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I am starting this thread so I have on place to dump all my rantings on this mess. To start with, the central problem in the whole mess was the Fed abdicating their role in oversight and regulation of the lenders, and the unscrupulous lenders realizing that the once the cats away, the mice can play. Say what you will (and give me time and I'll throw mud at every other player) without the easy money of reduced documentation loans going to people that had no business taking out mortgages for such high dollar amounts, none of the other bad actors could have the chance to do what they did.
When a lender gets a loan application, there are 3 main points considered for approval;
1 - character / credit history.
2 - the value of the asset / house, real estate, farm, car, truck, business.
3- the ability to repay the loan - the borrowers income, and their other cash assets.
In a reduced documentation loan, the borrower either states their income, and assets, or does a no doc loan where they provide no info on their income, job or assets. In effect, the borrower gives the lender a credit report, an appraisal and nothing else. No income, no tax returns, no paycheck stubs. Nothing for the lender to examine to determine if Joe Borrower can make his payments.
The other aspect which is getting a lot of the blame is the Adjustable Rate Mortgage - ARM. Where the bank offers a low "teaser" rate, for 2 or 3 years, and then it adjusts for the rest of the loan's term, usually 30 years in total. Which, by itself, ARMs aren't bad loans. But when lenders are offering them when the rates are at all time lows, and can go nowhere but up, to borrowers basing the approval on the low rate, and not the fully indexed rate, then it was a recipe for disaster. Everyone sees "Bob" at work got a new home. It is bigger than yours, bigger than everyone else's, so what does everyone else need to do? Keep up with the Joneses.
So the greed and peer pressure forces everyone to get bigger homes. Bigger loans. But, at the same time, US median income is falling by 5% after inflation, medical cost inflation is up double digits, gas is doubled, food is up, electricity is up, and what happens?
When those ARMs begin to reset, and people's incomes are down by 5%, then something has to give. At first the credit cards get maxed out, and the savings are all spent. Then people try taking overtime, or 2nd jobs. But the job market sucks, and moonlightning won't cover it anyhow. So then people get a little behind...
I'll hit on the rest of the bad actors in future posts. Just please understand that, so far in the story, without a Federal Reserve Banking system that wants laissez faire markets with no regulation, and lenders in a race to the bottom to see who can loan the most money to people with crappy credit, and shaky jobs (all the good borrowers are already covered by CITI and Wells Fargo, and BofA) the money isn't there to fuel the run up in prices.
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Cancelled Account
Dec. 20, 2007 at 10:40:29 PM
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| This user has cancelled their account with Voice of North America. | |
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Dec. 20, 2007 at 10:58:37 PM
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| If you look to the National Assoc. of Realtors, the market is looking up! We'll be going like gang busters. However, I've seen a market analysis from UBS, and one other that project in the hot markets from the 2000-2006 period (ie Phoenix) prices will come down another 12 -20% across the board. If you look at historical prices as a function of median income, homes are over valued 30%. My crystal ball is broken, but my bet is that prices come down another 10% in the hot markets, and we stay there through 2008, at which point if incomes start rising, you'll see prices rising. Of course, if Pres. Tancredo deports 12 million illegals, that will also destroy the housing market. |
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Dec. 20, 2007 at 11:35:22 PM
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| Phaedrus, this sub prime mortgage mess is the stuff scraped from the bottom of the exhausted post-WWII Breton Woods economic plan and its derivations. At the risk of repeating myself (which I do repeatedly) I have written several articles on this model, its origins and etiology, and the ramifications that are being made manifest today. We have dipped into that credit barrel again and again with ever more creative credit mechanisms to keep the Great American Consumption machine fueled and accelerating.
It seems to me that we have exhausted the ways to get creative. In fact, this time we may have punched a hole right through the bottom of the barrel, and the low quality gunk credit that was left in the bottom of the barrel is seeping out.
But, I have thought that numerous times before and we always seem to come up with the next creative gimmick to keep the consumer spending and the worker hard up against the traces of ‘productivity’, and are able to save the GDP with a sigh of relief. Been wrong before …
Maybe the Saudis and PRC will bail us out this time. The Global Economy to the rescue – recycle the petrodollars and the Bank of China’s colossal stash of foreign exchange in USDs. Maybe this brave new world of the global economy is the next phase, and it will pull our fat out of the fire this time around.
