he'll actually only pursue ratings from Fitch and S&P.
Wealth is simply physical goods that satisfy human needs and wants. It is the rain-proof roof over your head, the paved and signalled public highways that afford efficient transportation about your neighborhood, and the computer you are using to read CR now.
Ahead,
the NAA lists ~6 mill "held of market" type vacant units for Y2007Q3. This is a typo and should be classified as "held off market", which per the Commerce Dept. definition are whole apartment units that are for sale and not currently being rented. Suspecting those units could be brought on line quickly and combining the previously found 4 mill units, I found your 10 million rental units.
Ka-ching!
For my prize, please send me a Syracuse U. cap. My Mom went to school there during WW2.
Average Joe, I'm not sure how people will behave. I've seen it before in the early '90s - people that can afford their homes walked away because of the amount they owed. It wasn't common, but it happened.
It's hard to know how people will react this time. Say someone owes $500K on a house that they bought with little down. The house next door (identical) sells for $400K. I wouldn't be surprised if the upside down homeowner sent in the keys - and took the hit to their credit report.
conjure is very wise. but then again, if I were a couple of thousand years older, I might be too. And if I had half a brain, in addition to analyzing the current mess, I'd also be analyzing who was in the best position to participate in that new landscape in order to put my money in the right place at a good time. Oh wait. I do have almost half a brain. I'm sure conjure is also doing his homework.
Make no mistake about it, money will be lost, but money will be made. And no matter what anyone says, nothing is ever different at any time.
Rental housing appropriate for families is tight most places.
The whole idea of a tight rental market is BS. From north-central NJ, rentals are rapidly increasing and this is before start of any significant layoffs in NYC.
I suspect with the growing prevalence of negative equity situations, some consistent approaches on both sides will emerge. I imagine borrowers will find themselves in a better bargaining position so even those that might not have pursued some sort of adjustment will.
If I understand correctly, CR is primarily talking about people who might decide to walk away from an expensive house as a prudent financial decision, even though they could afford the payment.
In a tough environment, this is exactly the type of borrower who is most likely to be pursued for a deficiency judgment by lenders, or by the lenders' successors in interest if the lenders are not perceived as maximizing the value of the assets.
Most lawyers I have talked with on this subject believe that replacement refinancing of a purchase money loan is a purchase money loan. Additional money taken out is probably not a purchase money loan.
I Arizona, the non-recourse provision can include single family homes held as investment properties.
It will be very interesting to see if your scenario of people affording their homes yet walking away actually plays out to any measurable extent.
I think it will happen of course...but in such small numbers as to be statistically irrelevant.
I guess it's important for measureing the impact of falling home prices on the financial world/bank losses since it seems that measuring the number of people who can't afford their debt would be a much easier feat than predicting human behavior.
I frankly think your scenario of walking away from a house for a perceived 100k debt relif is very unlikely. (remember its not like 100k appears in your bank account, you simply pay less each month so the cost savings are not immediate and would come slowly over time, if fact costs in the immediate term are likely to go up with first and last month payments, moving costs, flowers for the wife, etc.)
"I'm not sure how people will behave. I've seen it before in the early '90s - people that can afford their homes walked away because of the amount they owed. It wasn't common, but it happened."
I was in your neck of the woods during the runup and crash in the nineties. What is really worring to me is the absolute depth of the housing fallout in SW Fl. I was in my twenties during the last episode so maybe i just did't notice the problems in socal. The market here seems to make the socal 90's look like a easy walk in the park.
I can see both sides...we muddle our way thru over several years...or the economy freakin tanks hard and really reeks havoc...
What's breakeven for the banks selling the LBO debt? 96-95¢? Some First Data(a supposedly sure thing) debt got sold @ 94¢?
Some of the wacky ones(United Rentals) have already been thrown under the bus, I'm assuming that the ones left will be a 94-93¢ for AAA paper & companies, 90¢ cent for the bulk of it; median lower than average #.
Just a WAG, but $7b between the two banks listed, though Citi invariably has more of the piers.
ac-Well, you could say that about all wealth. And beauty and art. And love. They are all illusions. In the end all is dust...
Last time I looked into the subject it seemed that the thinking in physics was that in the "early" universe time breaks down as you go further and futher back, so "early" and "time" ultimately have no meaning.
In other words time is a concept that only exists in proximity to a system that's so hideously self-referential that it's ultimately meaningless as are all concepts including "meaningless" and "ultimate" and presumably "end" too. Oh, and add "concept" to that list.
In any case, I like this type of nonsense because it sort of fits in with my worldview and doesn't conflit with empirical data so much as peoples' feelings about the world and themselves.
I'm constantly amazed how I'm one of the few people around here who can't predict the future.
Joe, the analysis is completely different if your state allows people to walk away from investment properties. That is an immediate savings of 100% of the mortgage payment, taxes, etc. For Arizona that is going to be huge.
Average Joe, CR makes a good point. The AMOUNT that people are going to be underwater and the current/future size of their payments might make a difference this time around.
10k-40k -- "Okay, this sucks but I like my home and it'll come back up in time."
100k-200k -- "I'll be working until I retire and may still not pay this off or see it re-appreciate back up. The current payments are also KILLING me AND they are going to adjust back up soon with no hope for a refi. I'm not going to be able to afford to eat. On the other hand, if I start over and/or buy another home at adjusted prices, my credit will suck for 7 years, but that'll still be faster... Hmmm, I may not like my home THAT much."
In further reponse to Aheadofthecurve, the folks I have heard about walking away voluntarily bought the second (cheaper) house before defaulting on the first. That way the credit hit didn't matter as much.
Andrew,
$10-$40k will be a small slice of the pie. Many people will likely have credit card debt alone totaling that number. Add to that just $50k in the hole on a house (on an income less that $75k), and people will walk, run, jump off a bridge or cliff, etc...Please donate to your local orphanage before the end of the tax year, because they will need the money.
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In further reponse to Aheadofthecurve, the folks I have heard about walking away voluntarily bought the second (cheaper) house before defaulting on the first. That way the credit hit didn't matter as much.
I've been talking to somebody considering default, and their plan is to get into a rental in the same neighborhood before defaulting. There are a lot of rentals there, so the landlords might not be too picky about a renter's credit issues or looming foreclosure.
No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time.
That also begs the question... how many of those homes were primary residences and how many were (speculative, investment or opportunistic, pick one) second homes ?
I suspect that a good percentage of the vacant homes down in Cape Coral were second homes (investment, or hedging against a future retirement). In those cases, there is no homeowner shoved out into the cold south Florida winter.
My prediction is that loan principle forgiveness will become somewhat common. Why foreclose on a non-recourse loan when it will end up costing you more? The borrower may very well be satisfied if they are adjusted to say $10-20K under water rather than $100+.
Second homes and spec/rental homes will likely hit much harder. If you're under water AND negative cash flow, you're likely to walk. This is a wave I conclude has yet to hit - Investors that can afford the payment, but won't when it becomes abundantly clear the market isn't coming back anytime soon.
With respect to leverage magnifying losses, no matter how much leverage is applied, and no matter how is it tranched and sliced or diced, the total amount of losses will not change. The losses may be redistributed, but they will not get any larger in the aggregate.
This is not to say that the impact on the economy won't be larger, as Goldman well notes because banks like to keep capital ratios constant and therefore will contract their lending as losses are incurred. But leverage will not magnify the total losses in the economy.
I'm considerably more sanguine about default risk after reading this semi-academic article about mortgage foreclosures. http://www.philadelphiafed.org/files/br/br_q3-2006-3_residential_mortgage.pdf One of the upshots is that a 20% drop in house prices only raises lifetime default risk to 6%. Basically borrowers choose to eat the losses as long as they can unless they are deep underwater (>15%). Jingle mail outside of the big bubble or big collapse areas is going to be limited to fraud and the fantasy loans. The big bubble/collapse areas are substantial, sure, but even there not every loan, or probably even most loans, will go under.
With only 4 trillion in mortgage loans from the past four years, the majority should fall in "safe" areas. Losses will be less than half the loan value even in the default. That puts peak losses to the financial system at less than 1 trillion and actual losses will probably be a lot less. The current conventional wisdom of 300-500 billion looks pretty good. While huge, that's not a meltdown loss.
IMO a quasi-Japan scenario is more likely, with a long period of underwater buyers trapped in homes and nervous banks trying to restore balance sheets. A long nasty recession but not the Armageddon many here fear (or is that hope for?)
RE: Second homes--in my coastal neighborhood, the amount of time allowed in the US per year by foreign owners (like from sweden) is being monitored and enforced very closely, as coompared to before the domestic security crisis. Don't see them around for months at a time anymore, which could also have a neg affect.
Let's play a new real estate game- Let's make a deal!!!
I only want to pay half of my mortgage-
how about lowering my interest rate to 3%? Or cut my balance in half?
This is going to be the new reality- after all if my neighbor gets a deal I WANT one too!!! Or I will mail back my keys out of sheer anger and get a cheap rental- fairness issues are going to be stunning- can you say Edwards the populist is going to have a field day!!!~
I can see the same way that people were proudly talking about their RE purchases in cocktail parties in the past 5 years, they proudly will be talking about sticking it to the lenders by mailing them the keys, and laugh about it.
Fair Economist- "...a quasi-Japan scenario is more likely, with a long period of underwater buyers trapped in homes and nervous banks trying to restore balance sheets. A long nasty recession..."
That particular scenario is one of several in Conjure's playbook.
""Conjure knows who owns majority of stock in Moody's."
Actually, he only owns 19%, but he's the biggest investor, and that does create a rather large conflict of interest. I wonder if he'll just ignore it, or if he'll actually only pursue ratings from Fitch and S&P.
Alistair | 12.28.07 - 5:09 pm | #"
Actually the perceived conflict of interest isn't a major issue, since it isn't a close call. A more interesting perceived conflict is if/when MCO gets realistic about the other bond insurers.
Canuck, I sort of see your point, but I don't think you are correct.
In a Ponzi economy where most assets consist of IOUs from other participants, each default leads to multiple additional defaults by people who were counting on your payments to make their payments. Each owner of a defaulted IOU suffers a real loss. It seems to me this is a direct effect of proliferating leverage, not a slowdown effect.
When people get desperate the unthinkable becomes more and more reasonable seeming. The analogy I was given on relative morality while in a short course on drug addiction in the work place was "Most people think drug crime as abhorrent and wonder why anyone could do such a thing. However, if those same reasonable people were swimming and suddenly found themselves trapped and held underwater they would very quickly get desperate enough to commit that same drug crime or worse for that next breath of air."
I'm hoping all we have to deal with is a Japan-like scenario of borrowers that are trapped in underwater houses for several decades. It's fine when all the numbers are large, but abstract, and you are still eating and paying your living expenses. But when those numbers get to the point of affecting your ability to eat and pay minimal expenses a lot of people a going to crack and look to grab the eject lever in desperation. Particularly, when the Joneses and Smiths just down the block just did it and it seemed to work out for them.
Hope or fear. Once someone expresses a theory or opinion, then they have an interest in that happening. No biggie.
Just human nature.
Throw out historical basis for assumptions. We have never been here before. With wages effectively declining there is no good way to wait this out. If you cannot pay for food and clothing, you bail.
Remember this thing is so huge because folks depended on historical basis for making crazy loans without checking to see if the present reality matched the historical norm.
"Rental housing appropriate for families is tight most places. Any increase in renters will cause rents to rise rapidly."
Yeah... funny thing about that. As incomes fluctuate you'd be surprised how what is "appropriate" changes.
this is a surprise to many, but you only need a 3 bedroom apartment for a family of 6. (mom/dad in 1 bedroom, 2 kids per bedroom).
I've just about had it with people who assume that one "needs" a bedroom per child, and that one can't share a bathroom...
when I was a kid (yeah, yeah, I know) I don't remember anybody who had their own room. You sort of assumed that you were going to share a room. I shared my bedroom with 2 siblings. And almost no houses had more than 1 bathroom.
it's only the last 10-20 years where McMansion living is seen as a 'necessity'.
