Worse housing collapse in 2010 (debt, borrowing, mortgage rates, purchase)

[chet everett]

Ticking time bomb is the wrong analogy. More like a a stuck brake pad. Those "shadow inventory" homes are a drag. They make it harder for prices to get to where they should be. They make it harder to accelerate any appreciation. They can literally burn up and become environmental hazards. They make it harder for lenders and real estate investors to "steer clear" of problem areas. They make it harder for buyers to judge "stopping distance" and know where the bottom is.

There is NO WAY that the lenders are stupid enough to "explode" these onto to market at once. They will trickle out over a LONG time. Some will be bulldozed. Lenders have lots of bad times ahead...

[bale002]

Originally Posted by GregW

It makes more houses affordable to people that just want someplace to live.

Do you realize, that even with NO mortgage, fixed costs for an oversized house can run up to $20,000-$25,000 per year and even more? And that's before getting dressed and eating breakfast, as if you left the house empty.

So even if they GIVE away some of these oversized houses, with wages stagnating, the average worker and family may in many cases still not be able to afford them.

Some of these are smack in the middle of urban residential neighborhoods, others in fringe developments built with the housing bubble in mind.

What then?

" ... A good portion of that excess stock of housing should be converted to bakeries, small textile and footwear factories, wood shops and metal shops, for example, even in the midst of so-called residential neighborhoods, and the incomes of the workers - who could sleep on the top floors - should reflect the real economic value of their labor - village people, like it used to be ... "

A change in zoning laws to start, perhaps? People living without insurance? Any chance?

Or are policymakers attempting to move "backwards" in the face of reality?

[floridasandy]

Originally Posted by chet everett

Ticking time bomb is the wrong analogy. More like a a stuck brake pad. Those "shadow inventory" homes are a drag. They make it harder for prices to get to where they should be. They make it harder to accelerate any appreciation. They can literally burn up and become environmental hazards. They make it harder for lenders and real estate investors to "steer clear" of problem areas. They make it harder for buyers to judge "stopping distance" and know where the bottom is.

There is NO WAY that the lenders are stupid enough to "explode" these onto to market at once. They will trickle out over a LONG time. Some will be bulldozed. Lenders have lots of bad times ahead...

prices aren't going to get higher because the economy isn't going to recover without jobs or economic stimulation. how long do you think the government will be able to replace the private sector as the agent of recovery? other countries have to be willing to keep buying our debt indefinitely.

we have a derivative market which does make this a ticking time bomb. i think that denninger had a good analogy for this:Matt writes:

But the most damning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room. Given that the SEC has failed to identify who was behind the raid, Wall Street insiders were left with nothing to trade but gossip. According to the former head of Bear's mortgage business, Tom Marano, the rumors within Bear itself that week centered around Citadel and Goldman. Both firms were later subpoenaed by the SEC as part of its investigation into market manipulation — and the CEOs of both Bear and Lehman were so suspicious that they reportedly contacted Blankfein to ask whether his firm was involved in the scam. (A Goldman spokesman denied any wrongdoing, telling reporters it was "rigorous about conducting business as usual.")

Matt (taibbi) gets so close, but fails in the closing.

See, there are two area of naked shorting that nobody wants to really deal with, yet both have to be if we are ever to make a difference. Let's deal with them in turn.

The first, the writing of "naked" swaps, is one that I've written about before. The essence of a "credit default swap" is a contract whereby the buyer of protection insures against the default of a credit instrument (usually a bond of some sort.) If the bond issuer doesn't pay principal and/or interest, the buyer collects the face value of the bond from the seller of protection - but in turn must tender the defaulted bond to the seller.

This "tender requirement" is due to the fact the most of the time a default bond is not worth zero - even in a bankruptcy most companies have some value, and the bondholders are entitled to that recovery.

This is pretty much like homeowners insurance if you think about it. Your house might have a fire, but odds are it won't be worthless if there is. Same with auto insurance - you buy insurance against a wreck, but if you have one, the insurance company can pay you the market value of the car prior to the crash and in turn they get to keep the (wrecked) car.

