Comments on: Housing Crisis: 1 in 33 Face Foreclosure Within 2 Years

Housing Crisis: 1 in 33 Face Foreclosure Within 2 Years

jacobw — Thu, 17 Apr 2008 11:30:35 -0800

Will States Respond to the Foreclosure Crisis? Their headline is that 1 in 33 homeowners are projected to face foreclosure in the next two years. But I found the stat that neighboring homes will lose $356 billion in value a rather staggering number to swallow for those not facing the threat of foreclosure.

By: jacobw

jacobw — Thu, 17 Apr 2008 11:38:16 -0800

Usually my problem is with commas. But back to the point at hand, this is really a sad state of affairs. I'm not a homeowner, and I figure it's time to buy, but I still can't afford the homes in my area.

By: smackfu

smackfu — Thu, 17 Apr 2008 11:39:12 -0800

It's $8800 drop per home... I would think the gains over the last few years would make that irrelevant.

By: batou_

batou_ — Thu, 17 Apr 2008 11:47:25 -0800

$356 is a staggering number untill you divide it by the articles estimate of 40 million homes that will not face foreclosure. I'm with smackfu here.

By: three blind mice

three blind mice — Thu, 17 Apr 2008 11:49:33 -0800

Will State's Respond to the Foreclosure Crisis? Its too bad that some people bought houses they cannot afford on terms they could not understand. But why should taxpayer's be required to (once again) bail out other people for making bad decision's? People who should never have been given a mortgage in the first place now want me and other taxpayer's to cover their payment's? Where is the justice in that? Pain is an essential function in a market economy.

By: oddman

oddman — Thu, 17 Apr 2008 11:51:14 -0800

So, perhaps my math is wrong (actually I'm certain it must be), the article claims that 40 million homeowners will experience a total reduction of $356 billion. But isn't this just a loss of $8,900 per homeowner? That's nothing, really. (Quick someone correct my math. Even still, assuming it's a larger loss, if you bought your home with the intention of living in it for a while, you don't have to be nearly so worried. Your home's value will eventually climb back up. It's only the speculators and flippers that need to sell their homes in the short term that are really in trouble. But, hey they bear significant responsibility for the bubble in the first place. So, I can't muster very much sympathy for them. (Yes, some non-speculating homeowners will be hurt through no fault of their own, and that sucks.)

By: DU

DU — Thu, 17 Apr 2008 11:51:26 -0800

Who is Will State and why do I care about his Respond (and what is that? a car?)?

By: chunking express

chunking express — Thu, 17 Apr 2008 11:54:09 -0800

Pain is an essential function in a market economy. Lots of things are an essential part of a market economy, and they get willfully ignored all the time.

By: stevis23

stevis23 — Thu, 17 Apr 2008 11:54:57 -0800

But why should taxpayer's be required to (once again) bail out other people for making bad decision's? Because we set the precedent by doing it for Bear Stearn's?

By: DU

DU — Thu, 17 Apr 2008 11:56:21 -0800

Pain is an essential function in a market economy. Fear of pain, actually. But regardless, I assume you complained to your Congressional delegation about the Bear bailout, right?

By: ornate insect

ornate insect — Thu, 17 Apr 2008 11:58:36 -0800

Its too bad that some people bought houses they cannot afford on terms they could not understand. But why should taxpayer's be required to (once again) bail out other people for making bad decision's? People who should never have been given a mortgage in the first place now want me and other taxpayer's to cover their payment's? Where is the justice in that? Pain is an essential function in a market economy. Wall Street ennabled the sub-prime mortgage crisis and encouraged a lending system that was devoid of a great deal of common sense. They did this on purpose, and now Wall Street has been bailed out by you and me. If you default on millions of sub prime loans you are bailed out by the Fed, but if you if you default on one there is no safety net? Where is the justice in continuing to hold Wall Street unaccountable for its actions, for its speculative excess, and for duping the American taxpayer into keeping it afloat? We don't have a market economy, we have an economy that has now effectively socialized the failed investment banking industry, and the "pain" you write of is something the rich are never asked to bear: the government rushes in to help them as soon as they are in trouble. And then we are trained like monkeys to look down the ladder, never up.

By: Mutant

Mutant — Thu, 17 Apr 2008 12:09:19 -0800

ornate insect -- "If you default on millions of sub prime loans you are bailed out by the Fed, but if you if you default on one there is no safety net?" Hold on a second - an obligor defaults on a loan. I wasn't aware that any obligor had been bailed out on the scale of "millions of sub prime loans". Example, please?

By: BobFrapples

BobFrapples — Thu, 17 Apr 2008 12:11:16 -0800

I bought my house last July. I just received a revised tax assessment in the mail, stating that the value of my house has gone up $30,000. Where the cock is this drop in value, so that I can pay less property taxes??

By: cowbellemoo

cowbellemoo — Thu, 17 Apr 2008 12:14:09 -0800

My respond closes automagically.

By: The World Famous

The World Famous — Thu, 17 Apr 2008 12:16:40 -0800

Where the cock is this drop in value, so that I can pay less property taxes?? Try selling your house, and you'll find the drop in value.

By: snofoam

snofoam — Thu, 17 Apr 2008 12:21:09 -0800

must we all make fun of someone's unnecessary apostrophe? if so, Can We Also Put All Link Text in Title Case?

