US house prices in freefall -- redux

[Dinner]

Originally posted by Ben Kenobi


Sooo insane. You paid 400k for a condo?!

I could buy like two houses for that money.

This drop in prices is a good thing, if you ask me.

Townhouse really. 3bed/2bath with an attached 2 car garage. My garage shares a wall with my neighbors garage but the actual house has no touching walls which is nice. I wanted a house house but they were all $550k for even the crappiest place in the ****tiest part of town. The prices had been above $300k for these units for almost 10 years so I figured they should be ok but it wasn't so.

[Rufus T. Firefly]

Originally posted by Felch


Wow, you're just . . . wow. Soooooo not getting the whole "economics" thing.

If we were talking about just declining prices, with everything else being held constant, you'd be right. But Kid may have a point here. The whole bubble is the result of many people owning houses who never should have. If the decline in housing prices produces forclosures on (or abandonment by) those people combined with tighter credit and higher barriers to entering the market (and bothe these things are already happening), then the price decline may indeed lead to fewer people owning house.

[Dinner]

Originally posted by DanS


Houses have never been a really good investment. They return 4-5% on your money -- even government bonds earn better.

It depends on where you live. The average yearly appreciation in SoCal from 1992 through about about 2004 was above that plus if you bought rental property you could easily get a rental income out of it. Buying to rent out was a very good business since someone else paid the mortgage and you got a leveraged 8%-10% per year. My parents bought several older homes to rent out in the 80's and early 90's and the appreciation was substantial plus the rents went up so fast that to this day my dad makes cash every month off of the rentals after the bills are paid. It can be a very good investment.

Right now though not so much.

[Felch]

Originally posted by Rufus T. Firefly
If we were talking about just declining prices, with everything else being held constant, you'd be right. But Kid may have a point here. The whole bubble is the result of many people owning houses who never should have. If the decline in housing prices produces forclosures on (or abandonment by) those people combined with tighter credit and higher barriers to entering the market (and bothe these things are already happening), then the price decline may indeed lead to fewer people owning house.

I understand the short term effects are terrible for many people, but this is a necessary market correction. A bubble is best burst sooner rather than later. Any attempts to prolong it or drag out the suffering will only serve to drag down the economy.

For an example, look at Japan's slow recovery from its early 90s recession. They spent the better part of a decade doing everything they could to avoid swallowing the bitter pill, but it only made the structural problems worse.

[Rufus T. Firefly]

Originally posted by Felch


I understand the short term effects are terrible for many people, but this is a necessary market correction. A bubble is best burst sooner rather than later. Any attempts to prolong it or drag out the suffering will only serve to drag down the economy.

For an example, look at Japan's slow recovery from its early 90s recession. They spent the better part of a decade doing everything they could to avoid swallowing the bitter pill, but it only made the structural problems worse.

Oh, I agree. I'm just saying that there may well be fewer people in the market after prices fall, which seems economically counter-intuitive, because the bursting bubble will flush out of the market all those buyers who never should have been there to begin with.

[Kidlicious]

Not only that, but the forclosed houses are not being sold for the most part. The banks aren't taking care of them, theives are stripping them, and vagrants are squating on them. Many will have to be demolished.

We're clinging desperately to the privatization and deregulation mantras that the republicans have so convincingly sold us on. It's going to cost big time too.

[Kidlicious]

Originally posted by Felch


Wow, you're just . . . wow. Soooooo not getting the whole "economics" thing.

I wouldn't expect you to understand how quantity and prices can both drop, but it's very simple economics.

[PLATO]

Re: Re: Re: I got mine.

Originally posted by Oerdin


Not at all. In the event of foreclosure the owner of the second doesn't get **** until the primary gets paid. That means he's going to get nothing out of a foreclosure so out of a short sell he might get a few bones thrown his way.

No Oerdin, I have to tell you. It is very unusual that the holder of the second would bail like that. Not unheard of, but it is very unusual.

In a short sale, the 2nd holder "forgives" the unpaid portion of the debt (which, btw, you may want to look at the tax consequences of that). In a foreclosure, the holder of the second is still owed the debt and can obtain judgment against the former homeowner for any unpaid portion of the debt. Being foreclosed on does not forgive the debt. In most cases the homeowner is totally insolvent by the time of foreclosure and it is not worth persuing for the lender, but they have time to wait and see. This is their philosophy.

It is the rare thing indeed that they will just walk away and agree to be hosed in a short sale. Now, there has been talk around Congress to give them some tax advantages for doing just this thing, but as far as I know, that hasn't gotten any traction just yet.

[Ben Kenobi]

Not only that, but the forclosed houses are not being sold for the most part. The banks aren't taking care of them, theives are stripping them, and vagrants are squating on them. Many will have to be demolished.

