People in my area think a 2-bedroom, 1-bath house for “only” $550,000 is a “bargain” that they should “snap up” because “prices will go back up like they always do.”
That is the language of bubble.
Think about this: People thought that stock in sillyname.com was a “bargain” when it fell to $20 a share, but a little while later no one thought the same stock was a bargain at ten cents a share.
Category Archives: Housing Bubble
Bailout Failed – Now What?
OK, the problem is that there is “toxic debt” out there and no one knows who will be affected by it. The toxic debt consists of “packages” of mortgages or other debt bundled up together. So imagine buying a package of 500 mortgages. What you now own is this obligation on the part of the mortgage holders to pay you a certain amount each month for the next 30 years (or until the mortgage is paid off.) If ALL the mortgage holders continue to make their payments, it is easy to know what your monthly revenue is going to be. But when you just don’t know how many people are going to stop paying, it is nearly impossible to know what this package is worth.
And that is what is causing the problem. No one knows what the revenue from these things will be, so no one knows if they themselves can make their own payments and certainly doesn’t know if others can pay them. And since everyone owes everyone else so much money from so many loans, no one knows who will be paying and who won’t and therefore who will go out of business or not.
And that means that you can’t trust ANYone to make their payments, because the people who pay the people who pay the people who pay them… might not be able to pay. Figuring out all those relationships is called “unwinding” it. THAT is what the bailout was about — buying that “toxic debt” so companies could say that they are free of it and still in business (or not) and therefore get or give loans (or not). That lets the situation unwind.
The root of it is the housing bubble. And the root of that was a credit bubble — too much credit. And that CAN’T be solved. Because NO ONE should ever have bought a house for so much money, or taken out second mortgages to buy cars and stuff. And it is done so it is too late really to do anything there. Like the answer to Iraq: don’t invade Iraq. Now it’s too late to solve it.
The problem though is what happens to businesses that ARE doing OK, but can’t get the money they need, because the whole banking system has f’ed itself up? (Why would a sound company need money? Well, when you sell something you don’t usually get paid for a while. And if you are owed ten million next Tuesday and have a payroll to make tomorrow, you have to borrow a bit.)
Even sound banks can’t lend because they need to keep a certain amount in reserve and have loaned out the limit of what they can loan. The Fed has been propping that up.
The Bush plan was basically to just give money to the firms that might loan them money, so they could make the loan, by buying toxic debt from them without really caring what it turned out to be worth. It is an OK idea, IF the public is protected and the process is transparent. But the Republicans would have none of that.
This bailout can be salvaged IF they really do stop executives from being paid ridiculous amounts across the board, really do get real equity in the firms so that the public gains if those firms gain from this, really do get (fair) deals in bankruptcy court for some of the holders of those mortgages so they can pay, and really do tax Wall Street firms and transaction enough to recover the money involved. That is a start and should be done right away, even though it doesn’t address root causes.
But like I said, Republicans are not going to go for that and we have to wait until Bush is gone.
One solution might be to set up new banks, from scratch. But that takes a bit of time. Another might be to set up what I call a Red Flag/Green Flag system so companies that do not hold toxic debt themselves get a green flag, and then you can visualize the networks of debt that do NOT have toxic debt in the chain…
Bailout Misinformation
In my morning paper,
Q How will the plan affect the housing market?
A If it works as intended (a caveat with all these answers) the $700 billion should help level off home prices. The huge infusion of money into the financial sector, designed to buy up the most toxic mortgage-related assets held by banks and others, should loosen up the mortgage market, making it easier for potential home buyers to secure a loan and get into the market.
That, in turn, should stabilize prices, as more buyers make bids for homes.
This is just wrong. If you qualify for a mortgage you can get a mortgage. If you do not qualify you can’t and this bailout makes no difference.
The problem happened because people who did not qualify were getting mortgages. They were offered low “teaser” or “qualifying” rates. This enabled people to pay much more for houses than they should have and could afford. So in the bubble frenzy this allowed houses to go way, way up in price. Later the mortgages “adjusted” to the real rate, dramatically increasing the monthly payments.
Now the old rules are back, requiring people to prove they could afford to make the payments. Those rules are not being changed by this bailout bill. So people will not be able to “bid the price up” way beyond what a house ought to sell for.
Prices are not going back up. Give that idea up.
Instead, ask yourself why this bailout is being sold to you with lies?
Getting A Loan
I keep hearing that there is a “credit crunch” and that people and companies can’t get loans. That is not what is happening right now.
