OK, I've had enough of this. Why do we even pay ANY attention to the charlatans who have been wrong on just about everything over the past few years? It amazes me that these idiots can be wrong over and over and over again, yet STILL they get attention as if they are somehow credible. We all need to wake the f$ck up.
Stupid theories abound. Witness the attempt to revive DPA funding throught the FHA. Witness the USDA (WTF?!) tumpeting it's "low" annual 13% default rate on its loan program. Peak credit has been reached; peak fraud never will be.
The real danger is that clearly the lessons and basic logic are not being learnt - and this i meant to be by the industry experts. Are we really genetically programmed to forget pain only to make the same mistake again?
How disgusting. Hubbard & Mayer get space in the WSJ to show how little they understand the real estate market and to offer a "solution" that is actually harmful.
Which is worse - that they know better and are just trying to sell this crap AGAIN to the sheeple or that they don't know better and we listen to them as if they somehow do? It just boggles the mind. We are in Bizarro World now.
I have to agree. Why does this persist? It's very clear that no real improvement can be had through these manipulations. I suppose some might think that delaying the pain (and spreading the impact over the maximum term) might do some real good. I could at least see an argument there, though I wouldn't share the opinion. On the other hand, what these people are saying just seems absurd.
Since we have no real economy anymore, let's just reboot the game of selling homes to each other again. Just wonderful. Are we all really that stupid? Wait, don't answer that question.
I completely agree with the sentiment of the post. I'm 29 and see no reason to buy a house again in the near future. Renting seems so much more attractive.
The housing bubble kept the economy running for a good 6 years. The ATM's Bush and Greenspan installed in every home and condo kept the depression wolves at bay. Unfortunately for them it crashed earlier than anticipated.
(Taken from the last thread in case it just died with minor editing.)
yagij writes: \trich writes: \tOil will be the "new money" that the world respects and values. \t rich | \t \t \t \t12.17.08 - 11:52 am --- Even over the historical big wigs like GLD & SLV? I understand that Oil translates into Energy which translates into Production. However, most of the oil is in places away from the industrial centers of the world. Also, I'm not sure if you can conduct business moving 55 gal drums, or are you thinking of a returning to the ol' Italian "bank benches" and the receipts would be traded.
I don't doubt that Oil will be important, but will it be the primary unit of exchange important?
quote: Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. Only the passage of time will salve their wounds. There is nothing anyone can do to convince them to buy right now.
I completely agree with the sentiment of the post. I'm 29 and see no reason to buy a house again in the near future. Renting seems so much more attractive. Joe Stalin | 12.17.08 - 11:57 am | # I'm the same agan and have exactly the same sentiment. So do most of my peers.
The Housing Bubble was an attempt by the average person to SAVE in a supposedly risk free investment in when the currency was being actively debased.
There is no economic freedom and there will be no political freedom in a irredeemable currency.
Buyers are now aware that they can be left underwater based on the PRICE that they pay, where as before, they were only looking at the PAYMENT. This is a major shift in how buyers will approach new purchases.
The best time to buy real estate is when rates are elevated and likely headed lower. The worst time is typically when rates are very low. Eventually, there will only be one direction for rates to go- up!
Once the financial system is loaded to the gills with 4.5% 30 year mortgages, and say the housing market and economy stabilize and start growing again, how will the Fed ever normalize interest rates without collapsing the financial system and bringing us right back to square one?
Similarly, you cannot affect real house prices by manipulating interest rates.
I disagree.
If the fed targets mortgage rates and lowers them more (relatively) than other economic endeavors then you will have misallocation of resources towards housing.
this can raise REAL housing prices due to the misallocation. it raises them even more when compared with alternative assets.
this is what we saw in 2002-2006 as example.
now I agree that one cannot increase real aggregate asset value by lowering interest rates. but one can raise real rates on selected assets by interest rate targeting.
I may not know enough of the actual mortgage finance numbers to refute Hubbard, but I think I and most of the posters get what is wrong with the suggestion - subsidizing housing skews the price. Once we go down that path, where does it end? And we got a taste of it a while back when Fannie had to raise the loan limit on the coasts. And 70% homeowner ship rate - why not 85%??? Heck, let's make it 99.9%!
sunsetbeachguy, good. People that were prudent and smart should get the oppotunity to buy at reasonable prices - in a few starter areas I think there are already some good deals. Prices need to fall futher in most areas though.
The tragedy is that many people will not buy when it makes sense - either because they were burned, can't qualify because of a foreclosure, or are just plain scared. That is too bad.
"There is nothing anyone can do to convince them to buy right now. I've seen this behavior before in California after previous (and much smaller) bubbles - and I believe we will see it again now. I wonder how this behavior factors into the author's forecast."
There will be a new round of speculators and qucik buck artists. This country will never run of easy money crooks...never!
Turbo writes:
Once the financial system is loaded to the gills with 4.5% 30 year mortgages, and say the housing market and economy stabilize and start growing again, how will the Fed ever normalize interest rates without collapsing the financial system and bringing us right back to square one?
Turbo | 12.17.08 - 12:02 pm |
Mortgage credit faces headwinds and I think the Fed is trying to keep the system as lubed up as possible while still deflating the bubble. Problem is the credit is tightening faster than they want it to and I think they are bringing down long rates to combat its effects.
By January first we will have conforming jumbo dropping over $100k everywhere and in some places significantly more than that. Private mortgage insurers are tightening to 85% LTV on conforming jumbos (90% conventional) in California from every guideline I can find. You either have to go FHA (not every property qualifies much less every borrower) or come up with 15% down.
The mid to high end is going to get hammered in 2009.
C&C pretty amazing. Of course, nobody can bring 20%+ down to the table. And those that can are certainly not going to touch house prices at this level, but whatever.
I heard rumors of 3 1/2 on this site. I spoke with the lady who is handling my refi and she mentioned 4.5, I told her "I hear 3.5 coming soon"...I talked with her again yesterday and she verified the 3.5 is in the works...
As noted above, there is no doubt that 4.5% interest rates can't last any longer than we can afford to subsidize them. Therefore, anyone who buys at 4.5% will probably end up with a capital loss in the future, creating another wave of problems.
Where is the money for long-term high risk investments at 4.5% going to come from? That's rhetorical, by the way.
As this recession worsens and drags out we'll hear a lot of calls for 'going back' to what were the 'good times'. We'll see plenty of bad ideas recycled again and again and again.
These talking heads change their story to fit the times not the data. It is indeed unfortunate that so many bought homes before they were ready and many of them lost a lot of money doing it. Remember that even a 100% loan had a lot of fees associated with it. Sometimes 5% or more!
okay am i wrong in thinking that this is not the best time to buy a house. they are still to expensive(imo).
why would anyone want to buy something that might/would lose value by the time you got the papers signed?
Ha nades, but why did I have to tell HER about the 3.5? It seems the posters here are ahead of the curve
If I can land this mortgage it will be a Godsend for me. Will cut my payments by @ 600 dollars per month. She was fairly miffed that a bartender knew more than she did...
I agree with what I think you were saying. Most everyone I know that bought was convinced that it was the best way to save money long term. That is, they were more driven by long term saving than by greed.
" some people were enticed to buy..."
Those big bad evil lenders preying on poor innocent buyers-evil, evil, EVIL. Victimization meme at its best.
A mature logical approach is needed. Both groups acted irresponseably.Lenders should be held accountable by not being able to sell loans to a third party, and buyers should learn that you are responsible for your actions. Enough of this PC correctness.
Hubbard and Mayer don't seem to understand that the housing bubble was like a giant Ponzi scheme. Everybody looking to buy bought for fear of forever getting priced out of the market and because 'real estate is such a good investment and it never goes down'. Now you either have no buyers left or burned buyers. Doesn't matter what you do with rates.
Economists are a lot like general managers of professional sports teams.
Some take careful, long term approaches to building their teams through the draft, with minimal quick fix solutions. See the Steelers. They might not win it all every year but generally they put together good seasons. Others want to spend lavishly to bring in expensive free agents to try and win it all next season. See my Redskins. It might occasionally look like it is working but sooner or later it all falls apart.
So in summation, I want a country with better economists and a football team with a better general manager.
(Taken from the last thread in case it just died with minor editing.) yagij | 12.17.08 - 11:59 am | #
yagij, are you having problems with CR Companion posting? If so, do you mind discussing this with me on the CR Companion blog (click on my homepage)? I'd like to make sure posting is rock solid.
Pb, not neccessarily, there are people out there that will be helped by these rates. My husband is laid off and my ARM resets in February. He should be returning to work in January but even so, the reset will kill us. The whole point to my getting the original loan was to get a mortgage history so I could refi (long story, was a caregiver for my Mother so no work history for a year and no rent history for a year). I am not a flipper or an investor, just someone that inherited a mortgage and is trying to save their family home...
Chill bear. I know 2 single professional women who bought in the south bay (SJ) st the peak. I talked to both asking them to wait. They both looked at it as they were saving for the future and were afraid if they did not do it they would be priced out.
That's correct in SF Bay Area in my experience. Fear was used brilliantly as a marketing stratedy. Of the people I know (first time homebuyers mostly), fear more than greed drove them to buy.
For the record, there has NEVER, in all recorded history been a good idea printed on the Editorial or Opinion pages of the WSJ.
It is a vile dungeon of wingnut fantasy policy masquerading as respectable thought.
R. Glenn Hubbard deserves no more than our scorn, and no less than to be diarrhea-boarded (a novel process analogous to waterboarding, but infinitely worse) with the rest of the Bush cronies.
okay am i wrong in thinking that this is not the best time to buy a house. they are still to expensive(imo). why would anyone want to buy something that might/would lose value by the time you got the papers signed? gabyjan | 12.17.08 - 12:14 pm | #
Depends on your situation - I know folks who have bought lately and it was absolutely the right thing to do...
1) they could easily afford the home 2) they had down payments in excess of 20% 3) they were at a point in their life where it mades real economic sense to own (want long term stability - kids in school) 4) they don't care if the price goes down or not - they aren't going anywhere for a long time 5) the price was comparable to renting (renting actually costs more around here for a better quality residence)
I am willing to bet there are a lot of places like this BUT there aren't that many people in this situation compared to the inventory of unsold homes.
many moons ago I queried tanta and crew that if every mortgage was now implicitly backed by the gov't , then why would'nt all rates for ANY borrower be pegged to the 30year rate, plus some point shaving factor, of course.
Just a few minutes ago on NPR a Cato institute editorial pleaded that people not let "frugality chic" get in the way of spending. Brilliant.
CR, please channel your inner Tanta and kick some serious butt in your dissent. I expect to hear more lunacy in the days and months ahead from the profiteers, and your forum remains a bastion of clarity.
RE: "only the passage of time will salve their wound."
I have another interpretation:
The U.S. is, in the best case scenario, entering an economic depression that will be far worse than both the Great Depression of the 1930s and the Panic of 1873. At worst, the USA will collapse altogether. Here's Why:
Belief in any system---and in this case we are discussing the concept of belief in the US economic system---is like oil to a combustion engine. Without belief in the credibility of the system, the economy seizes up and dies. Its that simple. If a system lacks credibility, if people dont believe in it, than they will not participate in that system (Unless of course they are compelled to at gunpoint, but were not there quite yet) Now in some cases, if things havent gone too far, trust can be reestablished and with that trust a belief in the system might grow---and the engine can be saved. But once trust has eroded beyond the point of repair, there is no chance of resuscitation. Either the system has to be thrown out and a new system has to take its place, or the citizens of the system have to be compelled by force and repression to accept the old way of doing things. This is where we stand today. Belief in the credibility of our economy has been summarily destroyed.
We hear a lot these days from the likes of Ben Bernanke and Henry Paulson and Barney Frank and Chris Dodd and George Bush. Each says essentially the same thing: Once the credit markets unfreeze, and once banks start lending again and people start borrowing again, once confidence in the system is restored then well be on the road to recovery. Each of these men, and millions who echo their sentiments, predict that this recession will ease soon because the FED is taking aggressive action to stimulate lending and to thaw the still-frozen credit markets and to lower mortgage rates and to stimulate employment and production, etc.. They are wrong. The credit markets will never thaw and banks will never start lending again because belief in the system has died. And because of this, the old regime and era of Fractional Reserve Banking and "money as debt" is also dying, albeit a violent and protracted death. And at the very heart of the crisis exists the foundational dynamic created by the decade-long DERIVATIVES experiment:
Virtually every bank, every financial institution, every nation, has a secret vault in which it is hiding its bad assets. And no one really knows who holds what. And some of these bad assets are part of bundles of securitized instruments that are so complex and so difficult to detangle, that it would take decades just to unravel them all and actually discover what all of the assets are really worth---if anything. And we're talking upward of 500 TRILLION dollars worth of these hidden, secretive, worthless assets. And the depth of mistrust that exists has become so powerful that it has, in a most extraordinary moment in history, actually given birth to an entirely new belief system! And what makes this new belief system so cataclysmic is this new belief system bases its spiritual and intellectual foundations upon the idea of disbelief! The leaders of the world---both political and financial---have, through their decades of theft and duplicity and lies, given birth to a new paradigm: the paradigm of disbelief. And it is this new paradigm, this new DIS-belief system if you will, that makes trust in then old way of doing things totally impossible.
Now, many of our self-proclaimed leaders continue to argue that this crisis will abate once confidence in the economy has been restored. These folks would argue that disbelief and confidence are, for all intent and purpose, synonymous. They are wrong. And underestimation of the power of disbelief keeps them from acknowledging the magnitude of our plight.
Lets take a brief look at a few examples of how disbelief in the system---rather than simply a lack of confidence in the system---will lead ultimately to the TOTAL collapse of the United States economy.
Banks wont lend to other banks---regardless of the declining LIBOR, falling interest rates, etc.---because every bank assumes that all of the other banks are insolvent.
