The Obama Administration's open policy of keeping house prices high benefits loan owners at the expense of renters and first-time buyers.
Irvine Home Address … 14691 FIR Ave Irvine, CA 92606
Resale Home Price …… $615,000
I kept the right ones out
And let the wrong ones in
It's amazing
With the blink of an eye
You finally see the light
Oh it's amazing
Aerosmith — Amazing
One housing bubble phenomenon was that the right ones — prudent people who knew what they could afford — were kept out, and the wrong ones — kool aid intoxicated fools — were let in. That mistake was bad enough, but now our own government is frantically working to repeat this mistake. Rather than doing something corrective, like letting house prices fall, our government is going to extreme lengths to keep the right ones out and keep the wrong ones in. Perhaps the administration is finally seeing the light, and in an amazing turn, they might actually let house prices fall.
Grim Housing Choice: Help Today’s Owners or Future Ones
By DAVID STREITFELD
Published: September 5, 2010
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Eager to avoid? Every policy rolled out over the last 3 years from the plethora of Bailouts and False Hopes to the Federal Reserves manipulation of interest rates has been designed to keep inflated house prices high. All of these policies force future buyers to pay for the mistakes of bubble buyers.
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
This is not shifting any benefit to future homeowners. If house prices fall, it merely levels the playing field. Prior to the housing bubble, debt-to-income ratios were reasonable in most of the country, and allowing house prices to crash merely restores the previous order.
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”
The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.
The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.
Caught in the middle is an administration that gambled on a recovery that is not happening.
“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”
I find those revelations troubling and shocking. First, a rising economy was never going to solve the "housing problem." First, the problem with housing is that prices are too high. The problem isn't a lack of demand, or foreclosures or anything else it has been made out to be. The problem has always been that prices were inflated beyond any reasonable valuation metric, and prices needed to fall.
People in the administration guiding housing policy are under the impression that house prices are temporarily depressed and that putting people back to work will bring buyers to the market that will pay higher prices. That isn't going to happen. Even if we had full employment, prices would still have to fall because they are still too high for current incomes. Unemployment is not the primary problem. Unemployment makes the problem acute, and it causes other related economic problems, but the root of it all is that house prices are just too high.
I am shocked the administration does not see this basic fact. Every policy they have unveiled has only served to prolong the misery because the guiding principal — keeping house prices high — is antithetical to the problem. Their solutions all have one thing in common; they make the problem worse. This is an undeniable fact.
That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.
The housing market is not slumping. Do you see the faulty mindset at work here? These people actually believe house prices are too low. They fail to see that house prices were in a bubble and rather than being in a "slump," house prices remain too high.
Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.
Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.
Let's hope the political capital for further meddling in the housing market has already been spent.
“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.
Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.
If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.
Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.
The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.
“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.
Ivy Zelman is the author of the Option ARM reset chart we have seen so much of. She has consistently been right about the housing bubble.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”
That is the simple truth. Artificially high prices discriminates against renters who would like to buy. Low interest rates offset some of this problem, but payment affordability is no substitute for lower prices.
A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.
We are facing a tsunami of accelerated defaults. Far too many people are holding on because they have the same delusions as the government. Once they realize that prices are rolling over and they aren't coming back any time soon, many more struggling loan owners will accelerate their defaults and home prices will be crushed. As for those that were duped into buying over the last few years because they believed in the stability of the market, well… shame on the government, and shame on the NAr for peddling this lie. Every person Shevy and I have talked to over the last year and a half has been told that lower prices are a real possibility if not a near certainty.
The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.
Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.
The strongest argument I can make for inflation ahead is the fact that the government now backs most of the housing market. With the US taxpayer on the hook, a decline of 20%-30% is unlikely. The government will tell the Federal Reserve to crank up the printing press and force prices higher by stealing from savers through devaluing our currency. If they print enough money, they can make wages go up and stabilize house prices. Of course, this will have a whole host of negative consequences, but with the enormous liability the US government now has with our backstops of the mortgage market, I see inflation as inevitable, particularly if house prices start to really slide.
With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.
Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.
“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”
This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors.