By: lunit

lunit — Thu, 17 Apr 2008 12:28:32 -0800

Its too bad that some people bought houses they cannot afford on terms they could not understand. But why should taxpayer's be required to (once again) bail out other people for making bad decision's? People who should never have been given a mortgage in the first place now want me and other taxpayer's to cover their payment's? Where is the justice in that? Um? We're not talking about "some people." We're talking about a huge number of Americans who largely didn't have access to information and were preyed upon by lenders and banks (many of whom are overseas, which makes it harder to negotiate payments now than it used to be when banks were largely local). Taxpayers will be paying for this regardless. If safeguards aren't inacted to stop the surge in foreclosures now, then we'll see the taxpayer bills go up in terms of providing social services for all of the people who will be newly homeless. What is more, these foreclosures are going to effect the economy (especially in denser areas ) a lot more than just reducing tax rolls, and that already is a problem for the State, and will only become more so if it's put off. Where is the justice in making the poor pay - once again - for the unethical and profit-driven motives of banks and corporations?

By: Kistaro

Kistaro — Thu, 17 Apr 2008 12:30:20 -0800

From a direct and self-centered point of view, I'm happy about the plummeting housing market- because it means that in five years or so, assuming I still have my current job (which I'm hoping, given the economy- there's some luck involved here), I might be able to afford somewhere to live. For now, my apartment is sufficient, and my only involvement in the mortgage thing is the painful things it must be doing to the taxes I paid a couple days ago.

By: lunit

lunit — Thu, 17 Apr 2008 12:30:56 -0800

wow, my spelling sure is dreadful. sorry.

By: fixedgear

fixedgear — Thu, 17 Apr 2008 12:30:59 -0800

The poor are paying? Really? I think it's 'soak the middle class' time again, kid's.

By: lunit

lunit — Thu, 17 Apr 2008 12:34:11 -0800

Well, maybe not the poorest of the poor. But a lot of the people who took out mortgages they couldn't afford can certainly be deemed "working class" or at least "lower middle class," IMO.

By: The World Famous

The World Famous — Thu, 17 Apr 2008 12:37:53 -0800

Making someone pay and taking away something they are not paying for are two very different things. Should people who cannot afford to own a home be excused for buying one anyway and then not paying for it? Of course not. Should the government act to prevent an economic collapse caused by millions of people buying homes they could not afford and then (surprise!) not paying for them? That's a trickier question. I do not think that the government should intervene just to help people keep their homes when they can't afford them. I do, however, think that the government should intervene to help everyone else not have to deal with a depression.

By: vhsiv

vhsiv — Thu, 17 Apr 2008 12:39:45 -0800

#:I'm glad to see that The Grocer's Apostrophe is making it's rounds -- Sometimes I wonder if it's just me that gets annoyed by such things...

By: salvia

salvia — Thu, 17 Apr 2008 12:43:26 -0800

This is an interesting report. Thanks for posting it, jacobw. It's interesting that the states are leading the feds on this, though they seem to lead the feds in almost everything good lately. I'm surprised California (which is probably one of the hardest hit) isn't doing much. I'm torn on the moral hazard question myself, and I would like to see home values drop to a price I could afford.

By: orange swan

orange swan — Thu, 17 Apr 2008 12:52:31 -0800

It's pretty funny (in a sad sort of way) that everyone in this thread is either worried about the drop in value of their houses or wondering if this will mean housing prices will drop to a level they can afford. No one has admitted to being a sub-prime buyer who will lose a house.

By: jessamyn

jessamyn — Thu, 17 Apr 2008 13:01:56 -0800

[fixed typo - removed OMG TYPO comments ffs]

By: Benny Andajetz

Benny Andajetz — Thu, 17 Apr 2008 13:05:19 -0800

It's $8800 drop per home... I would think the gains over the last few years would make that irrelevant Lies, damned lies, and statistics. I'm responsible. I pay my mortgage. I paid 50% down. Unfortunately, I had to relocate and buy this house at the top of the market (December 2005). Based on today's sales, my house has lost a hell of a lot more than $8,800. More like 5 times that. For now, my loss is only on paper, but it certainly limits my options. It's easy justifying this mess when it's not your money. Just saying.

By: Justinian

Justinian — Thu, 17 Apr 2008 13:22:07 -0800

It's easy justifying this mess when it's not your money. Fine. I bought a condo in Los Angeles in mid 2007. Because I had to move. It has likely lost 25-33% of its value in the last 9 months. Yes, that's up to a third of its value. So it is my money. A lot of it. And I don't think we should bail out anyone over this mess. Neither Bear Stearns nor some idiot making $50k a year who bought a $500,000 house here in Los Angeles. I could have jumped into the market as a speculator in 2004 or whatever, but I didn't because I knew that wouldn't be a responsible use of money. So, because I was responsible I didn't get to participate in the huge runup. And now you want me to pay to bail out people who were trying to cash in on the real estate market when I deliberately stayed out of it? Screw that. Make me do it and next time I'm jumping in to the bubble with both feet 'cause I could make a ton of money. And if I don't, you suckers will bail me out anyway.

By: Pope Guilty

Pope Guilty — Thu, 17 Apr 2008 13:30:48 -0800

Imagine, for a moment, the economic impact of 1 out of every 33 homeowners facing forclosure over the course of two years. Think about that for a second. What's more important- ensuring that people you think are stupid and irresponsible suffer for being stupid and irresponsible, or alleviating some of the nigh-catastrophic effects of that level of foreclosure? Some of you sound like Libertarians who object to the building of a bridge out of town, insisting that they'll never drive upon it, so why should they have to pay for it?, and all the while ignoring the effects of people who live out of town being unable to easily come into town. When economics becomes about deontological morality instead of about building a strong economy, things get really problematic really fast.

By: Postroad

Postroad — Thu, 17 Apr 2008 13:33:49 -0800

Those of us who have owned homes over the years have wrongfully assumed that their value should go up yearly and that owning was a money maker. Now many homes are in default, and as a result, the market in all communities flooded. That makes it a buyer's market and prices keep dropping. This will continue till those houses on the market are mostly bought up and prices again begin to go up...But that is not going to happen for a few years.

