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The Sacramento Bee ran a few articles on the front page of the business section today about the housing bailout debate---articles pro and con the government "bailout" for subprime borrowers. As you know, the Bush administration has already coordinated a 5 year freeze on interest rates for a select group of sub-prime borrowers, theoretically giving them time to refinance into less risky loans.
After reading this article, I have many questions: First of all, how much effect will the Bush bailout have on the market?
Secondly, what about the suggested scheme to create an "RTC-like" fund, akin to the Resolution Trust Corporation created during the 1980's savings and loan crisis? It would carry people's mortgages until, one by one, they had time to change the terms of their loan or refinance. If anyone out there is familiar with the RTC, or a similar fund, how much further would that go in terms of a bailout?
Finally, and most importantly, if various government programs succeed in artificially sustaining housing prices, how will anyone feel secure about the value in their home, now and in the future? Won't buying a home be a very risky venture now?
Buying property has been a risky venture throughout history, just like all major investments are risky ventures. Sometimes the risks are higher, sometimes they are lower, sometimes they are simply PERCEIVED to be higher or lower. If there really was a investment that wasn't risky, you wouldn't have a chance to play --it would all be snapped up and nobody would ever sell.
Having said that, property is the smartest investment out there, IMO. I believe in having a diverse portfolio, but every spare dime I have had has gone toward buying another little bit of property. My biggest regrets have come from times when I sold properties that I wish I still had. I'm old enough now to have inherited quite a few things--the most valuable things I have inherited BY FAR have been pieces of property, even when they were not in the most desirable parts of town. But property is an investment that you hold onto for a long time. Don't buy it with money you need for upcoming expenses. People get into trouble thinking they can buy something for a short time and flip it to make a fortune.
Thank you for your thoughts, but I'm really looking for a considered judgment of the current housing market, not platitudes about the inherent risks in investing or the relative value of different types of investment. I asked about the Bush bailout, plans for an RTC-like fund, and the dangers of investing in a housing market in which prices are propped up artificially with taxpayer dollars.
how will anyone feel secure about the value in their home, now and in the future? Won't buying a home be a very risky venture now?
I was attempting to answer these last two questions--oh well, can't write brilliant responses all the time...
As for the bail out--I don't see that as something that will change anyone's opinions or actions. People will continue to have whatever opinions they already have, but they'll latch onto the bailout to explain whatever behavior they've already decided to take.
By that I mean people who are looking for an excuse to feel insecure will have something to latch onto. People who want to buy (even though they know they can't afford it) will see it as a promise of a future lifepreserver should they get into trouble. Etc.
In the meantime, bailout or no bailout, buying property is a smart investment. IMO, of course.
Agreed. The "bailout" is purely voluntary on the part of the banks. Thus, the bank is the sole decider on who it wants to freeze rates for.
Ultimately, it sounds like the only people who may be able to avail themselves of the interest rate freeze are people facing a serious risk of foreclosure, but who have never been late on a mortgage payment. The interest rate freeze would essentially work like a forebearance on collection of additional interest for certain trusted customers that the bank can rely on to make payments and for whom the bank would probably lose money on if it foreclosed (b/c less than 3% equity in house per the "bailout" rules). The bank "wins" if it can keep a steady stream of payments coming in from these customers without having to foreclose. For deadbeat customers who have been late on mortgage payments -- the banks will not freeze their rate and they will foreclose at will b/c money in hand (via foreclosure) is better than a spotty record of payments from an unreliable customer.
Agreed. The "bailout" is purely voluntary on the part of the banks. Thus, the bank is the sole decider on who it wants to freeze rates for.
Ultimately, it sounds like the only people who may be able to avail themselves of the interest rate freeze are people facing a serious risk of foreclosure, but who have never been late on a mortgage payment. The interest rate freeze would essentially work like a forebearance on collection of additional interest for certain trusted customers that the bank can rely on to make payments and for whom the bank would probably lose money on if it foreclosed (b/c less than 3% equity in house per the "bailout" rules). The bank "wins" if it can keep a steady stream of payments coming in from these customers without having to foreclose. For deadbeat customers who have been late on mortgage payments -- the banks will not freeze their rate and they will foreclose at will b/c money in hand (via foreclosure) is better than a spotty record of payments from an unreliable customer.
I also agree it is mostly political posturing. The stipulation that the recipients of this "largess" have never missed a payment but are in immediate risk of foreclosure is an oxymoron. Nobody who has made all payments is in any risk of foreclosure.
Most of the analysts I've read agree with you and say it will affect only a small percentage of troubled borrowers, of whom some 40% will end up defaulting anyway.
Writing about the current financial crisis in his syndicated column on Friday, Paul Krugman spoke of an extended housing correction as a foregone conclusion.
All the borrowing during the housing bubble has left a lot of people facing negative equity and high risk of foreclosure when the housing market falls. But Krugman says that in order to restore a historically normal ratio of housing prices to rents or incomes the housing market would have to fall about 30 percent.
He concludes: "Markets won't start functioning normally until investors are reasonably sure that they know where the bodies - I mean, the bad debts - are buried. **And that probably won't happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.....**
Krugman, of course, is more interested in the consequences of the housing debacle for the entire financial system than in the simple housing forecast. He assumes that the housing correction will take "years" to complete:
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