So the solution is to bail out everyone who is in over their heads? That will eventually lead to the exact same spot we are in now, but the only difference beting that there will be more people who are even more underwater at that point.

We're clinging desperately to the privatization and deregulation mantras that the republicans have so convincingly sold us on. It's going to cost big time too.

Short term pain.

I think it's funny to hear you whine about higher costing credit when folks like me with NO credit history can't even get it, because other folks who were irresponsible have made it tighter.

All that means is I have to avoid credit altogether, until I either have enough in tangible assets that the bank won't consider me a credit risk for a small amount of credit and then go from there.

[PLATO]

Originally posted by DanS
We aren't dealing with it anything like the Japanese did. The analogy is bad. The market is finding its clearing price in typical American fashion -- relatively promptly.

Yes it is. Parts of it are ignoring the inherent problems with trading long term debt on a short term basis, but it is clearing the market.

...and setting up the big boys for some HUGE profits in 2010 and 2011.

[Kidlicious]

Originally posted by Ben Kenobi


So the solution is to bail out everyone who is in over their heads? That will eventually lead to the exact same spot we are in now, but the only difference beting that there will be more people who are even more underwater at that point.



Short term pain.

I think it's funny to hear you whine about higher costing credit when folks like me with NO credit history can't even get it, because other folks who were irresponsible have made it tighter.

All that means is I have to avoid credit altogether, until I either have enough in tangible assets that the bank won't consider me a credit risk for a small amount of credit and then go from there.

For some reason you think the more people that become homeless and the more houses that get demolished the better the economy will be in the future. That really doesn't make any sense.

[Ben Kenobi]

For some reason you think the more people that become homeless and the more houses that get demolished the better the economy will be in the future. That really doesn't make any sense.

Is the government responsible for the foreclosures? Why then are they bailing out people for poor personal decisions? The government didn't put a gun to these people's heads and force them to buy.

Secondly, you seem to be locked into this dichotomy between 'homeless' or 'house owner'. There are plenty of responsible people out there who have decided to rent or buy and apartment because they knew they couldn't afford a house in the first place. Why would someone who's foreclosed on a house not be able to rent an apartment for a fraction of the cost?

Are they too good to settle for what many other people have no choice but to do?

[PLATO]

Originally posted by Ben Kenobi


So the solution is to bail out everyone who is in over their heads? That will eventually lead to the exact same spot we are in now, but the only difference beting that there will be more people who are even more underwater at that point.

No. There is a difference between bailing people out and realistic credit standards.

Lenders today have tighted standards to the point that many otherwise qualified borrowers simply cannot get a loan. They may have obtained an ARM a couple of years ago thinking they would take advantage of the lower rate it offered and then refinance into a conforming loan when the rate was due to adjust. They may have done everything that they should have to make this happen according to what they were seeing two years ago, but now the credit markets have tightened to the point that they cannot get ANY loan. So their ARM adjusts 3% and their payment goes up $400 a month and they are in trouble.

Now let's all stand around and tell these people they never should have got a home in the first place.

Now...there is no doubt that their was a lot of abuse in the system. That stuff tends to clear in the first year of a bubble burst and for the most part it has. Most of the totally unqualified borrowers are back on the streets and the non-owner properties are in bank posession. Now we are moving into the territory where the otherwise qualified borrower is starting to get hammered.

What is needed is not a bailout, but some common sense.

The markets continue to insist tht Mortgage backed securities are "marked to market". This means that the lenders are having to write down well performing loans simply because the market for them is down. As they write these down, they are having to raise associated capital to cover these write downs. The lenders needs to maintain these capital ratios is what is causing the credit crunch.

Now, if the lenders were allowed to "mark to model" instead of "mark to market" then you would see a HUGE and IMMEDIATE difference in what is going on. Marking to model means to price the security on your balance sheet according to its expected performance as opposed to its current market value. MBS are to an extent an illiquid asset and have always been difficult for the market to establish a fair market price. It is ludicrous that the accounting changes of a few years ago (Thanks Enron!) have had this effect.

I will tell you for a fact...I this one change were made, then the credit crunch is over today.

[PLATO]

Originally posted by Ben Kenobi


Is the government responsible for the foreclosures?

Yes Ben...in many cases it is. In many other cases it is not. There is certainly enough responsibilty to share among many different facits in this crisis.

The only solution is for government and industry to work together and take a common sense approach. This does not necissarily mean that the government has to throw money at the problem. There does need to be some serious looks taken at the laws that contributed to this.

[PLATO]

Originally posted by Kidicious
We're clinging desperately to the privatization and deregulation mantras that the republicans have so convincingly sold us on. It's going to cost big time too.

There are plenty of fairly new government regulations that are quite clearly major contributors to this crisis as well. In general, the markets function much more efficiently in the absence of heavy government oversight.