I am embarrassed for consultants and economists that make foolish statements like that one. Borrowers will stay away until it becomes cheaper to own than to rent, then they will buy. It is really that simple. The kool aid intoxicated pay attention to price movement and momentum, but many buyers look at their current cashflow and determine that it is less expensive to own, so they buy to save money. That is what always puts a stable bottom in home prices.
Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.
William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.
The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.
Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.
“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.
If the builders and the realtors give up on stimulus, then no coherent voice is calling for it. Under those circumstances, nothing will be done.
That might give the Obama administration permission to take the risk of doing nothing.
Take the risk of doing nothing? OMG! Doing nothing is the cure to the problem! I can't believe the insanity that has gripped our policy makers. The mental disease of the housing bubble persists like a malignant tumor. 
Thoughtless or reckless?
In the post HELOC Abuse Grading System, I describe some of the distinctions between borrower behavior:
The top of the range of D graded HELOC abusers is the limit of each borrowers self delusion when it comes to how much appreciation they feel comfortable spending without losing their homes. People who earn a D still planned to keep their homes, they were merely misguided by their own ignorance and the incessant Siren's Song of kool aid intoxication. These are the sheeple; like the rats St. Patrick cast into the sea, each borrower followed the Piper to their underwater mortgage and a watery foreclosure.
Most of the HELOC abuse posts I have done have been Grade E abusers because they are entertaining. When someone borrows and spends a $1,000,000, it is dramatic, and as an outside observer, you have to wonder what they spent all that money on.
Somewhere beyond the limit of self delusion, a borrower makes another psychological leap, they no longer worry about the consequences of their actions and they spend, spend, spend. This grading category spans the continuum from thoughtless spending to foolish and reckless spending where the borrower exercises no restraint at all.
HELOC abusers who get an E had to make an effort to spend. It takes time and effort to really spend beyond ones means one small transaction at a time. How many dinners out, trips to Vegas and other indulgences does it take to consume $1,000,000? I don't know, but grade E abusers try to find out.
In my opinion, the owners of today's featured property earn an E. They don't seem to have given much thought to their spending. It's hard to see how you can spend so much money and really believe your house was going to pay for it.
But was it reckless? Was their spending restrained and calculated in any way, or was it out of control? I will let you decide.
- This property was purchased on 6/4/2001 for $395,000. The owners used a $355,500 first mortgage and a $39,500 down payment (10%).
- On 12/27/2001 they obtained a HELOC for $34,000 and had access to their down payment.
- On 9/18/2002 they refinanced the first mortgage for $384,000.
- On 11/4/2002 they opened a HELOC for $45,000.
- On 12/8/2003 they got a $480,000 first mortgage and a $60,000 HELOC.
- On 7/14/2004 they refinanced again with a $586,000 first mortgage and a $71,000 HELOC.
-
On 5/11/2005 they got a $568,000 first mortgage and a $151,000 HELOC.
- On 8/25/2006, the obtained a stand-alone second for $165,400 right at the peak and maximized their mortgage equity withdrawal. Through periodic refinancing, they managed to obtain every penny of appreciation the moment it appeared, and they left nothing in the walls. The bank bought this property via bad loans right at the peak.
- Total property debt is $733,400.
- Total mortgage equity withdrawal is $377,900.
- They have been squatting about 20 months now.
Foreclosure Record
Recording Date: 08/19/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 05/14/2009
Document Type: Notice of Default
I don't know how we could make kool aid any stronger than that. There are thousands of families out there like this one that extracted nearly $400,000 out of their homes and spent it. Then we allowed them to squat for a couple of years. With benefits like that — or at least the lure of potential benefits like that — it is no wonder that everyone in California wants to own a home and consider themselves a land baron or real estate investment genius.