If so, where do we go from here? |
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Cancelled Account
Dec. 20, 2007 at 11:44:42 PM
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| This user has cancelled their account with Voice of North America. | |
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Dec. 21, 2007 at 01:00:23 AM
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| "If you look at historical prices as a function of median income, homes are over valued 30%." Mathematically that number could be a bit misleading. Median income is simply the middle income across a spectrum of incomes between your lowest and highest value. Ex: Nine people making $10K and one person making $1M. The median income of that group is $10K. Mean income is the mathematical average. Ex: Same ten people. The mean income is $100,009. When there is a strong middle class, and not too many people are filthy rich or dirt poor, the median and mean incomes approach each other. Historical home prices as a function of median prices reflected this relative lack of disparity rich and poor. Now we have ever increasing income disparity. True, rich people have become much richer over the last few years, and the absolute number of millionaires (correcting for a constant dollar) has increased. This is in no small part due to regressive tax cuts and large business friendly economic policy. But as a percentage of the population, greater and greater wealth is concentrated with fewer and fewer people. Median income goes way down while the mean income tends to stay the same. So house prices as a percentage of median income would tend to look more inflated than they really are, relative to the total amount of money in the market. Maybe home prices are not really overvalued by 30% compared to historical prices, but by more like 20 or 25%. On the other side of the coin, an ebbing tide sinks all boats. As median income go down, fewer people can afford a house even if historical home prices as a percentage of income remained constant (i.e. home prices fell in lockstep with income). Compounding this is a drying up of credit for first-time low income home buyers. So basically this historical index is out the door. The decreasing population of ultra rich people can only own so many homes, and the rest are bought by us. When the experts point to a shake-out in the housing market that could take another 18-24 months to be fully realized, they mean that home prices will not only have to drop enough to correct for their present overinflated value, but even lower to compensate for an increasingly impoverished population. Merry Christmas |
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Cancelled Account
Dec. 21, 2007 at 11:31:50 AM
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| This user has cancelled their account with Voice of North America. | |
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Dec. 21, 2007 at 11:37:07 AM
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[This is a reply to comment by Danny Cruz on Dec. 21, 2007 at 11:31:50 AM]
"If you look at historical prices as a function of median income, homes are over valued 30%." Mathematically that number could be a bit misleading. Median income is simply the middle income across a spectrum of incomes between your lowest and highest value. Ex: Nine people making $10K and one person making $1M. The median income of that group is $10K. Mean income is the mathematical average. Ex: Same ten people. The mean income is $100,009. When there is a strong middle class, and not too many people are filthy rich or dirt poor, the median and mean incomes approach each other. Historical home prices as a function of median prices reflected this relative lack of disparity rich and poor. Now we have ever increasing income disparity. True, rich people have become much richer over the last few years, and the absolute number of millionaires (correcting for a constant dollar) has increased. This is in no small part due to regressive tax cuts and large business friendly economic policy. But as a percentage of the population, greater and greater wealth is concentrated with fewer and fewer people. Median income goes way down while the mean income tends to stay the same. So house prices as a percentage of median income would tend to look more inflated than they really are, relative to the total amount of money in the market. Maybe home prices are not really overvalued by 30% compared to historical prices, but by more like 20 or 25%. On the other side of the coin, an ebbing tide sinks all boats. As median income go down, fewer people can afford a house even if historical home prices as a percentage of income remained constant (i.e. home prices fell in lockstep with income). Compounding this is a drying up of credit for first-time low income home buyers. So basically this historical index is out the door. The decreasing population of ultra rich people can only own so many homes, and the rest are bought by us. When the experts point to a shake-out in the housing market that could take another 18-24 months to be fully realized, they mean that home prices will not only have to drop enough to correct for their present overinflated value, but even lower to compensate for an increasingly impoverished population. Merry Christmas |
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Dec. 21, 2007 at 11:39:26 AM
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| Bottom line: No matter what index we use to gauge the market, it's worse than you think.
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Dec. 21, 2007 at 03:42:41 PM
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| According to the economists who study historical averages, for home prices nationally, as a function of median income prices are still 30% over valued. In other words, of the huge gains we saw in 2001-2006, most of those will be given back, if we return to historic normal prices. On the other hand, if more buyers appear, through magical miracles by a few million more Adams and Eves, or by an immigration amnesty plan, then prices will moderate faster. |
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Dec. 21, 2007 at 03:46:54 PM
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[This is a reply to comment by Danny Cruz on Dec. 20, 2007 at 11:44:42 PM]
Danny Cruz
Dec. 20, 2007 at 11:44:42 PM Are you saying median home prices are over valued 30% in Phoenix or... View this Comment I don't know how much overvalued houses are. I am sure they are somewhat overvalued because sellers' expectations have not dropped down out of that rarified atmosphere of the recent housing boom. Sellers are pricing their property to obsolete expectations rather than to the market, and the disappointing sales volume reflects that discrepancy. As for my comment, it concerns the macro credit environment of the post World War II period, of which this sub-prime mess is just a symptom, albeit a potentially terminal one. It is not about the mess itself so much as how we got here and where we go from here. The Breton Woods model and its subsequent derivations may be dying of old age. How much more mileage is there in this unsustainable system that relies on ever greater borrowing to sustain consumption?
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