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Some Wisdom on the Housing Situation:

Boston Globe:

Owning a home in Boston is about 70 percent more expensive than renting an essentially identical home. Therefore the government should stop trying to keep owners in homes and instead let more people return to renting. Those families could spend the extra money on other needs…says a new study from the National Low Income Housing Coalition. The study joins a growing chorus making the point that home ownership is a misnomer in many cases. Many 'homeowners' are people with little equity, no equity or even negative equity who are basically making monthly rental payments to a mortgage company.

The group argues there is little long-term benefit to ownership because prices in cities including Boston likely will continue to decline…And even if they could, they'd be better off paying half as much and investing the difference in stocks.

Much of the "foreclosure crisis" involves homes purchased with no-money-down loans from which owners are walking away now that they have negative equity. [Not to mention long-time homeowners who cash-out refinanced regularly, ensuring that they never built any equity; I've read of individuals who have spent literally tens or even hundreds of thousands of dollars they received from refinances, and now want a bailout because they can't afford a few hundred dollars a month increase in their mortgage payment resulting from their last refinance into an ARM.] There is no more reason to consider such cases part of a social crisis than if the same individuals has leased apartments well beyond their means and have now been evicted.

On the other hand, some victims of the housing bubble are unlikely to get any government help. I know a woman who works as a cleaning lady, her husband as a maintenance man. They are immigrants who speak little English. They nevertheless managed to save 50K for a down payment on a townhouse, which they bought in the outer D.C. suburbs at the peak of the market in July 2005. That 50K in equity, and perhaps a bit more, has been wiped out as prices return to historically normal levels. Unlike those who put no money down, they can't just walk away, and unlike many others, they didn't buy beyond their means, so they aren't in foreclosure, but have seen their life savings evaporate. Sure, they didn't have to buy when they did, but they are certainly in a sense victims of the bubble, caused by the irresponsible lending and borrowing practices of others. If anyone is going to get bailed out by Congress, I would like it to be people like them [update: though, to be sure, I'd rather Congress stay out of it completely).

tvk:
Generally, I agree with you here. But the political reality is that if a lot of middle class people were being evicted from their leased apartments, you can bet there will be the "Cram-Down Evil Overcharging Landlords Act of 2008" in the works. The current situation is no different in that respect, either.
4.12.2008 6:12pm
Paul Milligan (mail) (www):
Understand some things -

1 ) They CAN 'walk away as easily as someone who put no money down'. It'll piss them off more, but their loss is already their loss, realized or unrealized. The money wasted on the inflated purchase price is already gone to someone else's pocket, and is not coming back. Thus their present position is no different than someone who put no money down. Their PRIOR position WAS different, but that's in the past now.

2 ) CONGRESS does not bail ANYONE out. They merely decide who YOU and I are going to bail out. If there is a bail-out, it is CONGRESS STEALING FROM YOU to make someone else's mortgage payment. Call it what it is - THEFT, not 'help'. If you're so concerned about helping this person you know, send them a month's mortgage payment. Why wait for Congress to take it away from you, screw it up, and THEN give it to someone you don't know ?
4.12.2008 6:33pm
devil's advocate (mail):

Cram-Down Evil Overcharging Landlords Act of 2008


just wait until the flow of folks out of foreclosed homes and into the rental markets starts to spike rents and this will be introduced and passed post haste.

My counterintutive plan as an alternative to their latest bail out don't know my axx from my elbow mortgage company and even stupider buyer of mrtgage back securities and leave no liar's loan behind rescue paackage:

Phase out the mortgage home interest deduction.
Anyone who buys before the end of this tax year gets the credit for the life of their first mortagage.

Anyone who buys in the next tax year can deuct 80% of their mortgage interest for the life of their first mortgage.

Following tax year 60%, next year 40% next year 20% and finally no credit is available thereafter unless secured by previous purchase.

This incentivizes those who have downpayments and are mortgagable in the current tight standard environment to reutrn to the market and help find the bottom, but by the time everyone else weather's foreclosure etc. and comes back to the market some years down the pike, the credit is gone. This lower's housing prices as people aren't factoring tax credits into higher offers.

Those who own homes and are not selling them get to keep the mortgage credit they already have so it does not affect their ability to afford the homes they have bought although it would depress the sale value of the home when they eventually sell. On the other hand if this helps stabilize the market, it stabilizes their investment and stops loss of equity now.