Irvine Home Address … 14691 FIR Ave Irvine, CA 92606 
Resale Home Price … $615,000
Home Purchase Price … $395,000
Home Purchase Date …. 6/4/2001
Net Gain (Loss) ………. $183,100
Percent Change ………. 46.4%
Annual Appreciation … 4.5%
Cost of Ownership
————————————————-
$615,000 ………. Asking Price
$123,000 ………. 20% Down Conventional
4.34% …………… Mortgage Interest Rate
$492,000 ………. 30-Year Mortgage
$117,948 ………. Income Requirement
$2,446 ………. Monthly Mortgage Payment
$533 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$51 ………. Homeowners Insurance
$43 ………. Homeowners Association Fees
============================================
$3,074 ………. Monthly Cash Outlays
-$405 ………. Tax Savings (% of Interest and Property Tax)
-$667 ………. Equity Hidden in Payment
$194 ………. Lost Income to Down Payment (net of taxes)
$77 ………. Maintenance and Replacement Reserves
============================================
$2,273 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,150 ………. Furnishing and Move In @1%
$6,150 ………. Closing Costs @1%
$4,920 ………… Interest Points @1% of Loan
$123,000 ………. Down Payment
============================================
$140,220 ………. Total Cash Costs
$34,800 ………… Emergency Cash Reserves
============================================
$175,020 ………. Total Savings Needed
Property Details for 14691 FIR Ave Irvine, CA 92606
——————————————————————————
Beds: 4
Baths: 2 full 1 part baths
Home size: 2,095 sq ft
($294 / sq ft)
Lot Size: 5,000 sq ft
Year Built: 1972
Days on Market: 7
Listing Updated: 40423
MLS Number: I10092718
Property Type: Single Family, Residential
Community: Walnut
Tract: 0
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Upgraded home in the highly desirable College Park Community. Upgrades include remodeled kitchen with granite counter tops & stainless steel appliance, double paned windows and sliders, remodeled bathrooms with travertine tile. Master bedroom features 2 large walk-in closets, upgraded bath with double sink and balcony. One bedroom and 3/4 bath downstairs. Front yard features a large gated courtyard with a gas fire pit and water fountain. Professionally landscaped backyard with tons of hardscape. Community amenities include Pool and Park. Walking distance to school and conveniently located close to shops and freeways.
With all these fabulous upgrades — the word upgraded or upgrades appears 3 times — why don't we have any interior pictures?
What year is this?
If a neighborhood is going to have 50% reductions off peak, it’s already seen them. 18 months ago, my in-law’s neighbor sold his house for 45% off what he paid for it in Sept 2006. This effect of housing wealth decreasing hurting consumer spending is not new, and is only considered news because so many said it wouldn’t happen.
Are there really that many renters who are waiting for that $250k home to fall to $200k? Isn’t that the sort of rational thought that made IR unique?
What is supporting prices in my area is rents. If people can rent their home and cover their payments, then they’d rather do that than take the loss.
“…Borrowers will stay away until it becomes cheaper to own than to rent, then they will buy…” IR.
“…Isn’t that the sort of rational thought that made IR unique? …” winstongator.
I agree with winstongator. We can’t reasonably project on the population any sort of rationality when it comes to home prices. Saying that renters are all rational now and will not buy a house until the numbers makes sense, completely disregards how people acted just a few short years ago.
Did everyone learn something from this crisis? But I think the lesson learned is fear. I doubt many people actually understand how a house “should be” priced.
OT. Congrats IR, you’re in Minyanville:
http://www.minyanville.com/businessmarkets/articles/home-equity-lines-of-credit-too/9/7/2010/id/29952?page=2
Let’s try that again:
HELOC Abuse
Thanks. It’s good to know others are reading my stuff and respect it.
An unstoppable negative feedback loop will be created when prices begin to freefall. That problem is what the Administration is trying to prevent. They’ve flushed so much cash into FN/FRE/HUD to keep a sustainable sales level, any variance to that to the lower end of prices will cause so many problems:
1) Sellers won’t wake up.
2) Buyer’s won’t purchase.
3) Sellers who must sell set new comp killers
4) Buyers smell blood in the water.
5) Panicked sellers rush to the exit doors.
Then the mother of all debt bombs detonates:
6) “Hey, if I’m 50% underwater and sinking fast. I should stop paying my mortgage”.
If this cycle plays through, the carnage will be epic, real “Old Testament” stuff to witness!
My guess is that we’re at level 1.5 – sellers won’t wake up and buyers have lost interest. This will be an interesting Q4 through Q2 2011 what with the direction of the market today, doused with the accellerant of bloating shadow inventory no longer able to be hidden off the books.
My .02c
Soylent Green Is People.
The negative feedback loop should have started with REOs out in the market with full force coupled with rampant foreclosures.