And the Gods of the Copybook Headings said: "If you don't work you die." Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew ... Poems - 'The Gods of the Copybook Headings'
vader- "Throw out historical basis for assumptions. We have never been here before."
Sorry, but you're wrong. There is nothing new about interest-only mortgages or mortgage-backed securities. Both were used extensively in--gulp--the 1920s. The MBS market imploded in 1931.
The severity of the coming downturn depends on employment. If employment tanks, it will cause an avalanche of foreclosures across all classes. You'll then see, as Conjure did during the early thirties, foreclosure moratoriums.
Having said all of this, keep in mind that Conjure and I are not predicting the end of the world. There is still time to stear clear of the abyss, IF Congress and the Fed get off their dead asses and get to work.
to pitch in about walking away,
In the late 80s,person I know walked away from his home just because it was under water. I dont have the exact amt.
he told me some time last year, that , then the talk was that RE was going to be under water for quite some time. He had a job in local technology company. He could be making payments if he wanted to. Yet he walked because environment was so pessimistic , there was no hope that RE would come back.
later 5 years or so, he bought a home in the name of is BIL (he could not get a loan) and he transferred the title few years later.
"Ah, generations of mankind!
I count you as nought even as you live.
Who, what mortal ever enjoyed more prosperity than was mere seeming,
Who, after his illusion, did not fall into decline?"
Prior busts had mature purchasers with 20% skin, FRMs, comparatively low DTIs, no expectation of immediate equity gains, and were never much more than low five-figures underwater.
The new, younger crowd has little down, ARMs, two-job ramen-diet payments, visions of MTV "cribs" lifestyles, and are facing the prospects of being hugely in debt for the rest of their working lives.
There is still time to stear clear of the abyss, IF Congress and the Fed get off their dead asses and get to work.
This is where we part ways. If TPTB immediately became fiscally responsible and totally transparent the entire country would immediately plunge into a depression.
transient- "What does Conjure think they should do?"
Conjure says, "Simply put, cut out the dead wood and refinance what's left."
As to what that means, use your imagination. The junk has got to come on the books, now. If it does, at least a third of the New York IBs will be instantly vaporized. Refinance the ones still standing, merging if necessary. Do the same with the state and federal banks.
Do the same with homeowners. If they qualify, use the GSEs to refinance them. If they don't, vaporize them.
Sorry, but this isn't the time for legal, political and philosophical bullshit. It's about using proven tools to make the system work.
TPTB and the MSM are misleading J6P in focusing on direct mortgage losses in the banking arena. It's the trillions in homeowner equity losses that'll kill the US economy.
Renting, no matter how affordable, still means a drop on the class ladder.
You have the blue-collar homeless, who are a step below blue-collar renters. Then you have blue-collar homeowners, who are a step above the blue-collar renters.
I came from a blue-collar homeowner family and Mom and Dad couldn't understand why I'd want to rent an apartment instead of buy a house if I could. Renting, to them, was a step backward. It didn't matter where the renting was taking place or how much rent I could afford for a trendy flat. They didn't understand that, for me (a college grad with a white collar job), that would be white-collar renting, which is still all in all, a class step above blue-collar homeownership.
What we're seeing now in America is a massive failure of upward class mobility, among not only among the blue-collars who were targeted with subprime loans (and tempted with the sort of homeownership of spiffy new homes that only white-collars could traditionally afford), but also among white-collar renters who hoped to graduate to white-collar home ownership.
Class mobility is not a steady progression through the generations of any particular family. Go back into your genealogy and you'll find examples of some of your ancestors who were "making it" but a couple generations later, their grandkids or great-grandkids had slipped into a lower class bracket. It happens a lot. The grandkids of some of these failed white-collar homeowners are going to be working in trades and living in smaller houses 50 years from now.
Make no mistake, what you're suggesting is exactly what I'd like to see happen. However, when you've dug a huge hole these actions don't avert the need for the long, painful climb back out.
Oh, and PS - forgot to add, this is what you would call a "class correction" in American society. The white-collar middle class has simply gotten too populous. Globalization cannot support 300 million white-collar Americans, despite pie-in-the-sky promises that in the future, everyone of middle-class breeding will have desk jobs in the biotech sector, and there will be handy immigrant gardeners for all. In a weird way, this subprime ("we are all subprime") mess is a handy way to trim the fat.
Thanks for the answers to my question about buy vs. rent yesterday. After reading this article from money central and running some numbers in the NYTimes Rent v. Buy calculator, I don't think I'll buy again. Lucky enough to have gotten out of the Cambridge, MA market before things started going really sour.
One thing that may encourage jingle mail in my part of california is how much cheaper it is to rent than buy.at the peak my then wife wanted to buy,and only backe off when i showed her that the cost of buying,AFTER putting 20% down,was 3.5 times the cost of renting the same home,without considering maintenance...if you are $150k underwater and can rent for less than half your current cost,and can blame someone else for you bad decision...and "everyone else is doing it"...BTW if you buy a new cheaper home and deliberately default on the older more expensive home...they call that "fraud".it sometimes has unpleasant consequences.
"Second homes and spec/rental homes will likely hit much harder. If you're under water AND negative cash flow, you're likely to walk. This is a wave I conclude has yet to hit - Investors that can afford the payment, but won't when it becomes abundantly clear the market isn't coming back anytime soon."
Residential income properties -- single and multiple -- are still being sold at serious negative cash flow on the central California cash. As are small commercial properties. I guess we're setting up yet another wave to come after the wave you're talking about.
Prices are so high that if the seller cut 20 percent off the asking price, you'd still be 30 percent too high.
Next Friday could be the coup de grace with the Dec employment numbers. With employment falling and businesses curtailing spending at the same time as the housing market is imploding we are in for a lot more jingle mail than any MSM operation is willing to print.
I wouldn't be surprised to see those 55Gal steel drums burning scavenged stuff to keep warm in line at soup kitchens...
As for how much house it takes to raise a family, I spent years living in 900-1000 square-foot flats in San Francisco that had been designed for a single family: two bedrooms (just one for the kids) and a living room up front that could be closed off from the rest of the house if you needed some place to stow Aunt Agnes or the teenage daughter, once she reached a certain age. They were mainly built in the early 1900s.
Generations of families were raised in those things. I knew some that still were, 20 years ago.
People will do what they need to do. It's amazing how much house you don't need. Frankly, I think there'll be a market in converting well-situated "executive" homes" (2500 square foot plus) into duplexes.
I'm not doubting what anyone is saying, but I know that buying is not 3x more expensive than renting where I live. The only rental I've seen similar to mine in my neighbourhood is $ 2400/month. I pay < $1500 PITI. Now let's say my house doubled since I bought it in 1996 (I don't actually know what it's worth, but I'd be perfectly content to sell it for that), you're looking at around $3000. After taxes that's pretty darn close to renting. Add in the part of the mortgage payment that goes to principal and I'd say they're about the same.
Anyway, I don't think I'll be mailing in the keys just yet..
The class POV is interesting, as it brings up the emotional side of this instead of the numeric one that we seem to rely on around these parts. And you are right...I bought my first house because my parents pressured me..."why do you want to rent? this is an investment" etc. Well, I could point out to them that a house was a poor investment because it generally just keeps pace with inflation plus a little, but it was the idea that made them say that. And a lot of people see home ownership as a sign of having made it in some way. The cost isn't the point, it's to be able to answer "Do you own or rent?" in the affirmative. I always ask prospective significant others that question as a cull
But there is a more interesting point here. The current political situation managed to convince, in my opinion, tons of people that they belonged to a class that they didn't, could spend like they belonged to this class, and live like it...no, they were ENTITLED to live like it. How else can you explain 4 bed houses for people making less than 50k a year? When I was a kid smirk my blue-collar parents had a two bedroom house, one car, one bathroom, and we certainly didn't wear the equvalent of $100 sneakers. Yet somehow we lived pretty well and didn't think much of it.
This correction is not only going to be hard on the monetary situation, but it's going to be really hard on those that find out they were lied to, and find all of this crashing down as they have to give up what they thought were the tokens of sucess as unaffordable. I know what I make and, trust me, it's in the upper levels and I can't afford what I see people with. The contraction this will cause is going to be epic in economic as well as social terms. We are living in historic times here.
The 1/3rd who own outright could probably ride out 50% declines with zero change besides lower property taxes, but they aren't going to be buyers.
Why do you think property taxes will go down? Assessed values may go down but I'll bet you the total property taxes paid by a homeowner stay the same or go up. Too many municipalities have yielded to the demands of unions and granted inflated salaries and benefits to municipal workers. It used to be people took these jobs with the understanding that the pay wouldn't be great but the benefits would. Maybe my area is an exception but the current situation is such that salaries in the public sector have not only kept pace with those in the private sector but have in fact outstripped them.
As of Year End 2006 8 of 10 regions in NY saw Public Sector workers with higher compensation than Private Sector workers - can anyone say "UNSUSTAINABLE"...
Perhaps this is a topic for a different thread or different blog, but the fact is, CLASS is the great unspoken rift in American culture, even more than race or ethnicity.
I always used to wonder why the Internet would give me a slight headache, until I realized it was created BY white-collar people (and their children), FOR white-collar people (and their children), which is not my background. I could never understand why everyone on the Internet talked as if easy money were a way of life, as if everyone jetted off for vacations and flew 10 times a year, where on earth these kids were getting so much money to buy all those gadgets that Apple kept coming up with.
We're also living in a historic time right now, because we now have kids who are second and third and even fourth-generation "middle class" kids. In the old days, the middle class wasn't a "class" so much as a work space where working-class people could have a chance to free themselves from a bone wearying cycle where they could NEVER get ahead. But now the "middle class" has become a huge and stagnant parking lot for millions of American families.
It is actually NORMAL, historically, for upward mobility to not be a steady and direct route from generation to generation. It is highly ABNORMAL to have such a huge multigenerational bourgeoisie in this country, particularly one which has been lulled into false security by easy cash and instant material gratification.
What's really sobering is that the kids of this bourgeois class, who are going to watch their parents lose/walk away from homes, are going to not have the faintest clue about things the working class knew about, like how to organize themselves and just the basic understanding of class consciousness.
There was a big article in the New Yorker the other week where some magazine writer decided to move to the country because she couldn't afford to live in the city any more. She clearly did not understand that she no longer really belonged to the privileged class she thought she did; she's one of the pushed-out people. That's the sad thing: it takes maybe half a generation for people to understand they and their children have slipped a rung on the class ladder. "Who, me?"
"multigenerational bourgeoisie" now I ask you, where...oh where else can you get that phrase in a blog post! Would to God that some decision-makers had read the comments here...
"Sorry, but you're wrong. There is nothing new about interest-only mortgages or mortgage-backed securities. Both were used extensively in--gulp--the 1920s. The MBS market imploded in 1931."
Good point and something that tends to ignored. The history is interesting but not easy to find on the internet. The funny thing is that the current monoline credit insurance structure was a reform based on market failure of 20's financial innovation.
It took the invention of structured finance to blow up the results of the reforms of the 1930's.
I'm not doubting what anyone is saying, but I know that buying is not 3x more expensive than renting where I live. The only rental I've seen similar to mine in my neighbourhood is $ 2400/month. I pay < $1500 PITI. Now let's say my house doubled since I bought it in 1996 (I don't actually know what it's worth, but I'd be perfectly content to sell it for that), you're looking at around $3000. After taxes that's pretty darn close to renting. Add in the part of the mortgage payment that goes to principal and I'd say they're about the same.
Anyway, I don't think I'll be mailing in the keys just yet..
Aheadofthecurve
Ahead,
To be fair, you live in Albany(it's MSA, anyhow.) The bleeding there was over a long time ago, and those who live there don't rent because the housing is cheap and diverse and plentiful. People who rent houses pay more due to risk premium & maint. costs, not scarcity.