Banks wont lend to individuals because banks currently assume that these loans will not be repaid.
Individuals refuse to take out loans from banks because banks have proven themselves to be dishonest, usurious institutions. In addition, people are coming to the realization that suffocating under a regime of debt servitude to banks is not the way they want to live out their days.
People have lost all faith in our federal government. Congress, the President, the folks who have promoted their economic Friedmanite agenda for decades---all of these institutions lack any sort of credibility. Hatred for and a lack of belief in our politicians and financial leaders is omni-partisan.
Shipping of commodities has come to a virtual standstill because commercial paper (short term promissory notes) are no longer trustworthy instruments of commerce.
Credit card companies are viewed with such contempt that the old regime of living with credit is slowly collapsing. Those in debt are defaulting by choice, refusing to pay the usurious issuers of these instruments of indenture.
Scandals like the Madoff affair are cementing for citizens the fact that the entire system, from the Hedge Fund managers to the accountants to the SEC overseers, is rotten to the core.
The scandalous decision to allow institutions to valuate their own assets in what can only be called a mark-to-bullshit model of valuation is not lost on the ever-growing number of people who believe that they are being royally screwed by the US kleptocracy.
Eight years of a Bush regime that demonstrated total disregard for the idea of law---including the apparent duplicity regarding the reasons for going to war in Iraq and the Katrina scandal---have further solidified citizens disbelief in the current paradigm.
The lies of Paulson and Kashkari regarding the use of the TARP funds, and the apparent decision of these men and their Congressional allies to save the rich whilst sacrificing the poor has further decimated systemic credibility.
The U.S. decision to ignore the worlds call for action on Climate Change vis-à-vis the Kyoto Accords, and the Bush Administrations decision to repeal emissions standards for industry, has eroded any belief that citizens of the country might have when their leaders speak of concern for the environment. Saying one thing and doing another creates disbelief. The same is true of the Big 3 automakers, who claim a belief in stewardship of the environment while simultaneously suing states over toughening emissions standards for cars and trucks.
The story that wont go away---that of the impending 500 Trillion dollar Credit Default Swap ponzi sceheme, which made CEOs of companies like Lehman and AIG multi-millionaires---continues to defy attempts by the government and financial leadership to sweep the story under the rug. When the defaults begin and the dominoes fall, disbelief in the system will reach new heights.
The Housing foreclosure disaster has left citizens without any trust for a system that created the subprime debacle. And despite all of the foreclosures and the implosion of the housing market, lenders continue to try and swindle people and trick people into refinancing or modifying their existing loans. Disbelief in this system is exploding at an exponential rate.
The creation of MBS, Mortgage Backed Securities, has further exacerbated the plummeting trust in the banking and lending sector. Now when a home-owner tries to contact his or her bank in a desperate attempt to save their home, the bank simply says that it no longer holds the loan. It sold the loan as part of a package of similar loans to someone else, who then re-packaged it and sold it to someone else, and so on---and no one knows where to find the loan anymore. Belief in the people who brokered these deals has disappeared.
Everyones getting laid off and people are having trouble making ends meet, and anger is mounting, and meanwhile, everyday on TV and on the Internet, people are bombarded with images of the manors and estates and wealth of the very men whose actions have destroyed their lives.
What was once touted as GDP growth is now being exposed as nothing more than DEBT growth, if you will. The lie of the schemers is coming into full view, and people are finding it harder and harder to believe that wealth was, in fact, created, when they are suffering under mountains of debt and lost income.
The power of the Internet as a source for disseminating information regarding the destruction of the US by the keptocrats is reaching tens of millions of angry people.
Outbreaks of E-Coli from spinach and cattle raised on city-sized mega-farms is sickening thousands: belief in the credibility of our system of food production and distribution is faltering.
I could go on. I have barely scraped the surface. But my point should be clear: We have moved beyond the point where swings in confidence in a system implicitly recognize that system as credible. We have moved to a regime of disbelief in the system, and this disbelief is growing by the hour, and there is nothing that can be done to stop its momentum. On some level we have reached a moment of crisis in our identity as a nation not entirely unlike that which we faced in the mid-19th century. We have reached a point where disbelief in the credibility of the current system will become a force that will tear us apart. How we will survive is a matter for the seers. But make no mistake about it: this is no Recession, and there will be no Recovery.
askin(Unrated) writes: \tHow long has Japan been at zirp? Can the United Dopes of america stay zero'd for a decade? \t askin | \t \t \t \t12.17.08 - 12:13 pm | # Since 1999. Almost twenty years. Don't think they'll be normalizing anytime soon either.
...now, in the 21st century, TPTB that have enjoyed instant gratification for an entire generation are in the gaming chairs. Immediate fulfillment has SO influenced and corrupted their thought processes that no action taken by them is given time to be evaluated before additional remedial "tweakings" replace it.
The obvious disadvantage to this decision-making process is the inability to analyze the reasons for any solution - most likely though, solutions are never had specifically BECAUSE of the "mental speed-freak" reactionary mindset. Constant changing of rules "mid-contest" never make for a satisfying game - but always for dissatisfied gamers.
In the news today, yet another private sector firm unilaterally freezes their defined benefit pension fund, freezes wages, and cuts 401k-matching funds. Of course, ho hum news to most.
But when it happens to the public sector, it will create civil unrest...by public servants only.
Its a good thing that property taxes and homes adjust in line with justifiable mortgage:wage ratios. Too bad for those that rely on higher property/income taxes.
From an email from an old friend of mine, which he sent last night:
"I am quoting 4.75% right now with 0 points, paying closing costs for loans in the $200,000 range. It is possible to do 4.625% right now with ZERO points, only paying closing costs for big enough loans. These would be VERY aggressive rates for family and friend. You can expect to pay 1/8% higher, but shouldn't pay more."
"Are the authors suggesting a return to the "fog a mirror, get a loan" standards of a few years ago to raise homeownership rates?"
CalculatedRisk on 12/17/2008 11:04:00 AM
Thanks for including this issue in your brief but pithy post. I anticipate they will move from suggesting to mandating a return to those standards.
Americans may be painfully slow on the uptake, but me-thinks the genie is out of the bottle. The country is slowly having collective "ah-ha" moment and is rethinking everythint it had previously believed to be true.
Just a few minutes ago on NPR a Cato institute editorial pleaded that people not let "frugality chic" get in the way of spending. Brilliant. Exit | 12.17.08 - 12:24 pm | # Wasn't that Will Wilkinson being a fool? That made me rage on my drive to work this morning, let me tell you!
Any real chance of rates below 4.5? Feeling like I'll be pretty happy with the 4.625 when inflation eventually sets in, but willing to listen to counterarguments. Payoff for refi is 9 months, then saves me $250/month going forward Thanks!
It's Libor liz. I'm paying almost 12% now. Payment is 1125 per month not including taxes and insurance. The new loan if I can get it will be @ 850 per month including taxes and insurance...including taxes and insurance I'm paying @ 1600 per month now...My loan is only for 129K
Comrade Kristina writes: \tOT Anyone know what time it is on Conjure's Global Depression clock? I tried to find the update in yesterday's threads but gave up. \t Comrade Kristina | \t \t \t \t12.17.08 - 12:22 pm --- 11:59:49 if I recall correctly.
There is an even clearer, and dumber, statement in the Mayer, Himmelberg, Sinai paper.
" conventional metrics for assessing prices in a housing market, such as price-to-rent ratios or price-to-income ratios, generally fail to reflect accurately the state of housing costs. House prices may appear exuberant by these metrics, even when they are in fact reasonably priced"
I have previously discussed at length the flaws in the methods in their paper. They make mistakes which include unobservable model inputs (risk premium), to models which ingore certain readily calculated realities (like the benefit of waiting a year to buy a house), and they do some things which are just flat out stupid.
One of the clearest stupid things arises from a paper analyzing whether there is a bubble calculating long term home appreciation through the period which might be a bubble. Then, they include that long term appreciation to calculate fair value. "the long-run appreciation rate of housing prices is 3.8 percent the average from
1980-2004 for the metro areas in our sample for this paper". Where were the peer reviewers on this paper? They are measuring past home price appreciation from a known trough in 1980 to 2005. 2005 was the point in time they were evaluating as a potential bubble. Anyone looking at the reasonable possibility that it WAS a bubble would say "Hey, that's the wrong point in time to use to measure price appreciation".
The authors used that home price appreciation to measure the cost of ownership. Expected future appreciation (based on trough to bubble history), was used to reduce the cash costs of ownership, like mortgages and taxes.
Just a few minutes ago on NPR a Cato institute editorial pleaded that people not let "frugality chic" get in the way of spending. Brilliant.
A desperate backlash against frugality. Imagine it.
As Mannwich noted, I think people are starting torethink things. Massive debt to finance non-essentials makes you vulnerable? Maybe it's not the best long-term policy for me or my family.
How disgusting. Hubbard & Mayer get space in the WSJ to show how little they understand the real estate market and to offer a "solution" that is actually harmful.
koan0215 | 12.17.08 - 11:54 am | #
When was the last time ANYTHING intelegent was published in the WSJ op-ed pages? The rest of the paper used to be worth reading, but the Op-ed pages were an insult to the fish that were wrapped in them. Unfortunately most of the top notch reporters who used to be with the WSJ, like Greg Ip, are no longer there, so what is the point of reading the rag?
On a related note, I just yesterday cancelled my subscription to the paper WSJ, after 5 years. Not relating to today's ed, obviously.
Pleasant lady asked the usual questions about why I was cancelling. Reason one was they jacked up my rate without me noticing for three months, which reminded me of a credit card company. Shame on me I guess. Reason two; I have been spending my reading time more and more outside of newspapers/periodicals. Old news.
But I was satisfied (gentlemans' C)with the WSJ overall. I have just come to realize that most of the stuff I have been reading about economics in the WSJ meant nothing ultimately. There are no consistent rules to economic policy, so insight is difficult to come by in print form. Stock info is out of date the next day. Commentary has been substandard lately in their ed. page, especially the blather highlighted in this CR post.
I still like the weekend/lifestyle section on Friday and Saturday though. That was the original reason I started subscribing. I liked to read the wine and food stuff. I can pick this up at Borders or Cub.
Impossible. If there is one resource in infinite supply, it must be that. Who can be so optimistic as to believe in Peak Stupidity?
Particularly when these nitwits are using the WSJ Editorial page to propose reinflating the most destructive commodity bubble in modern history.
And they missed the bubble in '05. What credibility do these guys have? They were wrong then, and wrong now. Even my stopped watch was correct once already today.
Not sure on that liz, from what I can understand they are capped to a 3% raise in payment...Keep in mind I'm a bartender not a mortgage expert...Even the 3% raise in payment will do us in, we are just at maximum overload now, hubby been laid off for three months now and savings are being burned through...With the payment reduction (which was on a 5.5% fixed) my payments will be cut in half...
Rates are already nice and low by historic standards. Rates are not the issue. The issue is availability of money to lend, and a return to cautious lender behavior of yesteryear. You can get a very nice rate today on a purchase or refi--if you qualify. But with the securitization conveyor belt mostly shut down, there isn't as much money to lend, and lenders can and must be a lot choosier about who gets to take advantage of these rates. Why is that so hard to understand?
Anonymous, not really seeking help, posters here suggested I seek out a mortgage advisor and I did that already. Just making the point that not everyone in trouble is a greedy house flipping maniac. Some of us were just put in bad circumstances via luck of the draw...
Behavior doesn't factor into their forecast. They have the entire world described by equations - pulled right out of their butts. This has been a fundamental problem - regulators who are not pragmatic but theologists
That's not true, and I'm a leftist. Murdoch has turned their editorial pages into a bizzaro world
I am not Anonymous | 12.17.08 - 12:24 pm | #
Leftist my eye. I don't know what planet you're from, Bizarro, but the WSJ editorial section has ALWAYS been a festering rightwing fever swamp. This is not a new development. They used to have first rate hard news, but it looks like Murdoch is bent on destroying that.
Unfortunately, guys like Hubbard get to speak directly to guys like Paulson and get their bad ideas translated into policy, and since guys like Paulson don't give a rat's ass what anybody else thinks of their dumb ideas, they'll go ahead and do it no matter what any of us say.
liz how can i tell if it's an option arm? I know I'm making next to no principle payments and have a balloon at the end. Have paid @ 400 bucks in principal in 2 years.
OT Anyone know what time it is on Conjure's Global Depression clock? I tried to find the update in yesterday's threads but gave up.
Comrade Kristina | 12.17.08 - 12:22 pm | #
I recall that we had about 12-15 seconds left to go, and about 6 minutes left to go before bond collapse. Of course the conjure clock is working near the event horizon of a black hole, so time for it moves differently (and much slower to an outside observer) than in the rest of the universe.
On the main pont of the origional post, it does seem to me that very low mortgage rates could be the salvation of the Alt-A/option ARM cohort that will be defaulting in mass come 2010 if they cant refi. However, even they would have to coe up with some $ to deal with their already underwater status. But at the margin might help a bit on that front.
YTL--Yes. I was offer a fixed 4.625 last week on a re-fi from BAC. I held off because I thought I might be able to do better this week. I am going to call my banker today.
CR said: "...One of the tragedies of the housing bubble was that some people were enticed to buy a home before they were really ready to be homeowners, and others to extend themselves too far. Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. Only the passage of time will salve their wounds. There is nothing anyone can do to convince them to buy right now...."
My story continues unabated to be diametrically opposed to the tone of this blog.
24 years ago I bought my first house with an ARM at 11% and a monthly mortgage payment that was about 40% of my net monthly paycheck. I had other debt, as well. Looking back on it now, I can see that there's no way I could have reasonably qualified, so either lending standards must have been extremely loose, I was sub-prime or both.
A job transfer to another state forced me to put it on the market the next year, I couldn't sell it, so I rented it out for 5 years. Oh, and I was upside-down on the mortgage for most of that time.