Unfortunately, FASB 157 delayed that feedback loop.
Every home”owner” I know is either a little or a lot underwater. In addition to their mortgages they’re drowning in even more debt. They all lease new cars, constantly buy stuff, “upgrade” their hopelessly over-leveraged homes. And all of this is STILL happening despite the obvious fact that they’re financially screwed with no savings to speak of. Honestly I think most if not all of them are just assuming they’ll be fine when their parents kick the bucket and they inherit whatever’s left over. And yet our entire economy is being carried on the backs of these fools. I know renters like me aren’t getting any direct financial benefit from this madness, but when the sh!t hits the fan cash will be king. If you live in a bubble market don’t even THINK about buying until the next financial meltdown is in the rear-view mirror. Just save every penny you can, enjoy life and the fact that when the water main needs replacing, your landlord gets the bill and the headache.
I see this behavior in California, however, I’m originally from North Dakota and still have a lot of family there, people in ND can’t believe the way that people behave financially here. Don’t get me wrong, there is a small percentage of financially irresponsible, however it’s much less prevalent. Moreover, from what I’ve seen, most of the country does not have the same HELOC abuse or other issues that we see in Orange County.
What’s going to happen when the government is successful at getting the economy back on track? Many areas of the country that did not have a bubble are below rental parity, they are properly working through foreclosures, and when the economy picks will not need all of the artificial market props and as a country we will likely start to see inflation which will force rates up. Between the California policies and government policies, it seems this is going to be much more drawn out here than in 90% of the country. If prices are still inflated here when the rest of the country has recovered and house prices have stabilized, California will be swimming up stream when also battling rising interest rates.
Is California gong to attempt to legislate and continue to fight to keep prices artificially high while the rest of the country moves on and rates rise?
The government will not and never has been “successful at getting the economy back on track”.
Inflation does not stimulate and economy.
Nice revisionism. WPA not only starting digging the economy out of the hole it was in, it built a lot of infrastructure that is still in use today. It takes a willfully ignorant ideologue to deny this.
Inflation does stimulate the economy. It’s very simple. With inflation, it’s cheaper if I buy something now than in the future. So, I buy it now. Economy stimulated. With deflation, it will be cheaper if I buy something later. So, I don’t now. Economy depressed. This is a simple economic concept.
Hell, this contributed to the panic buying that ran up house prices!
Do you like, you know, actually pay attention to how the world works? Or do you just read Ayn Rand all day?
It is true that price inflation alone is not stimulative in the long term as prices will eventually collapse and cause massive losses until everything comes back to equilibrium. Inflation that is stimulative includes wage inflation. Push up wages to push up prices to push up wages to push up prices, etc. to stimulate the economy.
I’m glad you compare the OC to the RoC (rest of country). I am still bothered by how the housing bubble has been reported, and how the strong geographic dependence has been underreported. Take the GSEs. If they were the main cause of the bubble inflating, why didn’t it inflate everywhere? Not that they didn’t have poor incentive structures and the (now explicit) implicit guarantees, but they impacted the entire country in similar ways.
As for helocs, CA should modify its property tax law so that a refi resets the tax value, so that a huge cash-out refi would seriously up your property tax bill. That measure is too little too late, but still makes sense.
Honestly, I don’t know where you live, but in my part of Irvine (TR) we have lots of older folks and I don’t see the fancy cars, fancy stuff.
Now then, a refi should NOT trigger a reset of the tax value. That’s unmitigated caca.
What should happen, however, is that the IRS and state tax authorities should start paying attention to cash-out refinances and ensure that the money was put into the property, not used as income. The law is clear on that in that in such case not all of the mortgage interest is deductible.
I see the exact same thing in my parents neighborhood, NW. We’ve had that house for over 15 years and most of our neighbors have been there longer… No fancy cars, just a bunch of Hondas and Toyotas…
“What should happen, however, is that the IRS and state tax authorities should start paying attention to cash-out refinances and ensure that the money was put into the property, not used as income.”
Unfortunately, you’re still going to see this phenomenon. Hell, even financial advisers advocate using HELOC instead of getting a car loan to finance a new car or using HELOC to pay off higher interest credit card bill.