Albany MSA is a 57-60th ranked; 1/2 the size of Indianapolis MSA, 1/4th the size of the Phoenix MSA(PHX has added a bunch of people since the last census), 1/20th the size of the Los Angeles MSA.
Indy is already tanking and houses are still cheap in absolute terms and getting cheaper even though it's not diverse and plentiful(although with the immigration clampdown the west side near speedway will open up.)
Phoenix is starting to tank in the core (median price wise)and is a bloodbath in outer sections as $3 gas is crimping their style.
LA is in the same boat as Phoenix, though there may be an additional high end implosion if the writers strike isn't ended in the next 6 months.
I know I could buy a huge victorian for under $100k in any town along the Erie Canal, but what job can I get there? Telecommuting's great, but there's crappy airport access & I don't have to shovel heat.
I sold my house in Tempe years ago because I couldn't manage the property because I was away so much and made a nice profit even though I left it in worse shape. I can live in my rental for another 2 years with the money from the sale(incl. utils) while my income stream has grown.
By that time I'll be able to buy a better plot for less money, if the lord's willing and the creek don't rise.
Point is, there's always a calculus where anybody is wanting to sell. Demographic trends have been a big driver of this current mess, and when it goes south it's gonna be a big time buyers market wherever you go.
Although it is not known the actual terms of the mortgage in question, the price paid for the home is known, the credit card is maxed, and the head of the household took a new job 80 miles away for complicated reasons with the idea that they could sell the existing home and move with the spouse giving up their job. But now it is not so clear why this move has not happened. I would expect that tight credit and a falling market price makes it tough to make such a change. What if the home they live in cannot be sold for the mortgage amount? What if they do not know what price they can get and are unsure because of reduced pricing and homes in the neighborhood going unsold? These folks may be caught in this credit crisis, with the crisis happening right when the events that caused the job change occurred.
This is in the heart of America. Not in a bubble area and not in an area where a lot of subprime is going under.
Does anyone have good data on homeowner/mortgage-borrower behavior in Houston during the mid-to-late 1980s? One could use it as a prototype for borrower behavior in the not to distant future.
We were all upside down on our mortgages. Many of us lost jobs; the remainder were running scared. If you were lucky, your company tranferred you the Bakerfield, bought your house for the mortgage principal balance, and you considered yourself damn lucky.
Others just loaded up their cars or pickup trucks and moved back to the Midwest or headed elsewhere where it was rumored that the job markets were strong. I doubt that they gave a lot of thought to the banks, much less their mortgages, as they waved Harris County goodbye.
California is full of people with the same boomer mindset. As the bust hits, U-Haul will be very, very busy.
Prediction: look for non-recourse states to pass "mortgage relief acts" with token items for borrowers and a carefully hidden switch to recourse, probably added as an anonymous amendment.
"I know I could buy a huge victorian for under $100k in any town along the Erie Canal, but what job can I get there?"
Depends what you do. Let's say you're a college professor, for example. Do you think SUNY pays much different from ASU? Or an MD. Do you think doctors bill about the same for an office visit in NY vs AZ? Or plumber, for that matter?
The point I am making is that there remain many mid-size and even larger areas (Houston, Dallas) where people will buy because it is not much more than renting. That's why I question the 30 % number nationally.
As for snow, I prefer winter here to summer in AZ, but that's probably because I grew up in Montreal and Albany doesn't seem that cold to me!
"Essentially all of the above borrowers will profit from jingle mail. Collectively they have borrowed well over $4 TRILLION in mortgage debt.
A 10%, $400B, total loss on this is a rock-solid lower bound. 30% ($1.2T) is a reasonable upper bound, the total losses may in fact come in at 20%, or $800B."
Anyone want to make a market on what the total losses will be? I imagine I will be happy to take the under if the above is representative of the predictions here...
I spent years living in 900-1000 square foot flats
I think the US 'went big' in housing before everybody else.
My first purchase in Canberra (Australia) in 1979 was a 960sqft 3/1 SFH. After I added a metal garage, my ex-UK-Army aunt here on holidays described it as "Captain's quarters" because it had covered car accomodation and 3 double bedrooms (I.e. more than 8 feet wide and long so you can fit in a 4'6" double bed).
She was amazed that I was living in it by myself at the time.
Before that, in the early 70's I remember wasting many an hour in the back of a classroom with friends drawing up DREAM homes on graph paper. Our agreed template was an 1800 sqft (30 x 60) 4/2 living space with stairs heading down to a garage/laundry/storage area underneath. We all thought that with good design this would be enough for any family of up to 3 kids.
I had one client who was building a house in ground zero of ground zero SW Florida. He was doing so in good faith, intending to live there, because as a good Cuban dad, he wanted to live near his daughter, sonin law and baby grandson.
The son in law died in a tragic accident; daughter could neither afford to live in the house, nor bear to live there because of sad thoughts, moved back to East Coast;
my client, while his credit was still good bought a house on the East Coast, and then we told the bank and developer to stop building and offered to give a deed in lieu of foreclosure, which they refused, so he filed bankrupcy and everybody but the West coast bank and developer are living happily ever after.
Another client with a homestead property and an investment property is coming in next week to talk of walking. I have 3 or 4 foreclosures which I am stretching out so that the people can try to sell or re-fi. The is easy, as the foreclosure law firm mills really haven't the slightest idea of what to do with opposition.
Lenders don't want to spend any money, even if it would make them more money. They let the REOs rot; don't pay assn fees on Condos and HOAs; abandon negotiated sales. Up to now they virtually never ask for deficiencies, even with outfits that always ask for them with car loans.
Practically speaking, unless they (lenders) change their ways the recourse/non-recourse distinction has, SO FAR, no practical consequences.
Most people who abandon their property have no money, and lenders would have to hire people and spend money to figure out who did. I doubt they will do anything so sensible. Lenders have, in my 30 years of practicing real estate law, never shown any intelligence at the top.
It would make sense to me to act pre-emptively and send letters out to everybody who was 30 days late (or 60, or in foreclosure) to offer to forgive present debt, lower the interest rate a point or 2, and maybe, try to get an honest appraisal and lower the mtg balance to what the house appraised for. The banks will figure this out long about the time it will be too late. Or when cram down legislation comes through. I think they will lose less money this way, but I think a lot at the top haven't wrapped their teeny weeny minds around the concept that they are going to lose a whole lot of money, and losing less money is better than losing more money.
Maybe somebody could figure in an equity kicker (if legal), just in case house prices go back up again in 10 years or more.
I didn't read all of the comments, above, so maybe this has been covered. But if the house has a HELOC or similar second mortgage (TD in California and perhaps other states), and the holder of the first forecloses leaving the second with nothing, the odds of the holder of the second filing a lawsuit (not judicial foreclosure or non-judicial foreclosure), goes up dramatically. They have nothing to lose.
mp,
I thought I'd run some of my thinking RE: Japan past Conjure.
Independence indoctrination in America begins right after birth. Folks place their baby in a crib, sometimes in a different room, and call on Ferber when the going gets tough.
Japanese women sleep in the same bed with their baby for at least the first year of life and children often sleep between their parents for what most Americans would consider to be an obscenely long time.
The Japanese value for interdependence produces measurable neurological differences. Asians with an interdependent identity construct have much shorter amplitude and frequency of emotional response than do Americans, but this does not hold true for Asian Americans. When someone with an interdependent identity is asked to describe a humiliating experience, they will most often cite an example of someone with their name or in their community behaving shamefully. Americans, invariably, will cite a mistake which they themselves made when asked to describe a humiliating experience.
So, the Japanese had psychological constraints that impeded their willingness to walk away from their debt obligations. Not only do Americans not have these impediments, but they have been raised to believe that it is morally acceptable to do what is in their own best interest.
I am not in any way suggesting that the Japanese system is better. I see pros and cons with both approaches.
So, I'm predicting that lots of Americans will walk away and that the repricing of real estate in America will happen much more quickly than it did in Japan.
On an anecdotal note, my landlord friend has seen a remarkable increase in the number of roommates applying for a single apartment. He most recently rented a two bedroom in a prime location to a lawyer husband and his wife with a school teacher roommate. Small apt. too, about 900 square feet.
How long will it be before someone creates a fund to buy the "rights" to sue recourse borrowers? In a digital age, how hard would it be to separate the wheat (deep pockets) from the chaff (deadbeats)? Banks may be bashful about recovering losses, but lawyers are not.
@jcsc is it really true? so that's probably one of the main reasons why the mortgage industry is down right now? I hope that this problem will be settled soon though
When asked about Sub Prime Prince Aug 10 said: 12 minutes ago
"as long as the music is playing" we will be dancing and the music is still playing !"
3 days later the credit markets began to implode !!!
DH
S&P's forecast losses for securitized closed end second lien mortgages from 2006 and 2007 were the highest forecast in any non-junior category that I've seen - over 30%. Their forecast losses for securitized HELOCs were bad but much, much lower. I wondered about the huge difference. Is it perhaps a high correlation with the non-recourse distinction?
Hey, at least it's cheaper than the war in Iraq...
As I've said before, there will be a day of reckoning for fraudulent borrowers.
Binging on refis, HELOCs, bling-bling-bling, followed by foreclosure, won't get them Scott-free.
Coupla points.
First, there is an assumption that people are aware of their recourse status and will act accordingly.
Second, pursuing recourse is very expensive with uncertainty.
Third, as much as there is recourse available to the lenders they haven't even shown an interest in pursing outright fraud.
Fourth, a disproportionate number of the most recent and most exposed home purchases were to minorities and other protected classes.
My general conclusion is that all loans in California are, in practice, recourse loans. The remainder are exceptions.
Next growth industry...collection agencies.
If 10 million homeowners walk away, where will they all live? There aren't enough rental vacancies to accomodate 5 % of them. No, they will stay in their homes and renegotiate better terms with lenders who will have no choice but to do so, because they will be unable to sell foreclosed homes.
Ummm, strike that reverse it. In practice the defaulting loans in California regardless of actual legal status are going to be treated as NO RECOURSE loans. Sorry for the typo.
This wasn't a forecast, just a simple exercise to show why changing social norms is very scary for the lenders.
Does this mean more people are starting to think of this as a cultural/behavioral problem as well as an economic/financial problem?
Or are today's homeowners just the same passionless utility-maximizing automata that make up our rational efficient markets?
Maybe the "purge the rottenness" perspective isn't quite as vile and sadistic as most people would like to believe.
Maybe the same forces that lead to great wars and genocides are still with us today and only manifesting themselves in different manners.
Maybe the problem isn't quite as simple and black and white as everybody wants it to be -- from any perspective.
Consumer psychology... the hardest to define aspect of this crisis, and therefore the scariest. Thanks for raising the issue.
Its not the trillion dollar in potential loss that is scary.
It hundreds of trillion dollars of derivatives and the leverage used to build complex financial products on top of an extremely shaky foundation that is scary (to me).
Next growth industry...collection agencies.
picosec | 12.28.07 - 4:03 pm | #
I agree. And when the war ends, those soldiers can work as repo-men. Knocking door-to-door...
Most middle class home owners are living on the edge with higher gas and food prices. I believe a fair number will make the rational decision and walk when they figure out they are under water on their mortgage. They have no choice if they can no longer hit the home equity loan button. Gee, I hope I am wrong but continue to look in to survival strategies.
Only a trillion? Peanuts compared to the size of the crater where the federal treasury used to be.
A trillion dollars is the new billion. Wake me up when we get to quadrillion.
Re: the final note in this post.
National servicers always have charts like this.
Someone out there works for a national servicer.
That someone also probably has email access at home or abroad.
I would of course never ask anyone to share confidential or proprietary information.
But if your employer wasn't energetic enough to put a confidential stamp on it, you could send CR a copy and make him a very happy blogger.
This has been a public service announcement. We return to our regularly scheduled commenting.
I still think based upon what I am seeing is that for the vast majority of people, walking away will be based upon the affordability of the monthly payment.