Within the first year after I finally sold it I bought another house (August, 1990, the middle of a recession, of which I was also unaware at the time) and have been owning houses continually ever since, for the real-life reasons that dryfly mentioned above (raising a family, stability, etc.).
Sure wish there was some way to quantify the "many" who are soured on the wonders of homeownership, as well as their actual experience. In the worst national housing slump since the Great Depression, my personal experience is that I have a large and growing equity in my home and my housing costs are the lowest they've ever been as a percentage of my income.
A 4.5% IR decreases the monthly mortgage cost and thus increases the number of homeowners who can afford to buy a home within conservative percentages of income.
It also increases the "amount" of house that can be purchased for a fixed monthly mortgage payment. This will help place a floor under home prices.
There is no single fix and to leave the markets to their own devices will bring on a depression that could perhaps be greater than the 30s.
Hubbard's proposal is something that must be done to avoid an otherwise catastrophic outcome.
I live in the subprime zone (the greater Sacramento area) and I could be enticed to buy but I have the following criteria:
* Must be affordable (20% down, PITI 25% of net on a 15 yr loan)
* must be able to pass FHA standards for a loan.
* in a stable area without a lot of recent investor activity.
* must be within 10 mile of my employer.
I can tell you there is zip, zero, zzzznada that comes close. I don't care if it needs work, is close to a busy street or any of the superficial wants. Until prices come down to where I can buy as an individual with a reasonable amount of risk, there is no saving even the supposedly bottomed-out markets.
"Hubbard's proposal is something that must be done to avoid an otherwise catastrophic outcome."
BSNEATH | 12.17.08 - 12:58 pm
You're far too shy and self-effacing. Please, show your light, tell us how 68% home ownership rate is sustainable, when the long term average is 64%.
4.5% mortgage rate produces a housing bubble, not home ownership. You people keep confusing housing with home.
Can someone explain to me, and the Dianetics guys, how a low mortgage rate saves me from going underwater on a depreciating house?
Can someone explain how two people who belatedly acknowledge that "fundamental factors played a role" in the bubble bursting two years after the fact can get away with ignoring "fundamental factors" NOW--i.e., when houses are still overpriced?
Well said, CR! Everything I have read which was written by Mayer and Hubbard was so terribly misguided that I dare not read anything further by those gentlemen. (At least I will try not to read their editorial in today's WSJ.) What is especially scary is that Mayer and Hubbard seem to have the ears of the Obama camp. Oh oh.
Thses low interest rates are making it difficult for me NOT to buy a primary residence. I have money sitting in CD's making almost nothing. This brings down the opportunity cost of sinking that money into a house. Trouble is that I KNOW housing costs will continue to decline. I just do not know for how long.
So I sit and wait. I have wanted to buy for years. I will eventually buy. Convincing me WHEN to buy is the trick. Tough to decide given the gloomy economic picture and bleak forecasts of the future.
The thing I keep coming back to though is whether the dollars I am hoarding are going to be worth anything. If not, I do not want to miss my chance at a house again. The fear motivation is real. The high prices kept me from being able to buy before. I want to be sure the high prices do not return before I have a chance to buy THIS TIME.
dan, you could have shortened your Reasons-We're-Doomed list to just one: We are still letting the Cons speak their vile lies. THAT is the reason we are going to crash. We are stuck on stupid.
Americans still cannot seem to name what went wrong.
Hint: The Greatest Generation that grew the US into a superpower were LIBERAL. We were a liberal society that took care of our own people.
Also, since this doesn't get much media play: the reason America grew into a beloved superpower and reserve currency of the world was because we STOPPED making war and went home after defeating the right-wing corrupted Nazi's.
The Cons hated that decision and have plotted ever since. And they eventually did fool everyone, and now it's all confusion.
Hey Cons: Where IS Osama bin Ladin? HEY? Where is he, you torturing, mercenary, seditious pigman scum?
You Cons let bin Ladin get away. And now they whinge about the Obama recession, and feel quite safe in their constant wormtongue patter. That is what will doom America: letting these criminals get away.
I say we don't ... how about it fellow citizens? Are we ready to understand that there is no Middle Class OR Liberty in Conservatism, and to unite against the corruption? We are all beneficiaries of our liberal roots and it was a big mistake to let our enemies define it. So now what?
I do not have any concern at all that the population will not pile into housing with almost the same enthusiasm as before, once certain conditions are met:
There must be someone who's talking about making easy money.
Too many people I know and read about are waiting for a "bottom" so they can get in and (unstated) start enjoying that "equity growth". And it's ever-so-important now because they've already taken a major hit either in their current/past property or their 401k.
The gamblers will be back, just as soon as they hear one of the slot machines is giving out free money.
Hopefully the banks are the ones that are more cautious this next time around.
For the record, I don't foresee the above happening for many years, but it will. In the meantime, people will buy houses that they can afford based on their personal needs. Crazy talk, I know.
I also do not understand the house bashing. Owning a home is different from renting. I understand that a house itself is just wood and plaster. But there is something to be said for owning the space. I sold my "starter home" in 2006 and have been renting ever since. I really miss that house and the neighborhood and the feeling of belonging in a community.
Even though I am renting a NICER house now in a better neighborhood, I know it is temporary and it affects my mood and willingness to get to know my neighbors and participate in any community related activities. This is a factor for me.
I have spent months at a time in different US states and foreign countries. It is nice to finally setup roots. I miss this. I want it again. Super low interest rates, near zero return on other investments, and a growing distrust of our financial system are pushing me towards buying.
Speaking of poor policy-making and the inability of the powers that be to see what's happening or what might be reasonably surmised about the near future, this counter-argument.
One of the many things I keep track of is changes in Fed funds targets. I was updating my data yesterday and noticed this: The NBER, with the advantage of hindsight, defined December, 2007 as the economic peak before the current recession. But the Fed had already eased twice before December, then eased once again in December.
Looking back to the 2001 recession, a similar pattern. The Fed had already eased twice before the recession began and once again in the first quarter of the recession.
In the 1990-91 recession, the Fed started easing in its first month.
Bottom-line, in the past three recessions the Fed was responding to economic change in advance of clear proof that the economy was in recession.
So maybe we could dial-back on the knee-jerk assumption that only bloggers and their commenters are aware, thoughtful, and forward thinking, and no one in government is.
As a long-time reader of the WSJ, I've noticed how detached the editorial section is from its actual reporting. For example, the article (sorry, can't find a URL, it was in my actual physical newspaper) noting that reduced mortgage rates didn't stem the tide of foreclosures, as ~50% of homeowners that had rates adjusted lower still foreclosed (if I recall.)
Pity, such a great newspaper--if you avoid the opinion section.
That is what will doom America: letting these criminals get away.
No system can survive when it completely does away with all feedback and accountability.
Even as we speak, the Senate Dems are joining hands with Republicans to make sure there are no prosecutions for any crimes by government officials over the past eight years--this, in the face of some upcoming indictments. Goldman wrecks the economy, steals from taxpayers and is rewarded with a 1% tax rate.
And these jokers make asses of themselves with laughable assertions about the bubble, and get rewarded with another uncritical platform in the WSJ.
Not sustainable. You would think by now we'd realize: things that can't go on forever, won't.
psychodave - Stop thinking in black/white terms. I don't give a crap about what rate of homeownership is sustainable. The point is that a 4.5% IR will lower the cost of financing a house and will increase the amount of house that can be purchased with a given monthly stream of cash flow. It will not encourage bad loans - banks are very conservative these days if you hadn't noticed. It will not create another "housing bubble". We have a huge overhang of surplus housing available - the supply far exceeds the demand. It will not even help us to avoid a major recession - the days of MEW are long gone and discretionary income has evaporated. What it will do, is encourage a higher level of economic activity and prevent housing prices from overshooting. Were it not for the credit crisis, mortgage rates would be at 4.5% today. This is one of the points Hubbard is trying to bring across that I suspect most posters have missed. In other words, if our financial markets were functioning properly, 4.5% would the rate that a bank would offer in today's market.
We had rates of 4.0 - 4.5 in the 1950s. It is the proper rate for a traditional 30 year conventional mortgage in our current economic environment.
It is such a shame so many of this countrys leading personalities are good-willed, but incompetent and stupid.
If only they were smart, and unscrupulous, and self-interested and liars, we would be able to think about collusion, malfeasance, corruption, theft and destruction of institutions, wealth and lives.
I guess it is a good thing that the elite is only stupid; it promotes social peace and makes the masses feel smart in the process.
"Hint: The Greatest Generation that grew the US into a superpower were LIBERAL."
That generation had no qualms about by-God nuking people; had decidedly non-PC ideas about race, prayed in schools, went to church, had no environmental regulation whatsoever, would've had today's plaintiffs bar drawn and quartered en masse, prohibited most immigration, had a fraction of the pre-Great Society safety net, had no Sarbanes-Oxley...and on, and on. More people considered themselves "liberal" in the 1930s and 1940s, but that was before liberalism overreached.
Recall that the 1970s weren't exactly the high tide of American glory, either.
Stretch002 - your thinking isn't entirely out of bounds. Consider this - you need to drill down and see what's really happening in your market (city) of interest at this point. There are markets out there with surprisingly intact single family housing fundamentals, as compared to most that won't recover for years.
Disclosure - I run a real estate market analysis team, and sold my personal residence in May 2006 and have been renting since; my markets of interest have more bloodletting to endure.
major arbitrage coming- all those who have no mortgage debt move to a trust deed state. Take out the low interest (3.5%) mortgage and watch. If property prices go lower mail back the keys, if interest rates go higher enjoy the low interests.
I just locked a 30yr to refi a loan I have 25yrs left on . The rate I locked at was 4.75% fixed. My broker is with countrywide. This is for @$300k on a property worth around $500k. I was thinking of waiting but when I heard 4.75% I said forget it and locked it in. How much lower can they go? I said the same thing when I took out the mortgage at 5.625%...
Can someone explain to me, and the Dianetics guys, how a low mortgage rate saves me from going underwater on a depreciating house?
It doesn't. That's not the issue.
The issue is that a certain amount of the income stream has to be spent on consumer goods. Reducing income spent on housing increases income spent on other goods, thus keeping the manufacturing/service economy alive.
To dan: Thank you for your post. Whether this is the end, I don't know, and I confess I hope they prop it up a little longer, because I'm too old for fighting in the streets. But, if I would put on my old idealist's cap, I could see the bright side of a collapse of faith in a corrupt government (tree of liberty, etc.)
Millions are not too old to yearn for a new world, seeing that the alternative is slavery.
If they want to prop up house prices, they need a) to pay to keep houses empty and b) severely restrict new construction. They need to do these things until the population catches up with the number of housing units. Anything else is just baloney.
In these unhappy times, yours is a hopeful story. That being said, anecdote is not data. One swallow does not a summer make.
On a separate note, Exit said "Just a few minutes ago on NPR a Cato institute editorial..."
The Cato Institute on NPR?! That's like a matter/anti-matter collision. That usually results in the near destruction of the universe (averted only by daring last minute deflector dish reconfiguration).
Here's the real problem: falling real wages. In every American industry we are paying the under-30 worker less real income than the over-30 worker. Fewer benefits, no pension and low wages leave little left to buy a home. Manipulating interest rates won't sufficiently offset this trend, which is global and long term.
L. Ron Hubbard's writings are far more plausible and respectable in comparison to R. Glenn Hubbard's . . . but still miserable dreck.
Gary
Why is it that anyone using all three of their names but starting with the abbreviated first are miserable idiots? I've known two of them personally and professionally.
Then, of course, you have the mass murderers that use all three full names with Wayne thrown in there somewhere. Perhaps the abbreviators are just a step down from truly evil.
CR thanks for making such a clear cut case for why this is a terrible idea. Your blog is read by opinion makers in media, finance and RE circles and your comments are an important part of the ongoing debate regarding our RE crisis. The NY times article is a crude attempt to create come measure of support among the financial opinion makers to further sell this idea to the Obama team and your response will be noted and hopefully followed.
Reducing income spent on housing increases income spent on other goods, thus keeping the manufacturing/service economy alive.
Um, I think you're missing the entire point of the proposal. Which is not to reduce the portion of income spent on housing, but rather to leverage that income into higher housing prices.
Moose writes:
Those big bad evil lenders preying on poor innocent buyers-evil, evil, EVIL. Victimization meme at its best.
A mature logical approach is needed. Both groups acted irresponseably. Lenders should be held accountable by not being able to sell loans to a third party, and buyers should learn that you are responsible for your actions. Enough of this PC correctness.
Problem is, buyers don't get to set the rules of lending --lenders, regulators and secondary markets do.
I am by nature very conservative and skeptical where pricing assets and borrowing are concerned. Even though I could clearly see a huge asset/lending bubble forming as early as 2004, there was nothing I could do about it --except wait on the sidelines. I was effectively shut out of the market because I could not find a sanely priced house in a decent neighborhood near where I lived, and it has stayed that way ever since. Either I payed the going --highly distorted-- "market rate", or I didn't buy. It was that simple.
The only real "choice" buyers got to make during the bubble was to stay out of the market completely. This is not the same power as being able to deliberately set rates below prevailing inflation to induce an asset bubble (Fed), or to actively encourage speculation and fraud via the tax code (Congress & "regulators"), or to incentivize toxic lending and transfer default risk by repurchasing and securitizing dodgy mortgages (the GSEs and bond markets).
Borrowers have some responsibility to "do the math" and think for themselves --no arguments there. Even so, your average borrower is no financial "expert" (as bankers and industry regulators are supposed to be), nor can s/he unilaterally rewrite the rules of a game written at the highest levels of government and industry.
The borrower was a tick on the dog in terms of overall responsibility.