By: lunit

lunit — Thu, 17 Apr 2008 13:34:47 -0800

I don't think the demographic we're talking about is composed primarily of people who "were trying to cash in on the real estate market." I'm glad that you knew better; a lot of people didn't. That doesn't make them any more or less responsible, it just means that you had access to information and/or an understanding of economics that they didn't. Also, it's in the states' best interest to help individuals negotiate their mortgages before they get foreclosed. Foreclosures are incredibly costly for governments not just in terms of lost tax revenue, but also in terms of the economic impact, and the social/cultural impact of the presence of abandoned properties. A lot of the measures in the report are about increasing access to education, giving people a little more leeway (time), etc. It's not about bailing people out as much as it is about trying to be flexible so that people can bail themselves out. Because if they don't, banks win and taxpayers and homeowners and communities lose. I don't understand what all the aversion to this is. Stemming the tide of this crisis is in the best interest of almost everyone involved.

By: Artful Codger

Artful Codger — Thu, 17 Apr 2008 13:47:49 -0800

Benny, Justinian, you're kind of silent on how much you made selling your old houses in a hot market. And no-one said you had to BUY in the new location, there's this thing called renting. or did your crystal ball not work either? We bought our house in the last big bubble (1989) so we know what losing value is like. We survived, you will too. It would be kinda sweet though, to see EVERY loan/bank/investment exec who scored big throughout this market rape have to cough up their bonuses.

By: luriete

luriete — Thu, 17 Apr 2008 13:49:18 -0800

I have seen far more misused apostrophes in this thread than have been present in all my other reading material of the past six months.

By: amuseDetachment

amuseDetachment — Thu, 17 Apr 2008 14:04:25 -0800

We shouldn't be bailing out these speculators. They already can walk out of their fucking loans. Any asshole could've made millions in 2005-2007 just flipping homes. Get loans, and keep buying/selling them and using the leverage from the banks to give you money. Keep taking money out and using 0% down. Easily get rich that way and in the end if you had 10 properties in early 2008, you just walk out and give it *all* back to the bank (without declaring bankruptcy). And we should lower the principal on their loans, why??

By: KokuRyu

KokuRyu — Thu, 17 Apr 2008 14:17:20 -0800

angryrenter.com A vast majority of the "owners", don't actually own. They have about 10% equity in their home. This is merely the option value. Those with less than 10% got a free or virtually free option on home price appreciation. Supporting behavior such as this is not the American way. This is capitalism, and there are ups and downs. This is a down time, we can live with it, and support of wreckless behavior now leads to more wreckless behavior in the future. It seems like America's renters may NEVER be able to afford a home. We are the class that has been ignored in this debate. Washington should not make us pay more in taxes to subsidize reckless borrowers and lenders.

By: Benny Andajetz

Benny Andajetz — Thu, 17 Apr 2008 14:26:32 -0800

Benny, Justinian, you're kind of silent on how much you made selling your old houses in a hot market Fair question. I've done well over the last twenty-five years. And I'll tough this one out. I just think it's glib to average out the losses and say "what's the big deal, it's only $9,000 per house". I'm lucky, and I know it. But there are plenty of first-time buyers out there now who are in a very tough way. Home ownership is a cornerstone of our economy and society; fixing the problem is in everyone's interest. Any asshole could've made millions in 2005-2007 just flipping homes. Flipping houses has never been easy work; not to mention that home-improvement is/was a huge part of our economy. I say that as someone who has been in the construction business in many facets since 1982. Flippers are easy to exclude,though, if that's the way you want to go. Look only at primary full-time residences.

By: Benny Andajetz

Benny Andajetz — Thu, 17 Apr 2008 14:31:21 -0800

A vast majority of the "owners", don't actually own. They have about 10% equity in their home. This is merely the option value. Those with less than 10% got a free or virtually free option on home price appreciation. Supporting behavior such as this is not the American way. It's called leverage. It's the only way most people (or companies, for that matter) can afford large capital expenditures. It's open to renters, too, if they choose to buy a house. Like all business, though, the bigger the reward the bigger the risk.

By: Mutant

Mutant — Thu, 17 Apr 2008 14:36:25 -0800

Ok, when I moved to London in 1997 I was initially living in corporate housing as part of my ex-pat package. After four years I decided to move to Europe permanently (went on a UK contract), and the privilege of free rent was withdrawn. A notoriously buoyant housing market met Mr Frugality, myself. Mrs Mutant is appalled that I still will dart into traffic to pick up pence found in the street. I really didn't want to purchase in this market, but was going to take a very quantitative and analytic decision. I first determined what type of place I wanted to live in - walking distance to work, garden, at least two bedrooms - then built a spreadsheet of some 100 observations on price for flats meeting this requirement. When it came time for physical viewings I looked at two, and made an offer on the second flat, which was immediately accepted by the seller. I paid £115K for a two bedroom, two story, fixer-upper garden flat. Financed at 80% LTV, 25 year fixed rate mortgage with no penalty for early repayment of principle. The woman that lived here, not only slowly went mad in the place, but also passed away and (partially) decomposed in my Lounge. Nobody wanted the flat, it was full of rubbish (my ghost was a hoarder), smelly (corpses do that) and urgently in need of 30 years of basic maintenance, not to mention renovation to contemporary standards. I'm handy, so I didn't mind at all. I got the place for a 40% discount to market price for similar properties at the time (that spreadsheet helped me recognise true value when I saw it), and have been slowly since fixing the place up. December 2007 we installed a new kitchen, last week I constructed window screens, I'm currently finishing building some entryway cabinets, and the bathroom is next up on our (ok, Mrs Mutant's) project list. Since my purchase I aggressively paid down principle until Q3 2007, when I only owed £40K. I then took out £20K in equity as I had a view on interest rates (down, by the way), and saw a way to game the system i.e., I borrowed floating, no penalty for early repayments and immediately rolled the capital into a fixed rate one year bond; my borrowing costs have declined twice since I did that trade, and I'm actually earning about 1% on someone else's money which, while it isn't a large sum, does indeed give me a thrill (it's a banking thing). And whle its nice to see another £20K on my balance sheet, I've also got great hopes that UK rates might get a lot closer to zero, if you know what I mean. I've watched the selling price (not ask) of neighbouring flats slowly climb, topping out at £290K Q4 2007. Now I'm seeing slow declines in asking price, and a sale just cleared nearby for about £270K. Same configuration of flat. Over the past seven years there's been such a sharp run up in property prices, short of a dirty bomb going off in Central London (this flat is in Zone 2), its difficult for me to envision a scenario where I'll go into negative equity. The lessons it seems most everyone in trouble now either missed or forgot:

