"The buyer should discount this lower house price back to the present, and we discover that interest rate changes only play small role in house prices."
Does ANYONE actually do this? Had this happened while Greenspan inflated the bubble, there would have been a much smaller bubble.
Is there any way to mandate that lenders against home/RE collateral
must take this into account in appraisal and collateral valuation?
Of course, one can raise incomes through inflation. THat "fixes" the problem, too. Repair the overvalued housing sector by devaluing everying else in creation.
In a few years our re-elected representatives will hire these guys to make up numbers on avoided drop in GDP attributed to the bailout and declare that the bailout made a huge profit. They will then be re-re-elected. I see no hope the taxpayer will see any of the $700 billion (or whatever higher number it will eventually be).
Didn't his study in 2005 presuppose continued appreciation at historicly average rates? After several years of historicly high appreciation? Or am I confusing his study with some other "there is no bubble" study?
The appraisals have been pushed beyond reality. I know because I am an appraiser. Let me explain. No State or entity will begin to investigate an appraisal if it is within a 10% value range of the review. Therefore, as time goes along these little 3,5 or 10% value inflations lead to some really big numbers. It has not helped that those in power, at least in my State, have done little to deter this practice. I am saddened becaue I have done a lot of review work and when I cut the value...I stopped getting work from these lenders. Funny how being honest brings you to the doorstep of the poor house...
SRC, Exactly. Of course Bernanke would love real wage growth, and I don't think he would even mind a little wage inflation right now to help support house prices (he would never say it though) ... but wage increases are hard to find with unemployment rising.
stabilize housing prices by using cramdowns: let bankruptcy judges cram down prices to a prior level. A very rough guess of an appropriate level might mid-2001, but a more modest approach of cramming down to 2002 could be a good start.
next, these cramdowns would blow away lots of MBS, so the cramdown would need to be associated with the mother of all write downs, which would be best accomplished under a bank nationalization . . . of course various MBS holders not covered in the nationaliziation would be wiped out. Then banks would need to be recapitalized, privatized, and opened for business under new regulation.
Last, this would need to be made poltically palatable. That can't happen until 2009 and would require continuation if not worsening of frightening conditions, and maybe also some perks to bring political factions into.
It ain't gonna happen in the next three months, for damned sure.
Goes to the crux of the problem, prices are too high period.
If all the hacks out there writing for the mainstream really wanted people to own houses, doesn't it make sense to allow prices to get cheaper so that they can.
In reality they are all trying to prop up the financial system to prevent a crash, none of the MSM strategies really focuses on helping folks own houses.
Regarding LIBOR-related mortgage resets, how about "pass a law that all reset clauses that rely on LIBOR must use the LIBOR overnight rate in their calculations. It's crazy, it socialism or worse, but it would keep some homes from defaulting right away, and the MBS would still go down in value since the interest streams would decline. But they would decline in a predictable way.
Let's not throw out the baby with the bathwater
I agree there are problems with their proposal, particularly relating to setting the interest rate.
However at the end of the day isn't it true that the underlying problem here is that we have a mortgage debt (and MBS) overhang. Financial institutions hold paper claims that insist on 100% face value of loans, even though this paper is presently trading at prices suggesting 40% or less.
The solution to a debt overhang is to arrive at some sort of debt forgiveness and distribute the losses between borrower, lender and (unfortunately) taxpayer.
Even though holders of MBS stand to gain more in the long-run by extending some debt forgiveness, no single holder wants to extend that forgiveness unilaterally -- they want to free ride. Hence the argument for the government which now directly controls some 90% of these loans to be the one that in effect forces all banks to renegotiate.
If done right the forgiveness will result in fewer foreclusures, less chance of overshooting on falling house prices, and therefore gains (or less serious losses) to both the financial system and the borrowers.
If it helps avoid a major recession, the economy as a whole may gain (or suffer less bad outcomes).
It's progress when calls for negotiated debt relief comes from conservatives.
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
This might be THE STUPIDEST idea I've read yet. But it does jibe with the "price control" mindset of idiots, some of which call themseleves Congresspersons and Presidential Candidates.
If there was a 10-15% spread between renting and owning, why arent there people rushing for the "rich dad" trade of buying a house, renting it out and using the extra for "cash flow"?
How long before they start calling to stabilize corn prices. A bunch of over-leveraged farmers are about to get their asses handed to them a the stupid ass banks that lent them the money. All the same mistakes are being made as in the GD.
You killjoy CR, all they want to do is keep partying like it's 1929 and you keep bringing up current woes. Party pooper.
It's like they believe that prices should not only be as high as they were, but they still could only go up if people believe they will. Propping up the mess we are in is not a solution, the market needs to correct.
Let it.
This horse is dead and they are just beating on a bag of bones now.
BTW, when the HOR rejected the bill and the dow dropped, we were treated to much cnbc-type bloviating about how much we needed this bailout.
So now that the Senate has passed the bill, is there even an ice cube's chance in hell that people will realize that the market is going down no-matter-what?
Am I right in saying we actually want prices to fall faster so the uncertainty ends sooner? Making it easier to do BK/cramdowns, short sales, or mortage renegotiations would seem to be the way to go.
Of course, prices falling faster would put more stress on banks. But there are a lot of voices saying we will have to go with the "Swedish model" sooner or later, so it might as well be sooner.
"Second - and this is important to understand - the value of the securities is based on projections of future house prices, not on current house prices."
This is not entirely correct. The buyers of MBS securities available now are looking at the underlying collateral (which is significantly obscured by the nature of the security) and seeing red now.
The securities are under-collateralized, and that requires an additional risk premium on day one.
However at the end of the day isn't it true that the underlying problem here is that we have a mortgage debt (and MBS) overhang.
Not necessarily. But even if it was, putting people into 30-year fixed 5.25% mortgages does NOTHING to solves the problem when these people-and-properties DON'T QUALIFY for them under reasonable underwriting standards.
I previously debunked the Mayer and Himmelberg paper in great detail for another blog. There were deep errors of assumptions and methods. I can repost that here if CR would like.
Frankly Dr Mayer is really starting to $%^& me off, so I am going to write the WSJ with that critique, his coauthor Himmelberg, and perhaps other members of the Columbia faculty.
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
This might be THE STUPIDEST idea I've read yet. But it does jibe with the "price control" mindset of idiots, some of which call themseleves Congresspersons and Presidential Candidates.
I have an evil twisted idea: Let's implement his refinancing at 0%!
Because that would expose for even the stupidest homeowner that they STILL cannot afford 30 years of payments at the current price.
I agree that a consequence of cramdowns would be tighter lending standards and higher down payments . . . and to that I say, good. If a proper balance is sturck it is the best choice out of an array of bad choices.
Even without cramdowns or any othr intervention we will see lending stands tighten more and down payments go up, because interevention or no intervention, MBS holders and institutions that kept mortgages on their own books are going to see massive losses. They are learning that risks were greater and costs higher, so they will demand bigger down payments, anyway.
Cramdowns would be imperfect, but if they don't overshoot they would less negative impact, and they would distriibute the cost of writedowns more fairly between homedebtor, lender, MBS holder, and nation.
They could also speed price discovery, esp if home debtors come to have a relative incentive to take the cramdown
I think jhu has the right principle in mind about fairness and distributing costs and debt forgiveness. The question to my mind is what tactic to use to achieve the goal.
So by attempting to artificially inflate prices, or keep prices high, consumers watch most of their income still go to the mortgage verses buying crap? Is that it? Is that what's going to solve all our problems, if we can just all over-pay for houses without wage increases? Come on, we have to address the fundemental issue of allowing Americans to get something (crap) for nothing (credit).
Anyone else getting a laugh about how big media is downplaying the stock plunge today? I guess it does not fit into the little bogus pro-bailout narrative they have created.
It seems that people are going to do what is best for them and walk away. They gambled. They lost.
Why would anyone share any potential appreciation with the bank or government or sign on the rent from the bank for 45 years?
There is such desperation to convince people to hold on to terrible "investments" and keep paying their property taxes.
The mismatch between short-term financing, like commercial paper, and long-term lending, mortgages, is the root of this problem; default is just an accelerant.
If we allow mortgage holders to lock-in 5.35% the mortgage holders keep this paper for the full 30 years virtually guaranteeing lender insolvency once rates go up.
The more I learn about both the past and the present, the more I think the Japan model is the BEST case scenario. Some view this as a cancel in our economy that needs to excised. I am starting to think this may be the bubonic plague.
When a relative has cancer we can all sit by their bed and offer them support while they undergo debilitating chemotherapy. If it's the plague, immediate quarantine is the only solution.
So while some of us on this blog (including me) think that the efforts of the government will only prolong the inevitable, perhaps we are being naive and overly optimistic. Perhaps we are insuring an even worse end by allowing the diseased to commingle with the healthy.
This would not be such a terrible proposal for a housebuyer who is reasonably certain to stay longer than a decade in the house. The number of those, however, might be too small to make a big difference.
I agree that a consequence of cramdowns would be tighter lending standards and higher down payments . . . and to that I say, good. If a proper balance is sturck it is the best choice out of an array of bad choices.
While I agree getting back to balance would be good, there would be a bit of cascading defaults due to the cramdown. ie, because the downpayments are increased, values will drop below the cramdowns. Then more cramdowns as a consequence.
I don't know if that cycle converges to something acceptable. It might (even if painful), I'm just saying it needs to be considered.
Of course it is a terrible proposal, but there are lots of loonies in key positions. How otherwise do you think we got to where we are? Nothing has changed. Loonies still run things in general.
Let's rising unemployment should cause household consolidation...affordable is affordable...the government is going to have to give houses away at this point...which I'm sure is already in the works somewhere...
You guys aren't getting this. The $1.5 trillion was to allow the markets to orderly revalue to 8800 Dow equivalents and negative GDP. We are still going to go way down but in a fashion that doesn't expose the fundamental insolvency of the financial industry. A sharp drop doesn't give banks time to pawn off their bad paper.
I have half a mind to get on the 2 train, go up to Columbia and smack these two with a fish. Apparently they have not been introduced to Dr. Shiller's inflation/income vs. home price appreciation chart.
Income and Rent rule the day not giving everyone a 5.25% mortgage.