Each says essentially the same thing: Once the credit markets unfreeze, and once banks start lending again and people start borrowing again, once confidence in the system is restored then well be on the road to recovery.-Dan
That was a long post. I agree that confidence in the idea that it's okay to be deeply in consumer and mortgage debt because there'll never be a downtrun is gone. I don't think that's the same thing as losing confidence in the entire economy. It actually seems like a good thing that people are cautious. I don't understand the idea that the economy depends on everyone taking huge risks with debt.
"The issue is that a certain amount of the income stream has to be spent on consumer goods. Reducing income spent on housing increases income spent on other goods, thus keeping the manufacturing/service economy alive."
Broward: I assume your are referring to China's economy?
Bankers will be more astute with there mortgage sales go forward and so the loss can be carried by the foolish homebuyer (as a loss of actual equity) rather than loss appearing as future taxes.
those idjits don't even get a basic econ 101 principle of demand and supply.
when rates are low and are attractive to additional people....those additional people compete for houses and push prices up.
i remember trying to warn some friends about that principle. they were so geeked up about buying houses in 2000-2003 period because rates were "so low"....i told them yeah, but the price of the house is so high right now that it doesn't amke sense to buy close to a possible peak. they had no idea that the payment on a 4.5% loan on a $500,000 home is the same as a 7.5% loan on a $360,000 home.
One of the tragedies of the housing bubble was that some people were enticed to buy a home before they were really ready to be homeowners, and others to extend themselves too far. Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time.
Very true. And really, can you blame people? It was cheaper to buy than it was to rent, for several years. Of course they elected to buy! Why wouldn't they? Now their credit is trashed and they'll be lucky to get a lease approved. Thanks, Alan Greenspan!
Right, let's use the bubble years to predict what will happen today by cutting out 2005-2008. This makes absolutely no sense. It's as absurd as saying "Let's see what happened the last time the dow hit 9000, oh it shot up!!!" How is that a forecast of any kind?
Bought a house too young at 22, now 29 and wife and I are separating; however, the market is at about 80-120K from a high of 280K (hell, there's a place for 50K in the neighboring division). We bought about 140K, figuring it's the DC Metro area, it wouldn't drop that far when the bubble burst.
Oops.
I can make the payments, barely, alone, but we're already -4K underwater from amount left on mortgage to best price in the area. I'd love to move and be closer to family,
And what's sad? Rents in this area haven't dropped at all. 1BR apartment in crummy areas go for more than my mortgage.
Well I certainly delayed buying a house for longer than probably made economic sense because I was running scared after my college roomate was foreclosed on. Even at one remove, I got my fear on. So many people who have been foreclosed on will be prevented by their own fear as well as potential lenders from reentering the housing market any time soon. Of course they will STILL be consuming housing, just as renters.
The only people here who thought the economy wasn't going into the tank when the Fed cut was you and O-joe.
I still think that cutting rates will not solve what ails this economy, just salve the amputations. It was the January cuts where they panicked. Ever since then it's been a blend of deft maneuvering by the fed followed by sheer incompetence by the treasury, as if goofus and gallant ran the offices.
The thing is, nothing gets fixed or cleared until risk is priced accordingly, which has been absent for some time and China is looking to continue with extended treasury buying policies.
Excellent rant, superb soapbox. For the past year, I've been debating what the replacement economic model could be for the USA. Vooddoo Reaganomics for the past 30years has created an oligarchy/russian mafia government. That baby will be thrown out with the bath water. I believe that Denmark, without the monarchy crap and perhaps with modifications, would be an economic model to emulate.
Fiat currency requires continuous growth(more debt) to sustain growth. -Huh
I don't see why as long as the amount of currency is consistent with the value of goods and services. Why does that require debt?
"As noted above, there is no doubt that 4.5% interest rates can't last any longer than we can afford to subsidize them. Therefore, anyone who buys at 4.5% will probably end up with a capital loss in the future, creating another wave of problems.
Subsidize? What subsidy?
Current 10 year treasuries are 2.17% ... in this June post:
... CR indicated that 30 year fixed rate loans generally follow 10 yr TS plus a "spread"
...at that time the 10 year TS was at 4.215% and CR indicated the proper 30 year mtg should be at appx 6.0%, an appx 1.8% spread ... the actual rate was 6.32% or appx 2.1% spread, which CR noted was high
USING CR's "proper" spread of just under 1.8% plus todays 2.17% on the 10 yr TS gives us a 30 year mortgage rate of 3.955%
... even if we use the actual spread from June - 2.1% over 10 yr TS - which CR noted was high, we should see 30 yr mtg rate today of 4.275%
BOTH BELOW THE 4.5% people are whining about ....
So which is it? Why is the "formula" today different than CR's in June?
CR uses the 10 year TS as a basis for mortgage rates because most loans are paid off within a 10 year or less period
So the government can issue 10 year bonds and pay today 2.17% for them ... if they lend the same at 4.5% there is a yield of 2.33% to work with ... so tell us, where is the "subsidy"??
The 30 year mortgage rate dropped today from 5.01% yesterday to 4.70% today ...
So first, the 4.5% rate is essentially already AT the current market rate (but still well above what the rates should be according to CR's calcs from June)
Todays Fannie Mae 30 year bonds were at 3.59% ... with a market MTG rate of 4.70% there is a yield of appx 1.11% between what Fannie Borrows at and what they pay - in that 1.11% is a profit for Fannie and for the private originators that supply them
And how did the 30 year treasury security do today? It closed at 2.92% ... at 4.5% there is a 1.58% yield spread between 30 year mtg and 30 yr TS rates ...
And that would be the way for the Fed to be very safe if they do a 4.5% loan program ... they can fund it thru Fannie by selling 3.59% 30 year Fannie bonds
... or they can fund thru Treasury by selling 30 year treasuries at 2.92% and have even more yield
... OR they can use a combination of Fannie 30 year bonds, 30 year treasuries and 10 year treasuries - a balance pool that reflects the expected repayment profile
BOTTOM LINE - they can lock in their exposure - and still include substantial profit - at 4.5%
And as to the 4.5% rate somehow "propping up" prices ... and what happens when rates rise ...
To me this is a pretty silly position. Rates rise and fall according to the market and always have. With little direct effect on prices.
We are at a place as I pointed out above where MARKET rates are very close to 4.5% ... by the comments of many we should be charging these people 6% or 8% or??? - even though the MARKET is at 4.7% - because 4.5% is way too cheap ...
When interest rates increase affordability changes - NOT price.
Clearly affordability changes demand to some extent and demand can change price .... BUT ONLY IN CONJUNCTION WITH SUPPLY. And today they have a pretty good handle on inventory, and you can be sure it will be more tightly managed in future.
So if rates always have the potential and history of up and down - how is it any different effect here ... even IF rates are set slightly lower than the market, how is the increase in rates from there any different than any other market increase?
In the end what is being proposed is a rate the encourages SALES ... to encourage a change in confidence - not a change in price.
Most in industry seem to agree there is a significant "confidence" issue at hand - that current action (or lack) exceeds the reality.
Orange County, Vegas and other area's strong sales show this well - when the incentive is good enough - low prices so far in these areas - buyers will put aside confidence issues and go for the deal
And homes are deals today .. even in areas like Orange County etc ... add in the current rates and they are a real deal
As noted earlier in thread many of these people are very smart. they understand the traditional home purchase - you buy as a long term hold.
They don't care if it goes down another 5% or about any of the other purported negatives. They know a deal, plan to own the home for the long term, and understand that in a normal world if you have to sell in 1st few years you lose money ...
These folks are getting very good deals - and they know it ... they don't care about the doom and gloomers or nay sayers ...
"Are the authors suggesting a return to the "fog a mirror, get a loan" standards of a few years ago to raise homeownership rates? Bring back the liar loans, NINJAs, DAPs, pick-a-pay lunacy - and yes, maybe a few more people will buy homes. Of course now lenders would also have to ignore recent foreclosures too."
First - I don't think the authors were saying anything of the sort ... but lets ignore that
I've seen absolutely no one advocate - not remotely close - that we go back to the LIAR loan age ...
Yet too many would have us throw out everything that has any negative ... ignoring the good/usuable parts
Subprime loans are a good example ... the majority are NOT in foreclosure and won't be, many people have been helped to own homes by them and have acted responsibly
Same with things like DAP loans ...
There is no reason we should and can not review each of these programs, determine the part that works and get rid of the part that doesn't
deflationary jane writes:
I can tell you there is zip, zero, zzzznada that comes close. I don't care if it needs work, is close to a busy street or any of the superficial wants. Until prices come down to where I can buy as an individual with a reasonable amount of risk, there is no saving even the supposedly bottomed-out markets.
deflationary jane | Homepage | 12.17.08 - 1:01 pm |
It's a bit misleading to generalize your area as "Sacramento sub-prime" when what you really mean is the Davis micro-market of high salaries and student rental housing market. You're right that you still can't touch anything under $300k there, but 10 miles away in Woodland there are approximately 140 houses for sale under $300k, 47 of those are listed at less than $200k.
But I suppose the Bollinger's and Louboutin's would feel out of place in Woodland. >:)
I agree. I've always been moderately risk-averse but this whole thing has made me absolutely terrified to incur debt. I won't even consider taken a loan on my house (which my husband and I own outright). I pray that we won't be forced into that circumstance by illness or other unforeseen life event.
There is another way to look at things ... some people perhaps SHOULD borrow everything they can if rates get to the 4.5% range
And then invest the money - mostly in "safe" investments ... there are CD's today paying at or above 4.5% - and the new FDIC limits are $250,000 for protection
It seems realistically feasable that one could borrow at 4.% today and reinvest the proceeds at at least that rate ...
... and interest paid is deductable, so there would it seems be a net gain after taxes?
And as the economy heats up, as we know it eventually will, you will have locked in a 4.5% cost on a pool that can be invested
The trick is to have the discipline not to touch it except for investment purposes AND to be absolutely faithful to an investment plan - ie: something like the 1/3rds idea - 1/3 in cash or equiv safe ivnestments (treasuries, CD's etc), 1/3 in "blue chip" low risk and then limit your "riskier" investing to no more than 1/3 or your assets
If you are older you would take less risk, younger perhaps a little more
Not necessarily advocating it - just pointing out the possibilities ...
thirst?
Wow, just by coincidence. No performance enhancers.
OK, I've had enough of this. Why do we even pay ANY attention to the charlatans who have been wrong on just about everything over the past few years? It amazes me that these idiots can be wrong over and over and over again, yet STILL they get attention as if they are somehow credible. We all need to wake the f$ck up.
You cannot change your real height by measuring it in centimeters instead of inches.
Similarly, you cannot affect real house prices by manipulating interest rates.
Stupid theories abound. Witness the attempt to revive DPA funding throught the FHA. Witness the USDA (WTF?!) tumpeting it's "low" annual 13% default rate on its loan program. Peak credit has been reached; peak fraud never will be.
The real danger is that clearly the lessons and basic logic are not being learnt - and this i meant to be by the industry experts. Are we really genetically programmed to forget pain only to make the same mistake again?
How disgusting. Hubbard & Mayer get space in the WSJ to show how little they understand the real estate market and to offer a "solution" that is actually harmful.
If we succeed in goosing home prices with 4.5% mortgage rates, what happens when market forces drive interest rates for US treasuries up?
Does the FED plan to keep printing money even after this crisis has passed?
I fully expect the WSJ to make the case that, if priced correctly, everyone would sign up to get cancer.
Which is worse - that they know better and are just trying to sell this crap AGAIN to the sheeple or that they don't know better and we listen to them as if they somehow do? It just boggles the mind. We are in Bizarro World now.
I have to agree. Why does this persist? It's very clear that no real improvement can be had through these manipulations. I suppose some might think that delaying the pain (and spreading the impact over the maximum term) might do some real good. I could at least see an argument there, though I wouldn't share the opinion. On the other hand, what these people are saying just seems absurd.
Yes.
Why would anyone get into debt now when everyone is expecting a prolonged period of deflation?
Since we have no real economy anymore, let's just reboot the game of selling homes to each other again. Just wonderful. Are we all really that stupid? Wait, don't answer that question.
I completely agree with the sentiment of the post. I'm 29 and see no reason to buy a house again in the near future. Renting seems so much more attractive.
Why would anyone get into debt now when everyone is expecting a prolonged period of deflation?
Subprime Shady | 12.17.08 - 11:57 am | #
You're not actually accusing Joe SixPack of thinking, are you?
The housing bubble kept the economy running for a good 6 years. The ATM's Bush and Greenspan installed in every home and condo kept the depression wolves at bay. Unfortunately for them it crashed earlier than anticipated.
" Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time."
Americans are easily duped, and the dream can be easily rekindled.
(Taken from the last thread in case it just died with minor editing.)
yagij writes:
\trich writes:
\tOil will be the "new money" that the world respects and values.
\t rich | \t \t \t \t12.17.08 - 11:52 am
---
Even over the historical big wigs like GLD & SLV? I understand that Oil translates into Energy which translates into Production. However, most of the oil is in places away from the industrial centers of the world. Also, I'm not sure if you can conduct business moving 55 gal drums, or are you thinking of a returning to the ol' Italian "bank benches" and the receipts would be traded.
I don't doubt that Oil will be important, but will it be the primary unit of exchange important?
quote: Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. Only the passage of time will salve their wounds. There is nothing anyone can do to convince them to buy right now.
Not just homes, but Stocks too.
Asset prices that go up indefinitely? It's Madoff x 1,000,000,000,000,000,000,000.
It's a real shame it has come to this.
I completely agree with the sentiment of the post. I'm 29 and see no reason to buy a house again in the near future. Renting seems so much more attractive.
Joe Stalin | 12.17.08 - 11:57 am | #
I'm the same agan and have exactly the same sentiment. So do most of my peers.
The Housing Bubble was an attempt by the average person to SAVE in a supposedly risk free investment in when the currency was being actively debased.