Know true value; people shouldn't complain if they bought fully priced in a bouyant market
If you simply must operate in such a market, do anything you can to gain an advantage e.g., purchase a place nobody else wants, negotiate a cash price, whatever
Can't stress enough the importance of fixed rate, long term mortgages with at least a 20% down payment - not only will funding costs be lower on the whole, but you'll also have a buffer against negative equity
Take a long term view; if you're not going to stay in market for at least ten years or so, purchasing your primary residence isn't an optimal choise
Don't be afraid to rent; seems like the culture on both sides of the Atlantic is driven by the status of homeownership. Sometimes it makes economic sense to rent (like most of London now, if one were to enter the property market these days)

Seems like almost everyone I know was purchasing as much flat as they could afford - sometimes on two paycheques! - and then upgrading to more prestigious address every two to three years. And this blanket statement covers a large number of bankers who should have known better. I could pay off my mortgage tomorrow morning if I wanted to. I'm glad Mrs Mutant & I live cheap.

By: notashroom

notashroom — Thu, 17 Apr 2008 14:44:07 -0800

Like BobFrapples, I just got a revised tax assessment in the mail, asserting that my home's taxable value increased 20% in the last year. Based on the rapidly increasing number of signs I see around here saying things like "Owner Finance! $500 down!" and "For sale: Price SLASHED!", I'm guessing this is a municipal hedge against lost tax revenue, and yet another way to stick it to the little guy. Or girl, in my case. I'm not in danger of foreclosure as long as I keep my job, but that doesn't mean I won't feel the extra hundreds a year for property tax.

By: chimaera

chimaera — Thu, 17 Apr 2008 14:47:49 -0800

I've said this before and I'll say it again. Please prove to me that the correction of an obscenely overvalued market is a Bad Thing. When one makes well above the median income and cannot afford to buy a median house (or, for that matter houses that cost HALF of the median, locally), the market is overvalued. I'll cry big crocodile tears for all those people who bought at the peak of the market and watched the value drop from there. Real big crocodile tears, and I'll be playing "My Heart Bleeds For You" on the tiniest violin I can find.

By: AppleSeed

AppleSeed — Thu, 17 Apr 2008 14:57:34 -0800

Wait a minute - housing and other bubbles are, by definition, out of line with market fundamentals. Bailing out individual home debtors (they do not own that house outright as long as they have a mortgage) will prolong these anomalous market conditions. But eventually, prices will return to the mean. Nothing to the contrary seems to wash. This is an important component of the economy and municipal taxes and so on. Well, housing is already messed up - to the point of putting the world economy deeply at risk. It's too little too late! A lot of us have already been priced out for years. I'm sorry, but Ponzi schemes end in a collapse - this was never real to begin with. Why do I have to be the bag holder? Didn't any of these towns and cities treat this as a windfall? Didn't they see it was unsustainable and built on air? And as per the numbers, no one seems to have mentioned that large areas did not have skyrocketing prices. The bubble was in all the major metro areas. So the $3 Bil' (try a couple trillion) is being averaged over areas that won't see any precipitous drop because they were not bubblicious. In short - is someone going to pay my rent or give me a free million dollar mansion? No? Then let 'er rip. Let's not draw this out over ten years.

By: TheOnlyCoolTim

TheOnlyCoolTim — Thu, 17 Apr 2008 15:37:18 -0800

Those of us who have owned homes over the years have wrongfully assumed that their value should go up yearly and that owning was a money maker. If I ever get to buy a house, I'm going to assume I get the use of the house and associated plot of land.

By: flarbuse

flarbuse — Thu, 17 Apr 2008 15:43:09 -0800

Their headline is that 1 in 33 homeowners are projected to face foreclosure in the next two years. But I found the stat that neighboring homes will lose $356 billion in value a rather staggering number to swallow for those not facing the threat of foreclosure. I know that 1 in 10 people are projected to die from AIDS in Africa, but how is the smell from their rotting corpses going to affect me?

By: ROU_Xenophobe

ROU_Xenophobe — Thu, 17 Apr 2008 15:52:56 -0800

Don't be afraid to rent; seems like the culture on both sides of the Atlantic is driven by the status of homeownership. I see what you mean, but you also mention that people were buying as much flat as they can. In the US outside of a few cities, it's awfully hard to separate the rent vs buy decision from the apartment vs detached-house decision. Once you exclude the student hovels, there are precious few detached houses for rent.

By: marble

marble — Thu, 17 Apr 2008 16:03:22 -0800

It's not about bailing people out as much as it is about trying to be flexible so that people can bail themselves out. Because if they don't, banks win and taxpayers and homeowners and communities lose. I thought the banks lose too. From what I've heard/read they aren't exactly thrilled about taking possession of a (often stripped/trashed) house they can't get rid of for anything approaching the loan amount.