In other words, regardless of how upside-down a homeowner is, if they can afford the monthly payment then they will likely continue to pay it.
This may be a smaller number of people than normal...the huge number of ARMS, interest only's, POA, etc will mean that they can't afford the monthly. Also, a recession involving job losses, plus the usual moving, divorce, sicknes, will mean a significant number that will have no choice but jingle mail.
Even if it's socially acceptable to walk, most people wont. Some of course will, but most wont. This is worse for the economy by the way since consumers will be impacted greater by long term higher debt service impacting spending. Those who walk will likely have more to spend.
My previous example: someone who owes $500,000 and houses like theirs are selling for $350,000 probably won't walk if THEY CAN AFFORD THIER MONTHLY for the forseable future (i.e. fixed rate steady job) Why? Because you have to make alot of financial calculations to make it worth it...like where are you going to live...how much is it worth to not have a landlord...how much do you lose to higher taxes....how do you convince your wife to pack up and leave....what if prices rebound quicker than you thought? All these are hard to calculate. It's easier to just keep paying and see what happens.
Treeeeleeeeeeeeooooons?
No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time.
Starbucks.
"In practice the defaulting loans in California regardless of actual legal status are going to be treated as NO RECOURSE loans."
Bingo. In this environment, where no one is responsible for anything anymore, I just can't see any significant attempts by banks to go after debtors. Just look how fast the IRS position on phantom income from forgiveness of debt (on short sales) was jettisoned. Any significant attempt by banks to go after assets other than the house would be met with a political (populist) response.
BTW, I think $1T is a good estimate of what the losses will be for lenders and investors. I'm working off a rough estimate that US residential housing will lose $5-7T in real value from these levels (based largely on the growth of the value of residential real estate from about $11-12T total in 2000 to about $21-25T at the peak). $1T for lenders/investors and a $4-6T merde baguette for homedebtors/homeowners sounds about right.
CR,are you sure about this:
For purchase money, state law determines the recourse vs. non-recourse issue. As Felix noted, refis are always recourse, and there was significant refi activity in recent years. ??
I remember checking this out ages ago and my understanding was that in most states neither purchase nor refi loans were recourse loans. I also remember there being some complicating factors.
Are there any states for which purchase loans have recourse?
No one answered my question-where are 10 million jingle mailers going to live?
Perhaps in tent cities?
Aheadofthecurve..
To answer your question: The houses that are there now will still be there. There is no shortage of structures to live in, we have plenty of houses..that's the point..there are plenty of places for these people to live....they will just be walking and buying back cheaper or renting from banks or people who buy up the houses they vacated.
No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time.
Well, if there are 10 million jingle mailers, then that means 10 million vacant homes. So the 10 million jingle mailers can all shuffle around and end up in their co-jingle mailers' homes. How about that?
Avg Joe - you keep stealing my responses. I was going to say that middle income families who can still afford their payments are not going to walk willingly even if their values go down, but you beat me to it. Now you beat me to it again. Guess one of us is redundant.
"No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time."
I'll tell you where they arent going to live...
Southern California.
Aheadofthecurve:
"No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time."
IMO they will just live in the foreclosed homes. Think about it. If everyone jungle-mailed at once, this could be a problem. But it will stretch out. The houses are a durable asset (at least in most places - Florida excepted!). The "owners" - banks, vulture investors, bottom-fishers, etc. - will just rent them out. In the Depression - an extreme example - laws were passed requiring banks to rent out the properties foreclosed upon to tenants for "fair" rental value (in some instances to the former "owners" of the foreclosed properties).
IMO, rents will fall on an equilibrium bases, as will prices, because fundamentally there is an oversupply of housing. There might be some adjustment period, where rents could rise, as people are deterred from buying and owners do not want to rent out the properties (holding out for a buyer), but over time supply will be unleashed and rental and purchasing prices both will fall. BTW, this is exactly what is happening on the West Coast of Florida, and Inland Valley of California (where oversupply is most egregios).
To add on to my prior post...
walking away from a loan you can afford to pay because the collateral is worth much less means a destruction of your means (credit score) to purchase another. Another question is how fast can you repair your credit and save a downpayment and is that quicker than a rebound in the price of houses?
I think I know the ,but it would take a brave soul to be so sure as to actually do it.
Besides...being upsidedown on a car or a motorhome never meant walking away in great numbers. If they can afford the house payment they will pay it.
The real question is how many people are in loans they can't afford to continue paying. Nearly 100% of them will walk (or do a workout with the lender).
Well, a $1 Tril loss in the value of real estate has already happened. We could estimate a 5% decline on average, if we include non-bubble areas, as of October. Since the sum value of real estate is aroun $21 Tril, that's easily a tril of losses so far, in terms of aggregate value.
So, a $1 Tril mortgage loss wouldn't be that far off the charts. It could be interpreted as, say a $3 Tril net loss of housing values, and $1 Tril of that loss going back to the banks via foreclosure.
Like CR, not a prediction, but really not that unrealistic.
I just posted this on the previous thread, but it seems even more apropos here:
It seems likely that the "new high end" was substantially fueled by people who sold for $500k a place they'd bought for $250k with $50k down and a $200k mortgage, and put the $270k equity down on the biggest home they could swing with an option ARM (per x-man's 2:59 post above), depending on two high incomes even to make those payments. When one or both of those high-income jobs disappears in the coming recession, they'll be wiped out even before the OA recasts, and if not, the recast will wipe them out.
Here in the suburbs of Chicago a large fraction of the housing market (in dollar terms) has been characterized by this sort of thing, and there is now an awesome inventory of spec McMansions and luxury condos sitting vacant. As I posted earlier this year, a hypothetical price-volume demand curve constructed based on actual 2006 sales indicated that about price cuts of about 30% would be necessary to clear the market even if demand remained at 2006 levels. But of course it won't, and even deeper price cuts will be needed.
Meanwhile, local foreclosure and pre-foreclosure listings have exploded in the last few months, now including many $400k+ properties (in summer was rare to see anything even as high as $200k -- just the subprime stuff).
The wheels are coming off the high end already. This is not a subprime problem.
Cal,
Right on brother. It's the leverage on the loans via alphabet soup derivatives. Housing is through the windshield guaranteed, ergo recession. Big money center banks go through the windshield, see 1929-33.
CR, would be interested in your thoughts on bad housing loans/derivatives/big picture blow ups. You've seen the notional amounts of derivatives written since 2002. How worried are you?
Bailout? How? What does that do to the dollar? I think BW2 is near the tipping point. What's next? Who effing knows...
5-10 yrs from now might be a brave new world. Not to Cassandra this too much, but seriously...
This site has state by state synopsis of foreclosure law including whether deficiency judgments are available: United States Foreclosure Laws - all states
Not a chart per se but the information is there.
That said, given the current environment including media focus and legislative attention, I suspect that no servicers are pursuing deficiencies except in exceptional circumstances.
Thus I believe the issue of recourse is irrelevant. Walking away from over encumbered homes will be commonplace in 2008-09.
In additioned to the forclosed homes, the NAA is reporting a ~10% apartment vacancy rate. I can't piece together their calculation, but this spreadsheet shows ~4 million apartment units are available. The same spreadsheet lists total vacancies of ~17 million. I could not discern what this number means.
http://www.naahq.org/NR/rdonlyres/D5F39AF3-63BD-42E1-B22A-D0A0A2417762/0/rvr3rd07.XLS
Rental housing appropriate for families is tight most places. Any increase in renters will cause rents to rise rapidly. That will nake it less likely that people will walk. I'm not saying no-one will walk, but it will be WAY less than 10 million.
Well, a $1 Tril loss in the value of real estate has already happened. We could estimate a 5% decline on average, if we include non-bubble areas, as of October. Since the sum value of real estate is aroun $21 Tril, that's easily a tril of losses so far, in terms of aggregate value.
It's not a loss if somebody can't deduct it.
Man none of you guys get it. There won't be foreclosures because all the borrowers are going to be able to stay afloat using loans from prosper.com!
CR,
Are you going to wait until NBER calls a recession, or will you call one before?
Thanks
It seems a safe bet that many of the high-end option-ARM buyers were real estate agents and mortgage brokers who had drunk the koolaid, and others in the finance business getting huge bonuses indirectly from the housing boom. Not mailing in the keys is not going to be an option for these people.
"Rental housing appropriate for families is tight most places. Any increase in renters will cause rents to rise rapidly."
Sources please. Data please.
Until then, repeating the same thing doesn't make it more convincing.
When do you think Uncle Ben will start citing CR!
Berkshire Hathaway's move into the municipal bond insurance business is brilliant, absolutely brilliant.
Conjure says, "AMBAC and MBIA are toast."
It would be interesting to know how many of the homes being foreclosed are 2nd homes or investment homes.
I am sure a high percentage of homes purchased in the run up was pure speculation!
There won't be foreclosures because all the borrowers are going to be able to stay afloat using loans from prosper.com!
Do they do margin debt? I'm looking to "refinance" a hefty margin call this evening. =(
I'd be willing to do one of those "reverse margin debt" thingies where you use your future investment income to reduce your current debit.
Aheadofthecurve, it doesn't happen all at once. If someone walks on their home - that home will eventually be sold. It's a wash except for some temporary issues.
And there are plenty of vacant units all around the country ...
Bob_in_MA, I'm trying to get the specifics for each state. California is non-recourse for purchase, recourse for refis (but probably mostly non-recourse for both in practice).
Best Wishes.
REBear, I think the economy is close to stagnate right now (December, SA) ... but without some major revisions, I'd say there was no recession in November. December is still too early to tell.
Best Wishes.
CR,
To clarify,
I have made an argument that jingle mail will be mostly isolated to those who have no choice, they can't afford the debt. I think this number is high enough to hit $1T because of the prevelance of the type of loans out there and the coming job losses due to recession.
Are you also implying that a significant number of people who would otherwise be able to service their debt will choose to walk away simply because the collateral is 30-50% below their debt level?
I just want to clarify so I'm not arguing a point on which we all agree.
Rental housing appropriate for families is tight most places.
Not here in the suburbs of Chicago. The MLS and CraigsList have hundreds of nice places for rent. A beautiful 4-bedroom home near me is up for rent at $2000/mo -- on the market since the summer, when they started out asking $3000, then dropped to $2300. A beautiful 2000+sqft 3-bedroom condo, likewise asking $3000/mo in the summer, has been down to $2400 for many months -- bet they'd jump at $2000 if you offered. There is a significant number of splendid McMansions asking $3000-$3500.
What's "appropriate" for families is highly flexible. I mean, simply imagine living with fewer than one entire bathroom per person! Sheer Barbarism. I mean, it was only the norm until recently - certainly could never happen again.
Counter questions. What's going to happen to those suddenly vacated homes? They'll just stand there immaculate, empty, untouched and unrented for how long? Will it become the expected norm for all new housing whooshing out the pipeline to sit there with the cellophane wrappers on everything? --- I rather like this image of the immaculate construction, actually. Not expecting to see it before the second coming, but well, live and learn.
Here be the data, courtesy the Fed Flow of Funds report:
Year / Net Mortgage Debt Increase / Net Consumer Debt Increase
2003 856.1 104.4
2004 954.1 115.0
2005 985.5 94.5
2006 997.7 104.4
2007 750.0 150.0
Essentially all of the above borrowers will profit from jingle mail. Collectively they have borrowed well over $4 TRILLION in mortgage debt.
A 10%, $400B, total loss on this is a rock-solid lower bound. 30% ($1.2T) is a reasonable upper bound, the total losses may in fact come in at 20%, or $800B.
Note that total VC investment 1995-2000 was ~$250B. This country misallocated 3-4 tech booms' worth of capital in this mad tulip chase.
Conjure knows who owns majority of stock in Moody's.
CR,
Maybe a more interesting question would be, in what percent of foreclosures have owners been held liable beyond the value of the home?