Would a law/regulation requiring that appraisers be hired 'blind' (name and firm name) out of a rotating area pool end the cherry picking of appraisers to get the value that the lender/broker wants?
stocks that appear to be late to the revaluation-downward party: lowes, home depot, harley davidson.. with retail doom, how are they still around their jan prices?
Yes, sigh, I know, this is unwinding for the big guys.
On the other hand, I'm not sure they can unwind this at quite the price-point they want. I say odds of DOW at 7500 are 50%. I think things will over-shoot.
Would a law/regulation requiring that appraisers be hired 'blind' (name and firm name) out of a rotating area pool end the cherry picking of appraisers to get the value that the lender/broker wants?
JimPortlandOR
With all the magical intervention abilities that many seem to assuem exists in the government, let us try a useful excercise:
Can the governemnt simply state that;
1. home prices are at bottom and will rise at 3% a year. Not above 3%, but not below 3% a year. For all time and forever.
Bonds of all stripes will return 5% a year. No matter what, 5% is there, but never over 5%.
The stock market will return 8% a year, no more no less. 8% guranteed.
Discussion: why not just fix everything in this way? CAn the governemnt do this? Why? Why Not? How long until they try.
So now that the Senate has passed the bill, is there even an ice cube's chance in hell that people will realize that the market is going down no-matter-what?
No, the talking points will be that, prior to Friday, anything bad is because it hasn't passed the House yet. After Friday, it'll be because it wasn't passed soon enough and now we need another tranche of bank welfare.
Fundamentally, there is no action that is a solution. Actions (or inaction) can only be better or worse steps to take under the cirumstances.
If there are cramdowns, there would likely be more than one round of them on some properties. Likewise, if there is a govt refinance program like HOLC or Roubini's HOME plan, there would also be some repeat customers. In any such scheme there will also continue to be defaults and foreclosures.
Too much of the debate about bailouts and fixes for the housing disaster is carried out with the notion that there is a perfect answer in this plan or that plan or in absolute laissez-faire. I think we're very deep in a hole of constrained choices.
Must re-enter the non-virtual world to work . . . see you all later
Housing bottom has been indefinitely postponed by Congress. In once booming markets, it will not happen before prices fall 50% from the peak or to nominal 1997 levels.
I thank the strawberry pickers, NINJAs, morons and other koolaid drinkers who outbid me on every single home I wanted in 2005.
Deflation has to occur before normal economic activity resumes. When you have overdosed on Viagra, you are blind to reality and must be deflated ASAP to be saved.
Allstate is running an ad for their Allstate Retirement services. The actress says after 9/11 her financial life changed from downsizing, etc. She realized she had to make up for this with riskier investments so she chose Allstate Retirement to see her through these troubled times.
Hopefully Allstate was the Ins. co. Reid was refering to. Death needs to visit those vultures
pseudo free marketers - these fake conservatives are so much worse than the lefties. Its a Profit and LOSS system, it cannot work if the price system doesn't get to signal that houses are too expensive!!!
How about the govt. matching any principal write down (up to 10%) for a fixed refinance of a problem loan?
I would think this could save a lot of iffy loans, and slow forclosures - but the worst stuff - the crap that is still genuinely 30-50% over-valued, or wildly-unqualified buyers - would be out of luck.
In other words - a bailout that helps people who are over-extended - but punishes the worst lending practices. Save what's worth saving, and let the market take care of the rest.
Hubbard is a joke, always has been. These bozos should be fired from Columbia with such drivel. If Columbia has any standards left, of course. I'm doubtful.
Put Columbia Business school on my list of institutions to avoid. Why would anyone pay money to learn from these idiots? While getting an MBA might be a smart career move, I get the distinct feeling that I'd be able to teach the professors more than vice versa.
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
I'm confused...? why not?
they've nationalzied f&f, they bailed out the bond insurer,the least they could do is allow those borrowers who are in the lowest income tax bracket to pay a decent rate , regeardless of house price.
Ok, yeah, so the house won't ever appreciate. big deal, housing appreciation is moer a function of a depreciating dollar anyway , right...
CR writes: [T]his shows a misunderstanding of the role of interest rates with regards to house prices. This gets complicated, but if the interest rate is artificially low today, the buyer can expect rates to rise - and therefore that the home price will not be as high in the future (all else being equal).
This is a weak link in your argument... so far, gov't has had an amazing run of success at keeping interest rates artificially low, and is fighting hard as we speak to "keep up the good work"! Hence there indeed has been a mighty connection between low rates and high prices, at least in places like California.
CR- look to the 1970s to see that you can have high wage inflation with high and rising unemployment. I am a big proponent of the theory government will try to use wage inflation to help fix the housing bubble. I think with all of the liquidiy the Fed has been doling out over the past few years some serious inflation is in the works.
I love USA. I proudly became a
citizen in 1990. This is country were
dumb people can be anything they want,
Rich, doctors, presidents,etc. You just have to be charming, not to mention from the right heritage.
In the Paulson $700 billion plan, the US Treasury buys toxic junk at "hold to maturity" full prices so banks can recapitalize their shareholders. The US Treasury will then sell those loans to FRE/FAN at full price. FRE/FAN will then write down principle with the losses going to the taxpayer.
The taxpayer gets screwed twice, first by overpaying, second by taking losses on these same loans
This is the same terrible line of reasoning that leads newscasters to warn us that if we don't pass the bailout, we won't be able to max out our credit cards or buy appliances in installments. The problem is not that prices are too high or incomes are too low ... it's that credit isn't accessible enough. It's ridicoulous
Loose credit and asset inflation has been a terrible deal for the general public (though it's made speculators and creditors very rich). Among the many pitfalls is a totally inefficient allocation of resources and redistribution of wealth. We'd be much better off in the long run with deflated prices and less debt.
Though I admit, it won't be fun getting there from here.
You know, these days, it's really hard to distinguish between conservatives and liberals. Everyone seems to be so radicalized. Glen Hubbard, Dean Baker, what's the difference?
The cost to rent should be the same as the price to buy EXCEPT for the tax breaks. If the price to rent is much less than the price to buy, as it was in California, then you have a bubble.
For example, a 5/1 ARM on a 360k house cost me $2300/month. The exact same house down the street was renting for around $1300/month. In my case, the tax break added up to about $500/month.
I'm happily living in Western NY now paying $600/month in rent. The food prices are a lot cheaper too compared to California. I was in CA last week, and boneless chicken was $9/pound compared to half that here. Milk is a full dollar cheaper per gallon. BTW, $600/month barely pays the property taxes where I'm living, so that's another factor in the housing debacle.
Credibility and accountability are in short supply in this country. These two industry-paid academia prove it. In boom time, Hubbard, a former Bush economic advisor, championed the "ownership society" policy. And the other idiot, Mayer, from Columbia is no different from David Lereah in blowing the bubble. At least Lereah was not hiding behind the ivory tower and pretending to be fair minded. He was the NAR economist and a built-in bias was totally anticipated. why do the MSM still give these idiots the podium without holding them accountable for past failures. They need to be sent to uruguay where Bush will retire to sell housing and real estate there.
America is full of whores that promote Crooks' interests. Crooks control Americans and American system via propaganda. Born-and-bred American dopes are economic slaves and intellectual slaves in denial.
Economists are in the front lines in defending the Crooks via propaganda. They are e-CON-meisters.
America IS in denial of the intellectual and moral rot.
Back in 2005 or 2006 after reading his op ed piece in the WSJ, I wrote Todd Sinai at Wharton an email to let him know the reasons there was a bubble and that he was woefully wrong. He never responded. Wharton is so overrated it is pathetic.
WASHINGTON (AP) President Bush says a lot of people are watching the House as it considers financial rescue legislation and says lawmakers must listen to voices urging passage.
\tSpeaking to reporters at the White House on Thursday, a day before the House vote, Bush warned that tight credit is freezing the ability of small businesses not only to expand, but to exist. He said the bill before the House is the best chance to correct the problem.
\tBush said the issue is affecting employees and families across the country and that lawmakers must listen so confidence can be restored in markets and financial institutions. The House rejected a rescue package on Monday, shocking Wall Street and Washington. The Senate passed a bill Wednesday night.
I tried to read it - with steadily increasing annoyance - but when they 'found' housing currently overpriced vis a vis rentals by 10 - 15%, I lost all interest. Would have to see the data on that one.
Edmund Phelps is at Colombia, I believe. So not every tenure there was a mistake.
"Chris Mayer recently published a study showing that -- assuming normally functioning mortgage markets -- the cost of buying a house is now 10% to 15% below the cost of renting across most of the country."
What country is he talking about?! Gah - what an idiot!
Look, it is still far too expensive to buy a house anywhere along the coasts of the US and in many other "hot spots" as well. Housing in Maryland starts at about 5x median household income for an area - you can get some place cheaper if you don't mind buying a poorly treated, outdated wreck that needs a lot of work - so how is this "cheaper than renting?!" The answer: it is not, unless this nimrod is counting toxic loans with low teaser payments as a way to "buy" a house.
For years, it's been easier to buy a house than rent - when you rent, the landlord actually expects some proof of income! Such a novel idea! But hey, with the Bailout on the way, the banks will be rewarded for pushing toxic loans and killing our economy.
Theme for 2009 for Chris to consider: "In many parts of the country, it is easier to rent a spot in a shanty town than to buy your own shack."
$700 billion is lost the moment that Bush signs it. It's just a quick grab from the taxpayer before he leaves office all for the benefit of the last three investment banks left standing, who have now way to pay out the trillions that they agreed to insure.
$700 billion amortized over 24 years at %3 works out to be another $350 billion interest. If the mortgage assets that have dropped 50%, which there are at least $700 billion of, manage to appreciate back to their original value, it will take 24 years at 3% per year. So in the end, it will have cost the taxpayer about half. The problem is, it will get much, much worse when the next round of 5/1 interest-only ARMs resets at the end of this year and next year.
Don't forget all of the refinances...which about equaled new home loans in terms of dollars. Ouch!
he keeps mentioning "small and medium" businesses. and "payroll". What he doesn't mention is WALL STREET, or BAIL OUT, or BANK SOLVENCY or anything like that.
Excellent video. I imagine the repubs have their own video of shame at behest of their sugar daddies. I did lose some respect for Barney Frank. One could argue the black caucus is fighting for it's power center but Barney knew this thing was a bad deal.
How much do we have to go through before we learn that its a bad idea to attempt to f*ck around with house prices?