By: b1ff

b1ff — Thu, 17 Apr 2008 16:07:06 -0800

If I ever get to buy a house, I'm going to assume I get the use of the house and associated plot of land. Even that will depend. You will need to consider title restrictions, zoning restrictions, environmental restrictions, as well as homeowners association rules, various state and municipal codes. These restrictions work to turn many homeowners into glorified renters. You can assume that, as more municipalities face the problems created by their financial shortsightedness, homeowners will be forced to pay for these mistakes. As long as people are dead set on owning a home, corporate and government entities are going to continue to exploit any irrationality in the decision to buy.

By: IndigoJones

IndigoJones — Thu, 17 Apr 2008 16:11:51 -0800

If there are sufficient votes and corporate money behind it, it will pass.

By: salvia

salvia — Thu, 17 Apr 2008 16:50:10 -0800

These efforts don't sound to me like, "hey, here's a million dollars cash." They are like, "hey, here's a second chance to get a mortgage with non-insane terms." Plus, it's not just helping homeowners, it's also keeping the bottom from falling out below all the institutional investors who bought AAA-rated securities. Since those investors are often cities and school districts trying to buy the safest thing they could, I see the public interest in helping them. I have this image in my head of one of those 1950s-style company men, just wanting to do what's right, getting close to retirement. He's running the investments for some school district in the Central Valley and put money in this supposedly very safe place. Now they seem to have lost half their money. I am a renter, and I want to see prices crash back down to earth as quickly as possible, but I still feel bad for that guy and that school district. I'm not positive these efforts will keep them from losing their money, but if so, I support them.

By: MattD

MattD — Thu, 17 Apr 2008 17:12:26 -0800

No one in the financial industry has been bailed out. Bear Stearn's shareholders lost more than 90% of peak value of their stock a year ago. Many thousands of Bear Stearns employees will lose their jobs, and many of those who won't be out of work are still suffering the destruction of most of their net worth, given how long they were in the stock. Beyond Bear, shareholders of many mortgage originators have lost more than 90%, and tens of thousands of their employees (in the aggregate) have lost their jobs too. The Fed's backing of JP Morgan's takeover did spare Bear's lenders and other counter-parties (basically, the entire financial market) he write-down on their positions which would have accompanied Bear's liquidation, but those avoided write-downs are a fraction of the write-downs that the financial institutions have had to take, and are still taking (it's not over yet), on their broader asset-backed and leveraged loan portfolios. Job losses on Wall Street and the City of London (and Zurich and Frankfort etc.) are going to top 100,000 before it is over. Now let's turn to the homeowners who are going to be foreclosed. Those homes aren't going to dry up and go away, any more than the vast numbers of units of new housing going unsold. Foreclosed-on homeowners are going to become renters. Most will not suffer any loss at all given that they bought their homes with little or no down-payment and were negative amortization, or interest only, for the entire life of their homeownership. All they are losing is the option on continuing home appreciation which their mortgage lender gave them for free -- the stupidity of which option give-away the entire financial industry is now paying for. If all of this actually leads municipalities to tighten their belts in the face of lower tax revenue, well thank God for little favors!

By: salvia

salvia — Thu, 17 Apr 2008 17:34:20 -0800

If all of this actually leads municipalities to tighten their belts in the face of lower tax revenue, well thank God for little favors! Oh yeah? Which city services are you most looking forward to being relieved of? Pothole repair? Police or fire? Oh, schools? Are you tired of how fast the service is at the zoning counter?

By: ornate insect

ornate insect — Thu, 17 Apr 2008 17:56:53 -0800

No one in the financial industry has been bailed out. That is just not really correct. Testifying to the Senate Banking Finance committee, the head of JPM confirmed that it was the Fed loan that secured the deal with Bear Stearns: no loan, no deal. Thus the Fed loan appears to have kept Bear from having to decalre bankruptcy. Now one can argue whether that was a good idea or not, but by my understanding of the word "bailout" (a non-techincal term), it can indeed be called a "bailout." Naturally, as part of the plan, what remained of Bear was taken under the wing of JPM, who did not want the domino effect in the industry that Bear's collapse might have caused. And meanwhile I can assure you that what the taxpayer just got in return for our money was a lemon-mountain of bad debts from Bear: we did not purchase anything of value, but paid to shoulder their losses. Immediately in the wake of the deal a "window" was opened up to allow other financial firms to "borrow" large sums to offset their own liquidity and credit problems. The CEO of Bear testified their collapse was a crisis of confidence, not of liquidity or credit, but this is just patently false(and it's what Enron also claimed). The entire financial industry has been kept afloat, for better and worse, by the Fed's actions. My own view is that whatever aid the Fed agreed to should have been accompanied by strict regulatory conditions for the industry--and that these could have been partially ironed out w/out the usual legal wranglings much as the deal itself was pushed through in an unusually quick time period.

By: b1ff

b1ff — Thu, 17 Apr 2008 17:56:58 -0800

No one in the financial industry has been bailed out. In December, after the crushing fall of BSC stock. Top management received record payouts that they get to keep because BSC was bought out. If BSC had gone bankrupt, the payouts would be cancelled. Isn't that a bailout? Of course the true scope of the bailout is much bigger. Bear Stearn's shareholders lost more than 90% of peak value of their stock a year ago. Does that mean that anyone who owns stock qualifies as being in the financial industry? Most of that money belongs to grandma by way of institutional holdings. Money and assistance from the government made this deal happen, and the motive of the deal is to benefit the top corporations in the financial sector, because the Fed is (wrongly) afraid to let them fail. BSC was cannibalized by the others in order to buy time. That time will be used to architect the next step. Warren Buffett, among others, has long spoken of counterparty risk and a chained meltdown of derivatives. It is very likely that the BSC bailout was aimed at guarding against this problem, which could bring down the entire financial sector. I realize that you touched on these issues, but I think that it is important to be clear that it is still a bailout even if it is stupid and ineffective. Grandma can lose money, Vinnie the jr investment banker can get canned, and it can still be a bailout. The only real criteria is that someone took your money without your say so and gave it to the same bastards that have been taking your money for years in more ways than you could count.