REBear, I think the economy is close to stagnate right now (December, SA) ... but without some major revisions, I'd say there was no recession in November. December is still too early to tell.
You mean no contraction, right? Only the NBER gets to decide when to use the R-word.
Maybe they'll announce when the recession actually occurred right after the election.
Rentals are available everywhere. This country has millions of vacant homes and builders are still building. Do some searches. It is a buyers / renters market.
Home inventories are way understated. They do not include all the people who put their house on the market and pulled due to no sale or even interest. Where I live I have 4 homes off the market but "for sale", with in a few feet of me.
hiker90 | 12.28.07 - 4:34 pm | #
I asked this a while back...Who do i have to shoot to get a 10% vacancy rate ??? I just rented a place Sunday and it bumped us above 60% occupancy. I'm gonna say we are better situated than 99% of rental owners. My parents have owned the units for close to 20 years...
Oh and current rents are 1999/2000 and may need to be cut again.
This is SW Florida.
Chris
The comment that the jinglers will exchange homes with other jinglers, assuming they become rental units makes me wonder. As a landlord I would be very skeptical about renting my place to someone that walked away from the home. I would not only raise my rent due to higher demand but add a risk premium in the case they walk away from me.
For those who is interested, a link to a very detailed analysis of law preemption with respect to recourse vs non-recourse status of refinanced loans. 14 pages.
http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=george_kuney
Look, I don't have data on how many will walk, but neither does anyone else. It's all conjecture. I simply don't believe in a 30% fall in prices nationwide, because many markets are not terribly overpriced even today. In my area (Albany, NY) the median house is just over 200K and median income of homeowners is around 60-65 K. So how would you justify a 30 % fall? If the median house were 140k, why would anyone rent?
Maybe a more interesting question would be, in what percent of foreclosures have owners been held liable beyond the value of the home?
A deficiency judgment is typically for the difference between the loan amount (plus expenses) and the fair market value of the property, when FMV is the lower of the two.
If fair market value of the property is more than the loan amount, the court generally considers that the lender has been paid all it is due by taking title.
Maybe they'll announce when the recession actually occurred right after the election.
Depends on who gets elected.
Where will all the people live after foreclosure?
America of 2007 in that we think that 2 to 5 people need 1500-5000 square feet of house to live in.
One possibility for those foreclosed upon to move in with relatives.
I know of situations already where parents are sheltering two of their children, and their spouses and clildren due to foreclosures and financial hardship. And this ball has only just now started rolling.....
At $50/hr pay, $1 trillion is:
20 billion man-hours; or
10 million man-years; or
1,000 years for a 10,000 person company; or
1,000 companies' salaries for a year, each w/ 10,000 employees.
I simply don't believe in a 30% fall in prices nationwide, because many markets are not terribly overpriced even today
The areas with the greatest appreciation also had the greatest density and greatest use of Crazy-Eddie lending practices.
The scalar quantity of markets is irrelevant. Their size and degree of income/debt imbalance is the relevant data to analyze.
And 7 trillion was lost in the dotcom bust.
As a landlord I would be very skeptical about renting my place to someone that walked away from the home. I would not only raise my rent due to higher demand but add a risk premium in the case they walk away from me.
Keith | 12.28.07 - 4:49 pm | #
Nope,I have a couple of tennants right now. They were straight up and told me they bought to much house. Came upon hard times. I wil only check current employer. Heck my dad won't even run a credit check. After 20 years he has come to the conclusion it is basically worthless...
The only reason i do this is i can have a delinquint tennant out in less than a month here in Florida. 6 weeks is the longest...
Chris
btw my above comment should read:
America of 2007 is unique in that 2 to five adults.......
I simply don't believe in a 30% fall in prices nationwide, because many markets are not terribly overpriced even today
WHO SAID THAT?!
A History of Home Values
Conjure stands by his August statement:
"Recession Q1-08"
He also stands by his November 22 statement:
"The bull market in equities is over."
The Conjure Clock now reads:
11:58:59
The clock has been moved back 1 second because Warren is now in the bond insurance business.
"And 7 trillion was lost in the dotcom bust."
The big difference here is leverage and dispersion of the losses. Dotcom stocks - for all the glam - were held by relatively few people (as a percent of population). And the $$ didn't have to be repaid (by and large - of course, there was some margin there...).
Houses are a different story. 60-70% of the population owns one. For many (if not most) it is their sole source of wealth, other than their labor. My guess is that the negative wealth effects will be very different from the dotcom debacle - and much worse.
If I make $50k per year, have $10k in credit card bills, and my house is underwater and expected to go further, I walk. No, I run. And I don't spend the extra time to mail in my keys. Jingle mail will be light, but mortgage abandonment will be strong.
What's "appropriate" for families is highly flexible. I mean, simply imagine living with fewer than one entire bathroom per person!
For about a year when I was growing up we had an outhouse and no hot water. I don't want to get back to that but I feel that is my real ace in the hole if things get too ugly. Been there, done that.
It's really not that bad except when the spiders are in season.
satchel- It wasn't just dotcom stocks that fell. The Dow and S & P fell 40% or so and there were no dotcom stocks in those indices. And 50% of workers have 401k s, not to mention pension plans and other holdings.
"And 7 trillion was lost in the dotcom bust."
7 trillion was not lost in the dot.com bust.
A 7 trillion dollar market illusion was revealed for what it was.
That 7 trillion dollars was never actually there to be lost.
Likewise with today's housing wealth.
Chris/hiker90 CR did a post on the number of rental units just a bit ago.
Calculated Risk: Housing Inventory and Rental Units
"Back in 2006, I estimated the excess housing inventory at 1.1 million to 1.4 million units. The number is higher now since the home builders have continued to build too many homes. Note: of course price is a factor. With the rental vacancy still above the normal range, there are probably 700 thousand excess rental units in the U.S. (assuming the vacancy rate falls back to 8%).
Here is a rough estimate of the excess inventory:
Source\tUnits
Rental Units\t700,000(1)
Vacant Homeowner Units\t750,000(2)
Excess Builder Inventory\t250,000(3)
Total\t1,700,000"
ac-Well, you could say that about all wealth. And beauty and art. And love. They are all illusions. In the end all is dust..
Ahead-where do you think the $7T went then via free money?
how about these bad loans...duh.
Aheadofthecurve,
Stock prices where set at the margin...If I buy one share of IBM at $500, then all IBM stock is worth $500 a share instantly. However this is obviously fake wealth since if everyone tried to get their $500 a share at once the price would obviously drop.
Now if you owned a bunch of IBM and then when it went up to that "fake" $500 a share level you borrowed against it and spent the money, well when it went back down to reality, or even half-way back down..you still have debt service.
Also if everyone else who bought IBM at $500 did so with borrowed money..(i.e virtually all houses are bought with borrowed money) then the debt is still there even when IBM price isn't.
The loss from the stock crash wasn't monitized. You only lost money on the stocks that you bought during the boom. For the average 401ker, that wasn't much more than $10,000 (since you can only buy so much stock in a 401k in a given time.)
It's a totally different animal.
two things: conjure is not the only one here that thinks what Mr Buffet just did was absolutely ruthless, but brilliant. It was a perfect move, and everyone honestly should have seen it coming. Look for similar moves by others into the IB and banking sectors. The business side of my brain is still in standing ovation mode over it.
Now, on jingle mail...who is going to walk? Well in my estimation like averagejoe, it is not simply the fact of being underwater that will be the deciding factor. There is also rent to consider. Wherever you are, if you are paying 4k a month and struggling, and could rent a similar place for 2k a month, what would you do? And as far as the credit hit goes...you need to do this while everything is cratering to get forgiven...and it won't matter to landlords because empty units talk. I'd rent to someone like this in a second. They are in repair mode and will be very, very good about payments actually. Much better than someone in other circumstances.
So in the most bubbly areas it will make all around sense. Walk away, file BK, rent and repair while plenty of others are in the same boat. A reverse of what everyone just did, if you think about it.
Two words: occupancy rates.
In the depression, several relatives moved in with my grandparents when
they lost everything.
My cousin and his wife are still nursing along those $1.1M worth of loans on two homes that are dropping in price. Both loans have gone through refinancing, which I hear makes them recourse in CA, but...they have the two homes with negative equity, a big truck, a little suburu, and two kids...there isn't much asset to grab, and my aunt would not let them set up a tent in the park,
even if she did get cranky about it.
The entry level home buyers just don't have many assets, and I suspect they're a large chunk of who bought in 2003-7.
I would also wager that the HELOC & SPEND crowd lives large, but has little to grab on BK day.
The 1/3rd who own outright could probably ride out 50% declines with zero change besides lower property taxes, but they aren't going to be buyers.
This is probably going to unravel back to the point where a home is a good deal over renting (cost + life style). We know what the real loss is going to be, but the nominal loss part is not going to be known until it's over.
"Conjure knows who owns majority of stock in Moody's."
Actually, he only owns 19%, but he's the biggest investor, and that does create a rather large conflict of interest. I wonder if he'll just ignore it, or if he'll actually only pursue ratings from Fitch and S&P.
12th. Grew up with wood stoves for heat myself. Managed. At least spiders weren't an issue.
ipodius- "Look for similar moves by others into the IB and banking sectors."
Conjure Bag repeats here for those who didn't get it the first time:
"There's going to be a new financial landscape."
you could say that about all wealth
financial instruments and money, yes. Wealth, no.
Wealth is simply physical goods that satisfy human needs and wants. It is the rain-proof roof over your head, the paved and signalled public highways that afford efficient transportation about your neighborhood, and the computer you are using to read CR now.
Valuation is not value.
Cobradriver and others interested in the mundane,
Finally putting 2 and 2 together lead to the definition of the types of vacant units listed in the NAA spreadsheet. The NAA data source is the Commerce Dept., which has a nice explanation here:
Housing Vacancies and Homeownership - Fourth Quarter 2006
: Definitions
Ahead,
the NAA lists ~6 mill "held of market" type vacant units for Y2007Q3. This is a typo and should be classified as "held off market", which per the Commerce Dept. definition are whole apartment units that are for sale and not currently being rented. Suspecting those units could be brought on line quickly and combining the previously found 4 mill units, I found your 10 million rental units.
Ka-ching!
For my prize, please send me a Syracuse U. cap. My Mom went to school there during WW2.
Best,
Average Joe, I'm not sure how people will behave. I've seen it before in the early '90s - people that can afford their homes walked away because of the amount they owed. It wasn't common, but it happened.
It's hard to know how people will react this time. Say someone owes $500K on a house that they bought with little down. The house next door (identical) sells for $400K. I wouldn't be surprised if the upside down homeowner sent in the keys - and took the hit to their credit report.
Best Wishes.
conjure is very wise. but then again, if I were a couple of thousand years older, I might be too.
And if I had half a brain, in addition to analyzing the current mess, I'd also be analyzing who was in the best position to participate in that new landscape in order to put my money in the right place at a good time. Oh wait. I do have almost half a brain. I'm sure conjure is also doing his homework.
Make no mistake about it, money will be lost, but money will be made. And no matter what anyone says, nothing is ever different at any time.
Rental housing appropriate for families is tight most places.
The whole idea of a tight rental market is BS. From north-central NJ, rentals are rapidly increasing and this is before start of any significant layoffs in NYC.
I suspect with the growing prevalence of negative equity situations, some consistent approaches on both sides will emerge. I imagine borrowers will find themselves in a better bargaining position so even those that might not have pursued some sort of adjustment will.
If I understand correctly, CR is primarily talking about people who might decide to walk away from an expensive house as a prudent financial decision, even though they could afford the payment.
In a tough environment, this is exactly the type of borrower who is most likely to be pursued for a deficiency judgment by lenders, or by the lenders' successors in interest if the lenders are not perceived as maximizing the value of the assets.
Most lawyers I have talked with on this subject believe that replacement refinancing of a purchase money loan is a purchase money loan. Additional money taken out is probably not a purchase money loan.