I thought the principle of the capped increase in tax value is because the person is living in the home and shouldn’t be punished for rising home values. If the cash-out refi, they are doing more than just living there. And especially if you make improvements, your tax value should change. Say you buy a small house and then do a tear-down, should that be exempt?
I would not move the tax value to the new appraisal, but a value relative to the amount financed.
I agree with you regarding lack of excess in my area of Westpark as well. However, what I do see in some of these neighborhoods and in homes that I show clients is people renting out rooms or multiple families combining to live in one property. Of course, there is nothing wrong with this and financially it’s the best choice. However, when home prices get to the point that two strong earners are not enough to afford them for purchase but can easily afford the rent even with 4.5% rates, it’s hard to argue that the price can be sustained.
Moreover, in the home I used to live in Northwood, I leased the circa 1700 sq. foot condo for $2000/month the same time my neighbor purchased for circa $650,000. They used a HELOC on a property they owned in Santa Ana before they purchased in Northwood for their down payment. They did not drive fancy cars and only wanted a better life for their family, besides making this poor purchase he spoke to me about investments that he had, drove a Toyota, and did not appear like many of the HELOC abusers to take a bunch of vacations, buy fancy cars, and some who over renovate their properties. He was foreclosed on about 6 months ago.
@Pwned:
Despite many of IR’s posts…there are probably less Irvine home”owners” underwater than most other cities.
It’s also why prices are a bit more stubborn here.
That and the fact that the banks have refused to foreclose on all the delinquent squatters.
Just when I though OHB ran out of foolish tricks or ammo.
Zero-Down Payment Programs; New FHA Mortgagee Letter; Does the Value of Servicing Warrant Retaining It?
http://www.mortgagenewsdaily.com/channels/pipelinepress/09072010-mortgage-hud-fannie-zero-down.aspx
More sale with govt backed mortages means more debt to the taxpayers by default. What would the banksters want:
1. Defaults of defective loans backed by the govt, who can sue or charge back the banks or
2. Defaults on new or modified loans by the govt, who can no longer sue due to known and explained risk at underwritting?
Maybe I can get a zero down loan and refinance with a HEW? It really doubling down now. Time for people to refinance multiple recourse loans into one single action loan.
Now I understand why the stock market went up last week. More free money for the banksters. If they want to leave the US, let them leave. Who else will cover them wtih bonus and bailouts for bad loans and bad behavior. Others countries use prison instead.
Renting with cash but could of been squatting for free.
The government had to prop up house prices to keep us from entering a second Great Depression. I take exception to commentators that imply that the billions in cheap money and incentives were a waste and that somehow the government was stupid for trying to manipulate the market.
This is all about letting the bad loans unwind in a controlled manner. Instead of letting the wounds gush so much blood that the economy died, the government put on a tourniquet to slow the bleeding. Perhaps the wound has healed enough to remove the tourniquet, perhaps not. But, there is no doubt that the steps taken – in one form or another – had to be taken.
If we didn’t have government intervention, investors would have fled nearly every asset class. In fact, they were fleeing in 2008. If the government did nothing, everyone would have been “investing” their money in a near useless yellow metal instead of industries that provide jobs and actually produce useful things. That is the harsh reality.
It is a shame that some people will lose their life savings for buying during the price supports, but it was almost certainly unavoidable after the bubble was inflated.
We should have never allowed the bubble to be inflated. The bubble occurred because the government did nothing while bad loans were written.
I couldn’t agree more. On the positive side, these new owners remodeled, bought furniture and ovens, new beds and beddings, paint, lights. All from local businesses. They may have even adopted a dog!
Sometimes I get angry. Angry that I was priced out for stupidly trying to save up a down payment. And angry that I didn’t get my cut of the massive fraud. But, then I think… Maybe I wouldn’t have had over a decade of steady work if we didn’t have the bubble. Maybe I wouldn’t have been able to take all the great vacations I took. Maybe I did, in fact, get my cut… but then I get mad again when some douche bag cuts me off in a Mercedes I know they bought from their home equity line of credit that they plan to default on.
My take on this is similar.
I got on the merry-go-round in 2002, rode it until 2008, and used the proceeds to write checks to my student lender and Toyota Motor Credit Corporation. No more debt.