By: b1ff

b1ff — Thu, 17 Apr 2008 18:27:44 -0800

Hi OI! We posted similar thoughts pretty much simultaneously. The one thing I might disagree with is this: My own view is that whatever aid the Fed agreed to should have been accompanied by strict regulatory conditions for the industry The enforcement arm of the SEC, created over 70 years ago, is notoriously underfunded, understaffed and lax. On the other side of the coin, the Fed's stated policy is to defend the economy at the expense of the dollar, and the US Treasury, which sells to the Fed and is the initiator of money creation, is run by a former chairman of Goldman Sachs. Expecting these groups to regulate the financial sector, their conduit for money creation and loan generation is pretty unrealistic, no matter what rules are on the books. But if we let these guys fail, they will finally get the message to self regulate. Knowing there is no safety net will make them back away from the egregious behavior that is causing the biggest problems right now.

By: Malor

Malor — Thu, 17 Apr 2008 18:28:37 -0800

Folks, there are hard economic realities here. You can't get around them, and any attempt to do so will only make the problem worse. Houses are too expensive. We're coming off the two biggest bubbles in the history of the world, debt and real estate, and haven't dealt with the fallout from the third-place bubble, the Y2K stock market. Why haven't we dealt with it? Because the Fed intervened with massive liquidity after that failure, which set off THIS pair of bubbles. Now we're facing a collapse that's far larger and more severe. Housing WILL get more affordable again. It has to. Either prices will drop, or the prices of everything ELSE will go up. This WILL happen, one way or another, no matter what gets done... and nearly all forms of intervention will result in catastrophically bad long-term effects. We can steal money from the savers and the cautious and give it to the speculators, but that means we'll have fewer savers and more speculators, which is the very LAST thing we need. Or we can print dollars to 'pay' our bills, which is another way of doing the same thing -- wrecking savers, rewarding debtors. All forms of bailout end up punishing the people who were smart enough to stay out of the mess. No matter how bad the foreclosures look, if we don't allow them, we're perpetuating the fucked-up economy that allowed that bubbles to happen. This is what happened to Japan after their property bubble; they suffered, badly, for more than a decade, and went from an immensely strong government fiscal position to one of extraordinary weakness. Their problems just dragged on and on and on and on because the government refused to let 'zombie companies' fail. We have to let the market clear if we ever want to get better again. We have financial cancer, and the treatment is letting the bad players fail, not bailing them out. It's economic chemotherapy; the tumors need to die, no matter how much it hurts the rest of the body. If we try to prop things up as they have been, the tumors will just get larger and larger and larger, and suck more and more and more resources away from the productive parts of the economy. Real estate speculation is enormously destructive; it doesn't produce anything, but it BECAME the economy for the last five or six years. We need to get away from that and get back to actually creating wealth again, not swapping buildings back and forth with ever-larger IOUs. There are no solutions you will like, post bubble. None. Zero. But despite the high pain of letting the markets clear, it's the best available response, the one that will give us the most long-term success. If you reward stupidity you will get more stupidity. It's simple. If you destroy the prudent and make the imprudent whole, then the prudent get out of the prudence business. If you're punished for being smart, why be smart? If you're rewarded for being stupid, then you might as well be stupid. Long-term, this is the most damaging possible outcome. By refusing to allow things to fail, we prevent new things from arising in their place, and we suck away the wealth of the economy to give to the incompetent. This is incredibly foolish behavior. A crowd this intelligent should understand that. Bad consequences need to be allowed, even when they're really bad.

By: aeschenkarnos

aeschenkarnos — Thu, 17 Apr 2008 18:35:12 -0800

Benny Andajetz It's open to renters, too, if they choose to buy a house. The problem is this is largely not a tenable choice at the moment, and won't be until after the correction. A significant percentage of the population can't buy a house they can afford and maintain their present income, due to the travel distance between their jobs or businesses and affordable housing. Or, turning it over to look at it from the other side, they can't purchase a house equivalent to the one they now rent, without a substantial increase in income. This isn't sustainable. A correction can be expected to over-correct, as usual; so house prices may be expected to seriously drop for a while, and those un-tainted by participation in the last round may be able to pick up bargains. It's reasonable to assume that house purchase prices will tend towards a point where monthly mortgage repayment approximates monthly rental prices for the house plus a bit for greater security. Conversely, rentals will tend towards a point where a month of rent approximates a bit less, for reduced security, than the monthly mortgage repayment. When rent vastly exceeds mortgage repayment, people buy, and that creates pressure to raise house prices because house-sellers can get more from house-buyers, and lower rents because tenants will prefer to just buy. When mortgage repayment vastly exceeds rent, people rent, and that creates pressure to lower house prices because house-buyers will prefer to just rent, and raise rents because landlords can get more from tenants. [As an aside: this, above all else, is what bothers me about this present situation. I have no objection to people attempting to enrich themselves by dumb and unsustainable means. By all means farm ostriches, sell herbal extracts, bet on the horse races, whatever. I do not care. I am not forced to participate, to buy an ostrich, eat MegaTablets, or bet. But I am forced to participate in the housing market. I am a renter, and you running up your house price runs up my rent, and I get nothing in return. My house does not improve; in fact, it continues to slowly get worse due to wear-and-tear. So I'm fully on board with the angry renter agenda. Come the price smackdown, I'm expecting to be in a position to buy, or rent, somewhere better. (Although I'd dearly love to buy my present house, which I chose for a number of good reasons, it doesn't look likely.) The harder the price smackdown, the better my relative position. In the end, it'll be just an exchange of financial black eyes; but at least, renters can say we did not start the fight.] The limiter in the system is affordable rent and/or affordable mortgage repayment. A bank or landlord simply can't get $1000 a week from a person who earns $999. (Even $600 is seriously pushing capacity.) There may be a person earning $1500 who is capable of paying the $1000 asked, and one tenant or purchaser can be exchanged for another in some manner (at some cost), but this triggers a domino effect, and that brings in the issues of population increase, and what the construction industry is doing is of course vitally relevant to the whole issue, both as a driver of change and driven by change. Building a new house should be expected to have a cost related to buying one of the same quality, plus something for greater control over specifications, minus something for time delay and location limitations, for the same reasons above: why build when you can buy or rent more cheaply? Why buy or rent when you can build more cheaply? Malor is absolutely right. The correction is coming.