Seriously, what would it take? I see these talking heads complaining that our policies are not fixing house prices - what more has to happen before people get it through their thick, thick melons that our ability to control prices is severely limited and fraught with consequences? Apparently not even watching millions of Americans lose home causes people to approach learning this.
Moreover if there were a way to permanently fix homeprices at an outrageously high rate through policy, I think that our government would have done this in a hot minute, damn the consequences and the middle class.
It can't be done people, the sooner we accept this the sooner we can get to the other side of this mess.
However I accept that in the aggregate nobody will begin to understand this concept much less accept it anytime soon.
Accurate appraisals stop the flow of money...they cannot have that. The system is based on money flow and that flow was directly related to home values. They have decreased human produced appraisals to about 30-40% of the valuation industry. That means broker price opinions, computer generated valuation models or AVM's have become the lions share of how your home is evaluated. You can make a computer do what you want...a human is a little harder to pressure. Cuomo has a plan that eliminates appraisers from working directly for banks and lenders that will take effect on Jan 1,2009. However, this mandate requires all appraisals to be ordered through a 3rd party. These management companies take 40-50% of the appraisers fee. We make $300 per order. Now we will make $150-175. Keep in mind my cost is $20K per year before I make one red cent. That is a lot of 1/2 priced appraisals. The best and brighest are going to leave the appraisal profession. Do you want some college dropout evaluating your biggest asset for $150? This came about because Cuomo was investigating WAMU. WAMU was pressuring a 3rd party management company to fire roster appraisers that would NOT make values. The 3rd party would not fire tham so WAMU bought 100% of the management company outright and got what they wanted. Then Cuomo got wind by having copies of internal e-mail and started an investigation that led beyond WAMU to Fannie and Freddie. Fannie and Freddie caved and agreed to the Jan 1st appraiser plan, if Cuomo would drop the investigation of them. Fannie/Freddie are the 2ndary market for loans so this agreement effects appraisers in all 50 states because now all appraisals are considered FEDERALY related transactions. So, now Cuomo has given the fox the keys to the hen house and appraisers will continue to be pressured and values will be hit. Good luck America. Sorry this is so long but the story of how we arrived here has more than one chapter or verse.
This may be the most ridiculous idea I've seen floated yet. Price controls on mortgages?! Didn't some Nixon guy play around with the notion of price controls back in the '70s? How'd that work out?
I came up with a half-dozen unintended consequences of this idea before I even finished reading the article ... but, then, what do I know; I don't have a Ph.D. or a tenured position at an Ivy League school.
I bet this group could come up with 100 before I leave for lunch.
"We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
I'm confused...? why not?
First of all, the word "allow" is inappropriate in this situation.
When the Gov. starts "forcing" private entities to change the terms of their contracts after the fact, the validity of any contract between private entities becomes questionable at best.
Money Man writes:
The appraisals have been pushed beyond reality. I know because I am an appraiser. Let me explain. No State or entity will begin to investigate an appraisal if it is within a 10% value range of the review. Therefore, as time goes along these little 3,5 or 10% value inflations lead to some really big numbers. It has not helped that those in power, at least in my State, have done little to deter this practice. I am saddened becaue I have done a lot of review work and when I cut the value...I stopped getting work from these lenders. Funny how being honest brings you to the doorstep of the poor house...
a moral hazard effect -- GSE guarantees and such allowed lenders to speculate (get fees by approving higher and higher mortgages, etc).
So much of the total current picture is about whether or not we as a people (the nation) can come to terms with the end of our illusory home equity windfall wealth.
Or worse -- corruptly prop up house prices in some way (a little) so as to transfer wealth from non-homeowners to homeowners, on net. Rob Peter to give his money to Paul.
At times we heard an idea that mortgage originators would have to begin to have a little skin in the game (vs putting all the risk on taxpayers through the GSEs)....
But rushing to "rescue" or bailout, we forget this kind of good idea.
Only until the supply and demand get anywhere close to equilibrium will prices stabilize. Because housing is not a perishable item (except for very bad construction), time and absorption, coupled with almost a complete lack of new construction, are the only way supply and demand will get back to equilibrium (barring demo of foreclosed homes). It is a long painful waiting game.
"We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%"
While we are at it, we propose a cap of $2/gal of gas.
Fundamental problem with the politicians and supporters of this administration is the refusal to accept that there was a asset bubble. They do not want to admit that your house was not worth million dollars; you thought it was and will never be again.
Asset, which traditionally inflates annually at about 0.5% over the inflation rate, ballooned at 10-20% on annual basis has to deflate equally.
This is not a terrible downturn in the housing market but a sensible correction.
Why not apply the same logic to Oil prices? Why not support soft landing of crude oil prices at $150 / bbl. or to iron ore or the dot com era salaries for computer professionals? Why not pass legislations to prevent these prices from falling? Why not bailout all those who bought oil company stocks on margin when oil was $150 /bbl.
It was not bad enough that the banks gave 125% mortgages to deadbeats - now the government is going to give twice that amount to the same deadbeats.
If these deadbeats cannot afford the mortgage - they should move out and rent a one room in the poor part of the town or move to Mexico or Guatemala where they can live comfortably on welfare check.
The ownership society was a linchpin of globalization. If the middle class, long based on manufacturing jobs, was to successfully segue to jobs in service, the shortfall would have to be made up by wealth effects. The neo-cons/liberals and academics had never held a job, but understood consumption induced by asset based wealth (academics' via the good-income-for-life offered by their most valuable asset: tenure).
The collapse of housing is many magnitudes more traumatic than was dotcom, because it rends the system from two sides. On the one side, the collapse of the debt in the FIRE sector is affecting earnings, employment, and credit. On the other side, the synthetic wealth effect (the summer Sunday morning on the patio at Starbucks reading the Times) on consumption and complacency is gone for a generation.
This experiment in shifting society in unprecedented ways relied on rising asset values being able to simultaneously mitigate the debt supporting the assets' valuations and at the same time motivate consumption. There was no way to do them both; the society chose the latter, and the system can no longer support the former. The increasingly irrational proposals to "save housing" are just the Duke brothers in Trading Places screaming "turn those machines back on! Get back in there..."
I haven't heard anyone outside the blogs--even the congressmen who were against the bill--mention that housing prices have anything to do with salaries. They all seem to think that is is the availability of credit that the the determinant of housing prices and so all their efforts are aimed at providing more credit. Talk about digging a deeper hole! It was the availability of easy credit that let house prices separate from salaries.
The Fed knows that housing prices are a "key channel of monetary policy transmission," and would like nothing more than to keep this bubble inflated so they can stop the liquidity injections.
Money quote:
"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."
People were not "cashing out" on their barrels of oil to fund their lifestyle or standard of living. The hoopa joop must continue or our standard of living will go down....
Austin Tex, you nailed it! Stephen Roach (and Andie Xie) in his writing as Morgan Stanley chief economist relentless fretted about the asset-dependent aspect of the economy and worried about how this growth paradigm would unravel. Unfortunately, for all his foresight he was exiled to Asia. His post now is assumed by the incessant cheery economist, Richard Berner, who often countered Roach's dire analyses with his own rosy assessments. Had Morgan Stanley heeded Roach's wisdom, they wouldn't be where they are today. History seems to repeat itself with idiocy.
Took a quick look at the 2005 paper (to see the methodology) -- reminds me that if you torture data long enough it will tell you anything.
Money quote for Dawg from the 2005 paper:
Hence, for example, a two-bedroom apartment that rents for $1,000/month ($12,000/year) should sell for up to $240,000. This price-to-rent ratio provides a baseline against which housing prices can be judged too high or too low.
Don't need to read anything else in the paper. Model differs from 100+ years of observed data = model is wrong.
CR: "First, house prices are falling because prices are too high when compared with fundamentals like incomes and rents." You are so right, CR! I have to say that you are one of very few bloggers that really understand what is happening. Any meaningful discussion of the current so-called credit crisis should start with this statement.
Many other commentators have suggested that the main problem of this crisis is uncertainty and lack of confidence. The opposite is true: There is increasing certainty and confidence that an awful lot of homeowners are doomed to lose their homes. Some nice data about the financial status of households can be found the in Paul 'Econtration' Kasriel's "Its So Over for Household Spending" at Welcome to Northern Trust
"The cost to rent should be the same as the price to buy EXCEPT for the tax breaks. If the price to rent is much less than the price to buy, as it was in California, then you have a bubble."
Why do people believe buying should be as cheap as renting? Itcertainly should not.
When you rent you have no opportunity for price appreciation as with buying. And housing has statistically been a good investment. Even with the declines of the last year across the entire US the last 5 years still show something like a 40% increase - a pretty good return.
Other than the last couple years as well when you bought a home you knew and expected that you had to be there 3 or more years to break even on selling costs .... and you expected appreciation of 3-4% a year typically.
I'm not sure as well where idea comes from that ability to buy is somehow a right - that home prices are only "accurate" if median income can afford a median price home ....
It is a noble goal, and certainly has many benefits - but is hardly a right ... to say that home prices should be reduced simply because of affodability is the very socialism so many have complained about here regarding the bailout
All of that said - housing prices HAVE dropped to the affordable level some here demand - across almost the entire country - INCLUDING virtually all of California
Global Insight/National City do a Housing Valuation Analysis that tracks valuation as a function of affordability back to the mid 80's ...
They do this for 330 markets across the country - rating, based on affordability, whether a market is over, under or fairly valued
And as of Q2 - 2008 they find virtually the entire country is fairly valued, again including all of California (except San Fran) ... which is why I believe we are seeing the very strong sales there we are
With almost all markets in the US fairly valued ... where many of those same markets were 15% to 25% or more over valued 2 years or less ago - the idea that prices are still drastically overvalued makes little sense
This study - if you read the methodology - is far more detailed than simply comparing median income to median prices as well ...
Home prices HAVE dropped to were they are affordable - especially cionsidering the very low interest rates - for the vast majority of Americans
This idea that prices have to drop significantly more - other than in very, very isolated markets, is simply without factual support as far as I can see ....