There is no economic freedom and there will be no political freedom in a irredeemable currency.
http://www.fame.org/PDF/buffet3.pdf
I would buy (at the right price) since I have been tracking this bubble since Baker called it in 2003.
But then again, I am a big contrarian in life.
Buyers are now aware that they can be left underwater based on the PRICE that they pay, where as before, they were only looking at the PAYMENT. This is a major shift in how buyers will approach new purchases.
The best time to buy real estate is when rates are elevated and likely headed lower. The worst time is typically when rates are very low. Eventually, there will only be one direction for rates to go- up!
Once the financial system is loaded to the gills with 4.5% 30 year mortgages, and say the housing market and economy stabilize and start growing again, how will the Fed ever normalize interest rates without collapsing the financial system and bringing us right back to square one?
"peak fraud never will be.
Max"
Yes...
Similarly, you cannot affect real house prices by manipulating interest rates.
I disagree.
If the fed targets mortgage rates and lowers them more (relatively) than other economic endeavors then you will have misallocation of resources towards housing.
this can raise REAL housing prices due to the misallocation. it raises them even more when compared with alternative assets.
this is what we saw in 2002-2006 as example.
now I agree that one cannot increase real aggregate asset value by lowering interest rates. but one can raise real rates on selected assets by interest rate targeting.
\tI would buy (at the right price) since I have been tracking this bubble since Baker called it in 2003.
sunsetbeachguy | 12.17.08 - 12:02 pm | #
The funny part about the bubble for me is that it convinced me I'm probably going to be a lifelong renter. Wherever I lay my hat is my home.
Current rates at a local CU...4.75%...
CR:
impassioned post. somewhat different than your typical tone. I like it.
These proposals and the real economy are keeping my rent low. Keepem coming and something may stick.
Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. ~CR
Sh*t i have that behavior and I've never owned a house. Know a few like me. Just a giant ball and chain.
.....
\tCurrent rates at a local CU...4.75%...
crispy&cole | Homepage | 12.17.08 - 12:05 pm | #
Mortgage rates? I just took a CD out at that rate.
I may not know enough of the actual mortgage finance numbers to refute Hubbard, but I think I and most of the posters get what is wrong with the suggestion - subsidizing housing skews the price. Once we go down that path, where does it end? And we got a taste of it a while back when Fannie had to raise the loan limit on the coasts. And 70% homeowner ship rate - why not 85%??? Heck, let's make it 99.9%!
sunsetbeachguy, good. People that were prudent and smart should get the oppotunity to buy at reasonable prices - in a few starter areas I think there are already some good deals. Prices need to fall futher in most areas though.
The tragedy is that many people will not buy when it makes sense - either because they were burned, can't qualify because of a foreclosure, or are just plain scared. That is too bad.
Best to all.
CR:
impassioned post. somewhat different than your typical tone. I like it.
Tanta would have gutted Hubbard and Mayer.
"There is nothing anyone can do to convince them to buy right now. I've seen this behavior before in California after previous (and much smaller) bubbles - and I believe we will see it again now. I wonder how this behavior factors into the author's forecast."
There will be a new round of speculators and qucik buck artists. This country will never run of easy money crooks...never!
JP - 30 year fixed rate under $417k with zero points
CR what specific areas in CA do you think are OK?
Turbo - great comment. I don't get it either.
Turbo writes:
Once the financial system is loaded to the gills with 4.5% 30 year mortgages, and say the housing market and economy stabilize and start growing again, how will the Fed ever normalize interest rates without collapsing the financial system and bringing us right back to square one?
Turbo | 12.17.08 - 12:02 pm |
Mortgage credit faces headwinds and I think the Fed is trying to keep the system as lubed up as possible while still deflating the bubble. Problem is the credit is tightening faster than they want it to and I think they are bringing down long rates to combat its effects.
By January first we will have conforming jumbo dropping over $100k everywhere and in some places significantly more than that. Private mortgage insurers are tightening to 85% LTV on conforming jumbos (90% conventional) in California from every guideline I can find. You either have to go FHA (not every property qualifies much less every borrower) or come up with 15% down.
The mid to high end is going to get hammered in 2009.
More on the PMI situation here:
Effective Demand: Mortgage Insurers tighten underwriting again.
Concentration of distressed sales relative to closed sales here:
Effective Demand: Short Sale & Foreclosure for San Fernando Valley & Ventura County - Novemeber 2008
God Shammgod,
My favorite basketball player!?
Who can afford to trade up anyway?
I heard Cramer say 3.5%.
Turbo
They are killing any future growth and "innovation" in the financial/banking sector IMO
C&C pretty amazing.
Of course, nobody can bring 20%+ down to the table. And those that can are certainly not going to touch house prices at this level, but whatever.
Thank you CR. Great post.
Best Regards,
-Ticker Tape of Doom
One thing people are missing is the cost of PMI, that is more than offsetting the lower mortgage rates
God, Tim and I want to know? B-ball reference?
I heard rumors of 3 1/2 on this site. I spoke with the lady who is handling my refi and she mentioned 4.5, I told her "I hear 3.5 coming soon"...I talked with her again yesterday and she verified the 3.5 is in the works...
When we return to 1998/99 pricing here in Southern California, I'll start believing that there is no bubble in housing.
"friardaddy"
"Asset prices that go up indefinitely? It's Madoff x It's Madoff x 1,000,000,000,000,000,000,000."
Very good point, but not enough zeros
1,000,000,000,000,000,000,000,000,000,000,......to infinity and BEYOND!!!
there...fixed it.
"The housing bubble kept the economy running for a good 6 years"
rps with this statement 9/11 prevailed
As noted above, there is no doubt that 4.5% interest rates can't last any longer than we can afford to subsidize them. Therefore, anyone who buys at 4.5% will probably end up with a capital loss in the future, creating another wave of problems.
Where is the money for long-term high risk investments at 4.5% going to come from? That's rhetorical, by the way.
I talked with her again yesterday and she verified the 3.5 is in the works...
Comrade Kristina
I second the thought. There is no lack of stupidity in the US. (not CK) Maybe we can export it!
....
I second Mannwich ... how do these cretins stay in the limelight...
Why post such silly ideas based on some weird logic by guys who can't see an elephant with their wide open eyes in broad daylight on this site?
Please desist such post so that the blog remains meaningful
How long has Japan been at zirp? Can the United Dopes of america stay zero'd for a decade?
As this recession worsens and drags out we'll hear a lot of calls for 'going back' to what were the 'good times'. We'll see plenty of bad ideas recycled again and again and again.
"CR: impassioned post. somewhat different than your typical tone. I like it."
Hopefully CR will refute the 'Bubble Brothers' (Krugman/Roubini) 'stimulus plan' for us on similar grounds very, very, very soon.
These talking heads change their story to fit the times not the data. It is indeed unfortunate that so many bought homes before they were ready and many of them lost a lot of money doing it. Remember that even a 100% loan had a lot of fees associated with it. Sometimes 5% or more!
okay am i wrong in thinking that this is not the best time to buy a house. they are still to expensive(imo).
why would anyone want to buy something that might/would lose value by the time you got the papers signed?
Ha nades, but why did I have to tell HER about the 3.5? It seems the posters here are ahead of the curve
If I can land this mortgage it will be a Godsend for me. Will cut my payments by @ 600 dollars per month. She was fairly miffed that a bartender knew more than she did...
God Shammgod - Wikipedia, the free encyclopedia
One of my biggest gripes about this bubble is that it exploited a necessity - shelter.
If it was a bubble in oil or stocks or gold or anything else, I wouldn't be so critical of our policies.
Once a house stopped becoming a home we were, and will be forever, screwed.
God Shammgod is a playground legend in NYC
tg is a born & bred dope:
I agree with what I think you were saying. Most everyone I know that bought was convinced that it was the best way to save money long term. That is, they were more driven by long term saving than by greed.
Note: I wrote "most," not "all."
" some people were enticed to buy..."
Those big bad evil lenders preying on poor innocent buyers-evil, evil, EVIL. Victimization meme at its best.
A mature logical approach is needed. Both groups acted irresponseably.Lenders should be held accountable by not being able to sell loans to a third party, and buyers should learn that you are responsible for your actions. Enough of this PC correctness.
Hubbard and Mayer don't seem to understand that the housing bubble was like a giant Ponzi scheme. Everybody looking to buy bought for fear of forever getting priced out of the market and because 'real estate is such a good investment and it never goes down'. Now you either have no buyers left or burned buyers. Doesn't matter what you do with rates.
She was fairly miffed that a bartender knew more than she did...
Comrade Kristina | 12.17.08 - 12:14 pm | #
LOL. She needs to get a grip, bartenders know waaay more than they let on...
and European Leagues. But did he make it to the NBA? Knicks/Lakers?
I don't think if we brought back the full panolapy of lying cheating methods that we would reflate the bubble.
Agreed, people are soured on housing, unless it is very very cheap.
Economists are a lot like general managers of professional sports teams.
Some take careful, long term approaches to building their teams through the draft, with minimal quick fix solutions. See the Steelers. They might not win it all every year but generally they put together good seasons. Others want to spend lavishly to bring in expensive free agents to try and win it all next season. See my Redskins. It might occasionally look like it is working but sooner or later it all falls apart.
So in summation, I want a country with better economists and a football team with a better general manager.
Peak Stupidity Theory?
no, me neither.
(Taken from the last thread in case it just died with minor editing.)
yagij | 12.17.08 - 11:59 am | #
yagij, are you having problems with CR Companion posting? If so, do you mind discussing this with me on the CR Companion blog (click on my homepage)? I'd like to make sure posting is rock solid.
Pb, not neccessarily, there are people out there that will be helped by these rates. My husband is laid off and my ARM resets in February. He should be returning to work in January but even so, the reset will kill us. The whole point to my getting the original loan was to get a mortgage history so I could refi (long story, was a caregiver for my Mother so no work history for a year and no rent history for a year). I am not a flipper or an investor, just someone that inherited a mortgage and is trying to save their family home...
Chill bear. I know 2 single professional women who bought in the south bay (SJ) st the peak. I talked to both asking them to wait. They both looked at it as they were saving for the future and were afraid if they did not do it they would be priced out.
Arrrrghhhhhh
Pb:
That's correct in SF Bay Area in my experience. Fear was used brilliantly as a marketing stratedy. Of the people I know (first time homebuyers mostly), fear more than greed drove them to buy.
Bubble Brothers: 'take those retired baby boomers out back and....
CR, you are polite to a fault.
For the record, there has NEVER, in all recorded history been a good idea printed on the Editorial or Opinion pages of the WSJ.
It is a vile dungeon of wingnut fantasy policy masquerading as respectable thought.
R. Glenn Hubbard deserves no more than our scorn, and no less than to be diarrhea-boarded (a novel process analogous to waterboarding, but infinitely worse) with the rest of the Bush cronies.
Rant off.
Tim and the Xmas Miracle writes:
God Shammgod,
My favorite basketball player!?
Tim,
Not my favorite player, but certainly my favorite name. And it's his real name.
Awesome handler, too.
OT Anyone know what time it is on Conjure's Global Depression clock? I tried to find the update in yesterday's threads but gave up.
alba writes:
and European Leagues. But did he make it to the NBA? Knicks/Lakers?
He had one year in the NBA. Inkow he played all over, I think palcer like Russia Israel.
He's in the US in the minors now I';m pretty sure.
I didn't think anyone would remember him.
okay am i wrong in thinking that this is not the best time to buy a house. they are still to expensive(imo).
why would anyone want to buy something that might/would lose value by the time you got the papers signed?
gabyjan | 12.17.08 - 12:14 pm | #
Depends on your situation - I know folks who have bought lately and it was absolutely the right thing to do...
1) they could easily afford the home
2) they had down payments in excess of 20%
3) they were at a point in their life where it mades real economic sense to own (want long term stability - kids in school)
4) they don't care if the price goes down or not - they aren't going anywhere for a long time
5) the price was comparable to renting (renting actually costs more around here for a better quality residence)
I am willing to bet there are a lot of places like this BUT there aren't that many people in this situation compared to the inventory of unsold homes.
R. Glenn Hubbard deserves no more than our scorn
Is he any relation to L. Ron Hubbard?
TG-you must not be a salesperson, I talked a nurse out of buying from San Jose..she is very thankful now!
Thier are benefits to honesty backed up by facts!
Gary writes:
CR, you are polite to a fault.
For the record, there has NEVER, in all recorded history been a good idea printed on the Editorial or Opinion pages of the WSJ.
That's not true, and I'm a leftist. Murdoch has turned their editorial pages into a bizzaro world
many moons ago I queried tanta and crew that if every mortgage was now implicitly backed by the gov't , then why would'nt all rates for ANY borrower be pegged to the 30year rate, plus some point shaving factor, of course.
Relief for holiday travel, discount sign on oil for over a hour, someone is upset...
Piracy talk time: arrrrrrrgggghhhhh
Wish that made me feel better.
Just a few minutes ago on NPR a Cato institute editorial pleaded that people not let "frugality chic" get in the way of spending. Brilliant.
CR, please channel your inner Tanta and kick some serious butt in your dissent. I expect to hear more lunacy in the days and months ahead from the profiteers, and your forum remains a bastion of clarity.
Comrade Kristina - The Great Recession began yesterday....the bond bubble contiunes unabated today...
RE: "only the passage of time will salve their wound."
I have another interpretation:
The U.S. is, in the best case scenario, entering an economic depression that will be far worse than both the Great Depression of the 1930s and the Panic of 1873. At worst, the USA will collapse altogether. Here's Why:
Belief in any system---and in this case we are discussing the concept of belief in the US economic system---is like oil to a combustion engine. Without belief in the credibility of the system, the economy seizes up and dies. Its that simple. If a system lacks credibility, if people dont believe in it, than they will not participate in that system (Unless of course they are compelled to at gunpoint, but were not there quite yet) Now in some cases, if things havent gone too far, trust can be reestablished and with that trust a belief in the system might grow---and the engine can be saved. But once trust has eroded beyond the point of repair, there is no chance of resuscitation. Either the system has to be thrown out and a new system has to take its place, or the citizens of the system have to be compelled by force and repression to accept the old way of doing things. This is where we stand today. Belief in the credibility of our economy has been summarily destroyed.