Now envision that we allow any number of people to buy fire insurance against your house. There's only one house, but ten fire insurance policies. Only one of those people (you) owns the house and only one of them (you) lives there, but ten people stand to collect whatever the damage amount is if there's a fire.

How likely would it be that someone would be sneaking around with a gas can at 3:00 AM were this to be allowed?

Now let's add another wrinkle to the mix - to collect on any of the insurance policies you must have possession of the house!

Tonight, you have a real fire and the house burns to the ground. The recovery value is zero; indeed, it might be negative (since you have to hire a bulldozer and cleanup crew to clear away the mess before you can rebuild.)

But if there are ten insurance policies, suddenly that burned out smoking hulk has value that doesn't really exist, and a bidding frenzy is likely to develop for the (one) house. See, without the (burned out) house to tender those insurance policies are worthless.

[jimhcom]

The market for housing will follow supply and demand. The supply of housing is inflated and the demand for housing will diminish as it becomes increasing clear to people that home ownership is no longer an easy road to riches. Once the allure of price appreciation is taken out of the equation, the benefits of home ownership are not nearly as appealing. Houses require a lot of expensive maintenance. In the past whenever homes needed major repairs or upkeep people would simply refinance and use their increased equity to do the repairs, and possible buy a new car and still end up with the same or in some cases lower payments. It was painless. Those days are over, and without the ability to finance the maintenance using heloc's those expenses become "out of pocket" and that is painful. Most people have a low tolerance for pain. The upturn in sales you are seeing now is temporary, driven by people hanging onto the hope thing will return to the days of the past. The reality is they will not return to the past. The smart ones are preparing to live in the future.

[Traderx]

Originally Posted by jimhcom

is they will not return to the past. The smart ones are preparing to live in the future.

Hmmmm

So if I were to buy a house today you think it would be worth less in say 30 years from now? How about 50 years? 1000 years?

To say things will not return to the past seems alittle over the top, doesn't it? Afterall "never" is a long time.

Perhaps housing won't recover in 5 years or even 10, but never? I doubt that.

[chet everett]

jimhcom obviously is not real old. If he were he might remember that there are GENERATIONS of people that owned homes, worked their tails off, maintained them lovingly and well, ALL without EVER considering a HELOC or doing it for "price appreciation".

In fact I suspect jimhcom is pretty darned young. And the kind of young that often goes along with "reckless" or other less than flattering adjectives that generally are applied to those that are NOT particularly wise. Perhaps it is that lack of wisdom that is shaped too much by the past decade or so and not the millennia that have shown that owning real property is a tremendously effective means of increasing one's wealth and raising the standards of living for yourself and future generations of your line...

[sonarrat]

Originally Posted by chet everett

jimhcom obviously is not real old. If he were he might remember that there are GENERATIONS of people that owned homes, worked their tails off, maintained them lovingly and well, ALL without EVER considering a HELOC or doing it for "price appreciation".

In fact I suspect jimhcom is pretty darned young. And the kind of young that often goes along with "reckless" or other less than flattering adjectives that generally are applied to those that are NOT particularly wise. Perhaps it is that lack of wisdom that is shaped too much by the past decade or so and not the millennia that have shown that owning real property is a tremendously effective means of increasing one's wealth and raising the standards of living for yourself and future generations of your line...

I would agree with that to some extent. But the value of housing has been blown out of proportion, because everyone thought that they could, and should, own a home. That was Bush's "ownership society." Now, the rug has been pulled up from under it.

The market will not return to normal unless one of two things happens. One, homes become affordable enough for everyone. Voila, those empty homes all get filled. But it comes at a steep price for all current homeowners. Two, investors - the real investors, not the hucksters who watched Flip This! and turned a poor unsuspecting house into a granite-lined monstrosity with a garage in-law unit - snap up the properties and rent them out. And these real investors are not dumb. Given the soft demand for rentals and still-poor capitalization rates, they're going to play the waiting game. They know about the shadow inventory, and they're calling the banks, trying to coax it out of them. Trying to get the kind of deal that makes millionaires out of ordinary men. So they won't pay top dollar, or even a good dollar, for anything.

Those are really the only two possible outcomes, and both are horrendously ugly.