... and on a National level they too show the same affordability picture - that housing across the US already IS affordable
In 2005 a family of 4 with the median income had 111% of the income reqd to buy a median priced home
Affordability has rapidly increased since then - in Q2 2008 the family of 4's median income represented 123% of the amount needed to buy a median priced home
In Q2 2008 - even in the "West" as a whole they had 101% of the median income to afford a media priced home
NAR's data only goes back to 2005 - but here is another resource that compares and ranks 1995 to 2005 for major markets:
I had read that joke of a proposal. I wish that CR had not even commented on it, given that there are always some idiots (including socialists other than the authors of the proposal) out there who would grasp onto such a plan. The so-called consumer groups, including our dear friends at ACORN, will soon include in their screams that this proposal must, I say must, become law.
Why do people believe buying should be as cheap as renting? Itcertainly should not.
Agreed but this is not an investment for most people primarily but a place to live. Most of us have to take on significant debt to get the most minimal housing. If sickness, downturns in the economy etc take place we have tremendous risk. Housing was seen as a riskless investement because of continous dollar debasement. The risng foreclosures show that argument to be false.
Mayer might have a fancy title but his analysis is flawed based on his starting assumption- mortgages are 2.4% higher the 10 year rather than 1.6%. What the erudite but clueless Mayer fails to realize is that the spread could be high because - mortgage rates are to high or because Treasury rates are too low. With Tbill's yield close to 0% I think that it is reasonable to conclude that Treasury rates are too low not that mortgage rates are too high. And with it goes his whole argument.
"tg: Agreed but this is not an investment for most people primarily but a place to live. "
An important point - but maybe for a slightly different reason ... when looking at housing too often ignored is teh fact you point out - a home is PRIMARILY MO an investment - it is shelter - a roof over your head - a necessity of life.
And that has a finite value irregardless of everything else.
In any calculation about housing you have to take that into account. At minimmum we need to attribute the value of having to rent a comparable space. The difference remaining after deducting comparable rent could be considered the "investment" cost
This investment cost can then be weighed against appreciation etc to get a realtionship ship between renting and woning. When you back out the comaprable rent that would have to be paid regardless of ownerhip - and only consider the part of payments above rent vs potential gains - the return on investment for any gain is MUCH higher
220 thanks for your response. I do not know. I remember living in a one bedroom apartment with four kids as a child. You can always downsize if you are without debt. With debt your hooked. To buy a house was the appropiate choice for a last fifty years prior to the last few years. It may be again in the future. I do not see rising incomes for most americans in this changing world economy. I suspect that we have seen a high for housing in real terms for our lifetime.
Agreed. I also wonder if the report looked at the current market price of the asset and also the cash flow requirements. I assume that most mortgages written in the last two years are under water and the mortgages (debt) is greater than the house's value (current market price). Who is going to take loss if you reset the asset to the current market price? Also, individuals selected interest only ARMS or pay only the minimum on a pay option loan because that is what they could affort. How are they going to afford a fully amortized (interest and principle) loan?
I read the article and thought it was sloppy. The research was theoretical and poor.
America is full of whores that promote Crooks' interests. Crooks control Americans and American system via propaganda. Born-and-bred American dopes are economic slaves and intellectual slaves in denial.
I think Jas Jain deserves a radio show. Seriously.
you are 100% correct in your opinions about Chris Mayer's research.
He's never seem to be objective nor intellectually honest in my view. He seemed to chose his opinion first and try to prove it later.
He was trying to open a RE oriented MBA in Columbia Business School in 2005/2006 when he published "star cities", a paper that claimed that cities like NYC were not overpriced because everybody wants to live there.
I remember he advised his own family members to buy at the peak, so he's not pushing things he doesn't believe in.
"a paper that claimed that cities like NYC were not overpriced because everybody wants to live there."
In itself that is not entirely wrong ... desirability IS a legitimnate and important factor in value - it is an important part of the "demand" side of the equation
And it ties into and is a part usually of the "supply" side as well - in many cases - like NYC - the supply is greatly constrained - in part by the demand - that people want to live there and in part beciase there is a very limited supply
Clearly a more desirable area, especially if it has limited supply as well, is going to see higher prices
Second - and this is important to understand - the value of the securities is based on projections of future house prices, not on current house prices. If we knew the trajectory of future house prices (and the relationship to defaults), we could accurately price the various mortgage backed securties (MBS).
Correct me if I'm wrong, but I thought the value of MBS is based on projections of future payments on mortgage debt, and not on the price of the underlying asset.
CR- look to the 1970s to see that you can have high wage inflation with high and rising unemployment. I am a big proponent of the theory government will try to use wage inflation to help fix the housing bubble.
That wouldn't be the same kind of government that since the 80's has been destroying the pricing power of labor by fostering union-busting, illegal immigration, and outsourcing, would it?
The US will start seeing rising real wages when it starts creating real jobs.
I live in a higher priced community in Silicon Valley, where $1 million buys you a fixer upper. The fixer upper next to me is for sale. They've had several offers but none went through because buyers can't get financing. I don't see how this can't provide downward pressure on prices.
If we knew the trajectory of future house prices (and the relationship to defaults), we could accurately price the various mortgage backed securties (MBS).
Mayer's point about the vicious cycle is that it's very hard to project MBS prices because falling house prices are inducing tighter lending standards which further decrease prices. The feedback makes it much harder to predict prices and is likely to cause an overshoot of prices below where they should reasonably be. The overshoot is dangerous because without adequate workouts, all the homes that end up in foreclosure will deteriorate, neighborhoods will deteriorate, and our economy will lose real (as opposed to financial) assets.
The real point of their proposal (which I don't think they argued very clearly) is that instead of buying $700 billion of MBS and taking the loss as homeowners default, we should take the loss by refinancing the homeowners immediately so we decrease the volume of foreclosures and let more people stay where they are. And hopefully prices won't overshoot downward excessively.
first?
1
yes finally!
As Nemo would say, "great, let's do it!"
damn it
ame
How's about stabilizing job losses....maybe folks with jobs COULD pay the mortgage. Just a thought....
Dr. Mayer would appear to be a fool, and not a disinterested one.
"The buyer should discount this lower house price back to the present, and we discover that interest rate changes only play small role in house prices."
Does ANYONE actually do this? Had this happened while Greenspan inflated the bubble, there would have been a much smaller bubble.
Is there any way to mandate that lenders against home/RE collateral
must take this into account in appraisal and collateral valuation?
Thanks, CR. What a great site.
We will not even get into the shady math the gov't uses to calculate unemployment these days...Good Times..Good Times
How's about stabilizing job losses....maybe folks with jobs COULD pay the mortgage. Just a thought....
Money Man
That presumes people have a reason to pay the mortgage when they are 100K+ underwater in a non-recourse state.
Hear, hear!
Thank you, CR.
Of course, one can raise incomes through inflation. THat "fixes" the problem, too. Repair the overvalued housing sector by devaluing everying else in creation.
I know some on here hate it when we call out bad previous forecast failures...but not me. This guy is wrong again!
In a few years our re-elected representatives will hire these guys to make up numbers on avoided drop in GDP attributed to the bailout and declare that the bailout made a huge profit. They will then be re-re-elected. I see no hope the taxpayer will see any of the $700 billion (or whatever higher number it will eventually be).
Didn't his study in 2005 presuppose continued appreciation at historicly average rates? After several years of historicly high appreciation? Or am I confusing his study with some other "there is no bubble" study?
The appraisals have been pushed beyond reality. I know because I am an appraiser. Let me explain. No State or entity will begin to investigate an appraisal if it is within a 10% value range of the review. Therefore, as time goes along these little 3,5 or 10% value inflations lead to some really big numbers. It has not helped that those in power, at least in my State, have done little to deter this practice. I am saddened becaue I have done a lot of review work and when I cut the value...I stopped getting work from these lenders. Funny how being honest brings you to the doorstep of the poor house...
you mean the market has to correct its excesses?
the government can't just step in and solve all of this?
inconceivable!
1 month dollar Libor is now up almost 200 bps in a month...this is going to hurt mid-sized business with credit lines and HELOC restters...
Lower interest rate will just cause a new speculative bubble, probably in a new market segment. That will go a long way to solving our crisis NOT.
SRC, Exactly. Of course Bernanke would love real wage growth, and I don't think he would even mind a little wage inflation right now to help support house prices (he would never say it though) ... but wage increases are hard to find with unemployment rising.
Best Wishes.
stabilize housing prices by using cramdowns: let bankruptcy judges cram down prices to a prior level. A very rough guess of an appropriate level might mid-2001, but a more modest approach of cramming down to 2002 could be a good start.
next, these cramdowns would blow away lots of MBS, so the cramdown would need to be associated with the mother of all write downs, which would be best accomplished under a bank nationalization . . . of course various MBS holders not covered in the nationaliziation would be wiped out. Then banks would need to be recapitalized, privatized, and opened for business under new regulation.
Last, this would need to be made poltically palatable. That can't happen until 2009 and would require continuation if not worsening of frightening conditions, and maybe also some perks to bring political factions into.
It ain't gonna happen in the next three months, for damned sure.
CR,
Your best piece yet.
Goes to the crux of the problem, prices are too high period.
If all the hacks out there writing for the mainstream really wanted people to own houses, doesn't it make sense to allow prices to get cheaper so that they can.
In reality they are all trying to prop up the financial system to prevent a crash, none of the MSM strategies really focuses on helping folks own houses.
Regarding LIBOR-related mortgage resets, how about "pass a law that all reset clauses that rely on LIBOR must use the LIBOR overnight rate in their calculations. It's crazy, it socialism or worse, but it would keep some homes from defaulting right away, and the MBS would still go down in value since the interest streams would decline. But they would decline in a predictable way.
*Mortage restters (not HELOC, as most helocs are tied to prime or other another index)
Let's not throw out the baby with the bathwater
I agree there are problems with their proposal, particularly relating to setting the interest rate.
However at the end of the day isn't it true that the underlying problem here is that we have a mortgage debt (and MBS) overhang. Financial institutions hold paper claims that insist on 100% face value of loans, even though this paper is presently trading at prices suggesting 40% or less.
The solution to a debt overhang is to arrive at some sort of debt forgiveness and distribute the losses between borrower, lender and (unfortunately) taxpayer.
Even though holders of MBS stand to gain more in the long-run by extending some debt forgiveness, no single holder wants to extend that forgiveness unilaterally -- they want to free ride. Hence the argument for the government which now directly controls some 90% of these loans to be the one that in effect forces all banks to renegotiate.