There is a TON of money out there to loan. If you can demonstrate an ability to pay it back you can get a loan. In fact there is so much money out there to loan, looking for a SAFE place to get a return that if you can show an ability to pay it back you can get a really good deal right now.
This is not a credit problem at all. It is a SOLVENCY problem. No one wants to loan money to a person or company that is about to go bankrupt.
Update – OK that was a bit too simple. If YOU want to buy a house and have the down payment and good credit and can afford to make the payments, you can get a loan. They’re dying to find you to loan money to you. If you are a solvent manufacturer with cash flow and a good credit history and you need a lot of cash to build a new plant the problem is that many of the banks that you would normally get a loan from are in trouble and THEY can’t borrow the money to then loan out to you.
Bailout Comment
If this story, Deal said near on big financial bailout is correct I think I feel a bit better about the bailout. Not completely better, but a bit.
1) If executives are really limited in pay (and stock) by this deal they won’t be involving their firms unless it is really necessary. They won’t be in it for themselves.
2) If we get equity in the companies that get bailout money then WE profit if they do.
3) It is phased in, so we don’t just dump all the rest of our money onto a few companies at once. Instead we can see if it is working – and a new President can change what is being done.
If we get these things, it’s a start. I think we should get rid of many of the executives responsible. I also think we need to redesign the system from scratch, insist that ALL corporate money be removed from politics immediately, impost a 90% or higher top tax rate and several other things.
And about this meeting with McCain and Obama at the White house today… is it possible they’re going to be injected with something, and then replaced by pod-people?
Update – Through Atrios, here is an example of what we are paying to bail out:
When we the taxpayers foot the bill for the excesses of the bubble, we are bailing out the lenders who enabled the behavior below:
* The house was purchased on 2/6/1998 for $183,000. There was a $173,500 first mortgage and a $9,500 downpayment.
* On 8/21/2002 they refinanced the first mortgage for $165,500. They actually paid down their debt.
* On 3/12/2003 they opened a HELOC for $50,000, just in case… Their first taste of kool aid.
* On 2/13/2004 they opened a HELOC for $226,000. The kool aid is flowing now.
* On 10/22/2004 they opened an Option ARM for $492,000.
* On 5/2/2005 they opened a HELOC for $75,100.
* On 10/21/2005 they opened a HELOC for $126,000.
* On 9/28/2006 they opened a HELOC for $150,000.
* Total debt on the property, $642,000 plus accumulated negative amortization.
* Total mortgage equity withdrawal, $468,500 including their tiny downpayment.
Basically, these people put $9,500 into the property and made $459,000 in 8 years.
. . . If this property sells for its asking price, and if a 6% commission is paid, the US taxpayer is going to lose $209,694.
Note – at the asking price we ONLY lose $209K. But at the asking price the buyer has to come up with $90K AND have an income of $115K for a CONDOMINIUM.
The bailout’s success depends on housing prices not dropping any more.
On The Crisis
This is a great blog post explaining what is really happening with this financial crisis.
Palin Says America Heading For A Depression
Governor Palin says that America is not heading for a recession, it will be another Great Depression. Go see: Palin: America may be in for another Great Depression
Wait A Minute — Why Just U.S. Taxpayers?
Why are only U.S. taxpayers being asked to put up $700 billion to bail out the world’s financial system?
The U.S. is $10 trillion in debt.
Europe’s economy is the same size as ours.
China is sitting on hundreds of billions if not trillions of surplus funds.
Middle Eastern countries are sitting on hundreds of billions in oil profits.
So why is the AMERICAN taxpayer supposed to suddenly step in and save the world’s financial system? Tell me that?
I suspect it is because we’re the ones who are currently set up for harvesting, and our Congress can be stampeded to do this with 48 hours notice.
Why The Bailout Plan CAN’T Work
Here is the justification for The Plan:
If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
Sorry, if houses are overpriced because of the bubble, then they are overpriced. This idea that people are not buying houses that cost $300, $400, $500, $600,000 because banks can’t lend them the money is just preposterous! Even if a bank can lend the money, they can’t lend the money because TOO FEW PEOPLE MAKE ENOUGH TO QUALIFY. The other day I showed that you have to have an income of $12,000 a month to buy a low-end house in the San Francisco Bay Area.
The idea that you can stop housing prices from falling back to where they should be is like the idea that you could have stopped the stock of golfballs.com from falling after the dot com bubble. I worked at a company where the stock went up to $35 a share for no reason, and then after the crash the stock went back to WHAT IT WAS WORTH: five cents a share.
You CAN’T prop up the price of house ABOVE WHAT THEY ARE WORTH. This is why the bailout plan can not work.