We hear a lot these days from the likes of Ben Bernanke and Henry Paulson and Barney Frank and Chris Dodd and George Bush. Each says essentially the same thing: Once the credit markets unfreeze, and once banks start lending again and people start borrowing again, once confidence in the system is restored then well be on the road to recovery. Each of these men, and millions who echo their sentiments, predict that this recession will ease soon because the FED is taking aggressive action to stimulate lending and to thaw the still-frozen credit markets and to lower mortgage rates and to stimulate employment and production, etc.. They are wrong. The credit markets will never thaw and banks will never start lending again because belief in the system has died. And because of this, the old regime and era of Fractional Reserve Banking and "money as debt" is also dying, albeit a violent and protracted death. And at the very heart of the crisis exists the foundational dynamic created by the decade-long DERIVATIVES experiment:
Virtually every bank, every financial institution, every nation, has a secret vault in which it is hiding its bad assets. And no one really knows who holds what. And some of these bad assets are part of bundles of securitized instruments that are so complex and so difficult to detangle, that it would take decades just to unravel them all and actually discover what all of the assets are really worth---if anything. And we're talking upward of 500 TRILLION dollars worth of these hidden, secretive, worthless assets. And the depth of mistrust that exists has become so powerful that it has, in a most extraordinary moment in history, actually given birth to an entirely new belief system! And what makes this new belief system so cataclysmic is this new belief system bases its spiritual and intellectual foundations upon the idea of disbelief! The leaders of the world---both political and financial---have, through their decades of theft and duplicity and lies, given birth to a new paradigm: the paradigm of disbelief. And it is this new paradigm, this new DIS-belief system if you will, that makes trust in then old way of doing things totally impossible.
Now, many of our self-proclaimed leaders continue to argue that this crisis will abate once confidence in the economy has been restored. These folks would argue that disbelief and confidence are, for all intent and purpose, synonymous. They are wrong. And underestimation of the power of disbelief keeps them from acknowledging the magnitude of our plight.
Lets take a brief look at a few examples of how disbelief in the system---rather than simply a lack of confidence in the system---will lead ultimately to the TOTAL collapse of the United States economy.
I could go on. I have barely scraped the surface. But my point should be clear: We have moved beyond the point where swings in confidence in a system implicitly recognize that system as credible. We have moved to a regime of disbelief in the system, and this disbelief is growing by the hour, and there is nothing that can be done to stop its momentum. On some level we have reached a moment of crisis in our identity as a nation not entirely unlike that which we faced in the mid-19th century. We have reached a point where disbelief in the credibility of the current system will become a force that will tear us apart. How we will survive is a matter for the seers. But make no mistake about it: this is no Recession, and there will be no Recovery.
askin(Unrated) writes:
\tHow long has Japan been at zirp? Can the United Dopes of america stay zero'd for a decade?
\t askin | \t \t \t \t12.17.08 - 12:13 pm | #
Since 1999. Almost twenty years. Don't think they'll be normalizing anytime soon either.
God Shammgod writes:
R. Glenn Hubbard deserves no more than our scorn
Played 2nd for the Atl Braves in the '80's
God Shammgod writes:
alba writes:
and European Leagues. But did he make it to the NBA? Knicks/Lakers?
He had one year in the NBA. Inkow he played all over, I think palcer like Russia Israel.
He's in the US in the minors now I';m pretty sure.
I didn't think anyone would remember him.
God Shammgod | 12.17.08 - 12:22 pm | #
Great handle but couldn't shoot the rock a lick. That did him in.
Kristina, why is the rate set gonna kill you? How is the rate set calculated.
Libor, cost of funds 11th district, 1 yr t bill, or the dreaded option arm?
30 yr fixed conforming refi at 4.625. Hey, why not?
...now, in the 21st century, TPTB that have enjoyed instant gratification for an entire generation are in the gaming chairs. Immediate fulfillment has SO influenced and corrupted their thought processes that no action taken by them is given time to be evaluated before additional remedial "tweakings" replace it.
The obvious disadvantage to this decision-making process is the inability to analyze the reasons for any solution - most likely though, solutions are never had specifically BECAUSE of the "mental speed-freak" reactionary mindset. Constant changing of rules "mid-contest" never make for a satisfying game - but always for dissatisfied gamers.
Speaking of retired...
In the news today, yet another private sector firm unilaterally freezes their defined benefit pension fund, freezes wages, and cuts 401k-matching funds. Of course, ho hum news to most.
Motorola to freeze salaries, pensions in cost-cutting move - MarketWatch
But when it happens to the public sector, it will create civil unrest...by public servants only.
Its a good thing that property taxes and homes adjust in line with justifiable mortgage:wage ratios. Too bad for those that rely on higher property/income taxes.
god shammgod....providence right? wasn;t he a guard?
@dan
You overestimate the memory of most Americans.
bad housing proposals never die...
Let's hope not. We need bad ideas now more than ever to keep this ponzi eCONomy from collapsing.
Those liabilities are your assets. That is just spooky.
From an email from an old friend of mine, which he sent last night:
"I am quoting 4.75% right now with 0 points, paying closing costs for loans in the $200,000 range. It is possible to do 4.625% right now with ZERO points, only paying closing costs for big enough loans. These would be VERY aggressive rates for family and friend. You can expect to pay 1/8% higher, but shouldn't pay more."
Wild.
"Are the authors suggesting a return to the "fog a mirror, get a loan" standards of a few years ago to raise homeownership rates?"
CalculatedRisk on 12/17/2008 11:04:00 AM
Thanks for including this issue in your brief but pithy post. I anticipate they will move from suggesting to mandating a return to those standards.
@ brontide
i think it transcends memory...i think it becomes part of our physical memory.
Americans may be painfully slow on the uptake, but me-thinks the genie is out of the bottle. The country is slowly having collective "ah-ha" moment and is rethinking everythint it had previously believed to be true.
Just a few minutes ago on NPR a Cato institute editorial pleaded that people not let "frugality chic" get in the way of spending. Brilliant.
Exit | 12.17.08 - 12:24 pm | #
Wasn't that Will Wilkinson being a fool? That made me rage on my drive to work this morning, let me tell you!
Some of these stupid ass wipes need to be drug out in the street and given the beat down. A bull market in stupidity.
R. Glenn Hubbard
is that the dianetics dude.?
Any real chance of rates below 4.5? Feeling like I'll be pretty happy with the 4.625 when inflation eventually sets in, but willing to listen to counterarguments. Payoff for refi is 9 months, then saves me $250/month going forward Thanks!
@dan
You overestimate the memory of most Americans.
Brontide
and their attention span on blogs
It's Libor liz. I'm paying almost 12% now. Payment is 1125 per month not including taxes and insurance. The new loan if I can get it will be @ 850 per month including taxes and insurance...including taxes and insurance I'm paying @ 1600 per month now...My loan is only for 129K
Comrade Kristina writes:
\tOT Anyone know what time it is on Conjure's Global Depression clock? I tried to find the update in yesterday's threads but gave up.
\t Comrade Kristina | \t \t \t \t12.17.08 - 12:22 pm
---
11:59:49 if I recall correctly.
There is an even clearer, and dumber, statement in the Mayer, Himmelberg, Sinai paper.
" conventional metrics for assessing prices in a housing market, such as price-to-rent ratios or price-to-income ratios, generally fail to reflect accurately the state of housing costs. House prices may appear exuberant by these metrics, even when they are in fact reasonably priced"
Is There a Housing Bubble?
I have previously discussed at length the flaws in the methods in their paper. They make mistakes which include unobservable model inputs (risk premium), to models which ingore certain readily calculated realities (like the benefit of waiting a year to buy a house), and they do some things which are just flat out stupid.
One of the clearest stupid things arises from a paper analyzing whether there is a bubble calculating long term home appreciation through the period which might be a bubble. Then, they include that long term appreciation to calculate fair value. "the long-run appreciation rate of housing prices is 3.8 percent the average from
1980-2004 for the metro areas in our sample for this paper". Where were the peer reviewers on this paper? They are measuring past home price appreciation from a known trough in 1980 to 2005. 2005 was the point in time they were evaluating as a potential bubble. Anyone looking at the reasonable possibility that it WAS a bubble would say "Hey, that's the wrong point in time to use to measure price appreciation".
The authors used that home price appreciation to measure the cost of ownership. Expected future appreciation (based on trough to bubble history), was used to reduce the cash costs of ownership, like mortgages and taxes.
Exit writes:
Just a few minutes ago on NPR a Cato institute editorial pleaded that people not let "frugality chic" get in the way of spending. Brilliant.
A desperate backlash against frugality. Imagine it.
As Mannwich noted, I think people are starting torethink things. Massive debt to finance non-essentials makes you vulnerable? Maybe it's not the best long-term policy for me or my family.
No, that's his brother: L. Ron Hubbard.
How disgusting. Hubbard & Mayer get space in the WSJ to show how little they understand the real estate market and to offer a "solution" that is actually harmful.
koan0215 | 12.17.08 - 11:54 am | #
When was the last time ANYTHING intelegent was published in the WSJ op-ed pages? The rest of the paper used to be worth reading, but the Op-ed pages were an insult to the fish that were wrapped in them. Unfortunately most of the top notch reporters who used to be with the WSJ, like Greg Ip, are no longer there, so what is the point of reading the rag?
What's your margin, Kristina?
Is the note capped to the bottom?
On a related note, I just yesterday cancelled my subscription to the paper WSJ, after 5 years. Not relating to today's ed, obviously.
Pleasant lady asked the usual questions about why I was cancelling. Reason one was they jacked up my rate without me noticing for three months, which reminded me of a credit card company. Shame on me I guess. Reason two; I have been spending my reading time more and more outside of newspapers/periodicals. Old news.
But I was satisfied (gentlemans' C)with the WSJ overall. I have just come to realize that most of the stuff I have been reading about economics in the WSJ meant nothing ultimately. There are no consistent rules to economic policy, so insight is difficult to come by in print form. Stock info is out of date the next day. Commentary has been substandard lately in their ed. page, especially the blather highlighted in this CR post.
I still like the weekend/lifestyle section on Friday and Saturday though. That was the original reason I started subscribing. I liked to read the wine and food stuff. I can pick this up at Borders or Cub.
Score yet one more permanent loss for old media.
blackhat writes:
Peak Stupidity Theory?
Impossible. If there is one resource in infinite supply, it must be that. Who can be so optimistic as to believe in Peak Stupidity?
Particularly when these nitwits are using the WSJ Editorial page to propose reinflating the most destructive commodity bubble in modern history.
And they missed the bubble in '05. What credibility do these guys have? They were wrong then, and wrong now. Even my stopped watch was correct once already today.
Somebody help Kristina re-fi
Not sure on that liz, from what I can understand they are capped to a 3% raise in payment...Keep in mind I'm a bartender not a mortgage expert...Even the 3% raise in payment will do us in, we are just at maximum overload now, hubby been laid off for three months now and savings are being burned through...With the payment reduction (which was on a 5.5% fixed) my payments will be cut in half...
CR is right on target. As always.
Rates are already nice and low by historic standards. Rates are not the issue. The issue is availability of money to lend, and a return to cautious lender behavior of yesteryear. You can get a very nice rate today on a purchase or refi--if you qualify. But with the securitization conveyor belt mostly shut down, there isn't as much money to lend, and lenders can and must be a lot choosier about who gets to take advantage of these rates. Why is that so hard to understand?
Anonymous, not really seeking help, posters here suggested I seek out a mortgage advisor and I did that already. Just making the point that not everyone in trouble is a greedy house flipping maniac. Some of us were just put in bad circumstances via luck of the draw...
CR,
Behavior doesn't factor into their forecast. They have the entire world described by equations - pulled right out of their butts. This has been a fundamental problem - regulators who are not pragmatic but theologists
That's not true, and I'm a leftist. Murdoch has turned their editorial pages into a bizzaro world
I am not Anonymous | 12.17.08 - 12:24 pm | #
Leftist my eye. I don't know what planet you're from, Bizarro, but the WSJ editorial section has ALWAYS been a festering rightwing fever swamp. This is not a new development. They used to have first rate hard news, but it looks like Murdoch is bent on destroying that.
Unfortunately, guys like Hubbard get to speak directly to guys like Paulson and get their bad ideas translated into policy, and since guys like Paulson don't give a rat's ass what anybody else thinks of their dumb ideas, they'll go ahead and do it no matter what any of us say.
You wanna email me a copy of your note?
Your payment MIGHT BE going down handsomely without your doing anything.
But no way if it's an option arm.
I'm confused:
are people actually SEEING 4.5% mortgages at this time?
if so, where do we sign up!!!! (for a refi)
I'm at 5.25% and I never thought it'd go that low again in my lifetime.
sad indeed.
Theologists perhaps, but certainly ivory tower theorists.
New thread with cliff dive graph. yum yum yum.
God Shammgod:
L. Ron Hubbard's writings are far more plausible and respectable in comparison to R. Glenn Hubbard's . . . but still miserable dreck.
I find it disturbing that Sp911 is resistance
liz how can i tell if it's an option arm? I know I'm making next to no principle payments and have a balloon at the end. Have paid @ 400 bucks in principal in 2 years.
OT Anyone know what time it is on Conjure's Global Depression clock? I tried to find the update in yesterday's threads but gave up.
Comrade Kristina | 12.17.08 - 12:22 pm | #
I recall that we had about 12-15 seconds left to go, and about 6 minutes left to go before bond collapse. Of course the conjure clock is working near the event horizon of a black hole, so time for it moves differently (and much slower to an outside observer) than in the rest of the universe.