If done right the forgiveness will result in fewer foreclusures, less chance of overshooting on falling house prices, and therefore gains (or less serious losses) to both the financial system and the borrowers.
If it helps avoid a major recession, the economy as a whole may gain (or suffer less bad outcomes).
It's progress when calls for negotiated debt relief comes from conservatives.
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
This might be THE STUPIDEST idea I've read yet. But it does jibe with the "price control" mindset of idiots, some of which call themseleves Congresspersons and Presidential Candidates.
I think the government is trying to keep house prices high so property taxes stay high.
If there was a 10-15% spread between renting and owning, why arent there people rushing for the "rich dad" trade of buying a house, renting it out and using the extra for "cash flow"?
Things must be really bad when GE has to look for short term funding.
stabilize housing prices by using cramdowns: let bankruptcy judges cram down prices to a prior level.
Cramdowns would exacerbate the problem: Lenders would immediately start demanding greater downpayments (40-50%) to protect against future losses.
And if you think 20% is causing trouble, just wait till we see 40%.
People tell me it's a great time to buy a house. Every day. Tho, they all said that in 2005 as well.
INO Futures and Commodities - Grains and Oilseeds - CORN (MINI) Mar 2010 (CBOT:YC.H10) Price Chart and Quote
How long before they start calling to stabilize corn prices. A bunch of over-leveraged farmers are about to get their asses handed to them a the stupid ass banks that lent them the money. All the same mistakes are being made as in the GD.
Reading the Editorial/Opinion pages in the WSJ is worse for your brain than megadoses of acid and methamphetamine.
Run away! CR, prolonged exposure to that garbage will iron the wrinkles out of your cortex, a loss our nation could ill afford.
You killjoy CR, all they want to do is keep partying like it's 1929 and you keep bringing up current woes. Party pooper.
It's like they believe that prices should not only be as high as they were, but they still could only go up if people believe they will. Propping up the mess we are in is not a solution, the market needs to correct.
Let it.
This horse is dead and they are just beating on a bag of bones now.
BTW, when the HOR rejected the bill and the dow dropped, we were treated to much cnbc-type bloviating about how much we needed this bailout.
So now that the Senate has passed the bill, is there even an ice cube's chance in hell that people will realize that the market is going down no-matter-what?
Am I right in saying we actually want prices to fall faster so the uncertainty ends sooner? Making it easier to do BK/cramdowns, short sales, or mortage renegotiations would seem to be the way to go.
Of course, prices falling faster would put more stress on banks. But there are a lot of voices saying we will have to go with the "Swedish model" sooner or later, so it might as well be sooner.
"Second - and this is important to understand - the value of the securities is based on projections of future house prices, not on current house prices."
This is not entirely correct. The buyers of MBS securities available now are looking at the underlying collateral (which is significantly obscured by the nature of the security) and seeing red now.
The securities are under-collateralized, and that requires an additional risk premium on day one.
Gretchen has the answer. Show us the way enlightened bong-water-sippin one.
Speaking of wage inflation are Boeing machinists still on strike?
Foreclosed properties need to be organised in a huge pool and rented out.
Foreclosed people can rent them and the pressure would be taken off prices which will otherwise undershoot in the ex-boom states unnecessarily.
Banks and MBS service agents will not rent for various reasons . The government needs to step in.
Action please.
Graham Cox
However at the end of the day isn't it true that the underlying problem here is that we have a mortgage debt (and MBS) overhang.
Not necessarily. But even if it was, putting people into 30-year fixed 5.25% mortgages does NOTHING to solves the problem when these people-and-properties DON'T QUALIFY for them under reasonable underwriting standards.
I previously debunked the Mayer and Himmelberg paper in great detail for another blog. There were deep errors of assumptions and methods. I can repost that here if CR would like.
Frankly Dr Mayer is really starting to $%^& me off, so I am going to write the WSJ with that critique, his coauthor Himmelberg, and perhaps other members of the Columbia faculty.
Ministry of Truth writes:
Speaking of wage inflation are Boeing machinists still on strike?
I believe so. Airbus would be pleased.
The Dow is singing the blues today.
I'm goin' down...
I'm goin' down,
down
down
down
down...
I guess they need to keep the pressure up on Congress, eh?
Anonymous,
We have already been informed by our county that tax rates will not be reset to match declining home values (which have dropped about 15% locally).
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
This might be THE STUPIDEST idea I've read yet. But it does jibe with the "price control" mindset of idiots, some of which call themseleves Congresspersons and Presidential Candidates.
I have an evil twisted idea: Let's implement his refinancing at 0%!
Because that would expose for even the stupidest homeowner that they STILL cannot afford 30 years of payments at the current price.
JP
I agree that a consequence of cramdowns would be tighter lending standards and higher down payments . . . and to that I say, good. If a proper balance is sturck it is the best choice out of an array of bad choices.
Even without cramdowns or any othr intervention we will see lending stands tighten more and down payments go up, because interevention or no intervention, MBS holders and institutions that kept mortgages on their own books are going to see massive losses. They are learning that risks were greater and costs higher, so they will demand bigger down payments, anyway.
Cramdowns would be imperfect, but if they don't overshoot they would less negative impact, and they would distriibute the cost of writedowns more fairly between homedebtor, lender, MBS holder, and nation.
They could also speed price discovery, esp if home debtors come to have a relative incentive to take the cramdown
I think jhu has the right principle in mind about fairness and distributing costs and debt forgiveness. The question to my mind is what tactic to use to achieve the goal.
So by attempting to artificially inflate prices, or keep prices high, consumers watch most of their income still go to the mortgage verses buying crap? Is that it? Is that what's going to solve all our problems, if we can just all over-pay for houses without wage increases? Come on, we have to address the fundemental issue of allowing Americans to get something (crap) for nothing (credit).
Anyone else getting a laugh about how big media is downplaying the stock plunge today? I guess it does not fit into the little bogus pro-bailout narrative they have created.
Never attribute to malice that which is adequately explained by stupidity.
...though it would take a lot of stupidity to adequately explain Dr. Mayer.
It seems that people are going to do what is best for them and walk away. They gambled. They lost.
Why would anyone share any potential appreciation with the bank or government or sign on the rent from the bank for 45 years?
There is such desperation to convince people to hold on to terrible "investments" and keep paying their property taxes.
This "plan" is just plain silly.
What about Pre-Payment assumptions?
The mismatch between short-term financing, like commercial paper, and long-term lending, mortgages, is the root of this problem; default is just an accelerant.
If we allow mortgage holders to lock-in 5.35% the mortgage holders keep this paper for the full 30 years virtually guaranteeing lender insolvency once rates go up.
The more I learn about both the past and the present, the more I think the Japan model is the BEST case scenario. Some view this as a cancel in our economy that needs to excised. I am starting to think this may be the bubonic plague.
When a relative has cancer we can all sit by their bed and offer them support while they undergo debilitating chemotherapy. If it's the plague, immediate quarantine is the only solution.
So while some of us on this blog (including me) think that the efforts of the government will only prolong the inevitable, perhaps we are being naive and overly optimistic. Perhaps we are insuring an even worse end by allowing the diseased to commingle with the healthy.
R. Glenn Hubbard...isn't that the Dianetic's guy? hoocoodanood he was a housing policy buff also.
This would not be such a terrible proposal for a housebuyer who is reasonably certain to stay longer than a decade in the house. The number of those, however, might be too small to make a big difference.
I agree that a consequence of cramdowns would be tighter lending standards and higher down payments . . . and to that I say, good. If a proper balance is sturck it is the best choice out of an array of bad choices.
While I agree getting back to balance would be good, there would be a bit of cascading defaults due to the cramdown. ie, because the downpayments are increased, values will drop below the cramdowns. Then more cramdowns as a consequence.
I don't know if that cycle converges to something acceptable. It might (even if painful), I'm just saying it needs to be considered.
Builder Bob,
You know you are in trouble when the advise to the common arthropod is "Stay the Course" and "don't make investment decisions when you're emotional",
you know like don't fend off the wolves from eating your family,...bad wolf, naughty wolf, ...narmf narmf
Of course it is a terrible proposal, but there are lots of loonies in key positions. How otherwise do you think we got to where we are? Nothing has changed. Loonies still run things in general.
buffet busted the dow
(GE down 10% thanks to his dilution)
Let's rising unemployment should cause household consolidation...affordable is affordable...the government is going to have to give houses away at this point...which I'm sure is already in the works somewhere...
What a joke. Did the NAR sponsor this "study"?
Speaking of R. Glenn Hubbard, let's play an oldie but a goodie
for thread music.
You guys aren't getting this. The $1.5 trillion was to allow the markets to orderly revalue to 8800 Dow equivalents and negative GDP. We are still going to go way down but in a fashion that doesn't expose the fundamental insolvency of the financial industry. A sharp drop doesn't give banks time to pawn off their bad paper.
The bailout is working.
I have half a mind to get on the 2 train, go up to Columbia and smack these two with a fish. Apparently they have not been introduced to Dr. Shiller's inflation/income vs. home price appreciation chart.
Income and Rent rule the day not giving everyone a 5.25% mortgage.
Would a law/regulation requiring that appraisers be hired 'blind' (name and firm name) out of a rotating area pool end the cherry picking of appraisers to get the value that the lender/broker wants?
stocks that appear to be late to the revaluation-downward party: lowes, home depot, harley davidson.. with retail doom, how are they still around their jan prices?
The bailout is working.
Rob Dawg | Homepage
Rob Dawg,
Yes, sigh, I know, this is unwinding for the big guys.
On the other hand, I'm not sure they can unwind this at quite the price-point they want. I say odds of DOW at 7500 are 50%. I think things will over-shoot.
Would a law/regulation requiring that appraisers be hired 'blind' (name and firm name) out of a rotating area pool end the cherry picking of appraisers to get the value that the lender/broker wants?
JimPortlandOR
But that would reward unamerican malcontents.
With all the magical intervention abilities that many seem to assuem exists in the government, let us try a useful excercise:
Can the governemnt simply state that;
1. home prices are at bottom and will rise at 3% a year. Not above 3%, but not below 3% a year. For all time and forever.
Discussion: why not just fix everything in this way? CAn the governemnt do this? Why? Why Not? How long until they try.
Have at it.