Brian
4.12.2008 6:42pm
matt b (mail):
well, none of them should be bailed out. as another matter, the immigrants made a poor fin decision, and i don't care--equally.
4.12.2008 6:43pm
deliotb (mail):
It's not that I believe in bailouts, but Congress seems to think it has to "do something." If anyone is going to get aid, I'd like it to be responsible savers, not reckless borrowers.
4.12.2008 6:50pm
Glenn W. Bowen (mail):

Many 'homeowners' are people with little equity, no equity or even negative equity who are basically making monthly rental payments to a mortgage company.


Anyone with a mortgage soon realizes this, if they didn't prior do taking a mortgage- the difference is, with a mortgage, you stand to get your money back if you wise up a little.

That's why you do it.

Did a search on the organization, seems sort of a "right to housing" outfit, sorta kinda maybe, but I couldn't give any specifics.

Anyway, the part of the study quoted states the obvious, which is to my eye more of the obvious such as the government wants to spend millions on to educate people about mortgages... how about a nice, one-page pamphlet instead?

"victims"? maybe.
4.12.2008 6:56pm
John (mail):
You talk as if the DC prices will never return to their prior levels. They will, and they will exceed them, and it will all happen before the mortgage is paid off. Calm down.
4.12.2008 6:59pm
Zacharias (mail):
White, middle-class babymakers will always vote to grease their skids at everybody else's expense, and they will always win, Bill of Rights notwithstanding. What's good for them is good for Amerika.
4.12.2008 7:04pm
Vinnie (mail):
Anyone unsophisticated enough to buy at the high voluntarily deserves what they get. A fool and his money and all that. It didn't take a crystal ball to see the fall coming, and it isn't done dropping yet.
4.12.2008 7:06pm
Tony Tutins (mail):
I don't see how a comparison is possible, because the rental stock is dominated by apartments while the housing stock is dominated by single family homes. Don't buy a house at the peak of the boom, is my advice. My stock portfolio is only now recovering to 1998 levels, so I don't know why stocks are seen as a better investment than a single-family home. GE's profit dip is going to send a chill through the market, for example.

Consider that someone owns the house you would rent, and they are making money by renting it. They have owned it for a while, and that is the secret for all homebuyers. I knew an immigrant couple in a similar situation to DB's friends. He was a mechanic's helper and she was a data clerk. They told me that with their salaries, they could not afford to rent the house they lived in. Luckily they had bought their house five years previously, so their housing costs were relatively fixed while rents moved with the market.

Secrets:

- Only buy when you plan to stay put for five years or more.
- Don't buy at the peak of the market.
- Don't buy above your income -- get a conventional mortgage with its rigorous income and credit checking.
- Don't use your house as a piggy bank.
- The amount of money wasted on condo fees could help you buy a single-family home. Cut your own grass, paint your own walls. Sock some money in your own bank account each year for a new roof, furnace, etc.
4.12.2008 7:18pm
Elliot123 (mail):
"just wait until the flow of folks out of foreclosed homes and into the rental markets starts to spike rents and this will be introduced and passed post haste."

Will the foreclosed houses remain empty?
4.12.2008 7:19pm
SenatorX (mail):
Another issue is all the interference to try and prop prices up keeps people like us on the sidelines. We have our 20% to put down sitting in the bank but there is no way a person can buy right now. Seems to me you will never see any sort of bottom in prices until the inventory of unsold homes starts to move. Housing being basically ponzi don't you need new buyers? Prices need to come down to in line with historical averages compared to incomes.

I am also waiting to see what congress does in regards to incentives to purchase. In Florida insurance is also a major problem. So far I haven't seen anything they are passing that will make a difference. By the time they move past bailouts paid for by lobbying, the market will have already corrected. Still, now you have to wait because it would suck to buy right before some tax credit incentive comes out.
4.12.2008 7:23pm
Glenn W. Bowen (mail):

White, middle-class babymakers will always vote to grease their skids at everybody else's expense, and they will always win, Bill of Rights notwithstanding. What's good for them is good for Amerika.


