I often hear, particularly from my conservative friends, that the housing bubble is just a symptom of the market, that there's nothing intrinsically evil about it, that realtors are just doing their jobs, ditto mortgage houses, that all a bubble does is separate fools from their money, etc. There is a certain free-market comfort to these sentiments. Nonetheless, they're bosh.
The current bubble was built by realtors and mortgage operations giving loans to people who had no (financial) business buying property. These people have begun to default at an alarming rate, but the point is that this spending spree doesn't just wreck the individual who gets foreclosed, it hurts everyone in the market, because those soon-to-be-foreclosures drove up the price for everybody else.
Still, my conservative friends argue, it wasn't like the realtors and mortgage people were committing malpractice or anything. Maybe, maybe not. However they seem to have acted at least close enough to ambulance-chasing trial lawyers to have earned public scorn.
To wit, we have this fantastic story about a woman in the D.C. suburbs finding a lost wallet and using it to two mortgages (two!) to buy a $419K townhouse with no money down.
Yup, that's some darn fine due diligence there. And make no mistake, this sort of thing hurts everybody. Except, of course, the realtor! Bet they didn't have to give back their commission.
1 hour ago
11 comments:
But home-ownership is at all time historic highs!
Jon, Come on
1) Increased foreclosures put downward, not upward, pressure on home prices.
2) While I agree that a portion of the loans that were given out should not have been, there is a place for ARM Mortgages, even to sub prime borrowers. I think of this as the birth of credit cards, where there was pain in the beginning, but once the market matured and an appropriate amount of standards were put into place the overall impact was very positive.
3) Foreclosures are heading towards 3% for sub prime borrowers while deliquincies are between 15-20%. So you are really missing the problem here. The problem is more related to credit and the demand for the MBS securities
Matt,
I can't tell whether or not you're kidding, so . . .
(1) Foreclosures put downward pressure on prices. I didn't say otherwise. But the passing out of loans to whoever walked into the office put immense upward pressure on prices.
(2) The beginning of the market for credit cards? Are you serious? So a bunch of people going into debt for a couple thousand dollars they couldn't handle which had virtually no effect on the prices of everyday commodities is like a practice where people are defaulting on $500,000 house purchases? Are you serious? Sometimes a difference in scale becomes a difference in kind. This is one of those times.
(3) We'll see where the foreclosure rate winds up, but it seems to me that the big picture is whether or not the pricking of the real estate bubble only temporarily wrecks the lives of a large group of people or spreads and helps contribute to a serious broad economic downturn that hurts nearly everybody. The jury is still out on this, of course, but we'll see soon enough. I'm pretty sure I wouldn't want to be standing on the same side of the projections game as the people at the NAR, though.
That comes across meaner and nastier than I meant it, Matt. Sorry. I'm just genuinely confused by the impulse to alibi realtors and the mortgage industry.
Hurts everyone? That's not right.
1. There are more--and bigger--houses, apartments and condos today because prices were high for several years in a row and builders and developers wanted in. Anyone buying or renting in the next several years will benefit from the greater supply.
2. No one can complain too much about the defaults without getting paternalistic. Encouraging lower-income, no-savings people to buy homes with low-money down, very low payment loans has been the policy of our state and federal governments for years and years. Who should be the one to change that? This NYT article from June about Chicago's difficulties was great about how hard it is to control borrowers and lenders without killing a useful market: http://www.nytimes.com/2007/06/12/business/12counsel.html?ei=5070&en=23bbb188aa9ea470&ex=1186027200&pagewanted=all
3. How about all of the people who have succeeded with their low-money, low-payment loans? There are lots of people who have.
4. I'd say two groups are getting really hurt:
A. people who bought their first places between [2002] and [2005]. The time period may be bigger in a few areas but not all.
B. Harvard, and rich people who bought hedge funds that went in big for deals back by weak home mortgages.
Everyone who buys their first place today wins. And almost everyone who bought in 1999 is still way up.
Jon,
I understand your first point better, and you are correct. But you are misunderstanding my second point.