Did I do as well as some? No. But I would have benefitted from steady work, and paid off my debts, even if I had not owned a house.
I abused debt in the 1990s, before the housing bubble. The resulting hangover scared me away from HELOC abuse, and made me fear debt generally. Because my earlier disasters scared the hell out of me, I am far wealthier and more secure today.
Whether or not you participate in a bubble hysteria, there are positive outcomes to be had, either in general economic well being, or lessons learned.
This is keynesian nonsense. The same nonsense that got us into the mess in the first place. It is not the job of the govt to manipulate markets with our tax dollars.
You are assuming the downturn is over and has been avoided. Dream on.
You’re assuming you know what I assume.
The nonsense that got us in the mess to begin with is the government letting the “free market” run itself.
Anyone who says different is a fool.
The free market caused the housing bubble?
LOL!
Two words:
“Fannie” “Mae”
What about Freddie :-)?
Yes, what about them?
The GSE’s weren’t the problem. The bubble was primarily driven by poor quality loans that were shoveled into CDO’s. It was absolutely the “free market” that caused this housing bubble.
It’s like you people live in a different world. Facts be damned!
It is of course correct to say that a “free market” and “free market principles” only work 100% properly when you can assume certain things like freedom of information and well-informed participants. When the free market does not produce that result of itself (which it often does not), some sort of external regulation is required in order to get back to the baseline assumption.
If information is imperfect (e.g. the previously shadowy understanding of what was going on with CDOs, subprime loan policies, etc), then regulation should be implemented to improve the flow. If market participants are frequently found to be acting in bad faith (another problem for a free market)–by some artifact of the market or endemic problem with the participants or both–then this too should be regulated (e.g. SEC rules) in order to disincentivize “bad,” “dishonest” and therefore destructive-of-the-healthy-free-market behavior.
On bear-blogish sites like this (I love this site by the way–and more now that I moved to Irvine), “government regulation” tends to get a bad rap because external manipulations like stimulus packages, homebuyer tax credits, and their ilk get lumped in with other less invasive tactics like regulation of financial products (which would have been more cost effective than 50 stimulus packages at eliminating this problem).
It’s important to keep conceptually separate full-on intervention from information/deception regulation.
The Keynesian view that occasionally irrational risk aversion in a market (which represents nasty opportunity loss costs because it lowers both investment and consumption, the former being the more important to the long term health of the economy) can be properly overcome by the “forced investment” of a tax-spend policy (like the WLA) aimed at loosening up capital, is not totally invalid. It can and has worked. But it requires great skill to apply, few situations call for it, and the politician is typically simply too overborne by interests which stand to benenfit in the short run by a legislative windfall even though it comes at the overall detriment of the larger system. External interference–especially the hamfisted version that a vigorous democracy in a republic of moneyed interests is generally going to promulgate–is generally bad for the system. But there are certainly times when, properly applied, it is wise and warranted.
Whether or not the latest round of interventions were wise or knee-jerk political reactions with no lasting benefit, I will leave to the historians. I doubt much total carnage was spared, or that in an economy with modern communication the economy would certainly have died with out it. But I certainly don’t know.
Quite, I probably agree with about 80% of what you wrote. I do not agree with the core premise that a “free market” economy can work 100% properly like you describe it. In point of fact, I do not believe “free market” economies can ever exist. They are an ideological pipe dream just like communism. Perhaps this is what you believe also, I can’t quite tell from your comment.
But, to the point of freedom of information and well informed participants: This doesn’t matter. Human nature seems to be primarily concerned with short term needs and wants, not long term… anything. People can, and often do, know that what they are doing is unsustainable and still do it. Why? I don’t know. But, it is fact. So, even if someone knows something will blow up 10 years down the road (well informed as they are), most will still do it if it makes those years easier until it blows up. That’s why a “free market” economy will never work. It would constantly blow up. It always has blown up.
I had said, “gush so much blood that the economy died”. Economies can’t die. I’m well aware of this. It was a choice of words that I thought conveyed my point well. Near death would be a better phrase, but then some people would describe our current economy as near death. It is far from it and these people are just a bunch of whiners.
