93 thoughts on “Curb Demand or Limit Supply?”

1. scott January 30, 2009 at 5:39 pm

   Also at some time the question to ask and answer is why was this bubble so much worse in markets like California (plus say some parts of Florida) than in many other parts of the country. Why isn’t this the Dallas Housing Blog or the Minneapolis Housing Blog? I’ve read IR’s postings on the Southern California Pathology but I think greed isn’t just a California thing.

   Other markets like NY/Boston had some elements of bubble – and have similar issues on tight zoning etc – and will come down, but the price/income ratios I don’t believe were as egregious as what it seems was the case here.

   In short this seems closer to an 80/20 situation where 80% of the losses are in 20% of the country. Identifying why it was worse in say Irvine than others would be helpful in terms of limiting the damage.
   1. IrvineRenter January 30, 2009 at 6:46 pm

      In areas of the country where there are strict land use controls, price increases are not blunted by an influx of supply. This helps create greater volatility. Once volatility is recognized by the population, irrational exuberance takes over.
      1. Chuck Ponzi January 30, 2009 at 11:55 pm

         IR,

         You’re exactly right. SoCal and Irvine provide fertile ground for irrational exuberance.

         In Dallas, if prices begin to rise, the free market delivers up a scad of new housing to push the prices down. Builders are incentivized by higher prices.

         In Irvine, the opposite is true. Builders are disincentivized by higher prices. As prices rise, they hold on to an ever dwindling supply of land.

         This can be seen in oil production, where a belief in decreasing supply (peak oil) incentivizes LESS production.

         Simply said, changing future expectations shift the supply curve. What the Irvine company is trying to do right now (by shelving every major development project) is to ensure a future for the IC by restricting development (and keep land prices high). It will not work because Irvine is not in a vacuum. The area will bleed jobs and people until an equilibrium is established. (not to say an equilibrium with Texas, but rather with other areas such as Corona, Rancho Mission Viejo, RSM, etc.)

         It’s like killing yourself to spite your enemies. It never works.

         Chuck Ponzi
         1. tlc8386 January 31, 2009 at 2:27 am

            http://www.ocregister.com/articles/park-lennar-great-2044921-million-development

            imainge if the Great Park has been open to the public to build homes that we wanted–and not told what they will build–

            According to park figures, the park had spent $54.7 million as of Feb. 29. —

            where did this money go?
            1. wheresthebeef January 31, 2009 at 5:08 am

               That sure is one expensive big orange baloon.

               I see that stupid baloon everyday on the way to work. However, I get the biggest kick of looking at the dark towers off of Jamboree (aka North Korean Towers). Those towers will be a long lasting scar that will remind everybody of the insane housing bubble that we endured.
      2. LC January 31, 2009 at 12:27 am

         Not land use controls — every county seems to roll over for developers — but developer greed and oligopoly, if you ask me. There are few builders left to compete against the corporate giants. They build in insuffient quantities to satisfy demand, thus keeping prices really high. It is a lesson learned from the 1980s, when they built 100s at a time. California has more land than any other state except Alaska and Texas. But home building here is the province of a select few. Irvine is a perfect example. You cannot build there unless you are a well connected corporation. It is the same trend that leaves little choice in restaurants and shopping in places like Irvine. There is no competing against the Wall Street funded corporations.
      3. Edie Spencer January 31, 2009 at 5:05 am

         Not necessarily. Minn/St. Paul experienced a huge real estate boom and run up of prices as well. Same for parts of Wisconsin as well, and the Omaha, Nebraska area !

         If you are working in SoCal, and are skilled, then the prices in the Upper Midwest seem cheaper…until you look at local salaries.
         1. Forbear January 31, 2009 at 8:23 am

            True, and the housing prices are very tempting. The only draw back is losing the job you moved there for, which can happen to anyone. The question to consider before moving is, when I lose this job will there be any others.

            Welcome to the new America. The reason I continue to reside in SoCal.
   2. george8 January 30, 2009 at 7:22 pm

      NYC, especially Manhattan, is still a huge bubble waiting to pop. I believe it is in the early stage of denial in NYC. The income/price ratio in Manhattan must be ridiculously high.
      1. Chris January 31, 2009 at 1:20 am

         It remains to be seen just how much of NYC’s income originates in the financial industry. As that industry collapses, the pop could be a massive detonation.
2. mav January 30, 2009 at 6:26 pm

   To suggest that the problem is confined to 2003-2006 is to ignore the past 25 years.

   The Great Unwinding has now taken hold of all business sectors.

   “As you simplify your life, the laws of the universe will be simpler; solitude will not be solitude, poverty will not be poverty, nor weakness weakness.” –Henry David Thoreau
   1. Bill McKim January 30, 2009 at 10:40 pm

      The problem certainly wasn’t confined to 2003-2006. there have been three. Late 1970s to early 1980s, and 1987 to 1990. That is why it is so quaint to long time observers that people believe that future bubbles can be prevented by making rules and regulations during the time period immediately after a bubble has burst, and expect them not to be changed by new individuals at the inception of a subsequent bubble.
      1. mav January 31, 2009 at 1:06 am

         Brian McKim,

         Under the tutelage of your economic crisis pamphlet and your apparent extended experience participating in bubbles I have a simple question for you:

         Do you remember life before the proliferation of mass consumer credit? It’s a rhetorical question as I’m sure you have lived through the past 25 years of American History. Suffice it to say the quality of life changed dramatically.

         I believe the Great Unwinding will send us back in time. The standard of living in America will decline precipitously…. there is always the possibility of kicking the can down the road a decade, transferring the insolvency disease to the US Balance Sheet; but at some point we will get back to life before mass leverage.
      2. tonyE January 31, 2009 at 3:48 am

         The first two of those bubbles came after some significant periods of hardship and pent up demand: the 70s saw stagflation and then rates dropped and the mid 80s were a relief after Volcker’s 20% prime rate.

         During both of those bubbles lending standards were reasonable.

         The bubble of 03 to 06 was worse because it was driven not so much by low rates ( rates were low in the 90s too) but by the availability of truly cheap money coming in from Wall Street -because nothing else was investment grade.

         From 03 to 07 there were no credible lending standards.
3. Mark Braun January 30, 2009 at 6:36 pm

   I don’t see how trying to alter the real estate market with tax policy could possibly be a solution. No legislation could ever get passed as long as we live in an electoral democracy and the creativity of Americans, especially wealthy Americans, at tax avoidance would be stimulated to greater heights.

   I do think there are several simple measures which could be implemented to prevent recurrences however: 1) No FDIC or other government supported institutions could lend greater than 80% LTV; 2) no HELOCs where total mortgage debt is greater than 80% LTV; 3) no stated income loans (the self employed like myself should be required to document income – no exceptions); 4) no mortgages where payment exceeds 31-35% of income; 5) any securitizer of mortgages or any other paper should be required to hold a substantial portion, say 20%.

   Under these circumstances real estate prices could not rise beyond the income of the population and there would be no unreasonable incentive to make ridiculous loans simply to obtain fee income.
   1. Bill McKim January 30, 2009 at 10:51 pm

      I need to go on at some length to explain how and why altering the tax policy not only could be a solution, but is the only possible solution.

      It was implied I want to tax away the profit that people make on their house above inflation. In my mind that is not really what happens in a non-bubble environment. “Inflation” sounds like the CPI, which makes it seem as though housing prices follow along with tomatoes, TVs, and wage changes.

      I don’t really know whether the things that change the relationship between the dollar and other commodities also change house prices or not. What I do know is that population density, employment opportunity influx, cultural improvements, infrastructure improvements, as well as their opposites do affect real estate prices.

      That is the true “profit” in owning real estate. In a location where these things are occurring in a positive direction, house prices go up. When they are occurring in a negative direction, housing prices go down.

      In your January 27 post you discuss your envy of those who did get in on all the “free money”, although you have no regrets about not playing the free money game, and not wanting to trade places with any of those people who were spending during the bubble who were conspicuously absent from the stores.

      Let me tell you about how I have found it to be in profiting from owning a house during both “normal” times and “bubble” times. I owned and sold three houses during “normal” times from 1952 to 1970. I profited by the appreciation of the value of those houses to the extent that I had no housing expense during all of that time. Because I lived in localities where population was increasing, jobs were coming in, cultural improvements were being made, and infrastructure was improving. I profited just about exactly enough when I sold the houses to return to me every dime I had paid out for down payment, mortgage retirement, mortgage interest, and property taxes.