POWER TO THE PEOPLE, MANNNNNNNNNNNNNNNN!!!

sincerely,
Your Student Advisor
4.12.2008 7:41pm
seadrive:
Who were you quoting, and where did that "70% more expensive" come from?
4.12.2008 7:59pm
deliotb (mail):
John, we're moving to Maryland in 5 years or so, so if prices go down, that just means the house in MD will be cheaper, too. If they go up, we'll just have to pay more for our house in Maryland. So I'm indifferent.
4.12.2008 8:04pm
EPluribusMoney (mail):
The way out of the housing bust would be for the government to print more money, causing 10% inflation for 3 or 4 years. That would raise the price of housing back up to peak of the market levels and everyone would be fine... except people with cash and other investments that don't rise with inflation.

Isn't this what the government is doing now with the cheap dollar and the bailouts? Where does the bailout money come from?
4.12.2008 8:06pm
NickM (mail) (www):
You could do a partial bailout for responsible people (i.e., those who took out loans they can afford to pay back)who bought at the wrong time by creating a tax deduction a la depreciation for the reduced value of the home, with a corresponding decrease in the basis upon sale.

Nick
4.12.2008 8:33pm
Steve2:

Much of the "foreclosure crisis" involves homes purchased with no-money-down loans from which owners are walking away now that they have negative equity. [Not to mention long-time homeowners who cash-out refinanced regularly, ensuring that they never built any equity; I've read of individuals who have spent literally tens or even hundreds of thousands of dollars they received from refinances, and now want a bailout because they can't afford a few hundred dollars a month increase in their mortgage payment resulting from their last refinance into an ARM.] There is no more reason to consider such cases part of a social crisis than if the same individuals has leased apartments well beyond their means and have now been evicted.

I'm perfectly willing to fund a bailout for such people, provided that the bailout takes the sole form of rebuilding Pruitt-Igoe for them and forbidding them to live elsewhere.


Sure, they didn't have to buy when they did, but they are certainly in a sense victims of the bubble, caused by the irresponsible lending and borrowing practices of others.

What other sort of victim is there? They were harmed as a consequence of the punishment-worthy actions of others. I'm not aware of any other definition of "victim"...
4.12.2008 8:50pm
Perseus (mail):
Since Congress is giving away all of this pork, what about some government help for people who prudently saved the 20% down and waited to buy, especially when help for the "victims" of the housing bubble will serve to prop up prices somewhat, thus making it more expensive than it otherwise would have been for people to buy in the next few years?
4.12.2008 9:05pm
A. Zarkov (mail):
The whole ownership concept for lower income people is a scam. With no skin in the game they're just renters who have to assume market risk, seismic risk, storm risk, etc. The very people who can least afford these risks are the ones saddled with it. Once developers built apartment complexes and owners rented them out.

The wave of foreclosures has also has destroyed neighborhoods as the "owners" abandon their properties. This alone will cause Congress to do something. Unfortunately Congress will do the wrong thing as it almost always does.

Here is my solution.

1. Convert the current owners facing foreclosure into renters of the property they currently occupy.

2. Give these new renters a (European type) call option on the property they occupy. Make the strike price something like the outstanding principal.

3. Set the expiration date at something like 2-5 years.

4. If the renters fail to exercise their option then the owner/bank can sell the property or continue to rent it.

The advantage of this scheme is it arrests the destruction of neighborhoods. It gives the people facing foreclosure a breather. By the time the option expires the credit crisis and the recession should have passed. If real estate is higher then some renters might get their property back. With all its problems this scheme is likely better than what Congress plans to do. It will also help avoid the tremendous ill will generated by something that looks like a bail out of people who make poor decisions at taxpayer expense.
4.12.2008 9:20pm
Dan Weber (www):
I don't see how a comparison is possible, because the rental stock is dominated by apartments while the housing stock is dominated by single family homes.

Huh. My time in Boston as both renter and owner disagrees with both those suppositions. Single-family homes are the minority.
4.12.2008 9:52pm
Glenn W. Bowen (mail):

2. Give these new renters a (European type) call option on the property they occupy. Make the strike price something like the outstanding principal.


doesn't this give a sweet deal to the occupants, and a no-deal for those who "just rent" other properties?

IOW the government gives the defaulters a pass with a future and a break as their rent works down the principle, none to the other guy.

I'm askin'.
4.12.2008 10:00pm
A. Zarkov (mail):
" ...doesn't this give a sweet deal to the occupants, and a no-deal for those who "just rent" other properties?"