So now that the Senate has passed the bill, is there even an ice cube's chance in hell that people will realize that the market is going down no-matter-what?
No, the talking points will be that, prior to Friday, anything bad is because it hasn't passed the House yet. After Friday, it'll be because it wasn't passed soon enough and now we need another tranche of bank welfare.
JJL,
Good perspective for those that assume the government is part-deity and in control.
...First, house prices are falling because prices are too high when compared with fundamentals like incomes and rents.
It's like the elephant in the room.
Anybody put any stock in the theory of the DJI is a leading indicator?
Index Value:\t4,243.57
Trade Time:\t11:20AM ET
Change:\tDown 332.80 (-7.27%)
Dow down 263. ... Flirted with 300 about 10 minutes ago.
JP
I agree.
Fundamentally, there is no action that is a solution. Actions (or inaction) can only be better or worse steps to take under the cirumstances.
If there are cramdowns, there would likely be more than one round of them on some properties. Likewise, if there is a govt refinance program like HOLC or Roubini's HOME plan, there would also be some repeat customers. In any such scheme there will also continue to be defaults and foreclosures.
Too much of the debate about bailouts and fixes for the housing disaster is carried out with the notion that there is a perfect answer in this plan or that plan or in absolute laissez-faire. I think we're very deep in a hole of constrained choices.
Must re-enter the non-virtual world to work . . . see you all later
UUU,
Leading indicator of what? Recession, recovery, chaos-theory?
No. No. No.
They're certainly selling the gold stocks and the small caps. More wild market action.
Should be base crucial economic policy on such gyrations?
be = we
Housing bottom has been indefinitely postponed by Congress. In once booming markets, it will not happen before prices fall 50% from the peak or to nominal 1997 levels.
I thank the strawberry pickers, NINJAs, morons and other koolaid drinkers who outbid me on every single home I wanted in 2005.
Deflation has to occur before normal economic activity resumes. When you have overdosed on Viagra, you are blind to reality and must be deflated ASAP to be saved.
gold and commodities are not down, dollar is up. that is all.
McCain is now referring to the bailout as a "tourniquet."
Doesn't that infer that it will stop circulation of lifeblood and sacrifice whatever is below it?
Is this a mistake or a warning?
"tourniquet."
[early AM vision: wild animal caught in steel trap, chewing off their leg to escape the trap]. Free at last, free at last....
Many of you were asking who the insurer is? Mish has a post up now...
Schoking but excelletn CSPAN video of the 2004 challenge and cover up of bad FannieMay and FreddieMac practices!
YouTube - Shocking Video Unearthed Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis
well worth the 4 minuits with the cast of Barney Franks, Frank Raynes, and many others!
ppl dont know hartford, so i guess its prudential
Allstate is running an ad for their Allstate Retirement services. The actress says after 9/11 her financial life changed from downsizing, etc. She realized she had to make up for this with riskier investments so she chose Allstate Retirement to see her through these troubled times.
Hopefully Allstate was the Ins. co. Reid was refering to. Death needs to visit those vultures
pseudo free marketers - these fake conservatives are so much worse than the lefties. Its a Profit and LOSS system, it cannot work if the price system doesn't get to signal that houses are too expensive!!!
How about the govt. matching any principal write down (up to 10%) for a fixed refinance of a problem loan?
I would think this could save a lot of iffy loans, and slow forclosures - but the worst stuff - the crap that is still genuinely 30-50% over-valued, or wildly-unqualified buyers - would be out of luck.
In other words - a bailout that helps people who are over-extended - but punishes the worst lending practices. Save what's worth saving, and let the market take care of the rest.
Fantastic post, CR.
Hubbard is a joke, always has been. These bozos should be fired from Columbia with such drivel. If Columbia has any standards left, of course. I'm doubtful.
Pathetic, Columbia, truly pathetic.
I could have had a PHD. But now I am
just a stock trader.
LOL
Put Columbia Business school on my list of institutions to avoid. Why would anyone pay money to learn from these idiots? While getting an MBA might be a smart career move, I get the distinct feeling that I'd be able to teach the professors more than vice versa.
1st,2nd,3rd and zqtzzxq!!!!!!!!!!!!!!!!
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
I'm confused...? why not?
they've nationalzied f&f, they bailed out the bond insurer,the least they could do is allow those borrowers who are in the lowest income tax bracket to pay a decent rate , regeardless of house price.
Ok, yeah, so the house won't ever appreciate. big deal, housing appreciation is moer a function of a depreciating dollar anyway , right...
and no more heloc's.
McCain is now referring to the bailout as a "tourniquet."
I still prefer the Sec 503 shorthand: Shaft.
"She realized she had to make up for this with riskier investments so she chose Allstate Retirement"
Are you serious? They are actually running an ad using the words retirement and riskier in the same sentence, let alone the same ad?
Is it just me, or are proposals to "save housing" getting wackier and wackier?
CR writes: [T]his shows a misunderstanding of the role of interest rates with regards to house prices. This gets complicated, but if the interest rate is artificially low today, the buyer can expect rates to rise - and therefore that the home price will not be as high in the future (all else being equal).
This is a weak link in your argument... so far, gov't has had an amazing run of success at keeping interest rates artificially low, and is fighting hard as we speak to "keep up the good work"! Hence there indeed has been a mighty connection between low rates and high prices, at least in places like California.
"She realized she had to make up for this with riskier investments so she chose Allstate Retirement"
Like a nice agricultural plot in the Columbian Mountains?
CR- look to the 1970s to see that you can have high wage inflation with high and rising unemployment. I am a big proponent of the theory government will try to use wage inflation to help fix the housing bubble. I think with all of the liquidiy the Fed has been doling out over the past few years some serious inflation is in the works.
JP writes: McCain is now referring to the bailout as a "tourniquet."
Oh? And which limb have we written off saving?
DCRogers,
The third limb I believe, below the waist. what a shame.
I love USA. I proudly became a
citizen in 1990. This is country were
dumb people can be anything they want,
Rich, doctors, presidents,etc. You just have to be charming, not to mention from the right heritage.
So this is what is going to happen:
In the Paulson $700 billion plan, the US Treasury buys toxic junk at "hold to maturity" full prices so banks can recapitalize their shareholders. The US Treasury will then sell those loans to FRE/FAN at full price. FRE/FAN will then write down principle with the losses going to the taxpayer.
The taxpayer gets screwed twice, first by overpaying, second by taking losses on these same loans
This is the same terrible line of reasoning that leads newscasters to warn us that if we don't pass the bailout, we won't be able to max out our credit cards or buy appliances in installments. The problem is not that prices are too high or incomes are too low ... it's that credit isn't accessible enough. It's ridicoulous
Loose credit and asset inflation has been a terrible deal for the general public (though it's made speculators and creditors very rich). Among the many pitfalls is a totally inefficient allocation of resources and redistribution of wealth. We'd be much better off in the long run with deflated prices and less debt.
Though I admit, it won't be fun getting there from here.
This is a price control in the mortgage market.
You know, these days, it's really hard to distinguish between conservatives and liberals. Everyone seems to be so radicalized. Glen Hubbard, Dean Baker, what's the difference?
The taxpayer gets screwed twice, first by overpaying, second by taking losses on these same loans
Littleguyneverwins,
No, there are many more opportunities for taxpayers to be violated. Unemployment, loss of social security, and lack of meaningful health coverage.
This "study" is as good as listening to Cramer
Unfortunatly, we have NO IDEA how much of their economic advice Paulson and BB get from Cramer.
The cost to rent should be the same as the price to buy EXCEPT for the tax breaks. If the price to rent is much less than the price to buy, as it was in California, then you have a bubble.
For example, a 5/1 ARM on a 360k house cost me $2300/month. The exact same house down the street was renting for around $1300/month. In my case, the tax break added up to about $500/month.
I'm happily living in Western NY now paying $600/month in rent. The food prices are a lot cheaper too compared to California. I was in CA last week, and boneless chicken was $9/pound compared to half that here. Milk is a full dollar cheaper per gallon. BTW, $600/month barely pays the property taxes where I'm living, so that's another factor in the housing debacle.
Credibility and accountability are in short supply in this country. These two industry-paid academia prove it. In boom time, Hubbard, a former Bush economic advisor, championed the "ownership society" policy. And the other idiot, Mayer, from Columbia is no different from David Lereah in blowing the bubble. At least Lereah was not hiding behind the ivory tower and pretending to be fair minded. He was the NAR economist and a built-in bias was totally anticipated. why do the MSM still give these idiots the podium without holding them accountable for past failures. They need to be sent to uruguay where Bush will retire to sell housing and real estate there.
--
"This is just a terrible proposal."
America is full of whores that promote Crooks' interests. Crooks control Americans and American system via propaganda. Born-and-bred American dopes are economic slaves and intellectual slaves in denial.
Economists are in the front lines in defending the Crooks via propaganda. They are e-CON-meisters.
America IS in denial of the intellectual and moral rot.
It is the morally rotten system, Stupid!
Jas
Back in 2005 or 2006 after reading his op ed piece in the WSJ, I wrote Todd Sinai at Wharton an email to let him know the reasons there was a bubble and that he was woefully wrong. He never responded. Wharton is so overrated it is pathetic.
Wait,
Lock people into 30 year mortgages, fixed so that it is extremely costly to sell and leave that property.
Are we talking tying people to the land, a la serfdom?
WASHINGTON (AP) President Bush says a lot of people are watching the House as it considers financial rescue legislation and says lawmakers must listen to voices urging passage.
\tSpeaking to reporters at the White House on Thursday, a day before the House vote, Bush warned that tight credit is freezing the ability of small businesses not only to expand, but to exist. He said the bill before the House is the best chance to correct the problem.
\tBush said the issue is affecting employees and families across the country and that lawmakers must listen so confidence can be restored in markets and financial institutions. The House rejected a rescue package on Monday, shocking Wall Street and Washington. The Senate passed a bill Wednesday night.
I tried to read it - with steadily increasing annoyance - but when they 'found' housing currently overpriced vis a vis rentals by 10 - 15%, I lost all interest. Would have to see the data on that one.
Edmund Phelps is at Colombia, I believe. So not every tenure there was a mistake.
"Chris Mayer recently published a study showing that -- assuming normally functioning mortgage markets -- the cost of buying a house is now 10% to 15% below the cost of renting across most of the country."
What country is he talking about?! Gah - what an idiot!