      This kind of profit is the profit that created “a religion in California”, and it is the profit that would not be touched in my proposal. When I came to California in 1957, the first thing I was told by my coworkers was to buy a house. Everybody knew that buying a house was fundamental to sound financial planning, and everybody wanted to do it. Furthermore, practically everyone could do it, because property didn’t increase in price by 20% or more in a year. It appreciated by 5 to 8% a year. This profit is secure under my plan.

      This profit I didn’t feel guilty about taking (although, having read Progress and Poverty before I ever bought a house, I realized that I was reaping the benefits of societal development, and not from anything that I had done).

      On my next two houses (which were pretty much the same kind of house that my first three had been), I profited $400,000 more than I would have if times had remained “normal”. That is because three irrational exuberance bubbles had occurred while I owned the two houses, and I had sold at the peak of the bubbles. This is the profit that I would tax away. This is the “free money” that you regret the recipients not paying back.

      If Californians are worshiping this God, then they need to be told not to do that, because that is the evil in this process. If we accept that it is right and proper that people should be able to gain and keep the profits from an irrational exuberance bubble, then nothing we do in terms of rules and regulations will deter the bubbles from recurring.
      It will be a difficult sell, as the Astute Observations already posted demonstrate, but it must be “sold” if we are to prevent the next bubble from occurring.

      I think the main thing that people tend to overlook in considering ending the bubbles by taxing away any profit which is due entirely to the existence of the bubble is the fact that it is absolutely vital that it be understood that that is the only solution that will work.

      All regulatory changes are doomed to failure, because the mood of the public during a bubble is entirely changed from the mood immediately after a bubble has burst. The new rules will revert to the old rules. The people operating the system when the new bubble begins to inflate will be different individuals than those individuals now operating the system. There is no institutional memory. There will be new Congressmen, new journalists, new loan officers, and a new President, and somebody else’s memory will not provide any bulwark against the apparent prosperity of rising real estate prices.
      This has been proven. We’ve tried this before.

      This time we have to do something different, and that is to prevent any bubbles from forming by taxing away any profit from irrational exuberance bubbles.

      Bill McKim
      1. Kelja January 30, 2009 at 11:48 pm

         What made this mess we’re in was the government attempting to micromanage the economy — generous tax breaks for owning a home, keeping rates artificially low too long, allowing lending requirements to be loosened too much.

         All you are doing is doing more of the same.

         I always am amazed at how the government is thought as the answer to a problem usually caused by itself.
4. PURPLEHAZE January 30, 2009 at 6:51 pm

   I sometimes feel that economists and commenters do not go far enough to use their intellect to give solutions out of this financial quagmire. Although reporting, analyzing and deciphering bubbles is fun, we need to move on and find solutions. Well that is in fact the Trillion dollar question! But I am sure that in the coming days everyone will want to give their two cents and the resulting chaos is what will finally drive the market to ‘depression’ on the Kubler-Ross model. Most of these two cents will end up being false. Unfortunately, there is no easy solution and dust will have to settle on all the over-expansion and build up of inventories before we see fundamental shifts in the economy towards growth and equilbrium. Just my two cents 🙂
   1. mav January 30, 2009 at 8:25 pm

      You act like this is somewhere in the realm of rocket science or black magic. There has been a plan all along. The plan is to dump the losses on the tax payer. This is always the plan.
      1. Bill McKim January 30, 2009 at 11:12 pm

         You’re almost right. That is certainly what has always been done, but it doesn’t seem to me that there has ever been a plan. This blog may help us to determine what the problem was and apply the money in a way that will fix it instead of making it worse. Curiously the one who most nearly had it right was Henry Paulsen when he first announced the $700 billion program. He was going to replace the money that had been lost by the lenders on home mortgages so that they could get back to lending money for all of the things that make the economy function, like meeting payroll, buying cars, and starting new businesses.

         If that is what he meant to do, I wish he had been able to explain it better. If every one understood that the only thing that had gone wrong was the money lenders had no money to lend because they loaned it on the basis that real estate was three times as valuable as it had been three years earlier. When that turned out not to be true, and the lender was limited to foreclosing on property to recover the money (because of prior instances of legislative bodies trying to fix economic problems), then there was no money to lend to all the other people that needed credit to function.

         If all of that had been understood by all, and no one had been looking for someone to blame, then the economy would have been humming again before the lack of credit put the auto companies in dire straits.
         1. maliburenter January 30, 2009 at 11:56 pm

            The problem was more widespread than that. Because of the credit bubble, more things than houses were overvalued. Commercial real estate was overvalued. Stocks were overvalued. Bonds guaranteed by AMBAC, FGIC, MBIA, etc, were sometimes overvalued (usually CDOs, MBS) and sometimes undervalued (usually munibonds). Bonds with very different riskiness were being treated similarly because they were all “guaranteed”.

            The excessive amount of credit available was just dying to find a place to roost. Much of it went to housing, in the US and elsewhere. A lot went to commercial RE. A ton went to hedge funds and exotic leveraged transactions. Unfortunately, a lot of it also fueled stock buybacks and takeovers, leaving the corporate sector more leveraged than before.

            This has happened before. A good close analogy is Japan. Many of the features of Japan’s bubble and bust sound very familiar from the most recent US bubble and the S&L crisis of the 1990s. You might particularly like Fig 19, which shows the tight correlation between asset prices and private sector credit.

            http://www.imes.boj.or.jp/english/publication/mes/2001/me19-s1-14.pdf
            1. Bill McKim February 1, 2009 at 6:12 pm

               I suppose that all of that is true. What is also true is that none of it happens if the disconnect between the price of houses and the value of houses is nver allowed to occur.

               No credit bubble comes into existence if there is no bubble in the price of the thing that is the subject of the credit.

               Nothing can be “over valued” when each transaction is examined by the tax assessor at the time of the transaction, the true value determined, and any profit from “over valuation” is taxed away.

               Selling at an “over valued” price as a way to make money will disappear. We can have a viable, prosperous economy in which things are sold for what they are worth.
            2. mav February 1, 2009 at 6:53 pm

               Whenever there is a credit bubble a cornucopia of inflation is going to occur in many asset classes. It’s the nature of the beast. You can focus on one asset class and maybe prevent speculative inflation in a specific asset class, but you will not prevent the plethora of goods and services that will hyper inflate. A key to any speculative bubble is a futures market with leverage. To say there was only a housing bubble over the past 10 years is to miss the entire point of our bubble economy.

               This is not a chicken and egg thing. Without the credit bubble there can only be very limited speculative inflation, with a rapid return to fundamentals. Preventing the credit bubble is the key.
            3. Bill McKim February 4, 2009 at 10:42 pm

               I’m glad I didn’t miss the point, for I never said or thought that there was only a housing bubble over the past 10 years. I’m discussing the housing bubble here because this is a housing bubble blog.

               The rest of this Reply is a message I sent to IrvineRenter this morning. I think it will give you a full (probably even fulsome) understanding of my position.

               [I tried to send it once, and was told that it exceeded the allowable length,(which, by my computer’s count it doesn’t). I will try sending it in chunks, so I you will see two or three Replies from me]

               I can’t tell you how much I appreciate you’re having mentioned me and my book on your January 30 post. I couldn’t see that anyone who responded had looked at the book, but it was a great pleasure to reply to many of those who had responded to your characterization of my position.

               I was pressed into making my arguments in ways that I hadn’t used before, and learned a great deal about the issue that I either hadn’t known or had not carefully considered.

               I was not entirely surprised that several people thought that I was advocating price control, or an excess profits tax, because at some point while writing the book I had realized that that confusion could exist. I don’t think it could have occurred to anyone who actually read the book, though.

               I was very surprised, however, to find that so many readers of your post thought that I was advocating taxing away all of the profit from the sale of a residence. I felt that even a cursory glance at the book would have dispelled that misunderstanding, because I only advocate taxing away any portion of the price of the sale of a residence that is due entirely to the existence of a bubble. Henry George advocated taking all of the profit, feeling that the only reason for land to become more valuable was the development of the surrounding area, and that that increase in value should be taken to pay for the government improvements that created the increase in value.