By: ornate insect

ornate insect — Thu, 17 Apr 2008 18:44:59 -0800

If you're rewarded for being stupid, then you might as well be stupid. This is precisely what the financial sector was just rewarded for: Bear Stearns and the financial banking industry were told that their speculative stupidity, predatory practices and greedy excesses were not only OK, but that it was necessary to keep Wall Street going by any means necessary. It's another example of privatizing the profits and socializing the losses, to use the familiar phrase. The double-standard in this country is staggering: we have a Pentagon that routinely fails to balance its books, "loses" literally trillions of dollars, and we have a policy put in place by war profiteering scoundrels that is bankrupting the country. What reforms have been created to address and redress the fiscal insanity and corruption on Wall Street and in the military welfare state of Washington, DC? [crickets chirping] I'm not sure I disagree w/the idea that homeowners should have to suffer their losses, but I am sure I disagree with the double-standard at work that keeps the investment bankers and the oil barons and the Enron-style financial messes propogated by plutocratic policy alive and well at the expense of us all. It would make sense to tie these two things together for once, and have some real economic and tax reform not designed to benefit only the wealthiest among us.

By: Mutant

Mutant — Fri, 18 Apr 2008 03:23:05 -0800

Wow guys I see a lot of sweeping generalities here. As Fridays are always a busy day for me, rather than address each comment I'll try to make a few observations. First of all bailout. Too passive a word for my tastes, in fact I had mentioned previously we'd probably see enforced takeovers before this was all over. My exact words were "More than likely we'd see another LTCM urgent deal, where The Fed tells some consortium of banks they will take over this institution, ...". Bear and JPM were essentially told by The Fed to do a deal. I hear lots of chatter and it seems every week another fund goes under, so I suspect we'll see a few more enforced takeovers in the banking sector before this is all settled. After all, rights issues by banks seem to be all the rage now, we're seeing a lot of this activity, and as dilution isn't exactly a recipe for happy shareholders banks must be doing this for a reason. Reason is, they need capital. So get ready for more shotgun weddings. Second, a few comments touched upon the need for increased regulation; well, I share the desire for increased stability and reduced volatility in assets that once upon a time were viewed not as cashpoints but as primary residences. But I'm not sure increased, US style regulation is the answer. For example, the housing bubble is (don't say was as things are still overvalued to some extent, and in some markets) a global phenomenon. As an American who has worked abroad for about one third of my life, I don't see harmonsation in the basic regulatory domains, starting with, for example, retail banking or capital markets. Lack of harominsation leads to arbitrage opportunities. Global regulation of the mortgage markets? Such regulation would be problematic at best and whose framework would be applied? As much as Bush / et al would love to impose US style regulations on the rest of the G20's banking and capital markets industries, that ain't gonna happen. And many of us can put forward a strong argument (perhaps this is for another thread) that the US, rules based regulatory models are deeply, and inherently flawed. Of course this leaves out the obvious question, how to drive forward such regulation? After all, its taken us (banking, as a discipline) about ten years to incorporate operational risk into our regulatory capital requirements under the Basel Accord. TEN YEARS even with many of us strongly arguing the necessity of these additional, balance sheet strengthening capital requirements. A decade to formalise what most financial institutions were doing on their own, prudent banking, undertaken in a non standardised manner. And even then, after this decade long push to adopt Operational Risk, many US banks (with the backing of The Fed and US regulatory agencies) opted out. So increased regulation of the mortgage markets? Sure, a nice to have but it ain't gonna happen. At least not in the meaningful way that I believe we'd all agree would have the desired outcome. And in the end, you can't protect people from being stupid. Finally, housing prices. Lots of expressions of expectation about the coming crash, prices correcting, etc. I'm not so sure this is gonna happen. At least in a meaningful way. I've long had the opinion - posted it and traded it - that they were going to inflate their way out of this problem. And before anyone hops in - I'm not saying this is a good thing, mind you. I just observe what's going on and try to make money off what I see. A few years ago I saw sharply higher inflation coming our way. Guess what? Its not all here yet either. The history of finance, of banking, is all about cycles; the current problem isn't so much unique as its a variation on a theme. A theme that's been played out before. Maybe not as large, but we've seen it all before. Sure we're going to - and in fact are - seeing corrections in housing prices. And while I have no doubt there are subdivisions out in those American suburbs with large number of units empty, repossessed by the banks who are holding the mortgage paper, but a systemic reversion in housing prices down to what would approximate fair value? Won't happen as long as The Fed, BOE and other Central Banks are in an accommodative posture. Keep in mind lots of cash has been sloshing around for a long, long time. Not everyone was stupid enough to participate (fully) in the housing bubble. I think a minority of cash rich speculators are already active in this market, while larger numbers are waiting to see where prices go.