It does give them a deal, but not too sweet a deal because I doubt property prices will increase before the option expires. They need some kind of hope to stop them from walking away. The bank avoids having to carry an empty house for however time it takes to process the foreclosure and rent it. That could easily be six months depending on the state laws. I'm not saying this is an ideal solution, just a better one than Congress is likely to come up with.
4.12.2008 10:16pm
RichC:
My time in Boston as both renter and owner disagrees with both those suppositions. Single-family homes are the minority.

Well, that depends on what the definition of "Boston" is. If it's "City of Boston", you're correct. If it's Boscamberville, you're still correct. But if it's "Greater Boston Metro Area", you're wrong.
4.12.2008 10:17pm
theobromophile (www):
Agree that Boston (city limits, outer urban areas) has a lot of duplexes that are both rented and owned. A lot of owners facing foreclosure are likely investment buyers who purchased the homes as rental properties.

Anyone who calls for "government action" to "save people's homes" ignores the fact that the housing market is absolutely symmetrical. A thousand dollars lost by current owners is a thousand dollars saved by new buyers. Money given to owners is that which makes it more difficult for renters who want to purchase to do so.

As such, the most sensible system would seem to be one wherein the most financially qualified people would own homes, which would be achieved by letting the market do its thing, but that's just me....
4.12.2008 10:45pm
Bama 1L:
A. Zarkov makes good points. Unfortunately there is no one to tell many prospective homebuyers that they would be better off renting. So many people have it in their head that a home is a surefire investment; that paying rent is like lighting money on fire; and that some combination of tax deductions and equity-building makes homeowners come out way ahead of renters regardless of a straight comparison of rent to mortgage payments. It used to be that the market sorted this out, because people who were better off renting usually could not get mortgages anyway, but the rise of exotic mortgages and the strong incentives for brokers and loan officers to sell as many mortgages as possible broke that down.

We'll buy when we have a solid down payment and know we'll be somewhere five years. In the meantime, we've been taking advantage of very favorable rental markets.
4.12.2008 10:55pm
Mark H.:

they didn't buy beyond their means, so they aren't in foreclosure


So what's the problem? They got the housing they wanted and will live there, presumably for decades to come.


but have seen their life savings evaporate.



In the the short term, perhaps, but did they buy with the intention of selling today (i.e. within a few years of buying)? If so, they should never have bought in the first place.

Will they be better off in the long-term? Of course they will. Just ask Raoul Castro who is finally allowing people to take title instead of paying rent to the state for life -- seems like in this, and other areas, the US is going at breakneck speed in reverse.
4.12.2008 11:03pm
Bad (mail) (www):
"Sure, they didn't have to buy when they did, but they are certainly in a sense victims of the bubble, caused by the irresponsible lending and borrowing practices of others. "

As far as I can tell, given that the drive to end regulation of fraud and so forth generally comes from the right, the conservative argument for these sorts of people seems to be: "serves them right for choosing to be part of the economy! They should have known better!"
4.12.2008 11:05pm
devil's advocate (mail):

Will the foreclosed houses remain empty?



certainly not forever, but the turnaround time is going to definitely create pressure in the rental markets. far less separate single family homes for rent. people still owning and trying to sell will hang out of renting if possible because its a hassle and can make the house harder to sell.

Definitely the empty housing stock should create a softer market in housing and maybe banks or foresclosure specialists who get a hold of these homes will respond by placing more single family homes in the rental market.


now you have to wait because it would suck to buy right before some tax credit incentive comes out.



Of course if Congress were talking eliminating credits it would be an incentive for people to get in before they were gone and help the market find its bottom.

Instead they are running hell bent to open the treasury.


the drive to end regulation of fraud and so forth generally comes from the right



a little caveat emptor goes a long way, for those on both sides of liar's loans.
4.12.2008 11:41pm
Dave Hardy (mail) (www):
1. At least in my state, and I suspect in many others, a residential mortgagee can walk away -- the mortgage holder cannot seek a deficency judgment, but has to be content with repossessing. In this context, the benefit of the bailout goes to the bank, not to the individual. Esp. when the situation is not that the buyer is unable to make payments, but that he/she finds that the house is no longer worth what they paid, i.e., is a bad investment that they might just walk away from.

2. I sometimes long for the good old days when a pol could just take a bribe. The ability of the briber, and the avarice of the bribee, had some limits, and if a person didn't want to participate in the bribe, there was no way to force them to do so. In this context, pols are driven to spend billions to buy votes, not out of the pocket of any bribe offeror, but out of yours and mine.