               We have never taxed property that way, and I don’t advocate any change in the way that we tax the value of property. I only advocate taxing away the portion of money realized from selling property that is only an increase in price, without any increase in the value of the property. That is the part created by the bubble, and it is the part that defrauds the buyer and the buyer’s lender, and, the way things work out, the taxpayers. This because it is payment for all of the “air” in the bubble, and for no actual value.

               I was also surprised to find that there were so many people around that continued to believe that we could combat the effects of a real estate bubble by making rules and regulations to control the actions of the individuals who will be doing the lending in a future bubble. Such rules and regulations have always proliferated in the wake of a bubble disaster and been eliminated or reversed when everybody wants everybody to be able to participate in the next bubble.

               I greatly over estimated the existence of any institutional memory. Apparently there is none. Now I admit that your proposal to include criminal penalties makes it harder for individuals to do the things that all around them will be clamoring for them to do, when the next bubble begins. However, I think I could successfully present an entrapment defense because we could have prevented the bubble from forming by taking any profitability out of it, but had chosen, instead, to continue to allow bubbles to form.

               The inevitable consequence of allowing the bubble to form is that individuals, or even businesses, will act in accordance with the wishes of buyers, sellers, media, “the public”, and legislators and go ahead and approve the improvident loans.
            4. Bill McKim February 4, 2009 at 10:48 pm

               [Continuing]
               The thing that I had never anticipated, though, was that so many people would believe that the bubbles are created by some sort of spontaneous combustion caused by the availability of too much credit. This is a classic case of the logical confusion of noting the existence of two things that exist at the same time, but concluding that the one that was the consequence was, instead, the cause.

               Now, one of the benefits to me of the discussion created by your post was a reconsideration of the fact that the bubble of the late 1970s came to an end with interest rate at 20%, while there was no significant increase in interest rates at the time of the 2003-2006 bubble. I’m afraid that I had brushed that aside with the only the thought that Jimmy Carter was President, so this was just another thing that ceased to function.

               Now I’m thinking that it may have been that a limit of the amount of money that was available to lend did drive interest rates up to the point that the amount that would be realized from buying a piece of property simply because its price would increase by 20% in one year would be eaten up by the interest that would be paid on the money borrowed to buy the property.

               I had always had the thought in mind that, even in the midst of irrational exuberance, at some point the realization is going to occur that “Hey! I can go pitch a tent in the park for five years and save all the money that I would have paid in rent and then go pay cash for a house”. Having been through the exercise occasioned by your post, I think it’s more likely that the increase in interest rates just stopped inflating the bubble.

               This analysis, though, does not mean that the status of the credit market at the time that the bubble started caused the bubble to form. You observed, at one point in our correspondence, that you thought I would benefit from reading the last chapter of your book. You were right, and I thank you for the suggestion. I think that you would benefit from reading Appendix 1 of my book, which is entitled A Triggering Event.

               In it I describe the creation of the first real estate bubble that I was aware of, and what the actual steps were in the formation of the bubble. I have always assumed that, although I could clearly recognize its spread across Los Angeles County, it seemed too presumptuous to believe that it was the trigger for the entire late 1970s, early 1980s bubble throughout the country. But then, some people had the very first McDonalds Restaurant in their neighborhood. I don’t have Professor Shiller’s data gathering facilities at hand to actually trace the spread of that bubble across the country, so I won’t speculate further about the extent of the effect of the bubble I watched form.

               It was the actual formation of a bubble, though, and its formation has convinced me that bubbles are triggered by events independent of credit markets. The existence of credit conditions may affect the rate of spread, the intensity, and the duration of a bubble, once it occurs, but that won’t make any difference if we change the tax policy to prevent the bubble from ever occurring.
            5. Bill McKim February 4, 2009 at 10:53 pm

               [Concluding]
               The triggering event of the 1987-1990 bubble was undoubtedly the Stock Market Crash in 1987.

               Possibly because the early 1980s bubble ran out of inflating gas because of the cost of money, its end was peculiar. There was never the dramatic crash in the price of houses that I had expected during the bubble. There was just an end to the increase in prices, then a slow decrease over a period of years.

               Thus, there were was not the horror of homeowners finding themselves dramatically upside down in their mortgages, just the disappointment that they hadn’t gotten in at the beginning of the bubble, and out at the peak.

               In the meantime, all of those who had experienced having suddenly become $100,000 richer were looking for a way to do it again in the absence of a real estate bubble. They tried FM Stations, and Fine Art, but there was really no place to go that was a casino big enough to place the aggregate of all those bets except the Stock Market.

               So they went there, and blew the roof off of it in 1987. When that happened, the people who by now believed that honest labor was for patsies and that getting in early in a divergence of price from value in market was the real way to accumulate money were again without a vehicle.

               Again, they were faced with the fact that there were only two casinos that could handle the aggregate amount of money ready to be bet. Now, the real estate market hadn’t really crashed, it had just sort of withered, and all of those who had recently been betting in the Stock Market casino, had fond memories of when they had been made flush at the Real Estate casino. They tested it, it jumped, and they were off to another ride!

               This time, whatever ended the real estate bubble, it wasn’t such a soft landing, and it took a longer time for real estate to look good to the “money without earning” crowd.

               Finally, in 2003, perhaps triggered by the collapse of Enron and related “Corporate Scandals”, real estate got another look as a way of profiting from a discrepancy between price and value. By this time those who had suffered from the collapse of the 1987-1990 real estate bubble, had moved into a different stage of the lives, a majority of the those involved in the mortgage lending business, journalism, and legislation were either different individuals, or were not able to hold sway over those who were new to the game.

               By this time, from development in the financial markets generally, and lessons learned from lenders running out of money in the early 1980s, as well as poorly thought out legislative changes, the bubble was, if anything, more explosive than the previous two.

               Understandably this leads to the perceptions that 1) the bubbles were caused by credit policies, and 2) that bubbles can be controlled or prevented by control of credit, control of the individuals and businesses involved in mortgage lending, and increased regulation by Congress.

               For all of the reasons discussed above, primarily that that would all be changed when the next bubble begins, the controls won’t work, and the reason that bubbles form is not credit policies.
         2. awgee January 31, 2009 at 4:54 am

            Inflate or die
   2. lowrydr310 January 30, 2009 at 10:13 pm

      Accountability is the problem – banks give loans then avoid risk by selling to fannie/freddie, who were happy to buy because Uncle Sam was implicitly going to bail them out (which turned out to be the case).

      There was no accountability by anyone. Even banks who didn’t offload their loans to fannie and freddie were too eager to create mortgages because of the huge demand for mortgage backed securities. Even the demand for mortgage backed securities was created by people with no accountability; they were managing money that didn’t belong to them.
      1. Bill McKim January 30, 2009 at 11:22 pm

         Actually, accountability isn’t the problem. The problem is that prices of houses were three times the value of houses. If that hadn’t occurred, lenders wouldn’t have been packaging and selling loans that were valueless and Uncle Sam wouldn’t have had to bail anybody out.

         Somehow it always seems easier to find someone to blame than it is to find the reason that a problem occurred and fix it.
      2. Kelja January 30, 2009 at 11:52 pm

         People are accountable when they are at risk if things go wrong. Banks are no different. The problem was that homebuyers, speculators, loan brokers, banks all off-loaded their risk to others. The homebuyer did this by buying homes with no or very little money down. The banks did it by selling off the mortgages to wall street.

         No skin in the game – no accountability.

         Human Nature doesn’t change.
5. Orcian January 30, 2009 at 7:02 pm

   Isn’t this mess kind of like Lord of the Flies? The kids (banks, lenders) got out of control, and one realizes the importance of the parent’s (the government’s) role in controlling the kids, to keep them from getting uncivilized and unruly. Kids without parents = disaster, just like this housing bubble.
6. Texas Triffid Ranch January 30, 2009 at 7:09 pm

   To quote one of my childhood role models:

   “There’s an infinite supply,
   And there is no reason why.
   I tell you it was all a frame,
   We only did it ’cause of fame.”
7. NoWowway January 30, 2009 at 7:30 pm

   I believe the equity burn numbers are off.

   This was our first property purchase except ours was a 3 bed/2 bath.

   You have to lug everything up the stairs. There is an attic space if you need to store a few things. There is an outside storage closet that you can store your bikes, but you need to use hooks to suspend them, if you want to get anything else into the space for storage. There is ONE carport assigned to each unit. You have neighbors below and if your kids like to run around, they will probably complain downstairs. They also hear “everything” you do. You have to learn not to look directly into the neighbors’ homes when you are passing by, so that you give them a sense of “privacy”.