Look, it is still far too expensive to buy a house anywhere along the coasts of the US and in many other "hot spots" as well. Housing in Maryland starts at about 5x median household income for an area - you can get some place cheaper if you don't mind buying a poorly treated, outdated wreck that needs a lot of work - so how is this "cheaper than renting?!" The answer: it is not, unless this nimrod is counting toxic loans with low teaser payments as a way to "buy" a house.
For years, it's been easier to buy a house than rent - when you rent, the landlord actually expects some proof of income! Such a novel idea! But hey, with the Bailout on the way, the banks will be rewarded for pushing toxic loans and killing our economy.
Theme for 2009 for Chris to consider: "In many parts of the country, it is easier to rent a spot in a shanty town than to buy your own shack."
$700 billion is lost the moment that Bush signs it. It's just a quick grab from the taxpayer before he leaves office all for the benefit of the last three investment banks left standing, who have now way to pay out the trillions that they agreed to insure.
$700 billion amortized over 24 years at %3 works out to be another $350 billion interest. If the mortgage assets that have dropped 50%, which there are at least $700 billion of, manage to appreciate back to their original value, it will take 24 years at 3% per year. So in the end, it will have cost the taxpayer about half. The problem is, it will get much, much worse when the next round of 5/1 interest-only ARMs resets at the end of this year and next year.
Don't forget all of the refinances...which about equaled new home loans in terms of dollars. Ouch!
bush looks wasted.
he keeps mentioning "small and medium" businesses. and "payroll". What he doesn't mention is WALL STREET, or BAIL OUT, or BANK SOLVENCY or anything like that.
girl bear
Excellent video. I imagine the repubs have their own video of shame at behest of their sugar daddies. I did lose some respect for Barney Frank. One could argue the black caucus is fighting for it's power center but Barney knew this thing was a bad deal.
How much do we have to go through before we learn that its a bad idea to attempt to f*ck around with house prices?
Seriously, what would it take? I see these talking heads complaining that our policies are not fixing house prices - what more has to happen before people get it through their thick, thick melons that our ability to control prices is severely limited and fraught with consequences? Apparently not even watching millions of Americans lose home causes people to approach learning this.
Moreover if there were a way to permanently fix homeprices at an outrageously high rate through policy, I think that our government would have done this in a hot minute, damn the consequences and the middle class.
It can't be done people, the sooner we accept this the sooner we can get to the other side of this mess.
However I accept that in the aggregate nobody will begin to understand this concept much less accept it anytime soon.
Accurate appraisals stop the flow of money...they cannot have that. The system is based on money flow and that flow was directly related to home values. They have decreased human produced appraisals to about 30-40% of the valuation industry. That means broker price opinions, computer generated valuation models or AVM's have become the lions share of how your home is evaluated. You can make a computer do what you want...a human is a little harder to pressure. Cuomo has a plan that eliminates appraisers from working directly for banks and lenders that will take effect on Jan 1,2009. However, this mandate requires all appraisals to be ordered through a 3rd party. These management companies take 40-50% of the appraisers fee. We make $300 per order. Now we will make $150-175. Keep in mind my cost is $20K per year before I make one red cent. That is a lot of 1/2 priced appraisals. The best and brighest are going to leave the appraisal profession. Do you want some college dropout evaluating your biggest asset for $150? This came about because Cuomo was investigating WAMU. WAMU was pressuring a 3rd party management company to fire roster appraisers that would NOT make values. The 3rd party would not fire tham so WAMU bought 100% of the management company outright and got what they wanted. Then Cuomo got wind by having copies of internal e-mail and started an investigation that led beyond WAMU to Fannie and Freddie. Fannie and Freddie caved and agreed to the Jan 1st appraiser plan, if Cuomo would drop the investigation of them. Fannie/Freddie are the 2ndary market for loans so this agreement effects appraisers in all 50 states because now all appraisals are considered FEDERALY related transactions. So, now Cuomo has given the fox the keys to the hen house and appraisers will continue to be pressured and values will be hit. Good luck America. Sorry this is so long but the story of how we arrived here has more than one chapter or verse.
This may be the most ridiculous idea I've seen floated yet. Price controls on mortgages?! Didn't some Nixon guy play around with the notion of price controls back in the '70s? How'd that work out?
I came up with a half-dozen unintended consequences of this idea before I even finished reading the article ... but, then, what do I know; I don't have a Ph.D. or a tenured position at an Ivy League school.
I bet this group could come up with 100 before I leave for lunch.
President Bush says a lot of people are watching the House as it considers financial rescue legislation and says lawmakers must listen
blackwater?
cia thugs?
"We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%
I'm confused...? why not?
First of all, the word "allow" is inappropriate in this situation.
When the Gov. starts "forcing" private entities to change the terms of their contracts after the fact, the validity of any contract between private entities becomes questionable at best.
"But there are a lot of voices saying we will have to go with the "Swedish model" sooner or later, so it might as well be sooner".
Sorry, you don't have the money for that after you've given all of it to bank owners.
Money Man writes:
The appraisals have been pushed beyond reality. I know because I am an appraiser. Let me explain. No State or entity will begin to investigate an appraisal if it is within a 10% value range of the review. Therefore, as time goes along these little 3,5 or 10% value inflations lead to some really big numbers. It has not helped that those in power, at least in my State, have done little to deter this practice. I am saddened becaue I have done a lot of review work and when I cut the value...I stopped getting work from these lenders. Funny how being honest brings you to the doorstep of the poor house...
a moral hazard effect -- GSE guarantees and such allowed lenders to speculate (get fees by approving higher and higher mortgages, etc).
So much of the total current picture is about whether or not we as a people (the nation) can come to terms with the end of our illusory home equity windfall wealth.
Or worse -- corruptly prop up house prices in some way (a little) so as to transfer wealth from non-homeowners to homeowners, on net. Rob Peter to give his money to Paul.
At times we heard an idea that mortgage originators would have to begin to have a little skin in the game (vs putting all the risk on taxpayers through the GSEs)....
But rushing to "rescue" or bailout, we forget this kind of good idea.
Only until the supply and demand get anywhere close to equilibrium will prices stabilize. Because housing is not a perishable item (except for very bad construction), time and absorption, coupled with almost a complete lack of new construction, are the only way supply and demand will get back to equilibrium (barring demo of foreclosed homes). It is a long painful waiting game.
TED writes:
"But there are a lot of voices saying we will have to go with the "Swedish model" sooner or later, so it might as well be sooner".
I'm all for spending some time with a Swedish model.
IF mortgages originators had skin in the game, then....honest appraisers would be valuable, and could even perhaps get a higher fee.
I'll put skin in the game if we are using Swedish models.
"We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25%"
While we are at it, we propose a cap of $2/gal of gas.
Fundamental problem with the politicians and supporters of this administration is the refusal to accept that there was a asset bubble. They do not want to admit that your house was not worth million dollars; you thought it was and will never be again.
Asset, which traditionally inflates annually at about 0.5% over the inflation rate, ballooned at 10-20% on annual basis has to deflate equally.
This is not a terrible downturn in the housing market but a sensible correction.
Why not apply the same logic to Oil prices? Why not support soft landing of crude oil prices at $150 / bbl. or to iron ore or the dot com era salaries for computer professionals? Why not pass legislations to prevent these prices from falling? Why not bailout all those who bought oil company stocks on margin when oil was $150 /bbl.
It was not bad enough that the banks gave 125% mortgages to deadbeats - now the government is going to give twice that amount to the same deadbeats.
If these deadbeats cannot afford the mortgage - they should move out and rent a one room in the poor part of the town or move to Mexico or Guatemala where they can live comfortably on welfare check.
Another example of why blogs are wiping out the print media. Good riddance to rags who whore themselves out to shills like that.
In 2003 before condo prices rose another 30% in my area I did the numbers and could not justify a buying 2 BR townhouse against my 2Br apt.
Unless I anticipated the now bursted bubble.
But 2 years ago I also ruminated to a friend to max the LTV with a refi and prepare to walk in 2007 or 2008.
I called it shorting the RE market.
So, we should bail out people lending to someone following my crooked/deluded thought?
Nahhh.
How is it that clowns like this get published in the WSJ, while the rational economists who actually foresaw the bubble are still being ignored?
If there are cramdowns, there would likely be more than one round of them on some properties.
Impossible, basically. After a cramdown the old owner still owns the house and he can't BK again for seven years.
The ownership society was a linchpin of globalization. If the middle class, long based on manufacturing jobs, was to successfully segue to jobs in service, the shortfall would have to be made up by wealth effects. The neo-cons/liberals and academics had never held a job, but understood consumption induced by asset based wealth (academics' via the good-income-for-life offered by their most valuable asset: tenure).
The collapse of housing is many magnitudes more traumatic than was dotcom, because it rends the system from two sides. On the one side, the collapse of the debt in the FIRE sector is affecting earnings, employment, and credit. On the other side, the synthetic wealth effect (the summer Sunday morning on the patio at Starbucks reading the Times) on consumption and complacency is gone for a generation.
This experiment in shifting society in unprecedented ways relied on rising asset values being able to simultaneously mitigate the debt supporting the assets' valuations and at the same time motivate consumption. There was no way to do them both; the society chose the latter, and the system can no longer support the former. The increasingly irrational proposals to "save housing" are just the Duke brothers in Trading Places screaming "turn those machines back on! Get back in there..."
Watching bubblevision. Rap on Congress critters for failing to "properly market" the bailout. That's one of the reasons we're in this fix.
A turd blossom by any other name still smells like a turd.
Ron Paul beat me to my new posting name. Lipstick on a bailout. Damn!
I haven't heard anyone outside the blogs--even the congressmen who were against the bill--mention that housing prices have anything to do with salaries. They all seem to think that is is the availability of credit that the the determinant of housing prices and so all their efforts are aimed at providing more credit. Talk about digging a deeper hole! It was the availability of easy credit that let house prices separate from salaries.
The Fed knows that housing prices are a "key channel of monetary policy transmission," and would like nothing more than to keep this bubble inflated so they can stop the liquidity injections.
Money quote:
"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."
"International Finance Discussion Papers, Number 841, House Prices and Monetary Policy: A Cross-Country Study", Federal Reserve Board (September 2005).
