Whither the Housing Market?
Tags: Obama Depression.
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If it doesn’t recover, then the economy doesn’t recover – and its not about to recover:
…the next phase of the housing crisis is about to begin according to new analysis by hedge fund owner and value-investing guru Whitney Tilson. Since home prices peaked in 2006, the Case-Shiller Home Price Index has fallen 34%. This, of course, was driven by a huge spike in defaults and delinquencies among subprime borrowers as interest rates and payments reset.
In a recent update to his housing overview from last December, Tilson says the next phase will be driven by prime and Alt-A borrowers who owe more than their house is now worth. The catalyst will be ongoing job loss, falling wages, and rising interest rates. Add to this a huge wave of Alt-A loan resets over the next five years. The result: Home prices will fall another 10%, possibly more.
What’s worse is that according to new research, the likelihood of a borrower making a “strategic” decision to default — in effect, mailing the keys back to the bank and walking away — increase greatly depending on how deeply underwater they are and whether people they know have done the same. This means there is a very real possibility that home prices declines reaccelerate as hope is lost and it becomes socially acceptable to give up on your mortgage.
It does seem that at least some banks are wising up about foreclosures – for instance, I have a friend who is staggeringly behind on his mortgage, but there’s been no move on the part of the lender to even start the foreclosure process. It makes sense – why would a lender already saddled with a large number of foreclosed properties want to add another to the pile of houses which cannot be sold? Better, at least for the moment, to allow someone to live free – and at least maintain the property – than to foreclose on it. So, while a huge spike of foreclosures is still likely as the year winds down, there’s not as much of it as one might have feared. On the other hand, if someone owes $396,000 on his house and he notes that the larger house across the street just went for $167,000 and, in addition, he’s seen a much nicer, larger house with a pool offered for $166,000, just what is keeping him in his current home, supposing he can get financing (such as, through his as-yet unused VA Loan benefit?).
Well, that guy is currently in negotiation with his lender to try and “cram down” the mortgage amount to get the house to a price where it can be rented out to cover the mortgage, then he’s going to find himself swell, new digs and hope that he doesn’t get laid off, ’cause that would really screw the economic pooch…but, one can’t worry about hypothetical situations; sufficient unto the day are the problems thereof. But what of the guy who has recently lost his job, or had a pay cut, or who is still working but his wife got laid off? What is the point of keeping a house your massively upside down on with no prospect even in ten years of getting back to your old value? And what of the guy who is in fine economic shape but just can’t see himself paying off a 300k mortgage over 30 years in order to end up, at best, with a loss given the interest he paid? Time to walk – and I’ll bet that millions of Americans will do just that, thus driving home prices into further decline.
As I said pre-Spendulus, we’re broke – as a nation, we went on a spending binge financed by fiat money and now the bill has come due. At least half the dollar wealth of the United States is fictional – it never existed. We played a gigantic confidence game on ourselves – bought in to the largest ponzi scheme ever imagined. We have to clear the decks, assess what our real wealth is, return to hard currency and start to rebuild. This means, of course, that we’d have to put off massive, new government programs at least for a while and thus this doesn’t commend itself to Obama, et al.
And so, we’re going to pretend we’re not broke and its all just a temporary slump which we can fiscal stimulus our way out of and then the ponzi scheme can go on forever. Trouble, this will – indeed, already has – run up against the fact that people aren’t actually stupid. No one sitting on a house which has lost 50% or more of its value is going to sit around the living room staring at his Obama commemorative plates chanting “hopeychange” in the expectation that the wizard will pull equity out of his hat. No, it doesn’t work that way – people act with amazing celerity to economic circumstances. The best example I’ve ever come across of this is from the early days of Lenin’s regime in Russia – the decree went out dictating what the peasants would be paid for their crops…through a bureaucratic slip up, onions weren’t included in the decree, and all of a sudden Russia was awash in onions.
As I’ve also said before, economics isn’t alchemy – it isn’t an esoteric thing which only a few geniuses can figure out. Its something which just happens because people have to make a living, some how. You don’t have to have a plan for it – you just have to ensure that no one is defrauding others and that the medium of exchange is fixed. Do that, and people will just go about their business – creating wealth and consuming same. The longer we go along our current path, the worse it will get and the longer it will take to dig out of it. We were already over the cliff when Obama took office, and now he proposes to tie lead weights to us on our way down. We can be smart, or we can be fools – Obama advises folly.
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34 Responses to “Whither the Housing Market?”
Caucus of Corruption
Yet given all the facts you laid out in your post, and all the other facts now so well-known about the origins of the housing meltdown and the subsequent domino effect of the rest of the economy, what is being done to keep it from happening again? What steps are being taken to change the bad laws, to allow banks to make sure their loans are only made to people likely to repay them to keep the government out of the market place?