[hindsight2020]

Originally Posted by chet everett

jimhcom obviously is not real old. If he were he might remember that there are GENERATIONS of people that owned homes, worked their tails off, maintained them lovingly and well, ALL without EVER considering a HELOC or doing it for "price appreciation".

In fact I suspect jimhcom is pretty darned young. And the kind of young that often goes along with "reckless" or other less than flattering adjectives that generally are applied to those that are NOT particularly wise. Perhaps it is that lack of wisdom that is shaped too much by the past decade or so and not the millennia that have shown that owning real property is a tremendously effective means of increasing one's wealth and raising the standards of living for yourself and future generations of your line...

Yeah but why is that? Just because? Nope. It's inflationary in nature. That's robbing peter to pay paul. the only thing appreciating in real terms is the land under the house and that is ONLY driven because we keep overpopulating this world (un-pc as it is, that's the real source of our relative suffering), otherwise that'd be devaluing as well.

I don't consider iliquid investments "effective" in nature, when they are of utilitarian value. If I have to remove food from my mouth or roof from my head to gain the liquid of my "investments", they are not good investments in principle. Most people put all their eggs on a house (bad investment), yet the land (good investment) the house sits on is usually too small a parcel to really make it worth their while. Which is why overall, outside the utilitarian value of a house, there's no "just because" reason as to why real estate is a no-brainer long-term "good" investment.

Most homeowners can't really afford to have that much liquid tied up in said houses, which is why they outright depend on the "bigger fool" real estate shell game to give them an out when that liquidity they don't have suddenly becomes a short-term need. It's kinda like retirement accounts, people really can't afford them (which is a testament to the lowering of standards in present day america) yet they tie up liquid they can't really afford to tie up into these penalty-ridden "investments". People are just math stupid and optimism-biased.

[user_id]

Originally Posted by hindsight2020

Y the only thing appreciating in real terms is the land under the house and that is ONLY driven because we keep overpopulating this world (un-pc as it is, that's the real source of our relative suffering), otherwise that'd be devaluing as well.

It has nothing to do with "overpopulation". The vast majority of land in the US is dirt cheap, but people cluster in cities. But every city starts as an essentially worthless plot of land that some group of people decided to build on.

The dynamics of real estate have been the same for centuries.

[chet everett]

I hate to do the "listen sonny" thing, but for goodness sakes you seem to think that every developer, home owner or land lord buys on optimism and lack of mathematical faculties. Having been in this for over two decades I assure that has never been the case for any one that has more than "roulete wheel" success. Both small and large investors have always "run the numbers" and consider alternative uses of their capital when deciding to make purchases. The temporary suspension of this behavior in some especially bubbly areas was certainly a problem, but in some of those same areas there are now particularly shrewd individuals how, looking at the paltry yield that riskless investments have are eager to get good deals on properties.

It is further not at all true that there is any sort of need for "bigger fools" as pretty much every piece of property can be assigned an easily determined level of utility.

Nor are the indications that more than handful of people are eager to change the course of human populations rising, which is not all the same as a phony Malthusian argument that there is some finite carrying capacity of the Earth. Rather than 'suffering' the general progression of humanity is toward more comfortable and fulfillment rather than less through increased knowledge.

And speaking of increased knowledge it would be wise of you to try to see beyond the knowledge of the last 24 months or so. Where the heck do you come up with "land" being the asset that protects one from 'inflation'. Inflation happens when prices for any goods/service rise. If that happens in uniform way the concusses is that nothing would change -- more currency would be required but more would be available. Instead what happens is that wages and prices get out of sync by too much and the imbalance is an expanded money supply caused by lack of true growth. Pick up any economics book and that is the chapter summary. To prevent excessive inflation the central bankers attempt to use the tools they have (like interest rates) to create sustained periods of moderate growth. Hard to pull off, as some of that borrowed money goes into "productive capacity" and some merely creates ann illusion of wealth.

I assure you that to some one living in a tin shack in the Gobi desert there is nothing illusory about the wealth of someone living in a 3 bed 3 bath homein Anytown USA any more than it is an illusion that a huge penthouse apartment will command a rent that will consume more of your wealth than a ground floor studio rental.