By: roystgnr

roystgnr — Fri, 18 Apr 2008 05:16:03 -0800

we'll see the taxpayer bills go up in terms of providing social services for all of the people who will be newly homeless If having to live in an apartment counts as "homeless", can I have some of my social services now? The checks must not have been reaching me, and there's probably a lot of back payments accumulated by now. But if you're worried about taxpayer bills, I'll tell you what: instead of paying a lot of money directly to me, how about you just not pay a lot of money to people who want to prop up a pricing bubble in a good I'd like to purchase soon. Then I'll be willing to call it even, and you get to avoid two huge taxpayer bills. That might even be good for getting more people into houses. Homes don't get left empty because the mortgage holder thinks, "I'd much rather have zero dollars instead of the price this would fetch from the highest bidder". I'll bet some are getting left empty because the mortgage holder thinks, "As soon as someone bullies or tricks the government out of bailout money, the highest bid will skyrocket again." An official government policy of "don't hold your breath" could cause a few of them to start looking at more productive options.

By: drezdn

drezdn — Fri, 18 Apr 2008 06:37:05 -0800

During the bubble, my wife and I wanted to get a house and were approved for a loan, but ran the numbers and realized that fiscally we just weren't ready yet. Since then we've been working on getting ourselves into a position where we'll be able to put down a good down payment on a decent house. If there's a bailout, it would seem incredibly unfair if it were designed/or effectively propped up housing prices, as in many areas the prices are artificially high, and propping up the prices would punish people who waited out the bubble.

By: Artful Codger

Artful Codger — Fri, 18 Apr 2008 10:48:24 -0800

If there's a bailout, it would seem incredibly unfair if it were designed/or effectively propped up housing prices. House prices in general will go down, but you'll still see some houses not decrease, and other houses go down ALOT. Shop carefully, you should be able to find a deal or a foreclosure at a price you can handle. Have at least 10% down, 20% is better.

By: Malor

Malor — Fri, 18 Apr 2008 12:45:10 -0800

but a systemic reversion in housing prices down to what would approximate fair value? Won't happen as long as The Fed, BOE and other Central Banks are in an accommodative posture. It will happen, either by house prices falling, or by other prices rising. It looks like they're trying for the latter, destroying the people foolish enough to save value in dollars.

By: Mutant

Mutant — Fri, 18 Apr 2008 15:12:45 -0800

Malor -- "It will happen, either by house prices falling, or by other prices rising. It looks like they're trying for the latter, destroying the people foolish enough to save value in dollars." Argh, your're right of course. Its my personal predisposition towards the inflation outcome that prevented me from pointing out the either / or. Agree totally about other prices rising - far, far faster than "official" estimates take into account. For the UK based MeFi crowd, The Daily Mail published their own inflation stats today. They put inflation about about SIX TIMES official numbers. Surprise, surprise, I was running my own book and put our inflation burden at about 18% (/Mutant has to pick up lots more stray coins from the streets ... hey! found five pence today so things are looking up! ) I saw some (unfortunately dead tree) research today from David Rosenberg, Chief Economist over at Merrill who calculates that US families now spend more servicing debt that they do on food - 13.2% vs 14.2% respectively. Not a good situation and I seem to think we're gonna see more inflation in the near term. Should be over in perhaps twelve months out, but, then again, the consumer landscape will look very different after this. Cycles again. Look at the US economy after Vietnam. Won't be much different after we finally pull out of Iraq and perhaps Afghanistan as well.

By: Mutant

Mutant — Fri, 18 Apr 2008 15:19:54 -0800

AND ANOTHER THING! Has anyone else noticed that vendors dealing in cash are very, very willing to round up to the nearest pound or even multiple of pence e.g., ten pence, twenty pence, etc.? Seems like every time I take a taxi and the bill comes out to, for example, three pounds eighty pence, after I hand the driver my four pounds he's gunning the engine, raring to leave without giving me my twenty pence! Same goes the other day in an Off Licence - bottle of champers came to nine pounds, ninety eight pence and the clerk handed me the bag and wished me a nice weekend. Dude. That two pence? That's my money. I'm walking about London with at least two or three pounds of mixed coins these days, just so I can make exact change. Was in New York last week and behaviour seemed the same. Inflation is forcing us to round everything up. I might be long gold & silver, but I don't like my small change being appropriated. Thanks for listening. Something I just wanted to share.

By: Pope Guilty

Pope Guilty — Fri, 18 Apr 2008 22:44:44 -0800

The driver probably was going to speed off because he was pissed at you for only tipping 20p.

By: Mutant

Mutant — Sat, 19 Apr 2008 02:07:45 -0800

"The driver probably was going to speed off because he was pissed at you for only tipping 20p." Heh, yeh, but we don't tip here (that's an American thing). Seems like as the value of the currency has been eroded, and you almost can't buy anything for twenty pence, folks are just walking away from their change. At least that's how I read it. Annoying. Crap I was rushing last night to post before getting the evening underway, and just now realised that I'd botched Rosenberg's comments on US disposable income and debt service. My original comment should read "I saw some (unfortunately dead tree) research today from David Rosenberg, Chief Economist over at Merrill who calculates that US families now spend more of their disposable income servicing debt that they do on food - 14.2% vs 13.2% respectively."

By: Mitheral

Mitheral — Thu, 24 Apr 2008 21:44:42 -0800

BobFrapples writes "Where the cock is this drop in value, so that I can pay less property taxes??" That's not going to make much difference, if house values drop 20% across the board guess what happens to the tax rate.