Then I take it you were able to predict the crash last year and thus sold your house while its worth was still high?
That’s already in the law you’re referring to. I know that you have a burning desire to blame liberals for each and every single problem on Earth, but in this case you’ve got nothing. What caused this crisis was the massive deregulation that took place at the end of the 90’s.
Sergei,
My house lost value the moment I moved in to it – its kinda the dirty, little secret of new houses…they lose about 10% of their value once you open the door, just as cars lose a significant portion of their value once you drive them off the lot.
But, at any rate, you’re confused about what I’m talking about – though, to be sure, in the general sense I have been predicting some sort of crash for years now, and that is why I became an advocate for returning to the gold standard…fiat money is a disaster in the making, we just managed to avoid the full effects of it for a long time. What tipped me off to the fundamental weakness of it was when your leftist hero – the liberal financial shark, George Soros – essentially crushed fiat currency simply by market manipulation. If that can happen, then its time to get out of it – because for an economy to function, as I stated, you need two things: enforced honesty (as far as possible, of course) and a fixed medium of exchange (ie, gold and/or silver backed currency).
amazona,
By Obama? None at all – either he or, more likely, his advisers figure that liberalism lives or dies by fiat currency and usury-based economics.
Mark-
If usury-based economics is so anti-conservative, then why did Bush prevent states from regulating predatory lending within their borders?
Also… what do you propose other than a fiat currency?
What caused this crisis was the massive deregulation that took place at the end of the 90’s. – sergei
Sergei is just another stuck on stupid liberal.
For many years the President and his Administration have not only warned of the systemic consequences of financial turmoil at a housing government-sponsored enterprise (GSE) but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted.
http://gatewaypundit.blogspot.com/2008/09/bush-called-for-reform-of-fannie-mae.html
Mark,
Good thread. I work with a lot of this daily and can tell you that many people who are quite able to pay their mortgages are considering bailing on their homes in which they are 50% – 70% upside down. The fact is that they can recover from the credit hit a lot faster than they can recover their values, so why not.
Many in fact have downsized, paid cash for another home, typically on the foreclosure market and then short sold their previous home. It’s actually a pretty good strategy.
cluster-
Why did Bush prevent states from regulating predatory lending within their own borders?
Why didn’t the SEC under Bush do its job?
Deregulation of the financial industry is a great path towards financial ruin.
Mark:
In February of this year my neighbor missed his first house payment. By May he was able to scrape enough money together to send in the 3 months of payments he had missed. The same day the mortgage company received the payments is the day they foreclosed on him. They sent him back his certified check. They wanted the 3 missed payments plus the added fees and the attorney fees. And they hadn’t even added on May’s payment!
My neighbor went thru Hope Now (a bureauocratic credit counseling office) and the mortgage company responded with “no assistance”. So he tried loan modification……..that proved as worthless as Hope Now. The repayment plan his mortgage company offered him was double his mortgage payments with an interest rate of 12%. The foreclosure sale is next month. In the meantime, my neighbor has moved out. No house is worth financial rape.
It is very unusual to see any foreclosures here and so far this year my little rural community has had 3 of them.
rana,
If you want to direct policy, it would help if you understood the problem.
The problem originated in the ability of lenders to bundle their MBS’s, en masse, and sell them on the secondary market, absolving them of any liability. They originate the loan and then sell it to the GSE’s, sans any scrutiny, freeing up more capital to do it again, and again, and again. It got to the point that anybody with a pulse was getting a mortgage, because lenders know that Barney Frank, Harold Raines and Fannie Mae were there to buy that security.
Bush, and McCain called for this to be looked into as early as 2005, but were told by Frank that nothing was wrong.
States had zero ability to curtail this, but thanks for playing.
uffy,
Keep in mind, we were told that the stimulus money was going to be used to keep people in their homes. Yet her we have Rana and Sergei still blaming Bush, and ignoring this little factoid.
Ignorance is our most expensive commodity and liberals have a monopoly.
rana,
You’re missing the point – the problem isn’t regulation, but the fact that we use fiat money and usury is considered the way to go. Hard money, anti-usury laws and all incentives to make, mine and grow things and we simply will not have this sort of problem. We’ve been regulating the banking industry since 1913 – are things better? Will one more regulation do the trick? Or will the bankers ensure that the regulations actually keep other players out while allowing them to make money like there’s no tomorrow? You’re working from the assumption that if St. Liberal will just get in charge, all will be well. Sorry – real world calling: it doesn’t work like that. You can regulate until the cows come home, but you can’t repeal human nature – which is Fallen, and thus given to error.