3. I should hope that if there is any bailout, there would some provision that if those helped hang on, and later turn a nice profit upon sale, we taxpayers who actually didn't overspend might be reimbursed.
4.12.2008 11:47pm
Joe42:
This article is utter nonsense. The comments in the Boston Globe site say most of it, and I'll summarize a few of them:

- The 70% calculation is absolutely incorrect; rents are really not that cheap - when I was shopping the were actually quite comparable to a mortgage. And there are HUGE tax benefits from owning a house. Consider it a 30% discount on all your mortgage payments. This is a big deal.

- If someone wants to walk away from a house, they can do so whether or not there is 20% paid down. Totally irrelevant.

- The housing market might decline for a little while, but just as it's done dozens of times in the past, it will recover, and values will increase.

- As long as you can afford the payments, now is an excellent time to purchase a house, for the reasons above, and also because there has been some decline.


I don't know why this blog entry from the Globe (it's not an article) is getting any credence here; I usually see much better reporting on Volokh's blog.
4.12.2008 11:52pm
A. Zarkov (mail):
"At least in my state, and I suspect in many others, a residential mortgagee can walk away -- the mortgage holder cannot seek a deficency judgment,..."

Non-recourse is more limited than you might think. In California it applies to purchase loans for a primary residence. All those poor souls who used their houses as an ATM machine won't necessarily avoid a deficiency judgment.
4.12.2008 11:53pm
byomtov (mail):
- Don't buy at the peak of the market.

This is reminiscent of Groucho Marx' advice for investing in the stock market:

"Buy low, sell high, and if stocks don't go up don't buy 'em."
4.13.2008 12:04am
Matt_T:
Any person who uses the phrase "blah blah Amerika blah" is doing the debate equivalent of smashing his head into a concrete wall in hopes of stopping his headache.
4.13.2008 12:33am
Michael B. (mail):
I've read of individuals who have spent literally tens or even hundreds of thousands of dollars they received from refinances, and now want a bailout because they can't afford a few hundred dollars a month increase in their mortgage payment resulting from their last refinance into an ARM.

'Dynamic scoring' I believe is proposed for budgeting but seems unfortunately lacking in some notable government failures. The deductibility of mortgage interest and elimination of deductibility of other interest was done as if no one was going to change their behavior. Similarly with the AFDC rules: have a baby, get a check then get a job or get married and lose the check; nothing to see here in the way of behavior change; move on. It would be nice if it worked that way. In the spirit of making renting part of the 'American dream,' I guess we need to phase out mortgage deductibility; you like over 30 years? This could be an offset to the mortgage rescue operation.
4.13.2008 1:05am
A. Zarkov (mail):
"This is reminiscent of Groucho Marx' advice for investing in the stock market"

I think you mean Will Rogers:

"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."
4.13.2008 1:24am
Brooks Lyman (mail):
Our society and our liberties are in large measure based on the secure and verifiable ownership of property; encouraging renting instead of home-ownership creates a larger class of people with no stake in our society/country and with a definite stake in increasing government handouts and government control of property (the intention being, control of landlords, but it will probably have negative effects on all of us).
4.13.2008 1:51am
neurodoc:
What's good for them is good for Amerika.
There was a time when the "Amerika" crap would annoy me. Not any more. I appreciate the signaling. As soon as my eye spots it, and it usually sticks out like a sore thumb, my brain is conditioned to stop reading and considering whatever might be there.
4.13.2008 1:54am
Fearless:
There is an amazing silence concerning the $30 billion bailout of Bear Sterns/Chase by all you middle-class homeowner haters.

I guess bailouts are okay for investment banks.


well, none of them should be bailed out. as another matter, the immigrants made a poor fin decision, and i don't care--equally.


Congratulations. You have just publicly admitted to being an uncaring asshole. But, what you fail to explain is why we should care what an uncaring asshole thinks should or should not be done.

Please explain...
4.13.2008 2:53am
A.C.:
Brooks Lyman -

Talk about snobbery! The rednecks may be clinging to their guns, or not, but dismissing renters as people with no stake in society, or as the logical constituency for government handouts, is insulting. As I see it, it's the people who bought houses on the bubble who are hollering for the government to do something. Those of us who stayed in our apartments, waiting for the madness to subside, are now convinced we made the right decision. We'll be buyers eventually, just not under stupid conditions.