   Tot lot and pool w/kiddie pool nearby that we used a lot. two HOA fees to pay each month.

   I have to say that price is absolutely ridiculous. This is a starter home – it’s set up like an apartment – complete with the ONE covered carport area/per household and the adjacent community trash bin.
   1. IrvineRenter January 30, 2009 at 7:51 pm

      Yes, the numbers were off. I have changed them. Thank you.

      I imagine, even with our ridiculous rents in Irvine, that this place will settle near $200,000. In retrospect, it is rather amusing that someone bought it for $465,000 thinking it would keep going up.
8. badtime January 30, 2009 at 8:22 pm

   i never get it. why do you have to pay 300 bucks HOA fee for a shitty apt like this one?
   1. LC January 31, 2009 at 12:35 am

      In the old days, that apartment would have rented at not much more than $300 per month. And I am talking about 1983.
9. AVRenter January 30, 2009 at 8:48 pm

   I hope I haven’t misread what Mr. McKim wrote but I disagree with the notion that, “Our economy isn’t broken, the financial system is.” Our economy is consumption based (broken), debt driven (broken) and import supplied (broken). The idea of just pumping the lost trillion dollars back into the system doesn’t seem to address a large part of the problem.

   Not to mention whatever the final loss number turns out to be I don’t think that’s the value that needs to be pumped back into the system. The value lost was based on b.s. valuation and it drove a b.s. economy. The economy needs capital? Fine, but I disagree that it’s a one-for-one ratio. Probably a minor point to the total discussion but the number just stood out to me.

   While I like the idea of an inflation based gains system I dislike and distrust the use of the CPI as we currently know it. The current CPI is, excuse my language, horse pucky, and I would certainly distrust the government’s future manipulation of this value if so much money rode on it.

   Of course I offer no solutions. I’m just a Bitter Betty.
   1. Bill McKim January 30, 2009 at 11:53 pm

      A lot of thing appear broken that would be just fine if credit was functioning normally. It’s hard to comprehend the necessity of credit, but everything depends on it. I didn’t realize until recent discussions that businesses routinely borrow to cover payroll. I thought that happened only when the treasurer had absconded with the funds.

      I can’t help but feel that more people would be buying even the Detroit cars if people weren’t either being denied credit or being scared to death of credit.

      I certainly agree that just pumping a trillion dollars into the economy will fix anything. What will fix things is for everybody (or at least Congress and their bosses, the media) to understand that what went wrong was that the credit providers lost all of the money they needed to lend to everybody by lending money of real estate base on the price that it was selling for, rather than the true value of the real estate.

      Therefore, the trillion dollars has to be spent, not in some shotgun, pork barrel fashion but specifically to restore credit.

      I’ve stated elsewhere in these Astute Observations that I don’t think the CPI has much to do with the appreciation of real estate, and that real estate appreciates in normal times according to population density, job influx, cultural improvements, and infrastructural improvements, and that real estate is the only thing causing the current crisis.

      I do offer a solution, but my Bettye is about tired of my doing right this minute.
      1. AVRenter January 31, 2009 at 1:36 am

         I guess this is where we may just fundamentally disagree. I gather that what you see as broken in the economy is that it just needs to be *restarted* with free flowing credit. I believe the economy is fundamentally broken and needs to be *fixed*. The last thing we need, as your example implies, is more cars (etc.). Sure, maybe a trillion dollars should be spent but as capital investments, not something I trust our government to do, and it shouldn’t be financed through more debt. That is where we are fundamentally broken. If everyone adopts our economic strategy there would be no credit for us to use.
         1. Forbear January 31, 2009 at 9:00 am

            A big whoooyaaa here.

            We need to produce a product to be a viable player in the worlds economy.

            The ponzi scheme/brokerage mentality hasn’t worked.
         2. Bill McKim February 1, 2009 at 6:37 pm

            You’re right, we fundamentally disagree. I didn’t intend to imply that having more cars will fix our economy. My point was that in 2003 the economy was humming along pretty well, and that it deteriorated because the housing bubble burst, taking out of the economy all of the credit that had been extended for mortgages.

            Because that credit was no longer available to use for other purposes, all sectors of the economy began to grind to a halt.

            I see no reason to believe that borrowing a trillion dollars from the Chinese to do “capital investments”, whoever selects them, would restore the function of the credit system. If the credit system remains inoperable nothing else works.

            Whatever was being done in 2003 and the years just prior to that seems to have been working, and the people making the decisions about how capital investments should be made should still make those decisions.
      2. awgee January 31, 2009 at 4:57 am

         More credit, (debt based money), is the problem, not the solution. You can not solve a solvency problem with more credit.
10. Woodbury Renter January 30, 2009 at 8:48 pm

    All of the regulatory requirements are in place to prevent irrational lending – Tier 1 Capital Ratios, Reserve Requirements etc. The essential catalyst for this bubble was the invention of mortgage securitization. This tool allowed banks to lend, move the assets off of their balance sheet and then lend again. It was better than crack for bank revenues. If you take mortgage (and credit card) securitization away – of at least if you force banks to continue to hold the assets on their balance sheets, then the unending supply of lending capacity that was the air for the bubble will be gone.
    1. tlc8386 January 30, 2009 at 9:21 pm

       Just like the old days when the bank owned your loan and did not leverage it out to the highest bid.
       I always say follow the big money–and it’s the bankers who leveraged our debt to make them billions–just look at their pay/bounces.
       They are the ones that loaned to anyone and everyone.
       And why because they sold off the risk–LOL–

       you got it right!!Woodbury
    2. Chris January 31, 2009 at 1:39 am

       You are missing one piece in your description, and that is corruption and incompetence in the ratings agencies.

       The mortgage backed securities involved mixing and selection and who knows what. Instead of saying that the resulting mess could not be assessed reliably, the ratings agencies were paid by the issuer to give these securities AAA ratings (or the equivalent). This is what allowed them to be sold in such quantities and was the source of the influx of money that drove everything. Without the fake “investment quality” ratings, the bubble may not have occurred.

       Personally, I’d say “would not have occurred,” but that is speculation. The high ratings allowed banks to sell the securities easily. Knowing the securities would be sold made the banks indifferent to the quality of the underlying mortgages.

       As long as I am spouting off, how about we outlaw ARMs with low teaser rates? What good do they do?
       1. tonyE January 31, 2009 at 3:57 am

          THAT WAS THE PROBLEM.

          NO REGULATION of the CREDIT AGENCIES.

          (excuse me for the upper case)

          It’s the DotCom Bust all over again, where the stock analysts worked for the same company as the stock brokers and all made money if everything was a SELL signal.

          The mechanisms are all in place. There is NO NEED for TAXES nor MORE REGULATIONS.

          Just make sure that the Credit Agencies are not financially rewarded by delivering Top Notch ratings.

          Credit Agencies should operate under strict controls and oversight. There should be no credit agency “market shopping” opportunities by the credit issuesuers as in: “if you mark this down we’ll take our business elsewhere”.

          That’s where the market failed.

          Simple.
          1. tonyE January 31, 2009 at 4:03 am

             Hmm.. BUY signal
    3. Bill McKim February 1, 2009 at 9:11 pm

       This one made me ask myself a lot of questions, and do a lot of thinking.

       Can Woodbury be right? Where did the money that the lenders loaned for houses that cost three times as much as the houses they had been lending on three years before come from?

       It doesn’t seem as though it could have come from attracting new deposits, because interest rates didn’t go up much, if any.

       Was it that, even at the relatively low interest rates, newly rich foreign countries had more money than they could find a place to spend? If that was true, how did that money find its way to the home buyer? Did the Chinese deposit money in Countrywide, or did they buy the securitized mortgages that Woodbury is talking about?

       What is the reason that banks have to “move assets off their balance sheets” before they can lend again? Is it because for a given “capitalization” a bank can only loan so much money? If that is it, what do they get for the “securitized” mortgages? Do they receive some per cent of what will ultimately be paid on the mortgage?