Will FDIC Be Able To Cover Your Accounts?
In the Seeing the Forest: Is Your Money Safe? post a few days ago I suggested that you make sure your money is in bank accounts that are insured by the FDIC.
Well, there is a possible hitch in that plan. As Atrios points out today, Washington Mutual is teetering and if they go under it could swamp the FDIC. Like so many other institutions FDIC doesn’t have the necessary reserves to cover what is happening.
The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.
What does this mean to you? Well, it might be a good idea to have some cash literally under your mattress in case your bank goes under and it takes a while for Congress and the Treasury to bail out the FDIC. That contingency means it might take a while before you have access to your money.
I wouldn’t worry that you are going to lose your money — Congress just won’t allow that. But it might be a little while before you can access it. So have enough cash at home to pay for things for a little while. I’m sure that checks will still be OK for paying the rent, etc…
Today’s Housing Bubble Post — When Will Prices Stabilize?
I’m hearing a lot of talk about plans to “stabilize” or “prop up” housing prices. Plans include cutting interest rates, providing tax credits, etc. in order to “keep prices from dropping too far.”
Here is a news flash: after a speculative bubble prices always revert to the mean. You can’t stabilize prices any other way except by letting them fall until they are back where they should be again.
Housing prices will “reach a bottom” and “stabilize” when the following occur:
Prices will revert to the mean. After a speculative bubble prices always revert to the mean. This is another way of saying they go back to where they should be. When there was a bubble in tulip bulbs prices went back to where they should be, which was not much above zero. Remember “dot com” stocks? They fell to reflect the actual value of the companies. Many of those companies weren’t worth anything.
Prices will stabilize when supply does not exceed demand. Currently there is a HUGE inventory of unsold, foreclosed, newly-built, unfinished or whatever houses on the market. There are speculators still sitting on two, three and more houses. And there is another supply of people waiting for a “better time” to sell. At the same time there is almost no demand, because people understand that prices are falling, and they will lose their future if they buy a house at these inflated prices. AND lenders are starting to want to know if the buyer can pay back the loan, which means fewer loans for buying houses. (Especially if they start getting honest appraisals again!)
Prices will stabilize when the price of a house reflects the local rents people are paying. That is when it makes sense for a landlord to buy a property. when they can make money on the rent.
Prices will stabilize when the average-priced house in the area is affordable by the average-income person in the area.
Prices will fall to the point where houses are worth what they are worth when purchased for what they are meant for. This means that a psychological change has to occur and people stop thinking of a house as an “investment” or a savings account, and merely as a place to live.
A house is a place to live. That is what a house is. When everyone involved comes to understand a house as a place to live housing prices will stabilize. Part of that understanding involves understanding that people should never pay more than 25-28% of their income on housing expenses. (That’s mortgage payment, insurance and property taxes added together. In some regions you should add heating and cooling costs to that.)
The bad news is that this means prices in many areas still have a long, long way to fall. In the San Francisco Bay Area, for example, two bedroom houses in bad neighborhoods are still being offered for $500,000. This means a $100,000 down payment, and monthly payments of $2400 PLUS insurance PLUS maybe $500 a month in property taxes. This means you have to have $100,000 in the bank and an income of more than $12,000 a MONTH to be able to buy a two bedroom house in a bad neighborhood. And this means that prices have a long, long way to fall.
The Housing Market’s Double Bubble: The Big One Still Has Yet To Pop
Look what the Republicans have done to our economy by following their core “trickle down” economic ideology, which really means borrow and spend. They have run up a massive debt which combined with no oversight, a near total removal of regulations on corporate conduct, and watched and let Neil Bush run a savings and loan (oh, sorry, that was that other Bush presidency — when S&L owners and Republican campaign contributors robbed us blind and bribed Senators like John McCain and then got a massive government bailout.)
We have all been hearing a lot about housing prices falling, and about the effect housing prices have on the economy. The impact to date, while real, is actually overstated. Why? Well, housing markets and their impact are the turtle of economics, they happen very very slowly. Prices have to fall and people have to sell, when they sell they, if they get less than they expected, may not spend as much as they would have if they had reaped a huge profit.
Of course, the lack of higher equity is hurting those home equity lines people were tapping like McCain at an open bar. But ask yourself, honestly, how many people do you actually know who have either been forced to sell or have sold and not made a profit? Not that many — yet. People are still holding out.
Unquestionably the economy is slowing. Consumer debt is massive, companies are cutting jobs, inflation is rising, unemployment is a full percentage point ABOVE where it was a year ago, and with a work force of 200 million plus, that’s 2,000,000 newly unemployed Americans.