Which group would you rather have making economic decisions that affect you?
4.13.2008 7:52am
Orielbean (mail):
In Boston, the majority of the available rental properties are 2 family homes, with the owner-occupier on the first floor w/ 2 bedrooms, and the second floor having 2-3 bedrooms for the renter at about 1300-1600 a month. Now, the cost of that house, if I the renter were to buy it today, was about 550,000 when we checked last week.

The bankers that I conversed with all have stated consistently that the current wisdom has the end of 2009 as the pricing bottom for housing. These are bankers from boston, from florida, from arizona, and from texas.
4.13.2008 9:29am
Gaius Marius:
FEARLESS: You obviously need to enroll in an introductory macroeconomics class at your nearest community college since you clearly never heard of the Great Depression that started in the United States in 1929. The Great Depression commenced with several bank failures (over 700 in the beginning and over 3000 by the end) that led to loans being called, a massive liquidity crisis that brought the economy to a grinding halt, and ultimately a 25% unemployment rate. Federal Reserve Ben Bernanke is a student of the Great Depression and wrote a thesis on the subject. Therefore, it is not suprising that Bernanke decided that the Federal Reserve needed to intervene in the Bear Stearns matter in order to stop a potential wave of bank failures.

Also, you incorrectly state that the Federal Reserve bailed out Bear Stearns. Apparently, you are unaware that the price for Bear Stearns' shares was $170/share several months ago. However, Bear Stearns's shares are now worth $10/share under the purported Federal Reserve bailout($2/share under Ben Bernanke's original plan). I hardly think that Bear Stearns' shareholders and/or employees whose retirement accounts were funded primarily with Bear Stearns' shares will agree with your meritless conclusory assertion that there was a bailout for Bear Stearns. Otherwise, how can you explain the several lawsuits being filed by Bear Stearns' shareholders against this purported bailout???

Instead, what the Federal Reserve has done is made a guaranty to JPMorgan that in the unlikely event that JPMorgan is forced to write off Billions of Dollars in losses related to taking over Bear Stearns' subprime mortgages, that JPMorgan will incur the first $1 Billion in such losses while the Federal Reserve will be on the hook for the remaining losses up to $29 Billion. The foregoing is hardly an incentive for JPMorgan to proactively incur Billions of Dollars in losses since it is on the hook for the first $1 Billion. If anything, JPMorgan's shareholders will demand that JPMorgan take the necessary steps to avoid having to writeoff even the first $1 Billion in losses.

Since Bernanke and the Federal Reserve intervened in the Bear Stearns matter, the liquidity crisis has been slowly easing as banks have been drawing on the Federal Reserve's discount window. Confidence is slowly returning to the equity markets since the markets are on notice that Bernanke and the Federal Reserve will do whatever necessary to prevent the failure of a major bank that could start a domino effect of bank failures throughout the system. It will not become apparent until years later but the Federal Reserve intervention with respect to Bear Stearns will be seen as a positive turning point in this particular recession, which benefits all individual investors and pension funds invested in the markets.

Frankly, Congress should not bail out the homeowners. Property prices skyrocketed to unbelievable heights and there must be a reversion to the mean if properties are to become affordable again to future middle class buyers. This is what happened to tech stocks in the early part of this decade and the same must occur with any asset class, including homes, that experiences a bubble. (You can thank that incompetent Alan Greenspan for these bubbles by boycotting his books.) If a home buyer bought a home or property because it's price was appreciating in double digits for the past few years, then that buyer is an idiot for chasing a return that could never be sustained at such level. The same goes for any buyer that attempts to chase returns in any asset class, which is why I will not buy gold or precious metals now even though their returns have skyrocketed these past six months because I know that what goes up must eventually come back down.
4.13.2008 10:06am
SirBillsalot (mail):
Echo the comments who point out that a homeowner who paid a downpayment can walk away just as easily as one who paid no money down. Anybody can sell anything at a loss. Ask anyone who has ever financed a car or any other depreciating asset. Or, for that matter, ask anyone who has ever "walked away" from an apartment when the lease expires.

Basically, the difference between buying and renting in a flat or declining market is that the buyer gets a tax break and the chance that his housing costs may turn into a profit if the market changes. Plus, you always have the option of staying put and paying off the mortgage. Once it is paid off, your housing costs consist of taxes and maintenance. Renters pay principal and interest forever through their leases.