I Arizona, the non-recourse provision can include single family homes held as investment properties.
Thanks for the response and the clarification CR.
It will be very interesting to see if your scenario of people affording their homes yet walking away actually plays out to any measurable extent.
I think it will happen of course...but in such small numbers as to be statistically irrelevant.
I guess it's important for measureing the impact of falling home prices on the financial world/bank losses since it seems that measuring the number of people who can't afford their debt would be a much easier feat than predicting human behavior.
I frankly think your scenario of walking away from a house for a perceived 100k debt relif is very unlikely. (remember its not like 100k appears in your bank account, you simply pay less each month so the cost savings are not immediate and would come slowly over time, if fact costs in the immediate term are likely to go up with first and last month payments, moving costs, flowers for the wife, etc.)
In any case, I appreciate your view.
"I'm not sure how people will behave. I've seen it before in the early '90s - people that can afford their homes walked away because of the amount they owed. It wasn't common, but it happened."
I was in your neck of the woods during the runup and crash in the nineties. What is really worring to me is the absolute depth of the housing fallout in SW Fl. I was in my twenties during the last episode so maybe i just did't notice the problems in socal. The market here seems to make the socal 90's look like a easy walk in the park.
I can see both sides...we muddle our way thru over several years...or the economy freakin tanks hard and really reeks havoc...
Its gonna be a interestng new year!
Chris
What's breakeven for the banks selling the LBO debt? 96-95¢? Some First Data(a supposedly sure thing) debt got sold @ 94¢?
Some of the wacky ones(United Rentals) have already been thrown under the bus, I'm assuming that the ones left will be a 94-93¢ for AAA paper & companies, 90¢ cent for the bulk of it; median lower than average #.
Just a WAG, but $7b between the two banks listed, though Citi invariably has more of the piers.
ac-Well, you could say that about all wealth. And beauty and art. And love. They are all illusions. In the end all is dust...
Last time I looked into the subject it seemed that the thinking in physics was that in the "early" universe time breaks down as you go further and futher back, so "early" and "time" ultimately have no meaning.
In other words time is a concept that only exists in proximity to a system that's so hideously self-referential that it's ultimately meaningless as are all concepts including "meaningless" and "ultimate" and presumably "end" too. Oh, and add "concept" to that list.
In any case, I like this type of nonsense because it sort of fits in with my worldview and doesn't conflit with empirical data so much as peoples' feelings about the world and themselves.
I'm constantly amazed how I'm one of the few people around here who can't predict the future.
Joe, the analysis is completely different if your state allows people to walk away from investment properties. That is an immediate savings of 100% of the mortgage payment, taxes, etc. For Arizona that is going to be huge.
but...they have the two homes with negative equity, a big truck, a little suburu, and two kids...there isn't much asset to grab
What about the children?
Average Joe, CR makes a good point. The AMOUNT that people are going to be underwater and the current/future size of their payments might make a difference this time around.
10k-40k -- "Okay, this sucks but I like my home and it'll come back up in time."
100k-200k -- "I'll be working until I retire and may still not pay this off or see it re-appreciate back up. The current payments are also KILLING me AND they are going to adjust back up soon with no hope for a refi. I'm not going to be able to afford to eat. On the other hand, if I start over and/or buy another home at adjusted prices, my credit will suck for 7 years, but that'll still be faster... Hmmm, I may not like my home THAT much."
In further reponse to Aheadofthecurve, the folks I have heard about walking away voluntarily bought the second (cheaper) house before defaulting on the first. That way the credit hit didn't matter as much.
Andrew,
$10-$40k will be a small slice of the pie. Many people will likely have credit card debt alone totaling that number. Add to that just $50k in the hole on a house (on an income less that $75k), and people will walk, run, jump off a bridge or cliff, etc...Please donate to your local orphanage before the end of the tax year, because they will need the money.
otice this on Craigslist today:
Several agents and broker got together to sponsor real estate tours thru Napa Valley. Most tours are offered during the weekend but we often we have additional tours thru the week. If you are interested in receiving a local foreclosure list or like to join our tour please email or call us. At least 5 properties are viewed at each tour. There is no buyer prequalification, obligation or commitment involved. $ 35 includes the foreclosure list, transportation and a light lunch/dinner. Christine Hannah 707.257.6000
Wine and foreclosure...
In further reponse to Aheadofthecurve, the folks I have heard about walking away voluntarily bought the second (cheaper) house before defaulting on the first. That way the credit hit didn't matter as much.
I've been talking to somebody considering default, and their plan is to get into a rental in the same neighborhood before defaulting. There are a lot of rentals there, so the landlords might not be too picky about a renter's credit issues or looming foreclosure.
Plus everybody's doing it, so it's OK.
I'm putting everything I have into the new bull market: toad bones and ground-up dog balls.
OT -- I thought the BlackRock and Pimco guys knew everything and were all powerful:
Drake Management Curtails Withdrawals From Largest Hedge Fund - Bloomberg.com
Surprising and disappointing; I thought that they could leap tall buildings in a single bound.
No one answered my question-where are 10 million jingle mailers going to live. If you don't have an answer for that then this whole discussion is a complete waste of time.
That also begs the question... how many of those homes were primary residences and how many were (speculative, investment or opportunistic, pick one) second homes ?
I suspect that a good percentage of the vacant homes down in Cape Coral were second homes (investment, or hedging against a future retirement). In those cases, there is no homeowner shoved out into the cold south Florida winter.
My prediction is that loan principle forgiveness will become somewhat common. Why foreclose on a non-recourse loan when it will end up costing you more? The borrower may very well be satisfied if they are adjusted to say $10-20K under water rather than $100+.
ac- "Plus everybody's doing it, so it's OK."
This reminds Conjure and me of a Cole Porter tune.
"And that's why birds do it, bees do it
Even educated fleas do it
Let's do it, let's fall in love"
Second homes and spec/rental homes will likely hit much harder. If you're under water AND negative cash flow, you're likely to walk. This is a wave I conclude has yet to hit - Investors that can afford the payment, but won't when it becomes abundantly clear the market isn't coming back anytime soon.
And in the boom areas, spec buying was 20-25% of all sales in 2005.
This wasn't a forecast, just a simple exercise to show why changing social norms is very scary for the lenders.
Funny, maybe these lenders should have thought of this before: changing underwriting standards is very scary for the lenders.
With respect to leverage magnifying losses, no matter how much leverage is applied, and no matter how is it tranched and sliced or diced, the total amount of losses will not change. The losses may be redistributed, but they will not get any larger in the aggregate.
This is not to say that the impact on the economy won't be larger, as Goldman well notes because banks like to keep capital ratios constant and therefore will contract their lending as losses are incurred. But leverage will not magnify the total losses in the economy.
I'm considerably more sanguine about default risk after reading this semi-academic article about mortgage foreclosures. http://www.philadelphiafed.org/files/br/br_q3-2006-3_residential_mortgage.pdf One of the upshots is that a 20% drop in house prices only raises lifetime default risk to 6%. Basically borrowers choose to eat the losses as long as they can unless they are deep underwater (>15%). Jingle mail outside of the big bubble or big collapse areas is going to be limited to fraud and the fantasy loans. The big bubble/collapse areas are substantial, sure, but even there not every loan, or probably even most loans, will go under.
With only 4 trillion in mortgage loans from the past four years, the majority should fall in "safe" areas. Losses will be less than half the loan value even in the default. That puts peak losses to the financial system at less than 1 trillion and actual losses will probably be a lot less. The current conventional wisdom of 300-500 billion looks pretty good. While huge, that's not a meltdown loss.
IMO a quasi-Japan scenario is more likely, with a long period of underwater buyers trapped in homes and nervous banks trying to restore balance sheets. A long nasty recession but not the Armageddon many here fear (or is that hope for?)
RE: Second homes--in my coastal neighborhood, the amount of time allowed in the US per year by foreign owners (like from sweden) is being monitored and enforced very closely, as coompared to before the domestic security crisis. Don't see them around for months at a time anymore, which could also have a neg affect.
Let's play a new real estate game-
Let's make a deal!!!
I only want to pay half of my mortgage-
how about lowering my interest rate to 3%? Or cut my balance in half?
This is going to be the new reality- after all if my neighbor gets a deal I WANT one too!!! Or I will mail back my keys out of sheer anger and get a cheap rental- fairness issues are going to be stunning- can you say Edwards the populist is going to have a field day!!!~
Someday this war's gonna end...
Fair, I live in ground zero- it will be armageddon here in Phoenix!!
I've been saying for months that the worse this gets, the better Edwards fares as a candidate.
I can see the same way that people were proudly talking about their RE purchases in cocktail parties in the past 5 years, they proudly will be talking about sticking it to the lenders by mailing them the keys, and laugh about it.
It can be very damaging phenomenon.
confessional remains open-
Expired
Fair Economist- "...a quasi-Japan scenario is more likely, with a long period of underwater buyers trapped in homes and nervous banks trying to restore balance sheets. A long nasty recession..."
That particular scenario is one of several in Conjure's playbook.
"This is going to be the new reality- after all if my neighbor gets a deal I WANT one too!!!"
Yes...once the collective consumer realizes that they have much less to lose, they can stick it to the "banks."
How about forgive some principle, lower the rate, AND leave my credit intact!
""Conjure knows who owns majority of stock in Moody's."
Actually, he only owns 19%, but he's the biggest investor, and that does create a rather large conflict of interest. I wonder if he'll just ignore it, or if he'll actually only pursue ratings from Fitch and S&P.
Alistair | 12.28.07 - 5:09 pm | #"
Actually the perceived conflict of interest isn't a major issue, since it isn't a close call. A more interesting perceived conflict is if/when MCO gets realistic about the other bond insurers.
Canuck, I sort of see your point, but I don't think you are correct.
In a Ponzi economy where most assets consist of IOUs from other participants, each default leads to multiple additional defaults by people who were counting on your payments to make their payments. Each owner of a defaulted IOU suffers a real loss. It seems to me this is a direct effect of proliferating leverage, not a slowdown effect.
Risk Capital, can you please make that 8-k go away? Who's next, the Sierra Club?
News Release | National Restaurant Association
The fat bubble just popped!
When people get desperate the unthinkable becomes more and more reasonable seeming. The analogy I was given on relative morality while in a short course on drug addiction in the work place was "Most people think drug crime as abhorrent and wonder why anyone could do such a thing. However, if those same reasonable people were swimming and suddenly found themselves trapped and held underwater they would very quickly get desperate enough to commit that same drug crime or worse for that next breath of air."
I'm hoping all we have to deal with is a Japan-like scenario of borrowers that are trapped in underwater houses for several decades. It's fine when all the numbers are large, but abstract, and you are still eating and paying your living expenses. But when those numbers get to the point of affecting your ability to eat and pay minimal expenses a lot of people a going to crack and look to grab the eject lever in desperation. Particularly, when the Joneses and Smiths just down the block just did it and it seemed to work out for them.
Fair Economist
Hope or fear. Once someone expresses a theory or opinion, then they have an interest in that happening. No biggie.
Just human nature.
Throw out historical basis for assumptions. We have never been here before. With wages effectively declining there is no good way to wait this out. If you cannot pay for food and clothing, you bail.
Remember this thing is so huge because folks depended on historical basis for making crazy loans without checking to see if the present reality matched the historical norm.
the better Edwards fares as a candidate.
thing is, the respective primaries are going to be decided next Tuesday, believe it or not.
lama- contimued support is a good thing.
what you don't know can hurt you, what you do know allows you the ability to assess/estimate the damage.
"Rental housing appropriate for families is tight most places. Any increase in renters will cause rents to rise rapidly."
Yeah... funny thing about that. As incomes fluctuate you'd be surprised how what is "appropriate" changes.
this is a surprise to many, but you only need a 3 bedroom apartment for a family of 6. (mom/dad in 1 bedroom, 2 kids per bedroom).