Now, as to replacement money – gold, gold and more gold. Revalue the currency by turning in our fiat money on a 100-1 ratio – our money has lost 99% of its value since 1913, and this will allow us to find out how much we’re really worth.
Once you’ve turned in your $100 fiat and got $1 gold/silver dollar back, you’ll see certain things…like the fact that a very large portion of Americans are earning $1.60 a day, which is better than the $1 a day from 100 years ago, but not the spectacular run-up which making $20 fiat dollars an hour seems like. The good news is that this is a 60% increase in wages with a 33% reduction in hours worked (no more 12 hours a day; most of us work 8)…the bad news is that $1 from 1909 didn’t pay any taxes except excise taxes on things like liquor. Meanwhile, the $1.60 of 2009 is forking over 20% or so in direct taxation, more in indirect taxation…and in some States that $1.60 is being taxed at a rate which would have made a medieval serf rise up in bloody revolt.
uffy,
Indeed – and there are variances all around the country on this. The Las Vegas Sun was all pumped up about the “record” number of existing home sales in June…while downplaying the fact that the overwhelming majority were foreclosed properties, likely being snapped up by investors who want to buy and hold property. They also didn’t want to highlight the 50% reduction in median home prices over the past couple years for the greater Las Vegas area.
“My house lost value the moment I moved in to it – its kinda the dirty, little secret of new houses…they lose about 10% of their value once you open the door, just as cars lose a significant portion of their value once you drive them off the lot”…Mark
——————————————————-
I’m sorry to hear that, Mark.
We purchased our home in 1971 and since that time the value has risen 500%. Houses at that time were very reasonable and we were lucky enough to be able to afford a nice little bungalow in a great community.
Canada is not currently experiencing the terrible housing crisis that has hit the U.S. and therefore prices are holding pretty steady.
I had no idea that American homes decrease as much as 10% in value the moment you move in. That’s a real eye opener.
Mark,
The market does have to correct itself, and the faster those foreclosures come off the market, the sooner real values can rise. The values of 2006 were over inflated.
Mark-
How can I put this into the simplest terms possible?
Bush. Sued. To. Prevent. States. From. Enacting. Usury. Laws!
The SEC, under Bush, failed to regulate the disastrous mortgage-backed derivatives that crashed the stock market, even though they had the power and the reason to do it. Regulation wasn’t the problem; lack of regulation was the problem.
Canadian Observer-
Canada’s banking system has typically been more stable than that of the US (they had national branch banking decades before we got around to it). You should look at bank closures from the US and Canada in the 1920s… That is an eye-opener!
rana,
How can I put this in the simplest terms possible?
It. Doesn’t. Frickin’. Matter. What. Bush. Did!
The course was set – disaster impended because we have fiat money and a usury based financial system. Trying to cut the APR on someone’s credit card doesn’t alter the fact that investors demand 8% or more per year because money is worthless.
Mark,
Rana is one of those liberals who likes to:
“to study and learn about things, so I can make informed decisions about them. – Rana”
Yet this recent piece of BDS would contradict that statement.
Rana,
State usury laws do little to prevent an interstate problem. Wells Fargo, Bank of America make loans in every state, making that a federal problem. If states acted independently, it could complicate and compound the problem, the regulatory efforts needed to come from the feds.
Back to the books!
Mark-
It does matter what Bush did. Bush had political capital to avert a coming crisis that countless experts saw coming, and he didn’t act on it.
Bush’s slavish devotion to business interests, rather than national interests, was a direct cause of our recession (albeit one of many).
cluster-
Yes… Regulation needed to come from the Federal Government. Too bad that in 8 years in office, Bush couldn’t regulate his buddies in the financial sector! You guys had 6 years of control of both the congress and the presidency. You have no excuses for your sides failure to act.
Rana,
I thought you were the one wanted to learn and be informed, yet you have obviously ignored my link and my posts.
So much for using that mush of a brain of yours, right? Keep plunging head first into ignorance, it suits you better.
Yes, you’re pretending that mind-bendingly complex things, like economics, can be easily understood just by applying a few rules (“fiat money is bad”). Reality is not nearly so simple.
There’s no such thing as a fixed medium of exchange; that would imply that “value” has some sort of discrete and quantifiable existence, like, say, calories do. There are of course mediums of exchange, but they are fundamentally just another good to be traded, and are affected by the laws of supply and demand. For starters, there’s no way to keep the de facto money supply constant, because people save, and sometimes lose, money, and when that happens it cannot affect the market. Moreover, the demand also changes as wealth is created and destroyed; thus, if in 1792, the US government had minted one million dollars and had somehow managed to keep this supply constant, a dollar today would be worth far more than a dollar back then.