       Why are the mortgages “securitized”? Is it just to spread the risk among mortgages from different regions of the country, different lenders, or different types of property? If so, would this be enough of a factor to preclude China from making deposits in Countrywide if the interest that Countrywide was paying was sufficiently high and safe to attract Chinese money. If not, mortgages would be very safe if the property was appraised by the Irrational Exuberance Tax Assessor at the time of the sale of a house, and a tax collected for the amount of the difference between the selling price and the actual value of the property.

       The lender would then only lend on the actual value of the house, not on some imaginary value that the buyer and seller had agreed upon. The reason that is all that the lender would lend is because he would know that, when the proposed new loan was to be paid off from the proceeds of a subsequent sale, that the tax amounting to the difference between what was paid for the property and the actual worth of the property would be paid first and the mortgage only after the tax was paid.

       In other words, the lender would not assume that the mortgage was secured by property that is worth what the buyer and seller imagined it was worth, because he would know what it was actually worth.

       I remain convinced that we can keep air from entering bubbles in the future, and that we can’t force banks, regulators, Congress, or anyone else to do something in the future after a bubble has come into existence.
11. Jeorge January 30, 2009 at 8:54 pm

    “we both hope that as a society we recognize the importance of stopping this from happening again”

    Unless you can change human nature (me first and more of it aka GREED), nothing will ever stop the next “bubble” from happening. No tax policy, no education, not a damned thing. Now the next “bubble” may not be as huge as this one nor in the housing industry, but it will happen.
    People made this happen, not markets, policies or any of that rot.
    1. Bill McKim January 31, 2009 at 12:10 am

       You are soooo almost right. All the solutions I’ve seen offered do involve changing human nature, and that’s not going to happen. That is what makes changing tax policy different, if that change is to tax away all of the “profit” that would be made because of the existence of a bubble. (NOT taxing away the profit that homeowners always have enjoyed in non bubble times).

       The reason it is different is that it prevents the bubble from ever forming. Once a real estate bubble forms – which it can from even credit worthy buyers – then human nature is to increase the apparent growth in wealth, and to especially include in that good fortune those who are too poor to actually be able to pay for a house. No education, no regulation, no law will remain in place once the bubble has come into existence.

       A change in the tax law, though, to tax away any profit that anyone make by selling at bubble inflated price will remain unchanged because the bubble will never get started.
12. SeattleDave January 30, 2009 at 8:58 pm

    “So, if the banking industry is given back the trillion dollars it loaned on real estate…then the wheels will start to turn and everything will be fine in the economy.”

    If I understand his point correctly, he would like to see the financial system return to loaning lots of money in order to grease the wheels of commerce. He seems to think that the current hardships will not have an effect on the populace.

    It is my hope that the citizens of this country are learning that all of that stuff they were buying with borrowed money was not all that necessary or important. I hope they realize that they do not need to buy a big SUV, that a nice Carolla will do just fine for their needs. They don’t need to buy a new car every 3-5 years, that a new car will last 8-10 years without any problems. They don’t need that Harley-Davidson. They don’t need that fancy vacation. They don’t need that Coach handbag or those $250 jeans. And they certainly don’t need to buy that McMansion.

    In short, I hope that people begin to realize (and I think they are) that their needs are not anywhere near their desires. And that they should stop borrowing money to fund their desires. Purchasing their needs out of their income is much more sustainable (and hopefully more emotionally satisfying).

    So, going forward, the banks can have all the money they want, and it will be of no use if nobody wants to borrow it (at least at past levels). And if people truly scale back their consumption to match their needs and incomes, then the economy will indeed be in trouble, and no amount of lending will fix it.
    1. Perspective January 30, 2009 at 9:42 pm

       I’m with you SeattleDave. I’m trying to “save the world” one person at a time.

       I spent 30 minutes yesterday trying to convince a coworker that he should repair his 97 Camry rather than go out and get any one of many “great deals” available today. He has a small emergency savings, no college savings for two young kids, a non-working spouse, and most people can’t “count on” their jobs right now.

       “Nobody else is buying; you’re not in great shape; why should you be buying???”
    2. Bill McKim January 31, 2009 at 12:53 am

       I can’t find anything in this astute observation to disagree with except in the second paragraph. I certainly am sorry for the effects that the current hardship is having on the populace, and those I know and love have been badly affected. But I also hope that one of the effects will be that the populace will be motivated in the direction of doing all they possibly can to see to it that Congress acts to prevent any such hardship in the future.

       As far as “greasing the wheels of commerce” is concerned, we seem to have a little different focus. SeattleDave seems to be concerned about what individuals will buy with credit cards, whereas I am thinking only that we really haven’t any choice about getting along in the world except a barter system, paying cash or using credit.

       My understanding of the way things work is that being limited to only being able to use cash on hand might work, or even be an improvement for personal transactions, but having to have a trucker carry a satchel with several hundred thousand dollars in it in order to back up to the loading dock would be fraught with peril.

       I think we need to use credit, in some instances, and right now there is so little understanding of what the problem is that even if our grandkids pony up the money that lenders lost on overpriced real estate, lenders would be reluctant to let go of the money, because they don’t understand why they didn’t get it back the last time they loaned it out.

       Let’s everybody settle down, sit back, and think about this problem, until we all understand it, and agree that it can be stopped only by making it impossible to make money by selling something for more than it is actually worth.
       1. Forbear January 31, 2009 at 9:14 am

          I can only agree, your comments are uplifting in these times economic failure.

          Goverments should be conservative in nature, because it’s our money.
13. lunatic fringe January 30, 2009 at 9:07 pm

    I’ll start off by saying that I couldn’t disagree more with Mr. McKim’s ideas. Price fixing is always a dumb policy. Being someone who really enjoys taking a fixer and renovating it and then enjoying the fruits of my labor by selling it, I would be infuriated to see my ability to make a profit be eliminated. I imagine most other people who do this would feel the same. Dumb, dumb, dumb…

    My thoughts on how to avoid this sort of mess in the future is pretty simple: Stop the freaking bailouts! No bailouts for Wall Street, no bailouts for homeowers, no bailouts for MBS buyers, no bailouts for shareholders and bondholders. I’d also do away with Level 3 assets and I wouldn’t allow off balance sheet investments. If you make people bear the brunt of their poor decisions, the poor decisions would tend to stop.

    Additionally I would get rid of every single government program that subsidizes home ownership. All this does is create artificial demand and ultimately causes prices to rise. Why is the government sponsoring programs that cause home prices to go up?
    1. lowrydr310 January 30, 2009 at 10:23 pm

       Why not pay tax on the profit from a home sale, just like you would on any other investment?

       I run a small business outside of my day job that earned around $20,000 profit this year, and despite some deductions I still have to pay a big chunk of that in tax. Why should flipping a house have any breaks?

       I’m right leaning fiscal conservative, and I say tax the sh*t out of home sale, and don’t offer any mortgage interest deduction on mortgages that have HELOC money involved (specifically those those with equity lines of credit that are significantly higher than the purchase price of the home)
       1. lowrydr310 January 30, 2009 at 10:27 pm

          I don’t agree with price fixing, though something needs to be done about the tax breaks on homes. (sorry I jumped the gun and misinterpreted your comment.

          I completely agree with everything you said.

          Price fixing is stupid, and all the politicians babbling at the moment should stop spewing garbage along the lines of “We need to make mortgages affordable and keep people in their homes”

          No, mortgages are affordable. We need to make HOMES more affordable – increase interest rates so banks could cover their risk, and let the still-hyperinflated home values sink back to where they should be… Then again, despite what any politician tries to do, this is going to inevitably happen.
    2. Bill McKim January 31, 2009 at 6:57 pm

       I am so glad to see Lunatic Fringe’s astute comment, because I had forgotten for the moment that my concept of taxing away the bubble portion of the profit on the sale of a house could be interpreted as Price Fixing. First, I want to say that I yield to no one in my disdain for Price Fixing. As far as I’m concerned Nixon should have been impeached as soon as he did that, and we would have been spared all of that nastiness later.

       The job of the Irrational Exuberance Tax Assessor will not be to set a price for the house. That price will be set by the buyer and seller. The IETA’s job will be to make sure that no one can profit by buying and selling houses for the purpose of making a profit, rather than for the purpose of using the property. The thing we want to get rid of is the dividing the United States into a giant Roulette layout, with enormous red and black squares with numbers assigned to them. We don’t want people buying property in Southern California because it is square number 28, and they think that it is going to be the next place that prices are going to sky rocket.