On the main pont of the origional post, it does seem to me that very low mortgage rates could be the salvation of the Alt-A/option ARM cohort that will be defaulting in mass come 2010 if they cant refi. However, even they would have to coe up with some $ to deal with their already underwater status. But at the margin might help a bit on that front.
YTL--Yes. I was offer a fixed 4.625 last week on a re-fi from BAC. I held off because I thought I might be able to do better this week. I am going to call my banker today.
Liz, just looked it up and there is a interest rate floor, in other words, it can never go down...correct?
One more time, I truly believe that proposals such as this one, and the proposers themselves, should be met with scorn and derision.
These people (Hubbard, et al) must be publicly shamed on a regular basis so that their voices lose the power to influence.
CR said: "...One of the tragedies of the housing bubble was that some people were enticed to buy a home before they were really ready to be homeowners, and others to extend themselves too far. Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time. Only the passage of time will salve their wounds. There is nothing anyone can do to convince them to buy right now...."
My story continues unabated to be diametrically opposed to the tone of this blog.
24 years ago I bought my first house with an ARM at 11% and a monthly mortgage payment that was about 40% of my net monthly paycheck. I had other debt, as well. Looking back on it now, I can see that there's no way I could have reasonably qualified, so either lending standards must have been extremely loose, I was sub-prime or both.
A job transfer to another state forced me to put it on the market the next year, I couldn't sell it, so I rented it out for 5 years. Oh, and I was upside-down on the mortgage for most of that time.
Within the first year after I finally sold it I bought another house (August, 1990, the middle of a recession, of which I was also unaware at the time) and have been owning houses continually ever since, for the real-life reasons that dryfly mentioned above (raising a family, stability, etc.).
Sure wish there was some way to quantify the "many" who are soured on the wonders of homeownership, as well as their actual experience. In the worst national housing slump since the Great Depression, my personal experience is that I have a large and growing equity in my home and my housing costs are the lowest they've ever been as a percentage of my income.
Sebastia
I must disagree with you CR.
A 4.5% IR decreases the monthly mortgage cost and thus increases the number of homeowners who can afford to buy a home within conservative percentages of income.
It also increases the "amount" of house that can be purchased for a fixed monthly mortgage payment. This will help place a floor under home prices.
There is no single fix and to leave the markets to their own devices will bring on a depression that could perhaps be greater than the 30s.
Hubbard's proposal is something that must be done to avoid an otherwise catastrophic outcome.
CR,
I live in the subprime zone (the greater Sacramento area) and I could be enticed to buy but I have the following criteria:
* Must be affordable (20% down, PITI 25% of net on a 15 yr loan)
* must be able to pass FHA standards for a loan.
* in a stable area without a lot of recent investor activity.
* must be within 10 mile of my employer.
I can tell you there is zip, zero, zzzznada that comes close. I don't care if it needs work, is close to a busy street or any of the superficial wants. Until prices come down to where I can buy as an individual with a reasonable amount of risk, there is no saving even the supposedly bottomed-out markets.
"Hubbard's proposal is something that must be done to avoid an otherwise catastrophic outcome."
BSNEATH | 12.17.08 - 12:58 pm
You're far too shy and self-effacing. Please, show your light, tell us how 68% home ownership rate is sustainable, when the long term average is 64%.
4.5% mortgage rate produces a housing bubble, not home ownership. You people keep confusing housing with home.
Can someone explain to me, and the Dianetics guys, how a low mortgage rate saves me from going underwater on a depreciating house?
Can someone explain how two people who belatedly acknowledge that "fundamental factors played a role" in the bubble bursting two years after the fact can get away with ignoring "fundamental factors" NOW--i.e., when houses are still overpriced?
BS,
Pass me that kool aid.
Well said, CR! Everything I have read which was written by Mayer and Hubbard was so terribly misguided that I dare not read anything further by those gentlemen. (At least I will try not to read their editorial in today's WSJ.) What is especially scary is that Mayer and Hubbard seem to have the ears of the Obama camp. Oh oh.
Thses low interest rates are making it difficult for me NOT to buy a primary residence. I have money sitting in CD's making almost nothing. This brings down the opportunity cost of sinking that money into a house. Trouble is that I KNOW housing costs will continue to decline. I just do not know for how long.
So I sit and wait. I have wanted to buy for years. I will eventually buy. Convincing me WHEN to buy is the trick. Tough to decide given the gloomy economic picture and bleak forecasts of the future.
The thing I keep coming back to though is whether the dollars I am hoarding are going to be worth anything. If not, I do not want to miss my chance at a house again. The fear motivation is real. The high prices kept me from being able to buy before. I want to be sure the high prices do not return before I have a chance to buy THIS TIME.
This bubble has really distorted things.
dan, you could have shortened your Reasons-We're-Doomed list to just one: We are still letting the Cons speak their vile lies. THAT is the reason we are going to crash. We are stuck on stupid.
Americans still cannot seem to name what went wrong.
Hint: The Greatest Generation that grew the US into a superpower were LIBERAL. We were a liberal society that took care of our own people.
Also, since this doesn't get much media play: the reason America grew into a beloved superpower and reserve currency of the world was because we STOPPED making war and went home after defeating the right-wing corrupted Nazi's.
The Cons hated that decision and have plotted ever since. And they eventually did fool everyone, and now it's all confusion.
Hey Cons: Where IS Osama bin Ladin? HEY? Where is he, you torturing, mercenary, seditious pigman scum?
You Cons let bin Ladin get away. And now they whinge about the Obama recession, and feel quite safe in their constant wormtongue patter. That is what will doom America: letting these criminals get away.
I say we don't ... how about it fellow citizens? Are we ready to understand that there is no Middle Class OR Liberty in Conservatism, and to unite against the corruption? We are all beneficiaries of our liberal roots and it was a big mistake to let our enemies define it. So now what?
I do not have any concern at all that the population will not pile into housing with almost the same enthusiasm as before, once certain conditions are met:
Too many people I know and read about are waiting for a "bottom" so they can get in and (unstated) start enjoying that "equity growth". And it's ever-so-important now because they've already taken a major hit either in their current/past property or their 401k.
The gamblers will be back, just as soon as they hear one of the slot machines is giving out free money.
Hopefully the banks are the ones that are more cautious this next time around.
For the record, I don't foresee the above happening for many years, but it will. In the meantime, people will buy houses that they can afford based on their personal needs. Crazy talk, I know.
I also do not understand the house bashing. Owning a home is different from renting. I understand that a house itself is just wood and plaster. But there is something to be said for owning the space. I sold my "starter home" in 2006 and have been renting ever since. I really miss that house and the neighborhood and the feeling of belonging in a community.
Even though I am renting a NICER house now in a better neighborhood, I know it is temporary and it affects my mood and willingness to get to know my neighbors and participate in any community related activities. This is a factor for me.
I have spent months at a time in different US states and foreign countries. It is nice to finally setup roots. I miss this. I want it again. Super low interest rates, near zero return on other investments, and a growing distrust of our financial system are pushing me towards buying.
Food for thought...
(Semi-OT)
Speaking of poor policy-making and the inability of the powers that be to see what's happening or what might be reasonably surmised about the near future, this counter-argument.
One of the many things I keep track of is changes in Fed funds targets. I was updating my data yesterday and noticed this: The NBER, with the advantage of hindsight, defined December, 2007 as the economic peak before the current recession. But the Fed had already eased twice before December, then eased once again in December.
Looking back to the 2001 recession, a similar pattern. The Fed had already eased twice before the recession began and once again in the first quarter of the recession.
In the 1990-91 recession, the Fed started easing in its first month.
Bottom-line, in the past three recessions the Fed was responding to economic change in advance of clear proof that the economy was in recession.
So maybe we could dial-back on the knee-jerk assumption that only bloggers and their commenters are aware, thoughtful, and forward thinking, and no one in government is.
Sebastia
As a long-time reader of the WSJ, I've noticed how detached the editorial section is from its actual reporting. For example, the article (sorry, can't find a URL, it was in my actual physical newspaper) noting that reduced mortgage rates didn't stem the tide of foreclosures, as ~50% of homeowners that had rates adjusted lower still foreclosed (if I recall.)
Pity, such a great newspaper--if you avoid the opinion section.
That is what will doom America: letting these criminals get away.
No system can survive when it completely does away with all feedback and accountability.
Even as we speak, the Senate Dems are joining hands with Republicans to make sure there are no prosecutions for any crimes by government officials over the past eight years--this, in the face of some upcoming indictments. Goldman wrecks the economy, steals from taxpayers and is rewarded with a 1% tax rate.
And these jokers make asses of themselves with laughable assertions about the bubble, and get rewarded with another uncritical platform in the WSJ.
Not sustainable. You would think by now we'd realize: things that can't go on forever, won't.
psychodave - Stop thinking in black/white terms. I don't give a crap about what rate of homeownership is sustainable. The point is that a 4.5% IR will lower the cost of financing a house and will increase the amount of house that can be purchased with a given monthly stream of cash flow. It will not encourage bad loans - banks are very conservative these days if you hadn't noticed. It will not create another "housing bubble". We have a huge overhang of surplus housing available - the supply far exceeds the demand. It will not even help us to avoid a major recession - the days of MEW are long gone and discretionary income has evaporated. What it will do, is encourage a higher level of economic activity and prevent housing prices from overshooting. Were it not for the credit crisis, mortgage rates would be at 4.5% today. This is one of the points Hubbard is trying to bring across that I suspect most posters have missed. In other words, if our financial markets were functioning properly, 4.5% would the rate that a bank would offer in today's market.
We had rates of 4.0 - 4.5 in the 1950s. It is the proper rate for a traditional 30 year conventional mortgage in our current economic environment.
It is such a shame so many of this countrys leading personalities are good-willed, but incompetent and stupid.
If only they were smart, and unscrupulous, and self-interested and liars, we would be able to think about collusion, malfeasance, corruption, theft and destruction of institutions, wealth and lives.
I guess it is a good thing that the elite is only stupid; it promotes social peace and makes the masses feel smart in the process.
Were it not for the credit crisis, mortgage rates would be at 4.5% today.
Were it not for the credit crisis--in all its aspects-- today's economic conditions would not exist. So the statement is an absurdity.
"Hint: The Greatest Generation that grew the US into a superpower were LIBERAL."
That generation had no qualms about by-God nuking people; had decidedly non-PC ideas about race, prayed in schools, went to church, had no environmental regulation whatsoever, would've had today's plaintiffs bar drawn and quartered en masse, prohibited most immigration, had a fraction of the pre-Great Society safety net, had no Sarbanes-Oxley...and on, and on. More people considered themselves "liberal" in the 1930s and 1940s, but that was before liberalism overreached.
Recall that the 1970s weren't exactly the high tide of American glory, either.
Stretch002 - your thinking isn't entirely out of bounds. Consider this - you need to drill down and see what's really happening in your market (city) of interest at this point. There are markets out there with surprisingly intact single family housing fundamentals, as compared to most that won't recover for years.
Disclosure - I run a real estate market analysis team, and sold my personal residence in May 2006 and have been renting since; my markets of interest have more bloodletting to endure.
major arbitrage coming- all those who have no mortgage debt move to a trust deed state. Take out the low interest (3.5%) mortgage and watch. If property prices go lower mail back the keys, if interest rates go higher enjoy the low interests.
@ Yearning to Learn,
I just locked a 30yr to refi a loan I have 25yrs left on . The rate I locked at was 4.75% fixed. My broker is with countrywide. This is for @$300k on a property worth around $500k. I was thinking of waiting but when I heard 4.75% I said forget it and locked it in. How much lower can they go? I said the same thing when I took out the mortgage at 5.625%...
Can someone explain to me, and the Dianetics guys, how a low mortgage rate saves me from going underwater on a depreciating house?
It doesn't. That's not the issue.
The issue is that a certain amount of the income stream has to be spent on consumer goods. Reducing income spent on housing increases income spent on other goods, thus keeping the manufacturing/service economy alive.
To dan: Thank you for your post. Whether this is the end, I don't know, and I confess I hope they prop it up a little longer, because I'm too old for fighting in the streets. But, if I would put on my old idealist's cap, I could see the bright side of a collapse of faith in a corrupt government (tree of liberty, etc.)
Millions are not too old to yearn for a new world, seeing that the alternative is slavery.
I don't care how low rates go, unless I can pay in excess of 50%(preferably 80%+) down, I will NEVER "own" another home.
If they want to prop up house prices, they need a) to pay to keep houses empty and b) severely restrict new construction. They need to do these things until the population catches up with the number of housing units. Anything else is just baloney.
Sebastian,
In these unhappy times, yours is a hopeful story. That being said, anecdote is not data. One swallow does not a summer make.
On a separate note, Exit said "Just a few minutes ago on NPR a Cato institute editorial..."
The Cato Institute on NPR?! That's like a matter/anti-matter collision. That usually results in the near destruction of the universe (averted only by daring last minute deflector dish reconfiguration).
Here's the real problem: falling real wages. In every American industry we are paying the under-30 worker less real income than the over-30 worker. Fewer benefits, no pension and low wages leave little left to buy a home. Manipulating interest rates won't sufficiently offset this trend, which is global and long term.
With the stock market the only game in town (due to "Bowling Ball" Paulson and Helicopter Ben), watch now as the new bubble begins to inflate.
As for housing it's simply median income = median home price! Any thing more complex than that is pure conjecture or self interest.
L. Ron Hubbard's writings are far more plausible and respectable in comparison to R. Glenn Hubbard's . . . but still miserable dreck.
Gary
Why is it that anyone using all three of their names but starting with the abbreviated first are miserable idiots? I've known two of them personally and professionally.
Then, of course, you have the mass murderers that use all three full names with Wayne thrown in there somewhere. Perhaps the abbreviators are just a step down from truly evil.