Did the government actions have a lasting benefit in the grand scheme of things? Lasting benefit? Probably not. 100 years from now it probably wouldn’t matter what the government did or didn’t do. Did it have a benefit for people that are alive today? Yes, absolutely. In aggregate it did. Some people got screwed, but most people are better off because of the intervention.
Yeah, strictly speaking–from a theoretical standpoint–it’s best not to think in terms of “free market” or “not free market.” There are only free market aspects or principles, and either the principle is freely active and not interfered with in a given economy or it isn’t. “Free market” simply means that–as to this aspect–the multitude of economic participants will work it out on their own. When “working it out on their own” is good for a particular thing, then the free market principal is a good one. When, for a given thing, this doesn’t seem to do it either because the information is imperfect or because the market participants are irrational as to this thing(as you posit), then action by a hopefully (but not likely) more rational arbiter is necessary.
Freedom of information is paramount. People may sometimes be dumb about some things, but our economy isn’t simply the result of bunch of clowns driving around hitting each other in the face with cream pies. They take and process information (especially the big money players). And it’s worked out well on the whole. Up, not down. When the information has been good.
So to say that a “free market” exists or doesn’t exist, is like asking if “merciful” exists or doesn’t exist. Depends on who you’re talking about, and when, and if you were to ask that person about it themselves, they’ll probably ask you what the precise circumstances are underwhich it is proposed “merciful” is thought to be, or not be.
Having said that, whether you’re of a Keynsian or Austrian bent, I think there’s wide agreement that a market in which exists a decent information flow and a set of participants which by and large care about their bottom line, should otherwise be left to make their own decisions without artificial incentives. The very ignorance and impulsiveness you charge people with (perhaps rightly) speak just as loudly against tempting little carrots such as have recently been dangled, as they does against a “free market.”
It will be likley be to their detriment, short term and long. Momentarily stabilizing a systemic shock to the credit matrix is probably necessary. I don’t take issue with that. The cba is good on that. But there are other forms of recent government intervention which will have no lasting (i.e. 2-5 years; I’m not talking 100) benefit. These are either ill-considered, or are simple un-Keynesian redistributions made for political reasons, but with the Keynesian varnish of necessity. Plausibly, but not *actually* necessary, and politically expedient. Look for it.
But I live in a democracy, with all sorts of irrational/uneconomic pressures bearing on my leaders, and I’ve learned to live with this.
Getting back to specifics, it was private CDO’s that were the primary cause of this housing bubble. That had nothing to do with the government, other than the fact that they didn’t step in and stop a very obvious fraud. Well, that’s not true. State governments tried to step in, but were blocked by the free marketers of the federal government at the time.
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html
This type of lending occurred because they could take these bad loans (it started with subprime loans) and package them into different risk classes via a CDO. The top tier of the CDO was supposed to be safe because not all the loans could fail. Of course, in some CDO’s pretty much all the loans did fail.
Dumb money went to fund the CDO’s which took the loans off of bank balance sheets so that more loans could be made to go into more CDO’s to attract more dumb money to issue more loans, etc. The “free market” at work. Of course, since the securities issued through the CDO’s typically had a shorter term than the underlying loans, most loans ended up back at on the banks balance sheets once people figured out the game and refused to invest in the securities these CDO’s were issuing.
It’s easy, in Irvine, to see that GSE’s had almost nothing to do with the housing bubble here. Just look at the loan amounts on most of these places. They are past the conforming limit that applied during the bubble. That means Fannie Mae and Freddie Mac simply weren’t involved in those loans during the bubble.
So, going back to what I said. It was the “free market” that caused this catastrophe. There doesn’t have to be a discussion of economic theory or vague generalizations made. This is just a simple fact.
If I were OB, I would think the same way since 67% owners could be converted to voters……. unfortunately, I doubt it
I give up.
Am I the only one who feels that signing a mortgage is an unclean act?
If renting gets too expensive, and I don’t yet have the hard purchase cash, I can always buy a double-wide, together with the 1/4 acre it sits on, 15 miles north of town, for about $75K.
The thought of even calling a loan officer makes me think of spraying disinfectant on my cell phone.