Sounds like somebody needs a hug.
This would have been an excellent refutation if I had claimed that the problem was with the GSEs and that Bush hadn’t tried to do anything about it, but as I didn’t claim either of those things, it falls a little short.
They’ve had the ability to sell them for 71 years, and the ability to bundle them for 22 years. In any case, while that certainly did contribute to the problem, it was only one part.
During the late 90’s, Bush was the governor of Texas, a position with very little impact on the nation’s financial industry.
You mean that we regulated the banking industry from 1913 to 1999. Sure, we didn’t get rid of all of the regulations, but we got rid of enough to result in our current situation.
If investors think that money is worthless, why are they investors in the first place? They want 8% a year because money isn’t worthless, at least in their opinions. You yourself said that you didn’t see any problem with fiat money until George Soros completed step 1 of his diabolical plan to take over the universe. Regardless of whether your conclusion is right or wrong, it is one that the overwhelming majority of people have not come to.
Froglet reminds me of a grumpy guy in a place I USED to shop who announced that “Bush stole my father’s retirement”. Oh. And how, exactly, did Bush do this? Well, he controlled Congress. In 2007? Well, he was the President. And why did BUSH do this? Because he wanted to.
I don’t know about this claim that BUSH sued anyone–sounds fishy to me. And it has been a long time since Bush had “political capital”.
As for the whine that the Republicans had six years to fix what the Dems broke, I need some help on this. I know that McCain’s bill was blocked by Frank or Dodd and never made it to the floor for a vote, and my resident Lib says, well, it SHOULD have.
Will someone please explain the process by which a bill can get to the floor for a vote? I know committee heads have a lot of control, as do committees—whenever I hear this squealing about how BUSH and the R’s SHOULD HAVE fixed the problems the Dems handed them, and had all this control, I just remember that Bush couldn’t even get judicial appointees out of committee to the floor for a vote, so clearly there is a huge amount of power in committees, and Dodd and Frank had the committees sewed up.
And I am not sure what “regulation” would have, could have, changed the course of the problem as long as the feds were forcing lenders to make bad loans. There were regulations and they were not enacted—who ran the SEC? Who ran and oversaw Fannie and Freddie?
And why are the Libs still coming in halfway through the problem to hurl accusations and pretending that the first half does not exist. Without sub-prime lending, forced by Dem legislation, none of the rest would have happened. And why, after problems were uncovered and announced, would the Republicans have had to FORCE Dems to cooperate?
Mark Noonan says:
July 12th, 2009 at 8:46 pm
So Bretton Woods is whose fault again?
Rana,
No, it doesn’t – had Bush been able to thwart Frank, Dodd and the rest of the ultra-liberal, friend-of-the-working-man (ha!) people in government, all it would have done is put off the day of reckoning. You can’t sustain dishonest things, not forever. You really can’t fool all of the people, all of the time…for instance, we could never fool the financiers that fiat money was worthwhile…thus they wanted their 8% and the ability to convert their assets into hard-value items not subject to taxation.
lead,
Everyone’s fault, that’s who – look, I’m not blaming Obama, dammit; he’s just making things worse or, more accurately, not allowing us to get out of this mess. We, as a people, conned ourselves. Time to un-con, ya dig?
Sergei,
Gold is worth what it has always been worth – the amount of things gold can be exchanged for, that has fluctuated….so, you could get $30 US paper dollars for a troy ounce of gold 100 years ago…now you can get around $900 US paper dollars for that same ounce.
you were the one wanted to learn and be informed, yet you have obviously ignored my link and my posts.
A, therefore B. Change the “yet” in your sentence to “which is why,” and you’re on the right track.
As to regulating the banks, how’s the government going create regulations to prevent something that hundreds of thousands of very smart investers, with their fortunes on the line failed to see?
As to the gold standard, how would the government finance it’s over 10 trillion dollar debt without a little help from the fed? I think they need to pay off a little of that debt before they can think about changing to some kind of free market medium of exchange.
Both parties need to quit using economic theory stretched to absolutely stupid extremes to justify irresponsible government. “stimulating aggregate demand” should be called the “liberal laffer curve”. The government should simply have taxes = spending(plus pay down a little debt each year), except in maybe the extreme case of invasion by another world power. Economist in the goverment, conservative or liberal, are not capable of any economic magic.
anarchist,
First off, it would be a $100 billion dollar debt, if we converted to the gold standard at the rate of 100 fiat dollars for each gold dollar. We’d also be able to finance the debt at 3% with a stable currency. You, of all people (given your moniker) should be wild for the gold standard.