I've just about had it with people who assume that one "needs" a bedroom per child, and that one can't share a bathroom...
when I was a kid (yeah, yeah, I know) I don't remember anybody who had their own room. You sort of assumed that you were going to share a room. I shared my bedroom with 2 siblings. And almost no houses had more than 1 bathroom.
it's only the last 10-20 years where McMansion living is seen as a 'necessity'.
And the Gods of the Copybook Headings said: "If you don't work you die." Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew ...
Poems - 'The Gods of the Copybook Headings'
vader- "Throw out historical basis for assumptions. We have never been here before."
Sorry, but you're wrong. There is nothing new about interest-only mortgages or mortgage-backed securities. Both were used extensively in--gulp--the 1920s. The MBS market imploded in 1931.
The severity of the coming downturn depends on employment. If employment tanks, it will cause an avalanche of foreclosures across all classes. You'll then see, as Conjure did during the early thirties, foreclosure moratoriums.
Having said all of this, keep in mind that Conjure and I are not predicting the end of the world. There is still time to stear clear of the abyss, IF Congress and the Fed get off their dead asses and get to work.
Conjure Clock: 11:58:59
What does Conjure think they should do?
to pitch in about walking away,
In the late 80s,person I know walked away from his home just because it was under water. I dont have the exact amt.
he told me some time last year, that , then the talk was that RE was going to be under water for quite some time. He had a job in local technology company. He could be making payments if he wanted to. Yet he walked because environment was so pessimistic , there was no hope that RE would come back.
later 5 years or so, he bought a home in the name of is BIL (he could not get a loan) and he transferred the title few years later.
It all depends on HOPE in future:)
"Ah, generations of mankind!
I count you as nought even as you live.
Who, what mortal ever enjoyed more prosperity than was mere seeming,
Who, after his illusion, did not fall into decline?"
-Sophocles
Average Joe,
People will walk like never before.
Prior busts had mature purchasers with 20% skin, FRMs, comparatively low DTIs, no expectation of immediate equity gains, and were never much more than low five-figures underwater.
The new, younger crowd has little down, ARMs, two-job ramen-diet payments, visions of MTV "cribs" lifestyles, and are facing the prospects of being hugely in debt for the rest of their working lives.
Conjure Clock
Back in the 1920s and 1930s were were ascending in power, both military and economic. Now we are descending.
The population mix was farming and industrial, now mostly service.
Incomes were increasing, now declining.
No credit cards.
The instruments were around, but not the derivatives. It was mostly a cash society, now a credit one.
Historical comparisons are suspect.
Now greed and mass insanity with flat out lying in the financial arena. Thats always been around.
There is still time to stear clear of the abyss, IF Congress and the Fed get off their dead asses and get to work.
This is where we part ways. If TPTB immediately became fiscally responsible and totally transparent the entire country would immediately plunge into a depression.
transient- "What does Conjure think they should do?"
Conjure says, "Simply put, cut out the dead wood and refinance what's left."
As to what that means, use your imagination. The junk has got to come on the books, now. If it does, at least a third of the New York IBs will be instantly vaporized. Refinance the ones still standing, merging if necessary. Do the same with the state and federal banks.
Do the same with homeowners. If they qualify, use the GSEs to refinance them. If they don't, vaporize them.
Sorry, but this isn't the time for legal, political and philosophical bullshit. It's about using proven tools to make the system work.
BTW,
TPTB and the MSM are misleading J6P in focusing on direct mortgage losses in the banking arena. It's the trillions in homeowner equity losses that'll kill the US economy.
Renting, no matter how affordable, still means a drop on the class ladder.
You have the blue-collar homeless, who are a step below blue-collar renters. Then you have blue-collar homeowners, who are a step above the blue-collar renters.
I came from a blue-collar homeowner family and Mom and Dad couldn't understand why I'd want to rent an apartment instead of buy a house if I could. Renting, to them, was a step backward. It didn't matter where the renting was taking place or how much rent I could afford for a trendy flat. They didn't understand that, for me (a college grad with a white collar job), that would be white-collar renting, which is still all in all, a class step above blue-collar homeownership.
What we're seeing now in America is a massive failure of upward class mobility, among not only among the blue-collars who were targeted with subprime loans (and tempted with the sort of homeownership of spiffy new homes that only white-collars could traditionally afford), but also among white-collar renters who hoped to graduate to white-collar home ownership.
Class mobility is not a steady progression through the generations of any particular family. Go back into your genealogy and you'll find examples of some of your ancestors who were "making it" but a couple generations later, their grandkids or great-grandkids had slipped into a lower class bracket. It happens a lot. The grandkids of some of these failed white-collar homeowners are going to be working in trades and living in smaller houses 50 years from now.
mp,
Make no mistake, what you're suggesting is exactly what I'd like to see happen. However, when you've dug a huge hole these actions don't avert the need for the long, painful climb back out.
Oh, and PS - forgot to add, this is what you would call a "class correction" in American society. The white-collar middle class has simply gotten too populous. Globalization cannot support 300 million white-collar Americans, despite pie-in-the-sky promises that in the future, everyone of middle-class breeding will have desk jobs in the biotech sector, and there will be handy immigrant gardeners for all. In a weird way, this subprime ("we are all subprime") mess is a handy way to trim the fat.
tj- "...these actions don't avert the need for the long, painful climb back out."
Conjure and I didn't say this would be painless. There's going to be lots of pain. The question is: How much pain.
The pain associated with doing nothing would be excruciating.
Thanks for the answers to my question about buy vs. rent yesterday. After reading this article from money central and running some numbers in the NYTimes Rent v. Buy calculator, I don't think I'll buy again. Lucky enough to have gotten out of the Cambridge, MA market before things started going really sour.
Why rent? To get richer - MSN Money
Thanks again for the responses. This is a great blog. Tanta, didn't you go the rent route, btw?
One thing that may encourage jingle mail in my part of california is how much cheaper it is to rent than buy.at the peak my then wife wanted to buy,and only backe off when i showed her that the cost of buying,AFTER putting 20% down,was 3.5 times the cost of renting the same home,without considering maintenance...if you are $150k underwater and can rent for less than half your current cost,and can blame someone else for you bad decision...and "everyone else is doing it"...BTW if you buy a new cheaper home and deliberately default on the older more expensive home...they call that "fraud".it sometimes has unpleasant consequences.
this is a surprise to many, but you only need a 3 bedroom apartment for a family of 6. (mom/dad in 1 bedroom, 2 kids per bedroom).
You should've seen the shack in which my great-grandparents raised their fourteen (yes, 14) kids. Most McMansions have closets bigger than that place.
"Second homes and spec/rental homes will likely hit much harder. If you're under water AND negative cash flow, you're likely to walk. This is a wave I conclude has yet to hit - Investors that can afford the payment, but won't when it becomes abundantly clear the market isn't coming back anytime soon."
Residential income properties -- single and multiple -- are still being sold at serious negative cash flow on the central California cash. As are small commercial properties. I guess we're setting up yet another wave to come after the wave you're talking about.
Prices are so high that if the seller cut 20 percent off the asking price, you'd still be 30 percent too high.
Next Friday could be the coup de grace with the Dec employment numbers. With employment falling and businesses curtailing spending at the same time as the housing market is imploding we are in for a lot more jingle mail than any MSM operation is willing to print.
I wouldn't be surprised to see those 55Gal steel drums burning scavenged stuff to keep warm in line at soup kitchens...
As for how much house it takes to raise a family, I spent years living in 900-1000 square-foot flats in San Francisco that had been designed for a single family: two bedrooms (just one for the kids) and a living room up front that could be closed off from the rest of the house if you needed some place to stow Aunt Agnes or the teenage daughter, once she reached a certain age. They were mainly built in the early 1900s.
Generations of families were raised in those things. I knew some that still were, 20 years ago.
People will do what they need to do. It's amazing how much house you don't need. Frankly, I think there'll be a market in converting well-situated "executive" homes" (2500 square foot plus) into duplexes.
I'm not doubting what anyone is saying, but I know that buying is not 3x more expensive than renting where I live. The only rental I've seen similar to mine in my neighbourhood is $ 2400/month. I pay < $1500 PITI. Now let's say my house doubled since I bought it in 1996 (I don't actually know what it's worth, but I'd be perfectly content to sell it for that), you're looking at around $3000. After taxes that's pretty darn close to renting. Add in the part of the mortgage payment that goes to principal and I'd say they're about the same.
Anyway, I don't think I'll be mailing in the keys just yet..
The class POV is interesting, as it brings up the emotional side of this instead of the numeric one that we seem to rely on around these parts. And you are right...I bought my first house because my parents pressured me..."why do you want to rent? this is an investment" etc. Well, I could point out to them that a house was a poor investment because it generally just keeps pace with inflation plus a little, but it was the idea that made them say that. And a lot of people see home ownership as a sign of having made it in some way. The cost isn't the point, it's to be able to answer "Do you own or rent?" in the affirmative. I always ask prospective significant others that question as a cull
But there is a more interesting point here. The current political situation managed to convince, in my opinion, tons of people that they belonged to a class that they didn't, could spend like they belonged to this class, and live like it...no, they were ENTITLED to live like it. How else can you explain 4 bed houses for people making less than 50k a year? When I was a kid smirk my blue-collar parents had a two bedroom house, one car, one bathroom, and we certainly didn't wear the equvalent of $100 sneakers. Yet somehow we lived pretty well and didn't think much of it.
This correction is not only going to be hard on the monetary situation, but it's going to be really hard on those that find out they were lied to, and find all of this crashing down as they have to give up what they thought were the tokens of sucess as unaffordable. I know what I make and, trust me, it's in the upper levels and I can't afford what I see people with. The contraction this will cause is going to be epic in economic as well as social terms. We are living in historic times here.
I really like Conjure's approach.
So much that I will overlook the turning back of the clock.
The 1/3rd who own outright could probably ride out 50% declines with zero change besides lower property taxes, but they aren't going to be buyers.
Why do you think property taxes will go down? Assessed values may go down but I'll bet you the total property taxes paid by a homeowner stay the same or go up. Too many municipalities have yielded to the demands of unions and granted inflated salaries and benefits to municipal workers. It used to be people took these jobs with the understanding that the pay wouldn't be great but the benefits would. Maybe my area is an exception but the current situation is such that salaries in the public sector have not only kept pace with those in the private sector but have in fact outstripped them.
As of Year End 2006 8 of 10 regions in NY saw Public Sector workers with higher compensation than Private Sector workers - can anyone say "UNSUSTAINABLE"...
Sorry a bit OT but maybe not
Scroll down for table
Perhaps this is a topic for a different thread or different blog, but the fact is, CLASS is the great unspoken rift in American culture, even more than race or ethnicity.
I always used to wonder why the Internet would give me a slight headache, until I realized it was created BY white-collar people (and their children), FOR white-collar people (and their children), which is not my background. I could never understand why everyone on the Internet talked as if easy money were a way of life, as if everyone jetted off for vacations and flew 10 times a year, where on earth these kids were getting so much money to buy all those gadgets that Apple kept coming up with.
We're also living in a historic time right now, because we now have kids who are second and third and even fourth-generation "middle class" kids. In the old days, the middle class wasn't a "class" so much as a work space where working-class people could have a chance to free themselves from a bone wearying cycle where they could NEVER get ahead. But now the "middle class" has become a huge and stagnant parking lot for millions of American families.
It is actually NORMAL, historically, for upward mobility to not be a steady and direct route from generation to generation. It is highly ABNORMAL to have such a huge multigenerational bourgeoisie in this country, particularly one which has been lulled into false security by easy cash and instant material gratification.
What's really sobering is that the kids of this bourgeois class, who are going to watch their parents lose/walk away from homes, are going to not have the faintest clue about things the working class knew about, like how to organize themselves and just the basic understanding of class consciousness.
There was a big article in the New Yorker the other week where some magazine writer decided to move to the country because she couldn't afford to live in the city any more. She clearly did not understand that she no longer really belonged to the privileged class she thought she did; she's one of the pushed-out people. That's the sad thing: it takes maybe half a generation for people to understand they and their children have slipped a rung on the class ladder. "Who, me?"