I disagree somewhat with your idea of a better economy will not help the housing business. It will help but not to the extreme it has in the past. I do get this impression that people are just waiting thinking the comeback is just around the corner.
All I can say is that as housing bubble popped, squatting bubble formed and squatting bubble is about to pop as well. My guess is that post Nov elections, we may see increase in activity of kicking the squaters to the curb.
NPR covered this topic today.
http://www.scpr.org/programs/patt-morrison/2010/09/07/housing/
I called in and later posted some comments.
“Mr. Goddard started out the interview talking about how prices are up 10% and then when I pointed out that the tax incentives artificially inflated the market he said that he has not seen that in his area? Which is it? Are prices up 10% as a result of artificially created inflation or not?
He wants to take credit for how great the market is and how CAR and NAR are for tax incentives that artificially inflate the market. However, when called out on the reality that these incenvies artificially inflate the market are bad policy and that as a realtor and member of OCAR, CAR, and NAR, in my area people were paying 30-40k extra to save 8k in taxes and that these types of programs are rediculous, and as a result I was telling my clients to wait and that they would be better off when the tax credit went away, he responded by saying that he did not see any price increases as a result of this in his area?
Moreover, he blamed the drop in sales by sales being pushed forward as a result of the tax credit. Is that a good thing? It seems like a bad thing, yet he still seemed to be proud of the poor policy The mistakes are being magnified now as not only was demand pulled forward, but it may even hurt the market more because now many are waiting for the next program. These policies are turning realtors and real estate professionals into a joke and making real estate sales the equivelant to used car sales.
Larry Roberts, author of the Great Housing Bubble and writer of http://www.irvinehousingblog.com would have made a great guest today. His blog post touched on this topic and he has been the most accurate Orange County real estate forecastor that I know of.
Moreover, even though prices have come down prices in many areas of OC tripled between 2000 and 2006 when incomes only went up circa 17%. This was not sustainable. Even though prices have fallen circa 30% artificially holding prices at these high levels only help banks that would otherwise be insolvent, at the expense of the rest of America.
In reality all of the talk that they are trying to help homeowners is realy just a disguise to help the big banks. Even those getting mods are not really being helped, they are simply made slaves to their homes and really only loan owners and not homeowner at all. Until we wake up and let the market take care of itself we will simply conitinue to kick the can down the road while keeping banks happy at the expense of the American public.
Good post, IrvineRenter. I could not agree more.
The government is going to print its way out of the problem. They are going to fear monger us with deflationary terror for awhile and then when the prices start going through the roof – we will be told it is the result of how much better the economy is doing. The masses will eat it up.
Mortgage rates and home prices
I completely agree with the consensus conclusion that the goverment should keep its hands OFF the housing market…
…and it’ll never happen.
There’s no way the government is EVER going to take a “hands off” approach, even as it becomes increasingly obvious that that’s exactly what they should do (and should have done already).
“Passive” politicians are seen (or so they believe) as weak politicians, and since their only mandate in life is to keep getting reelected, they will keep picking at the scab until there’s a permanent scar.
Or the patient bleeds to death.
What politicians could do and should do is usually a certain indication of what they won’t do.
They will step back and let the housing market correct when the Senate freezes over and Congressmen can fly.
The market will correct eventually anyway. The question is, how much tax money is going to be thrown at it in an effort to stop it in the meantime?
and how long it’s going to take. As long as they keep tinkering it could be a while.
Yeah, the more they mess with it, the longer the correction will take and the more painful it will be when it finally arrives. I would prefer if they would just let it happen, but that is probably unlikely because of the banker lobby.
Actually, all the efforts at propping up the housing market were directed at saving the big banks at the expense of the little guy. Even the loan mod program was designed to benefit the banks. Once people got loan mods, they started making their payments again, which was cashflow for the banks. No balances were reduced, but banks started getting payments again, right? Semi-performing assets are better than non-performing assets.
You are exactly right. If one looks at these types of programs it’s fairly easy to see that the intent is to help the banks. Regardless, if their intent is to help the banks or help the loan owners, anything that artificially props up the market and favors one part of society ie. loan owners over renters is bad policy. Especially when it’s done at the expense of responsible Americans. I believe that they used the card of helping homeowners to be able to get popular support for programs that banks were pushing.