CR thanks for making such a clear cut case for why this is a terrible idea. Your blog is read by opinion makers in media, finance and RE circles and your comments are an important part of the ongoing debate regarding our RE crisis. The NY times article is a crude attempt to create come measure of support among the financial opinion makers to further sell this idea to the Obama team and your response will be noted and hopefully followed.
Reducing income spent on housing increases income spent on other goods, thus keeping the manufacturing/service economy alive.
Um, I think you're missing the entire point of the proposal. Which is not to reduce the portion of income spent on housing, but rather to leverage that income into higher housing prices.
I think they are viewing lower interest rates and no appraisal refinancing as a way to stop the upcoming wave of ALT-A and Prime foreclosures.
As long as the people who are underwater bought the houses to live in and NOT to speculate with, it could work.
Moose writes:
Those big bad evil lenders preying on poor innocent buyers-evil, evil, EVIL. Victimization meme at its best.
A mature logical approach is needed. Both groups acted irresponseably. Lenders should be held accountable by not being able to sell loans to a third party, and buyers should learn that you are responsible for your actions. Enough of this PC correctness.
Problem is, buyers don't get to set the rules of lending --lenders, regulators and secondary markets do.
I am by nature very conservative and skeptical where pricing assets and borrowing are concerned. Even though I could clearly see a huge asset/lending bubble forming as early as 2004, there was nothing I could do about it --except wait on the sidelines. I was effectively shut out of the market because I could not find a sanely priced house in a decent neighborhood near where I lived, and it has stayed that way ever since. Either I payed the going --highly distorted-- "market rate", or I didn't buy. It was that simple.
The only real "choice" buyers got to make during the bubble was to stay out of the market completely. This is not the same power as being able to deliberately set rates below prevailing inflation to induce an asset bubble (Fed), or to actively encourage speculation and fraud via the tax code (Congress & "regulators"), or to incentivize toxic lending and transfer default risk by repurchasing and securitizing dodgy mortgages (the GSEs and bond markets).
Borrowers have some responsibility to "do the math" and think for themselves --no arguments there. Even so, your average borrower is no financial "expert" (as bankers and industry regulators are supposed to be), nor can s/he unilaterally rewrite the rules of a game written at the highest levels of government and industry.
The borrower was a tick on the dog in terms of overall responsibility.
Each says essentially the same thing: Once the credit markets unfreeze, and once banks start lending again and people start borrowing again, once confidence in the system is restored then well be on the road to recovery.-Dan
That was a long post. I agree that confidence in the idea that it's okay to be deeply in consumer and mortgage debt because there'll never be a downtrun is gone. I don't think that's the same thing as losing confidence in the entire economy. It actually seems like a good thing that people are cautious. I don't understand the idea that the economy depends on everyone taking huge risks with debt.
"The issue is that a certain amount of the income stream has to be spent on consumer goods. Reducing income spent on housing increases income spent on other goods, thus keeping the manufacturing/service economy alive."
Broward: I assume your are referring to China's economy?
[i]We are still letting the Cons speak their vile lies.
JR | Homepage | 12.17.08 - 1:08 pm |
Are you proposing that my freedom of speech be taken away? Explain to me exactly how that is "liberal."
I think the apt analogy may be the person who confesses to cheating on their spouse and then can't understand why they just can't get over it.
"It's in the past, it mean nothing!"
It is the bigger fool theory, however....
Bankers will be more astute with there mortgage sales go forward and so the loss can be carried by the foolish homebuyer (as a loss of actual equity) rather than loss appearing as future taxes.
those idjits don't even get a basic econ 101 principle of demand and supply.
when rates are low and are attractive to additional people....those additional people compete for houses and push prices up.
i remember trying to warn some friends about that principle. they were so geeked up about buying houses in 2000-2003 period because rates were "so low"....i told them yeah, but the price of the house is so high right now that it doesn't amke sense to buy close to a possible peak. they had no idea that the payment on a 4.5% loan on a $500,000 home is the same as a 7.5% loan on a $360,000 home.
ain't no such thing as a free lunch.
One of the tragedies of the housing bubble was that some people were enticed to buy a home before they were really ready to be homeowners, and others to extend themselves too far. Many of these people are now soured on the wonders of homeownership, and they will not be buyers for an extended period of time.
Very true. And really, can you blame people? It was cheaper to buy than it was to rent, for several years. Of course they elected to buy! Why wouldn't they? Now their credit is trashed and they'll be lucky to get a lease approved. Thanks, Alan Greenspan!
You nailed it with this post.
Tj is a born and bred dope
That is a good quote/article from the Daddy of Warren Buffet. Richard Russell had the same recently.
Right, let's use the bubble years to predict what will happen today by cutting out 2005-2008. This makes absolutely no sense. It's as absurd as saying "Let's see what happened the last time the dow hit 9000, oh it shot up!!!" How is that a forecast of any kind?
Bought a house too young at 22, now 29 and wife and I are separating; however, the market is at about 80-120K from a high of 280K (hell, there's a place for 50K in the neighboring division). We bought about 140K, figuring it's the DC Metro area, it wouldn't drop that far when the bubble burst.
Oops.
I can make the payments, barely, alone, but we're already -4K underwater from amount left on mortgage to best price in the area. I'd love to move and be closer to family,
And what's sad? Rents in this area haven't dropped at all. 1BR apartment in crummy areas go for more than my mortgage.
I don't understand the idea that the economy depends on everyone taking huge risks with debt.
Charles J Gervasi | Homepage | 12.17.08 - 2:12 pm | #
Fiat currency requires continuous growth(more debt) to sustain growth.
Well I certainly delayed buying a house for longer than probably made economic sense because I was running scared after my college roomate was foreclosed on. Even at one remove, I got my fear on. So many people who have been foreclosed on will be prevented by their own fear as well as potential lenders from reentering the housing market any time soon. Of course they will STILL be consuming housing, just as renters.
Sebastian,
The only people here who thought the economy wasn't going into the tank when the Fed cut was you and O-joe.
I still think that cutting rates will not solve what ails this economy, just salve the amputations. It was the January cuts where they panicked. Ever since then it's been a blend of deft maneuvering by the fed followed by sheer incompetence by the treasury, as if goofus and gallant ran the offices.
The thing is, nothing gets fixed or cleared until risk is priced accordingly, which has been absent for some time and China is looking to continue with extended treasury buying policies.
Some dopes never learn.
dan - 12:25 pm,
Excellent rant, superb soapbox. For the past year, I've been debating what the replacement economic model could be for the USA. Vooddoo Reaganomics for the past 30years has created an oligarchy/russian mafia government. That baby will be thrown out with the bath water. I believe that Denmark, without the monarchy crap and perhaps with modifications, would be an economic model to emulate.
Fiat currency requires continuous growth(more debt) to sustain growth. -Huh
I don't see why as long as the amount of currency is consistent with the value of goods and services. Why does that require debt?
"As noted above, there is no doubt that 4.5% interest rates can't last any longer than we can afford to subsidize them. Therefore, anyone who buys at 4.5% will probably end up with a capital loss in the future, creating another wave of problems.
Subsidize? What subsidy?
Current 10 year treasuries are 2.17% ... in this June post:
Calculated Risk: 30 Year Mortgage Rates vs. Ten Year Treasury Yield
... CR indicated that 30 year fixed rate loans generally follow 10 yr TS plus a "spread"
...at that time the 10 year TS was at 4.215% and CR indicated the proper 30 year mtg should be at appx 6.0%, an appx 1.8% spread ... the actual rate was 6.32% or appx 2.1% spread, which CR noted was high
USING CR's "proper" spread of just under 1.8% plus todays 2.17% on the 10 yr TS gives us a 30 year mortgage rate of 3.955%
... even if we use the actual spread from June - 2.1% over 10 yr TS - which CR noted was high, we should see 30 yr mtg rate today of 4.275%
BOTH BELOW THE 4.5% people are whining about ....
So which is it? Why is the "formula" today different than CR's in June?
CR uses the 10 year TS as a basis for mortgage rates because most loans are paid off within a 10 year or less period
So the government can issue 10 year bonds and pay today 2.17% for them ... if they lend the same at 4.5% there is a yield of 2.33% to work with ... so tell us, where is the "subsidy"??
The 30 year mortgage rate dropped today from 5.01% yesterday to 4.70% today ...
So first, the 4.5% rate is essentially already AT the current market rate (but still well above what the rates should be according to CR's calcs from June)
Todays Fannie Mae 30 year bonds were at 3.59% ... with a market MTG rate of 4.70% there is a yield of appx 1.11% between what Fannie Borrows at and what they pay - in that 1.11% is a profit for Fannie and for the private originators that supply them
And how did the 30 year treasury security do today? It closed at 2.92% ... at 4.5% there is a 1.58% yield spread between 30 year mtg and 30 yr TS rates ...
And that would be the way for the Fed to be very safe if they do a 4.5% loan program ... they can fund it thru Fannie by selling 3.59% 30 year Fannie bonds
... or they can fund thru Treasury by selling 30 year treasuries at 2.92% and have even more yield
... OR they can use a combination of Fannie 30 year bonds, 30 year treasuries and 10 year treasuries - a balance pool that reflects the expected repayment profile
BOTTOM LINE - they can lock in their exposure - and still include substantial profit - at 4.5%
And there is no subsidy ...
And as to the 4.5% rate somehow "propping up" prices ... and what happens when rates rise ...
To me this is a pretty silly position. Rates rise and fall according to the market and always have. With little direct effect on prices.
We are at a place as I pointed out above where MARKET rates are very close to 4.5% ... by the comments of many we should be charging these people 6% or 8% or??? - even though the MARKET is at 4.7% - because 4.5% is way too cheap ...
When interest rates increase affordability changes - NOT price.
Clearly affordability changes demand to some extent and demand can change price .... BUT ONLY IN CONJUNCTION WITH SUPPLY. And today they have a pretty good handle on inventory, and you can be sure it will be more tightly managed in future.
So if rates always have the potential and history of up and down - how is it any different effect here ... even IF rates are set slightly lower than the market, how is the increase in rates from there any different than any other market increase?
In the end what is being proposed is a rate the encourages SALES ... to encourage a change in confidence - not a change in price.
Most in industry seem to agree there is a significant "confidence" issue at hand - that current action (or lack) exceeds the reality.
Orange County, Vegas and other area's strong sales show this well - when the incentive is good enough - low prices so far in these areas - buyers will put aside confidence issues and go for the deal
And homes are deals today .. even in areas like Orange County etc ... add in the current rates and they are a real deal
As noted earlier in thread many of these people are very smart. they understand the traditional home purchase - you buy as a long term hold.
They don't care if it goes down another 5% or about any of the other purported negatives. They know a deal, plan to own the home for the long term, and understand that in a normal world if you have to sell in 1st few years you lose money ...
These folks are getting very good deals - and they know it ... they don't care about the doom and gloomers or nay sayers ...
CR also makes the following comment:
"Are the authors suggesting a return to the "fog a mirror, get a loan" standards of a few years ago to raise homeownership rates? Bring back the liar loans, NINJAs, DAPs, pick-a-pay lunacy - and yes, maybe a few more people will buy homes. Of course now lenders would also have to ignore recent foreclosures too."
First - I don't think the authors were saying anything of the sort ... but lets ignore that
I've seen absolutely no one advocate - not remotely close - that we go back to the LIAR loan age ...
Yet too many would have us throw out everything that has any negative ... ignoring the good/usuable parts
Subprime loans are a good example ... the majority are NOT in foreclosure and won't be, many people have been helped to own homes by them and have acted responsibly
Same with things like DAP loans ...
There is no reason we should and can not review each of these programs, determine the part that works and get rid of the part that doesn't
and on and on writes:
30 yr fixed conforming refi at 4.625. Hey, why not?
and on and on | 12.17.08 - 12:26 pm |
Late to get to these comments, and this question may have already been answered but: How many years have you been in your home already?
I've seen more people continually refinance chasing lower rates and going right back into a new 30 yr loan.
I'd look at shortening the repayment period if I were you. Just my $0.02.
deflationary jane writes:
I can tell you there is zip, zero, zzzznada that comes close. I don't care if it needs work, is close to a busy street or any of the superficial wants. Until prices come down to where I can buy as an individual with a reasonable amount of risk, there is no saving even the supposedly bottomed-out markets.
deflationary jane | Homepage | 12.17.08 - 1:01 pm |
It's a bit misleading to generalize your area as "Sacramento sub-prime" when what you really mean is the Davis micro-market of high salaries and student rental housing market. You're right that you still can't touch anything under $300k there, but 10 miles away in Woodland there are approximately 140 houses for sale under $300k, 47 of those are listed at less than $200k.
But I suppose the Bollinger's and Louboutin's would feel out of place in Woodland. >:)
I agree. I've always been moderately risk-averse but this whole thing has made me absolutely terrified to incur debt. I won't even consider taken a loan on my house (which my husband and I own outright). I pray that we won't be forced into that circumstance by illness or other unforeseen life event.
erobin ...
There is another way to look at things ... some people perhaps SHOULD borrow everything they can if rates get to the 4.5% range
And then invest the money - mostly in "safe" investments ... there are CD's today paying at or above 4.5% - and the new FDIC limits are $250,000 for protection
It seems realistically feasable that one could borrow at 4.% today and reinvest the proceeds at at least that rate ...
... and interest paid is deductable, so there would it seems be a net gain after taxes?
And as the economy heats up, as we know it eventually will, you will have locked in a 4.5% cost on a pool that can be invested
The trick is to have the discipline not to touch it except for investment purposes AND to be absolutely faithful to an investment plan - ie: something like the 1/3rds idea - 1/3 in cash or equiv safe ivnestments (treasuries, CD's etc), 1/3 in "blue chip" low risk and then limit your "riskier" investing to no more than 1/3 or your assets
If you are older you would take less risk, younger perhaps a little more
Not necessarily advocating it - just pointing out the possibilities ...