"multigenerational bourgeoisie" now I ask you, where...oh where else can you get that phrase in a blog post! Would to God that some decision-makers had read the comments here...
Conjure Bag says, "Ellen, in today's economy, consciousness of any kind is a thing to be prized."
Cheap money is a social narcotic.
"Sorry, but you're wrong. There is nothing new about interest-only mortgages or mortgage-backed securities. Both were used extensively in--gulp--the 1920s. The MBS market imploded in 1931."
Good point and something that tends to ignored. The history is interesting but not easy to find on the internet. The funny thing is that the current monoline credit insurance structure was a reform based on market failure of 20's financial innovation.
It took the invention of structured finance to blow up the results of the reforms of the 1930's.
Ellen,
Do you have a link for that New Yorker article? Or name of the author?
tj, what is 'TPTB'?
Honestly, with all of the homes, cars, buildings, etc., I see markedly lower production --> markedly lower incomes for a long, long time.
The only growth industry that I can see is substituting U.S.-produced fuel for what will be prohibitively expensive oil once the dollar collapses.
It is going to be very, very tough for individuals and families that don't have wads of capital/savings.
TPTB = The Powers That Be
Lo tengo; gracias.
2007: Standard of Living's Last Stand.
Stay tuned, our depression officially starts Oct. '08.
That, of course, is after the dollar collapse.
I'm not doubting what anyone is saying, but I know that buying is not 3x more expensive than renting where I live. The only rental I've seen similar to mine in my neighbourhood is $ 2400/month. I pay < $1500 PITI. Now let's say my house doubled since I bought it in 1996 (I don't actually know what it's worth, but I'd be perfectly content to sell it for that), you're looking at around $3000. After taxes that's pretty darn close to renting. Add in the part of the mortgage payment that goes to principal and I'd say they're about the same.
Anyway, I don't think I'll be mailing in the keys just yet..
Aheadofthecurve
Ahead,
To be fair, you live in Albany(it's MSA, anyhow.) The bleeding there was over a long time ago, and those who live there don't rent because the housing is cheap and diverse and plentiful. People who rent houses pay more due to risk premium & maint. costs, not scarcity.
Albany MSA is a 57-60th ranked; 1/2 the size of Indianapolis MSA, 1/4th the size of the Phoenix MSA(PHX has added a bunch of people since the last census), 1/20th the size of the Los Angeles MSA.
Indy is already tanking and houses are still cheap in absolute terms and getting cheaper even though it's not diverse and plentiful(although with the immigration clampdown the west side near speedway will open up.)
Phoenix is starting to tank in the core (median price wise)and is a bloodbath in outer sections as $3 gas is crimping their style.
LA is in the same boat as Phoenix, though there may be an additional high end implosion if the writers strike isn't ended in the next 6 months.
I know I could buy a huge victorian for under $100k in any town along the Erie Canal, but what job can I get there? Telecommuting's great, but there's crappy airport access & I don't have to shovel heat.
I sold my house in Tempe years ago because I couldn't manage the property because I was away so much and made a nice profit even though I left it in worse shape. I can live in my rental for another 2 years with the money from the sale(incl. utils) while my income stream has grown.
By that time I'll be able to buy a better plot for less money, if the lord's willing and the creek don't rise.
Point is, there's always a calculus where anybody is wanting to sell. Demographic trends have been a big driver of this current mess, and when it goes south it's gonna be a big time buyers market wherever you go.
A little tale:
Although it is not known the actual terms of the mortgage in question, the price paid for the home is known, the credit card is maxed, and the head of the household took a new job 80 miles away for complicated reasons with the idea that they could sell the existing home and move with the spouse giving up their job. But now it is not so clear why this move has not happened. I would expect that tight credit and a falling market price makes it tough to make such a change. What if the home they live in cannot be sold for the mortgage amount? What if they do not know what price they can get and are unsure because of reduced pricing and homes in the neighborhood going unsold? These folks may be caught in this credit crisis, with the crisis happening right when the events that caused the job change occurred.
This is in the heart of America. Not in a bubble area and not in an area where a lot of subprime is going under.
I know I could buy a huge victorian for under $100k in any town along the Erie Canal, but what job can I get there?
Probably a job that would enable you to buy a $100K house, but not a $200K house. Hey, it all works out.
I'm constantly amazed how I'm one of the few people around here who can't predict the future.
LOL. {Golfclap for ac]
seems that Tom Adkins for today's video is available for comments and questions....
Q#1) What is the relationship between money supply and inflation?
Q#2) How long does it take you to extract your head from your a*#h$le?
CommonConservative.com - Contact Us
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adkins@commonconservative.com
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Does anyone have good data on homeowner/mortgage-borrower behavior in Houston during the mid-to-late 1980s? One could use it as a prototype for borrower behavior in the not to distant future.
We were all upside down on our mortgages. Many of us lost jobs; the remainder were running scared. If you were lucky, your company tranferred you the Bakerfield, bought your house for the mortgage principal balance, and you considered yourself damn lucky.
Others just loaded up their cars or pickup trucks and moved back to the Midwest or headed elsewhere where it was rumored that the job markets were strong. I doubt that they gave a lot of thought to the banks, much less their mortgages, as they waved Harris County goodbye.
California is full of people with the same boomer mindset. As the bust hits, U-Haul will be very, very busy.
Prediction: look for non-recourse states to pass "mortgage relief acts" with token items for borrowers and a carefully hidden switch to recourse, probably added as an anonymous amendment.
"I know I could buy a huge victorian for under $100k in any town along the Erie Canal, but what job can I get there?"
Depends what you do. Let's say you're a college professor, for example. Do you think SUNY pays much different from ASU? Or an MD. Do you think doctors bill about the same for an office visit in NY vs AZ? Or plumber, for that matter?
The point I am making is that there remain many mid-size and even larger areas (Houston, Dallas) where people will buy because it is not much more than renting. That's why I question the 30 % number nationally.
As for snow, I prefer winter here to summer in AZ, but that's probably because I grew up in Montreal and Albany doesn't seem that cold to me!
Best wishes to you
Great post, CR. Be very excited to hear about the recourse versus non recourse info.
I think that is a big factor in the housing downturn, however, we may find that non recourse isn't as high as some may fear.
One way to tell recourse versus recourse states is just look at mortgage interest rates.
Recourse states have lower interest rates than non recourse states.
Troy wrote:
"Essentially all of the above borrowers will profit from jingle mail. Collectively they have borrowed well over $4 TRILLION in mortgage debt.
A 10%, $400B, total loss on this is a rock-solid lower bound. 30% ($1.2T) is a reasonable upper bound, the total losses may in fact come in at 20%, or $800B."
Anyone want to make a market on what the total losses will be? I imagine I will be happy to take the under if the above is representative of the predictions here...
Bob Dobbs,
I spent years living in 900-1000 square foot flats
I think the US 'went big' in housing before everybody else.
My first purchase in Canberra (Australia) in 1979 was a 960sqft 3/1 SFH. After I added a metal garage, my ex-UK-Army aunt here on holidays described it as "Captain's quarters" because it had covered car accomodation and 3 double bedrooms (I.e. more than 8 feet wide and long so you can fit in a 4'6" double bed).
She was amazed that I was living in it by myself at the time.
Before that, in the early 70's I remember wasting many an hour in the back of a classroom with friends drawing up DREAM homes on graph paper. Our agreed template was an 1800 sqft (30 x 60) 4/2 living space with stairs heading down to a garage/laundry/storage area underneath. We all thought that with good design this would be enough for any family of up to 3 kids.
I had one client who was building a house in ground zero of ground zero SW Florida. He was doing so in good faith, intending to live there, because as a good Cuban dad, he wanted to live near his daughter, sonin law and baby grandson.
The son in law died in a tragic accident; daughter could neither afford to live in the house, nor bear to live there because of sad thoughts, moved back to East Coast;
my client, while his credit was still good bought a house on the East Coast, and then we told the bank and developer to stop building and offered to give a deed in lieu of foreclosure, which they refused, so he filed bankrupcy and everybody but the West coast bank and developer are living happily ever after.
Another client with a homestead property and an investment property is coming in next week to talk of walking. I have 3 or 4 foreclosures which I am stretching out so that the people can try to sell or re-fi. The is easy, as the foreclosure law firm mills really haven't the slightest idea of what to do with opposition.
Lenders don't want to spend any money, even if it would make them more money. They let the REOs rot; don't pay assn fees on Condos and HOAs; abandon negotiated sales. Up to now they virtually never ask for deficiencies, even with outfits that always ask for them with car loans.
Practically speaking, unless they (lenders) change their ways the recourse/non-recourse distinction has, SO FAR, no practical consequences.
Most people who abandon their property have no money, and lenders would have to hire people and spend money to figure out who did. I doubt they will do anything so sensible. Lenders have, in my 30 years of practicing real estate law, never shown any intelligence at the top.
It would make sense to me to act pre-emptively and send letters out to everybody who was 30 days late (or 60, or in foreclosure) to offer to forgive present debt, lower the interest rate a point or 2, and maybe, try to get an honest appraisal and lower the mtg balance to what the house appraised for. The banks will figure this out long about the time it will be too late. Or when cram down legislation comes through. I think they will lose less money this way, but I think a lot at the top haven't wrapped their teeny weeny minds around the concept that they are going to lose a whole lot of money, and losing less money is better than losing more money.
Maybe somebody could figure in an equity kicker (if legal), just in case house prices go back up again in 10 years or more.
wow, great points.
I don't think people's attitudes towards their homes have changed. That's just idiot CEO talk blaming someone else.
Banks simply made loans to different borrowers: speculators, fraudsters, fools, and free-lunchers.
Congratulations on getting the attention and acknowledgement from the MSM that you so richly deserve.
I didn't read all of the comments, above, so maybe this has been covered. But if the house has a HELOC or similar second mortgage (TD in California and perhaps other states), and the holder of the first forecloses leaving the second with nothing, the odds of the holder of the second filing a lawsuit (not judicial foreclosure or non-judicial foreclosure), goes up dramatically. They have nothing to lose.
mp,
I thought I'd run some of my thinking RE: Japan past Conjure.
Independence indoctrination in America begins right after birth. Folks place their baby in a crib, sometimes in a different room, and call on Ferber when the going gets tough.
Japanese women sleep in the same bed with their baby for at least the first year of life and children often sleep between their parents for what most Americans would consider to be an obscenely long time.
The Japanese value for interdependence produces measurable neurological differences. Asians with an interdependent identity construct have much shorter amplitude and frequency of emotional response than do Americans, but this does not hold true for Asian Americans. When someone with an interdependent identity is asked to describe a humiliating experience, they will most often cite an example of someone with their name or in their community behaving shamefully. Americans, invariably, will cite a mistake which they themselves made when asked to describe a humiliating experience.
So, the Japanese had psychological constraints that impeded their willingness to walk away from their debt obligations. Not only do Americans not have these impediments, but they have been raised to believe that it is morally acceptable to do what is in their own best interest.
I am not in any way suggesting that the Japanese system is better. I see pros and cons with both approaches.
So, I'm predicting that lots of Americans will walk away and that the repricing of real estate in America will happen much more quickly than it did in Japan.
On an anecdotal note, my landlord friend has seen a remarkable increase in the number of roommates applying for a single apartment. He most recently rented a two bedroom in a prime location to a lawyer husband and his wife with a school teacher roommate. Small apt. too, about 900 square feet.
How long will it be before someone creates a fund to buy the "rights" to sue recourse borrowers? In a digital age, how hard would it be to separate the wheat (deep pockets) from the chaff (deadbeats)? Banks may be bashful about recovering losses, but lawyers are not.
@jcsc is it really true? so that's probably one of the main reasons why the mortgage industry is down right now? I hope that this problem will be settled soon though