       The IETA will look at the sales price of a house and identify the four elements of the price: 1) What the seller paid for it when he acquired it 2) What the seller has spent in improving the property while he has owned it, such as adding a room, having landscaping mature, or putting in a swimming pool 3) How the value has increased because of development of the surrounding area, such as population density, job creation, cultural facilities, or infrastructure, such as police and fire protection, streets and sewers, etc. 4) Irrationally exuberant increases in selling prices in the area.

       Number 4), and only number 4), will be taxed at 100%. Number 3) will be taxed the same way property has always been taxed. 1) and 2), of course will not be taxed.

       Now, in my mind, it is not clear whether number 3) includes within it some “inflation” in the CPI sense, or whether it is purely the development of the surrounding area. Probably most people would think of it as only inflation, unless they have read Henry George’s Progress and Poverty, in which he identified an increase in actual value of real estate caused by development of the surrounding area, as opposed to inflation, which is just an increase in price without any increase in value.

       I think that, for the IETA’s purpose, the two things can be lumped together, because it seems that they can be measured the same way.

       Element 4), the amount subject to the bubble tax, will be arrived at by subtracting the total of 1), 2), and 3) from the selling price.

       Obviously, the trick is to correctly measure 3). This is the thing that will distinguish the process from Price Fixing. We can’t have someone arbitrarily picking a number because of their own notion of what the house should sell for. The IETA has to measure the actual value of the property.

       A couple of ways suggest themselves. One is the rental value of the house. IrvineRenter briefly discusses the use of rental value in the last chapter of his book, and concludes that it is not easy to do, but has some advantages.

       Another way, which I think has merit, is to carefully compile data, by locality, concerning the long term appreciation in non bubble periods. For localities in which I have lived, over the years from 1940 to 2003, that appreciation has been remarkably consistent at around 7% of the original purchase price for each year of ownership. Now, all of the places that I’ve lived over that time have been places where the population density was increasing and the surrounding area was developing. I checked zillow.com and concluded that for the very small farming community of Lenora, Kansas, that figure might be nearer 0%.

       The bottom line is that it will be difficult to come up with an entirely fair and accurate method of determining the actual value of a property when it is sold, but it can and must be done because there is no other way of stopping the ravaging effects of irrational real estate bubbles from occurring!

       My fondest wish is that this august body of bright people who are interested in stopping the creation of future real estate bubbles address exactly this problem in a Wiki like manner. Methods of obtaining a true evaluation of property be proposed and critiqued and improved by the 4000 readers of this blog. I think that would produce something that could be taken to Congress and the Administration and say “You want to create Change that will truly solve a problem? Here’s the way to do it.”
       1. Bitter Renter February 3, 2009 at 6:34 am

          If you designate the price the seller paid as not subject to your “irrational exuberance” tax, then this strategy won’t help for most properties that last changed hands during a bubble period (such as this one), since that previous irrational exuberance will be built into the “allowed” price.
          1. Bill McKim February 5, 2009 at 3:29 am

             Huzzah! At last someone is addressing the only thing that I felt needed to be addressed in considering my solution to preventing real estate bubbles. That is the difficulty of putting in place a system for establishing an accurate and fair value for real property.

             Bitter Renter is entirely right, IF THE TAX CAME INTO EXISTENCE DURING A BUBBLE. The first thing we have to do is to recognize how unlikely, if not impossible it is that that would occur. The only way that could happen is if the buyer had bought the house during the existence of a bubble, and then the law was changed before the house was sold.

             It could not happen if the law was changed, then the buyer bought the house, and then a bubble occurred, because a bubble would never occur once the tax Irrational Exuberance Tax was enacted. Once lenders understand that all proceeds of a future sale will go first to pay a 100% tax on everything above the actual value of the house, before the buyer receives anything to repay the mortgage, the lender will not lend anything more than some percentage of the actual value of the house, as determined at the time of sale by the Irrational Exuberance Tax Assessor (IETA).

             The buyer may still be willing to pay more than the property is worth, but he will do it knowing that when he sells it, he will not receive anything more than the actual value of the house at that time (which will probably be the actual value at the time he buys the house plus around 7% of the actual value at the time he bought the house for each year until he sells it, assuming the house is located in an area where there is a developing economy).

             It is highly unlikely that an Irrational Exuberance Tax would be enacted while a bubble was in existence, because while the bubble is going on nobody wants to do anything other than pump it up and keep it going. No law is going to be passed which would impede increases in house prices while they are going up. Even I, were I omnipotent dictator of the world, would hold off until I was sure that all my kids and friends had gotten in on the gravy train.

             If, in spite of all that, a buyer did buy a house during a bubble, and then the Irrational Exuberance Tax was enacted, the most nearly fair thing to the buyer would be to exempt what he paid for the house when the Irrational Exuberance Tax was being assessed when he sold the house. The portion of the sales proceed on which the IET would be assessed would be any amount by which the sales price exceeded the purchase price plus normal appreciation of the property.

             Although there could be a quick series of sales of the property before the bubble burst, eventually some buyer and his lender would be left unable to sell the house for as much as was paid when it was bought.

             There will be some transition cases in which taxes will actually be collected under the Irrational Exuberance Tax Law, but it must be remembered that the law is not intended to generate any revenue! After it is fully operational, there will be no collections under the Irrational Exuberance Tax, because there will be no irrational exuberance. Nobody will buy a house to make a killing on it, but only for shelter.

             From that point on, the buyers of that piece of property will pay Irrational Exuberance Tax based upon the actual value of the property, since that is where the selling price will have sunk to.
14. Sue January 30, 2009 at 9:42 pm

    I can’t believe they paid $465K for that “apartment”. If you’ve lived in Woodbridge a long time you may know that the complex there across from the high school began as a low income type place. I think it was around 1992-93. We had a friend who bought there. You had to live there a certain number of years (maybe 2 or 3) before selling in order to get in.
15. Niven January 30, 2009 at 9:49 pm

    “the markets like NY/Boston had some elements of bubble”

    Many areas of the tri-state (NY/NJ/CT) area have been ‘built up for the past thirty years. The appreciation in many of those areas NEVER occurred. There is no desert to expand into, no new condos for as far as the eye can see. Congestion and density have been a problem for decades. Hence they never allowed over-building to occur. You buy a house if you have a family, it’s not looked upon so much as an investment. I would think the hardship is in the new luxury area.

    On Long Island there are strict regulations concerning new developments due to the ground water issues. In most affluent areas of NJ if you want a new home you TEAR down an old one and build another in its place. In Bergen Co, several of my neighbors sold (it took about 3 months) at only 5% below the 2007 prices. There isnt the mobile pyschology of so. Cal.

    We scoffed at you guys when you were the first to use credit cards to buy groceries. It’s the sunshine. It makes you too optimistic.
    1. lowrydr310 January 30, 2009 at 10:35 pm

       NJ is still overpriced. In many areas, it’s just as bad as Irvine.

       There are many areas that are reasonably priced by Irvine standards, however they are in less than desirable areas. Factor in extremely high property taxes, some of the worst school systems in the nation, and that horrible accent and you’ll quickly realize there’s nothing that’s reasonably affordable.

       I’m a bitter renter, but the fact that my annual rent is still less than what my friends pay in property tax makes me feel better.

       I found many homes I could afford, but nothing I want to live in. As a bitter renter, the difference between what I pay and what a mortgage & tax would cost is going into a bank account that even at a crummy 3.25% is growing at a faster than homes are appreciating.
       1. Chris M January 30, 2009 at 11:02 pm

          Where are you getting 3.25% from a bank? I’m only getting 2.5% on my ING money market.
          1. Bitter Renter February 3, 2009 at 6:40 am

             You can do better than even 3.25%. Check out http://bankdeals.blogspot.com/search/label/weekly summary?max-results=1 and http://www.highyieldcheckingdeals.com/.
16. maliburenter January 30, 2009 at 9:51 pm

    As I’ve said before, the proposal of setting maximum loan value off of the equivalent rent for a house has a lot of potential. It means that as prices get more and more irrational, the people buying have to use a larger and larger percentage of their own money. The lower amount of leverage in the system would cool bubbles.

    The other big thing is get rid of the tax deduction for HELOC interest. Consider making underwriting terms for HELOCs much more restrictive.

    Lastly, enforce the newly amended Regulation Z with a vengeance.