Yea, I would prefer the gold standard over a fiat currency, but, under our current system dollars can be seen as representing debt. You’re suggesting setting an artaficial dollar to gold price and then converting all the debt obligations to that price in gold, which would pretty much screw over the all US gov’s creditors, actually pretty much all creditors.
Might as well just crazy inflate the currency, that way you can eliminate the debt and buy alot of cool stuff at the same time(you could make in cool conservative stuff, like military weapons). When inflation hits a ridiculous enough level the free market will find a currency like gold or ciggaretes or something.
There’s actually quite alot of literature written about moral ways to change the currency to a free market currency.
cluster-
Fanny and Freddy had little to do with the bundling of sub-prime mortgages into credit default swaps in the beginning. Who I was talking about Bush regulating was Goldman Sachs, Bear Stearns, Lehman Brothers, and all of those on Wall Street who decided to destroy our financial system with Credit Default Swaps. It’s awfully convenient to blame GSEs (which are a horrible idea in the first place), but the truth is rarely easy.
Guess that’s why it’s so hard for a simpleton like you.
amazona-
Much of the problem that Bush had was inaction of the SEC on his watch. Proper regulation could have been practiced on his watch without ever having to deal with the Congress.
Mark-
Sadly, a metal standard pretty much won’t work in our global system.
I’ll recount the story of how the gold standard in England died (1920s). England could not expand it’s money supply fast enough to support economic growth, so prices skyrocketed. With higher relative prices in their homeland, Englishmen went to France to spend their money, with the French being more than willing to take as much the more valuable Pound as it could get. Then, with these huge reserves of Pounds and nothing to do with them, the French Government took all of the Pounds back to Britain, demanding gold in return. The British couldn’t pay back the French without bankrupting their treasury, so the British gold standard died.
Now on to how the gold standard died in the US. Though American citizens couldn’t carry or exchange gold for currency since 1933, the value of the US dollar was still tied to gold for purposes of international trade until 1973. During that period, the US was the only major Western power to still use a gold standard, which is part of the reason why the US was the international reserve currency (meaning that while we were on a metal standard, the rest of the world was on a “USD standard”). The French, through their dealings with the United States and various developing countries, had accumulated a ton of dollars. As they did with Britain, France came to us and tried to get all of the gold we had for the dollars they had. Then, Nixon killed the gold standard to keep from bankrupting the Treasury.
What did we learn from these stories (other than the French’s propensity to ruin things… lol)? We learned that Gold Standards require international cooperation to work properly, international cooperation that is usually quite hard to come by. I think that a gold standard would be swell, but I don’t think that it will work in today’s global economic climate.
Oh, and how is fiat currency dishonest?
Which they weren’t doing. The claim that the Community Reinvestment Act did that is easily refuted by the act itself:
This assumes that gold has always been worth something. For most of human history, gold was considered a junk metal, because it is too soft to do anything with. Sure it looks nice, so some American societies (e.g. the Tairona) attached religious importance to it, but it was not until the Bronze Age that it became a commodity. Even then, though, it had no intrinsic worth. The only real practical application of gold is ballast. The reason its so expensive is that people think it looks nice, which creates demand, and later on because it came to be used as a type of currency, which increased demand even more, to the point that it was all some people could ever think about.
The regulations that we’re in place worked pretty well, and a non-partisan analysis of the crash makes it pretty clear what regulations would have stopped it.
Quite the optimist, aren’t you?
ranafuerte, the brittish government suspended gold convertability to help fund WWI. When the war ended, the resumed convertability at prewar levels. Of course everyone wanted gold instead of undervalued pounds. The government tried to increase the demand of brittish goods to bring gold to the country but in the end failed.
All this proves is a fundamental economic 101 law. If the government price fixes something, like gold to pounds, and it’s under market value, they create shortages of gold and a surplus of pounds. Stuff like this is exactly why people propose and actual REAL gold standard, becuase dicking around with the currency can create real economic problems.
Sergei, your pretty much right, alot of the regulations Bush wacked where to keep the sellers as the holders of asseets. To keep bankers honest all you need to do is pay bonuses at the maturity of financial assets.
anarchist-
How would a gold standard work if not through a legally defined exchange rate between gold and currency? I mean, that’s pretty much the definition of the gold standard. By advocating that kind of standard, you are either assuming that Congress (which, if anything, is run by a bunch of economic illiterates) can set an appropriate price for gold, or, if you let the currency float based on the value of gold relative to something else, place the value of our currency in the hands of commodity speculators.
No offense, but I think that I prefer the Fed.