If you want my full views on this issue you can read them at my blog here http://increasing-returns.blogspot.com/2007_03_01_archive.html
but they are merely summarazing a point made by David Leonhardt in the NYT here
http://www.nytimes.com/2007/03/21/business/21leonhardt.html?ex=1332129600&en=428d169ccc5393b6&ei=5124&partner=permalink&exprod=permalink
"But whatever happens, it’s important to remember that the mortgage market is following a classic cycle that nearly every other form of consumer credit has also followed. When somebody comes up with an innovation, be it consumer loans, credit cards or creative mortgages, it inevitably leads to an explosion of borrowing that includes a good amount of excess and downright abuse. After the abuse is cleaned up, though, most families end up better off."
What I am trying to get you to acknowledge is that sub prime and ARM mortgages are not entirely bad. I agree that they have gone too far over the past few years (in fact I have been saying this for 2 years now), but these mortgages represent a genuine innovation.
And I don't want to wreck the 80% of people who do benefit from these loans in order to service the 20% who didn't.
Also, one point related to the fist one. The reason for the increase in home values is that it became easier to finance your home (using either ARM's or the sub 6% fixed). But, as I easily admit, things went too far and prices got to the point where they couldn't go higher. Now the problem is that default is looking better than sellin because the housing price deceleration has left the loans to be paid greater than the value of the house.
It's growing pains, it ain't pretty, but that is what this is.
Jon,
I understand your first point better, and you are correct. But you are misunderstanding my second point.
If you want my full views on this issue you can read them at my blog here http://increasing-returns.blogspot.com/2007_03_01_archive.html
but they are merely summarazing a point made by David Leonhardt in the NYT here
http://www.nytimes.com/2007/03/21/business/21leonhardt.html?ex=1332129600&en=428d169ccc5393b6&ei=5124&partner=permalink&exprod=permalink
"But whatever happens, it’s important to remember that the mortgage market is following a classic cycle that nearly every other form of consumer credit has also followed. When somebody comes up with an innovation, be it consumer loans, credit cards or creative mortgages, it inevitably leads to an explosion of borrowing that includes a good amount of excess and downright abuse. After the abuse is cleaned up, though, most families end up better off."
You attempt to paint the entire sub prime and ARM Mortgage as evil, while failing to acknowledge that they have been an innovation ot the mortgage market.
I don't want to wreck the 80% of people who do benefit from these loans in order to service the 20% who didn't.
Also, one point related to the fist one. The reason for the increase in home values is that it became easier to finance your home (using either ARM's or the sub 6% fixed). But, as I easily admit, things went too far and prices got to the point where they couldn't go higher. Now the problem is that default is looking better than sellin because the housing price deceleration has left the loans to be paid greater than the value of the house.
It's growing pains, it ain't pretty, but that is what this is.
Matt,
I didn't pull your post down--don't know why it didn't show up for you. I may be dastardly, but not *that* dastardly!
Jon,
I am sorry for the last post. For some reason my posts were not showing up, then I realized it was up and tried to delete. I guess it didn't take.
I'm currently looking for a townhouse or condo in the Richmond, VA area. I find it astonishing that I could effectively get a mortgage with less than $10k in cash, a significant debt load, and a contracting position that may or may not turn into a permanent staff position.
Mind you, I'm not signing anything. But one of the companies I checked out was Ryan Homes, which is part of a mortgage company. Guess who offered me $15k cash on my down payment so I could buy into their townhouse community with only 3% down, and hey, I wouldn't even have to use my own money!
Real estate prices have doubled in this area in the last five years. I'd much rather have houses still selling for under $147k and a higher interest rate than lower interest rates and the same houses going for over $300k.
As for those homes being bigger... um. Who needs a McMansion? Our families aren't bigger. People aren't having more kids because they buy bigger houses. So what's the point of bigger homes, except to inflate home prices for those of us who would just like about 1700-2000 sq. ft. of space?
I'm probably one of the few people who is actually going to gain from the housing market collapse, assuming I can get a mortgage. I'm spending the next year working myself out of debt first, and looking around at what's out there meantime.
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