    “Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
    Require creditors to verify the income and assets they rely upon to determine repayment ability.
    Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
    Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.
    “These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system,” said Governor Randall S. Kroszner.

    In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer’s principal dwelling, regardless of whether the loan is higher-priced:

    Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
    Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
    Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer’s credit history.”
    1. Bitter Renter February 3, 2009 at 7:51 am

       Thanks for the info on that — I’d not heard about it. For anyone wanting some more info on this, there’s an article on it at <http://activerain.com/blogsview/592800/Amendment-of-Regulation-Z>.
17. zubs January 30, 2009 at 10:23 pm

    To get the banks to start lending again, couldn’t the banks start giving out recourse loans? Student loans are already recourse.

    Banks could make their mortgage loans recourse and therefore be more confident in lending.
    1. lowrydr310 January 30, 2009 at 10:41 pm

       The whole idea behind non-recourse home loans is that there was a tangible asset that the banks could take back should the borrower default. In normal real estate markets, this isn’t a problem since the homes could usually be sold for more than the mortgage balance (because real estate always goes UP!)

       In addition, a home is something people need to live in so no sane borrower would default on his home! [sarcasm] Don’t forget the hit your credit rating will take – us responsible Americans care so much about protecting our precious credit ratings [more sarcasm, if you couldn’t tell]

       A bank can’t take back an education that they loaned money for, at least not without the invention I’m working on in my evil lab.
       1. zubs January 30, 2009 at 10:57 pm

          Japan’s mortgage’s are recourse, and so are many other countries. I understand why the USA has non-recourse for mortgages, but now that the systems is broke, to fix it, part of the fix could be to bring recourse mortgages back.
          1. newbie2008 February 3, 2009 at 10:47 am

             Non-recourse is for non predatory leaning. For non-recourse leaning to work, a real down payment is needed and real long term interest must be used. No more 0 to negative down and low come on loans. The taxpayer pays for all the US backed home loans. Next flood to hit, higher end homes and commercial real estate.

             Don’t throw out the baby with the bath water.
       2. Bitter Renter February 3, 2009 at 7:53 am

          Thanks for the info on why non-recourse mortgages exist, and LOL at the evil lab comment. :cheese:
18. awgee January 30, 2009 at 10:38 pm

    Without going into too much discourse, this was not a problem of the free market gone wild. The housing bubble was just the latest symptom of government intervention, (interest rates), in the free market. More government intervention is not the answer to too much government intervention. More legislation is not the answer. The problem is fiat currency, fractional reserve banking, and a central bank. You aren’t going to solve the problem of inefficient markets and expanding credit with legislation. You have to get rid of a credit based monetary system.
    1. Jason January 31, 2009 at 2:18 am

       Hazzah!

       Everybody watch ‘Money as Debt’ and we will discuss on Monday:

       http://tinyurl.com/bhnnl5
    2. mav January 31, 2009 at 2:43 am

       the only way to destroy it, is to allow it to destroy itself

       or guns, lots of guns, and blood
19. Bread Winner January 30, 2009 at 11:34 pm

    lowrydr310 said

    “NJ is still overpriced. In many areas, it’s just as bad as Irvine.”

    -No in most areas it’s still reasonable. You’re absolutely wrong on that. Pockets of insanity of course (Princeton NJ), but most areas are OK. Prices went up gradually -single digit not 25% per year.

    If you can’t see the difference between NJ and Irvine, you’ve been to neither place.
    1. tonyE January 31, 2009 at 4:08 am

       It’s 75 degrees in OC today.

       NJ is below freezing.

       I need to be there on business next week.

       Folks, I’d rather pay lots of money for a home in SoCal than live for cheap in NJ. I just can’t stand the cold winters and muggy summers.
    2. lowrydr310 February 2, 2009 at 9:11 pm

       I lived in Irvine for many years, and I currently live in NJ.

       NJ didn’t go up as bad as Irvine, but it’s still overpriced. Central and North NJ have many homes that are just as expensive as Irvine, and have higher property taxes than Irvine.

       “Reasonable” homes in NJ are only reasonable if you’re only considering the price and ignoring the age of the home, the property taxes involved, the school district the home is in, and many other factors. Sure you could find a home for $300,000 or less but they’re usually small houses in less-than-ideal neighborhoods.

       If you still disagree with me, please show me some examples of what you consider reasonable. I’d bet money that they wouldn’t even come close to the crummiest places in Irvine.
20. Kelja January 30, 2009 at 11:43 pm

    The Credit Crunch is affecting lending. But it’s not the only reason, or even the most important one.

    What if you gave out loans and no one took them?

    Right now, requirements to qualify are toughening up – the standards are going back where they should have been all along. Going back to the point where defaults will drop to an acceptable level. Now the government could turn around and loosen things up: back to option arms, interest only loans and no doc loans – I’m not saying they won’t – but right now it’s hard for anyone without stellar credit ratings to get a loan.

    Also, perhaps Mr. McKin hasn’t noticed, but people are losing their jobs. Joblessness is increasing further taking prospective buyers out of the house buying pool.

    The government is plowing money into bad banks and begging them to loan, but what if people go back to saving and don’t take out any loans.

    The economy is toast.
    1. LC January 31, 2009 at 12:39 am

       As someone who has had experience as a borrower from the best and biggest banks in the United States, I can only say that I would rather drink lye and have my eyes poked out with an ice pick, than borrow money from any of them again. It is just too bad that as a saver, the banks still manage to steal my money with fees every once in a while.
       1. Forbear January 31, 2009 at 9:29 am

          Ouch!!!!!
    2. Bill McKim January 31, 2009 at 7:18 pm

       I have noticed that people are losing their jobs, including my relatives, and also including people when the bubble burst in the early 1980s and early 1990s.

       I have also noticed that requirements toughened up after each of those bubbles and were relaxed again when the next bubble started. Learn from history! Any rules that are put in place at the time of a busted bubble will quickly be changed at the start of the new bubble.

       That is why I say that the only solution is to prevent the creation of the bubbles, and the only way to do that is to make it impossible to profit by selling property for more than it is worth.

       If that is done by taxing away ONLY the profits due to the irrational bubble, that law won’t be changed because the next bubble won’t ever start.
21. Party Pooper January 30, 2009 at 11:48 pm

    IR,

    I think there is 1 thing I have learned through all this mess that shows we will never be able to stop bubbles from popping up over and over again in ALL markets. People will always keep looking for a way to make a Ponzi scheme work without ever acknowledging that it is a Ponzi scheme BECAUSE

    There is nothing that anyone can do on this earth to make people be responsible with their own money.
22. Matt January 30, 2009 at 11:51 pm

    I don’t know whether Bill’s approach would be the better one, but I haven’t invested too much time thinking about that because I think it’s just not going to happen. As he notes himself, regulation is the response that has happened every time something goes wrong.

    Taxing house profits out of existence (or even heavily, the same logic really applies) simply won’t come to pass. Right off the bat, you’ve got 177 votes in the House and 41 in the Senate that would absolutely refuse to consider it…that’s a filibuster. But, I don’t even think such a proposal would muster a majority in either chamber. Americans REALLY don’t like paying taxes; I can’t see how this proposal would even get off the ground. The proposal MIGHT be a good idea, but it’d go over like a lead balloon.

    Regulation most likely will pass, so I think the more practical question is what should that regulation look like?

    I wrote to Senator Feinstein a month or so ago about not saving people in a house who can’t afford to live there. The letter I got back showed me that I clearly belong to the third category of letter writers. (The first category is those that agree with you, the second is those that are “opposite” you and the third category is “people who staffers can’t understand”)
    1. Bill McKim January 31, 2009 at 1:46 am

       Good observation.

       I’d just like to point out that I DON’T advocate taxing house profits out of existence. At another Reply in this series, above, I detail the profits that I have made in the houses that I have bought to live it. I have always made a profit, and would not want the “normal” profit to go way. My point is that the “normal” profit in a developing area is about 7% of the purchase price for each year of ownership.

       The profit that I think should be taxed away is the extra 32% of the original purchase price for each year that I lived in a house because of two bubbles that occurred while I was living there.
       1. tonyE January 31, 2009 at 4:13 am

          Regulating the amount of profit that can be made is the worst kind of government intervention that can be made and won’t work.

          Just look at the Soviet system. Five year plans, everything regulated but because there was no personal incentive nothing really worked.