People were not "cashing out" on their barrels of oil to fund their lifestyle or standard of living. The hoopa joop must continue or our standard of living will go down....
Austin Tex, you nailed it! Stephen Roach (and Andie Xie) in his writing as Morgan Stanley chief economist relentless fretted about the asset-dependent aspect of the economy and worried about how this growth paradigm would unravel. Unfortunately, for all his foresight he was exiled to Asia. His post now is assumed by the incessant cheery economist, Richard Berner, who often countered Roach's dire analyses with his own rosy assessments. Had Morgan Stanley heeded Roach's wisdom, they wouldn't be where they are today. History seems to repeat itself with idiocy.
Took a quick look at the 2005 paper (to see the methodology) -- reminds me that if you torture data long enough it will tell you anything.
Money quote for Dawg from the 2005 paper:
Hence, for example, a two-bedroom apartment that rents for $1,000/month ($12,000/year) should sell for up to $240,000. This price-to-rent ratio provides a baseline against which housing prices can be judged too high or too low.
Don't need to read anything else in the paper. Model differs from 100+ years of observed data = model is wrong.
CR: "First, house prices are falling because prices are too high when compared with fundamentals like incomes and rents." You are so right, CR! I have to say that you are one of very few bloggers that really understand what is happening. Any meaningful discussion of the current so-called credit crisis should start with this statement.
Many other commentators have suggested that the main problem of this crisis is uncertainty and lack of confidence. The opposite is true: There is increasing certainty and confidence that an awful lot of homeowners are doomed to lose their homes. Some nice data about the financial status of households can be found the in Paul 'Econtration' Kasriel's "Its So Over for Household Spending" at Welcome to Northern Trust
Austin Tex: Right on. (Still reading the thread.) No way outta the box without pain.
"The cost to rent should be the same as the price to buy EXCEPT for the tax breaks. If the price to rent is much less than the price to buy, as it was in California, then you have a bubble."
Why do people believe buying should be as cheap as renting? Itcertainly should not.
When you rent you have no opportunity for price appreciation as with buying. And housing has statistically been a good investment. Even with the declines of the last year across the entire US the last 5 years still show something like a 40% increase - a pretty good return.
Other than the last couple years as well when you bought a home you knew and expected that you had to be there 3 or more years to break even on selling costs .... and you expected appreciation of 3-4% a year typically.
I'm not sure as well where idea comes from that ability to buy is somehow a right - that home prices are only "accurate" if median income can afford a median price home ....
It is a noble goal, and certainly has many benefits - but is hardly a right ... to say that home prices should be reduced simply because of affodability is the very socialism so many have complained about here regarding the bailout
All of that said - housing prices HAVE dropped to the affordable level some here demand - across almost the entire country - INCLUDING virtually all of California
Global Insight/National City do a Housing Valuation Analysis that tracks valuation as a function of affordability back to the mid 80's ...
They do this for 330 markets across the country - rating, based on affordability, whether a market is over, under or fairly valued
And as of Q2 - 2008 they find virtually the entire country is fairly valued, again including all of California (except San Fran) ... which is why I believe we are seeing the very strong sales there we are
http://www.nationalcity.com/housevaluation
With almost all markets in the US fairly valued ... where many of those same markets were 15% to 25% or more over valued 2 years or less ago - the idea that prices are still drastically overvalued makes little sense
This study - if you read the methodology - is far more detailed than simply comparing median income to median prices as well ...
Home prices HAVE dropped to were they are affordable - especially cionsidering the very low interest rates - for the vast majority of Americans
This idea that prices have to drop significantly more - other than in very, very isolated markets, is simply without factual support as far as I can see ....
The NAR also publishes a housing affordability index
Affordable Housing Real Estate Resource: Housing Affordability Index
... and on a National level they too show the same affordability picture - that housing across the US already IS affordable
In 2005 a family of 4 with the median income had 111% of the income reqd to buy a median priced home
Affordability has rapidly increased since then - in Q2 2008 the family of 4's median income represented 123% of the amount needed to buy a median priced home
In Q2 2008 - even in the "West" as a whole they had 101% of the median income to afford a media priced home
NAR's data only goes back to 2005 - but here is another resource that compares and ranks 1995 to 2005 for major markets:
Major Market Housing Affordability: United States: 1995-2005
I had read that joke of a proposal. I wish that CR had not even commented on it, given that there are always some idiots (including socialists other than the authors of the proposal) out there who would grasp onto such a plan. The so-called consumer groups, including our dear friends at ACORN, will soon include in their screams that this proposal must, I say must, become law.
Why do people believe buying should be as cheap as renting? Itcertainly should not.
Agreed but this is not an investment for most people primarily but a place to live. Most of us have to take on significant debt to get the most minimal housing. If sickness, downturns in the economy etc take place we have tremendous risk. Housing was seen as a riskless investement because of continous dollar debasement. The risng foreclosures show that argument to be false.
Mayer might have a fancy title but his analysis is flawed based on his starting assumption- mortgages are 2.4% higher the 10 year rather than 1.6%. What the erudite but clueless Mayer fails to realize is that the spread could be high because - mortgage rates are to high or because Treasury rates are too low. With Tbill's yield close to 0% I think that it is reasonable to conclude that Treasury rates are too low not that mortgage rates are too high. And with it goes his whole argument.
"tg: Agreed but this is not an investment for most people primarily but a place to live. "
An important point - but maybe for a slightly different reason ... when looking at housing too often ignored is teh fact you point out - a home is PRIMARILY MO an investment - it is shelter - a roof over your head - a necessity of life.
And that has a finite value irregardless of everything else.
In any calculation about housing you have to take that into account. At minimmum we need to attribute the value of having to rent a comparable space. The difference remaining after deducting comparable rent could be considered the "investment" cost
This investment cost can then be weighed against appreciation etc to get a realtionship ship between renting and woning. When you back out the comaprable rent that would have to be paid regardless of ownerhip - and only consider the part of payments above rent vs potential gains - the return on investment for any gain is MUCH higher
Oh for crying out loud...
220 thanks for your response. I do not know. I remember living in a one bedroom apartment with four kids as a child. You can always downsize if you are without debt. With debt your hooked. To buy a house was the appropiate choice for a last fifty years prior to the last few years. It may be again in the future. I do not see rising incomes for most americans in this changing world economy. I suspect that we have seen a high for housing in real terms for our lifetime.
Why do people believe buying should be as cheap as renting? It certainly should not.
Because,
buying means saving, hence difficult. renting is easier, hence more competition
In the absence of cheap credit, buying will be cheaper, because only those with the ability to save will be able to buy.
during last 5 years, it was reverse. Renting you have to have income verified, job verified and none of this was required for buying.
Agreed. I also wonder if the report looked at the current market price of the asset and also the cash flow requirements. I assume that most mortgages written in the last two years are under water and the mortgages (debt) is greater than the house's value (current market price). Who is going to take loss if you reset the asset to the current market price? Also, individuals selected interest only ARMS or pay only the minimum on a pay option loan because that is what they could affort. How are they going to afford a fully amortized (interest and principle) loan?
I read the article and thought it was sloppy. The research was theoretical and poor.
UH OH! Even the good d3als are going bad -
Buyer Beware! JPMorgan Sees WaMu Value Decline « Your Mortgage or Your Life…
How bad will the crap be that we as taxpayers end with?
This is just a massive bank takeover by a small cartel led bt Goldman Sachs and JP Morgan! Who is next!
America is full of whores that promote Crooks' interests. Crooks control Americans and American system via propaganda. Born-and-bred American dopes are economic slaves and intellectual slaves in denial.
I think Jas Jain deserves a radio show. Seriously.
Dickhead on CNBC right now.
CR,
you are 100% correct in your opinions about Chris Mayer's research.
He's never seem to be objective nor intellectually honest in my view. He seemed to chose his opinion first and try to prove it later.
He was trying to open a RE oriented MBA in Columbia Business School in 2005/2006 when he published "star cities", a paper that claimed that cities like NYC were not overpriced because everybody wants to live there.
I remember he advised his own family members to buy at the peak, so he's not pushing things he doesn't believe in.
"This is just a terrible proposal."
Indeed.
"a paper that claimed that cities like NYC were not overpriced because everybody wants to live there."
In itself that is not entirely wrong ... desirability IS a legitimnate and important factor in value - it is an important part of the "demand" side of the equation
And it ties into and is a part usually of the "supply" side as well - in many cases - like NYC - the supply is greatly constrained - in part by the demand - that people want to live there and in part beciase there is a very limited supply
Clearly a more desirable area, especially if it has limited supply as well, is going to see higher prices
Shill alert at the end of a dying thread.
The stupidity is burning my eyes.
Second - and this is important to understand - the value of the securities is based on projections of future house prices, not on current house prices. If we knew the trajectory of future house prices (and the relationship to defaults), we could accurately price the various mortgage backed securties (MBS).
Correct me if I'm wrong, but I thought the value of MBS is based on projections of future payments on mortgage debt, and not on the price of the underlying asset.
CR- look to the 1970s to see that you can have high wage inflation with high and rising unemployment. I am a big proponent of the theory government will try to use wage inflation to help fix the housing bubble.
That wouldn't be the same kind of government that since the 80's has been destroying the pricing power of labor by fostering union-busting, illegal immigration, and outsourcing, would it?
The US will start seeing rising real wages when it starts creating real jobs.
I live in a higher priced community in Silicon Valley, where $1 million buys you a fixer upper. The fixer upper next to me is for sale. They've had several offers but none went through because buyers can't get financing. I don't see how this can't provide downward pressure on prices.
If we knew the trajectory of future house prices (and the relationship to defaults), we could accurately price the various mortgage backed securties (MBS).
Mayer's point about the vicious cycle is that it's very hard to project MBS prices because falling house prices are inducing tighter lending standards which further decrease prices. The feedback makes it much harder to predict prices and is likely to cause an overshoot of prices below where they should reasonably be. The overshoot is dangerous because without adequate workouts, all the homes that end up in foreclosure will deteriorate, neighborhoods will deteriorate, and our economy will lose real (as opposed to financial) assets.
The real point of their proposal (which I don't think they argued very clearly) is that instead of buying $700 billion of MBS and taking the loss as homeowners default, we should take the loss by refinancing the homeowners immediately so we decrease the volume of foreclosures and let more people stay where they are. And hopefully prices won't overshoot downward excessively.