          This issue is best left by fixing what went wrong: the credit agencies and (btw) the stock analysts.

          Both should be removed from the profit incentives of their ratings.
          1. Bill McKim January 31, 2009 at 9:38 pm

             Well, again, here is someone that thinks that I am advocating a limit on the amount of profit that can be made on a sale. This is the same misunderstanding discussed in reply to Lunatic Fringe, who said that I was advocating Price Controls.

             I am definitely NOT advocating limiting THE AMOUNT of profit that can be made on a sale. I agree that that would not work.

             I advocated changing the KIND of profit that can be made by selling a house. If the profit is the kind of profit that is made by selling houses in times when there is no bubble occurring, then that would be taxed the same way it always has.

             To use my own experience as an example, I sold four houses that were bought then sold in the years between 1940 and 1972, in an era before irrationally exuberant housing bubbles began. In each instance the profit I made was about 7% of the purchase price, multiplied by the number of years the property was owned.

             In 1972 I bought a house and sold it in 1988, after two periods of irrational exuberance bubbles. My profit was 40% of the original purchase price for each year that I owned the house.

             Now I’m not saying that there should be a law that mandated that I only be able to make a 10% profit, or a dollar amount of profit. I am saying that I should not be allowed ANY of the profit that was due ONLY to the fact that real estate bubbles had occurred. Obviously about 33% of the original purchase price for each year I owned the house was purely because of the bubbles, and was only an increase in the PRICE of the house, without any commensurate increase in the VALUE of the house.

             An increase of 7% of the original purchase price for each year that I owned the house was actual increase in the VALUE of the house.

             The reason that one should not be allowed to profit from the increase in price during a bubble is that he is selling empty air. The buyer is getting the same VALUE that he would be getting if the bubble wasn’t occurring, but he would be paying a PRICE of perhaps three times that much. In other words the seller is defrauding the buyer, and also the buyer’s lender.

             When it comes time to pay the piper when the bubble collapses (NOW), it is too late for the buyer or the buyer’s lender to recover from the buyer the money they were defrauded out of. The buyer already spent it, and he is protected by anti-recourse laws. Therefore, the taxpayer’s grandchildren have to pay it.

             Of course, I’m not saying that the seller is an evil person because he benefited from perpetrating this fraud on the buyer. After all, he no more knew that he was perpetrating a fraud than did the buyer or the buyer’s lender. I’m just saying that it is necessary for us to recognize what is actually occurring, and act to prevent it from occurring in the future.

             The only way that can be done is to prevent the PRICE of real estate becoming disconnected from the VALUE of that real estate. The only legislation that will accomplish that, and that will stay in place, is legislation that makes it impossible for a seller to profit by selling a property for more than its actual value.

             All regulatory schemes, and all solutions that rely on individuals to “do the right thing for the overall good of the economy” in the future, will fail in the future as they have repeatedly failed in the past. The reason is that, once a bubble is in progress, everybody’s perspective changes. During the bubble all rules will be changed to expedite buying property when its price is sky rocketing.

             Why do I know all this and the rest of you don’t? Is it because I’m the smartest one among us? No, it is because I’m among the oldest. I have been watching the housing market closely, both because of professional involvement and as a homeowner since the late 1970s. I have seen the consequences of three boom and bust cycles, and accurately recognized the incipient end of the latest one.

             I did not anticipate the beginning of the most recent one because, like many of you now, I really believed that the lessons of the previous two cycles would never be forgotten, and that we were wise enough to not do that again. It turned out that I was wrong. All that happened was that a few more people had to come into the market and into the housing and lending industries that hadn’t had firsthand experience in the previous two bubbles, so they were all too eager to hop aboard the trolley when it started rolling again. This merely delayed it long enough for it to coincide with the downturn in the Stock Market, whereas before the two had been countercyclical. That is why this one is so bad.
23. Anonymous January 31, 2009 at 12:30 am

    A proposal to prevent wholesale financial failure
    By Lasse Pedersen and Nouriel Roubini

    http://www.ft.com/cms/s/0/4d0add58-ee27-11dd-b791-0000779fd2ac.html?nclick_check=1
24. awgee January 31, 2009 at 5:06 am

    If I read correctly, Mr. McKim is advocating taking away “excess” profits from the sale of residential real estate. Because it would work. Because it would stop bubbles.

    Has Mr. McKim or anybody addressed the morality of taking away someone’s profits? Does anybody understand that this is stealing? And when taken by a democracy, it is just stealing by a bully mob with physical violence as a threat to back up it’s plunder?

    I would rather live in a country with asset bubbles than a country where the mob is free to steal.
    1. Bill McKim January 31, 2009 at 9:52 pm

       I am not advocating taking away “excess” profits from the sale of residential real estate. What I am advocating taking away the KIND of profit that is a fraud on the buyer and the lender.

       This question is another misunderstanding of my position that is similar to those of Lunatic Fringe and tonyE, so I am going to include in this answer part of my answer to tonyE that particularly addresses the morality of profits.

       Well, again, here is someone that thinks that I am advocating a limit on the amount of profit that can be made on a sale. This is the same misunderstanding discussed in reply to Lunatic Fringe, who said that I was advocating Price Controls.

       I advocated changing the KIND of profit that can be made by selling a house. If the profit is the kind of profit that is made by selling houses in times when there is no bubble occurring, then that would be taxed the same way it always has.

       To use my own experience as an example, I sold four houses that were bought then sold in the years between 1940 and 1972, in an era before irrationally exuberant housing bubbles began. In each instance the profit I made was about 7% of the purchase price, multiplied by the number of years the property was owned.

       In 1972 I bought a house and sold it in 1988, after two periods of irrational exuberance bubbles. My profit was 40% of the original purchase price for each year that I owned the house.

       Now I’m not saying that there should be a law that mandated that I only be able to make a 10% profit, or a dollar amount of profit, or an “excess” profit. I am saying that I should not be allowed ANY of the profit that was due ONLY to the fact that real estate bubbles had occurred. Obviously about 33% of the original purchase price for each year I owned the house was purely because of the bubbles, and was only an increase in the PRICE of the house, without any commensurate increase in the VALUE of the house.

       An increase of 7% of the original purchase price for each year that I owned the house was actual increase in the VALUE of the house.

       The reason that one should not be allowed to profit from the increase in price during a bubble is that he is selling empty air. The buyer is getting the same VALUE that he would be getting if the bubble wasn’t occurring, but he would be paying a PRICE of perhaps three times that much. In other words the seller is defrauding the buyer, and also the buyer’s lender.

       When it comes time to pay the piper when the bubble collapses (NOW), it is too late for the buyer or the buyer’s lender to recover from the buyer the money they were defrauded out of. The buyer already spent it, and he is protected by anti-recourse laws. Therefore, the taxpayer’s grandchildren have to pay it.

       Of course, I’m not saying that the seller is an evil person because he benefited from perpetrating this fraud on the buyer. After all, he no more knew that he was perpetrating a fraud than did the buyer or the buyer’s lender. I’m just saying that it is necessary for us to recognize what is actually occurring, and act to prevent it from occurring in the future.

       The only way that can be done is to prevent the PRICE of real estate becoming disconnected from the VALUE of that real estate. The only legislation that will accomplish that, and that will stay in place, is legislation that makes it impossible for a seller to profit by selling a property for more than its actual value.
25. granite January 31, 2009 at 7:08 am

    There is one blog, (besides this one) that’s gotten it right consistently. Mish Shedlock, period.

    “Without any understanding, pain in the auto industry (which was caused by the lack of credit to buy cars) looked just as serious and important as pain in the lending industry.”

    I don’t think Mish would go along with this statement. Mish would argue this deflation is necessary and that turning on the spigot again is not the answer. The new frugality is. I concur.
26. Craig February 2, 2009 at 8:16 am

    The easiest way to stop another bubble from happening is to not bail out anyone who suffered from this one — bankers, brokers, realtors, flippers, or house buyers.

    This solution has several added advantages:

    It doesn’t cost the taxpayers anything.
    It doesn’t interfere in voluntary financial transactions between consenting adults.
    It doesn’t encourage institutions to believe that they might somehow be “too big to fail”.
27. LC February 2, 2009 at 10:19 pm

    …Curb Demand or Limit Supply?…

    Certainly not curb appeal.

Comments are closed.