And one final thing. Rents generally adjust for inflation, whereas mortgage obligations do not. Even if the interest payments go up, the portion allocated to principal, which because of amortization gets larger each year, is fixed, but because of the effect of inflation, it effectively gets smaller and more affordable. Over the 20 or 30 year life of a mortgage, that can be quite significant.

But, of course, if you view a mortgage as a CD with a 5 year yield and not as a way to finance your living expenses, none of this will make sense.
4.13.2008 10:52am
Joe Sixpack:
The banks owe this mess to themselves. Cape Cod type shack in working class area of NJ was manipulated by banks to $300k.

The only way out, is to create mass inflation (15% a year) to eat up inflated "value" down to supply and demand market value. So the $300k shack will be $300k, but of different value $$. McDonald's will pay for flipping burgers $14/h.

It seems that between mass Wall Street failures and printing money, Bernanke opted for printing.
4.13.2008 10:53am
AnonLawStudent:
Fearless,

If you look at the details of the Bear Stearns "bailout," what essentially happened was a bankruptcy, but without causing a cascading liquidity crisis via the impact of the automatic stay on amounts due to other institutions. As a nice collateral effect, the Fed managed to burn all of the speculators who bet heavily against Bear using credit default derivatives; the same thing happened with in the Countrywide "bailout." As a punitive measure, the collateral effect is worth some expense to the public.
4.13.2008 11:43am
Tony Tutins (mail):

So many people have it in their head that a home is a surefire investment; that paying rent is like lighting money on fire; and that some combination of tax deductions and equity-building makes homeowners come out way ahead of renters regardless of a straight comparison of rent to mortgage payments. It used to be that the market sorted this out, because people who were better off renting usually could not get mortgages anyway.

My cousins who have rented since they married now pay twice as much for their apartment as I do for my single family house. I am the one with extra money to invest in stocks, not them. I have something tangible to show for my mortgage payments; they have a stack of rent receipts. My wife and I lived frugally for 18 months to save up for a down payment and closing costs; then for the next few years we continued to drive our elderly cars and went on tent camping vacations. By that time our salaries had increased and we could enjoy a few luxuries.

There are indeed signs that the market is reaching its peak. For one thing, you read thoughtful articles in the newspaper ("Is the Market Reaching Its Peak?"). You read about it on the Internet, such as the Housingbubbleblog.


dismissing renters as people with no stake in society, is insulting.

We never received any political campaign mail the whole time we were renting, in two different states. Once we bought a house, we received campaign ads with every election. Political parties see renters as transient people with no stake in society, so I guess we were insulted by both the Democratic and Republican parties. The importance of giving citizens a stake in their community was recognized by Reagan and the Congress 20 years ago, when the mortgage deduction was preserved while other loan deductions were restricted/eliminated. The failure of Congress to limit mortgage deductibility to buy/build/improve one's residence was the fatal flaw.
4.13.2008 12:15pm
Duffy Pratt (mail):
If renting is cheap compared to buying, why would people need government incentives to rent? And if the government did create such incentives, wouldn't that lower the cost of housing even more as demand continued to dry up?

Here in Houston, renting is cheaper than buying when you consider monthly payment, maintenance, and property taxes. Buying gives you some more freedom over what you can do with the property (though Homeowner's Associations stick their nose into that freedom). And buying gives you much more flexibility in the kind of housing you will have. But, if you can live with a rental property, its almost certainly a better deal here.
4.13.2008 12:17pm
Harry Eagar (mail):
What Mark H. said about Professor Bernstein's immigrant friends.

They're still living in their house, which is the purpose they purchased it for. Unless they got a funny mortgage and are going to be aced out with increasing monthly payments, what's the problem?

In another 27 years, they will own free and clear a valuable and easily salable property in Washington. If they had rented for 30 years, they would have had zip.
4.13.2008 12:19pm
Fearless:
I agree with the Bear Stearns/Chase bailout.

But that doesn't change the fact that it was a bailout. Bear Sterns stockholders were able to sell their shares at a higher price than they would without the nanny state intervention.

And JPMorgan/Chase's purchase was subsidized.

All I am saying is this. If it is okay to help investment bankers in the name of economic stabilization, it is okay to help homeowners in the name of economic stabilization.

Those who think it is okay to help the former, but not the latter, show that they are not really about personal responsibility and taking the consequences for your actions after all. Why shouldn't the share holders of Bear Sterns lose more of their money than they would have without an intervention? Why should JPMorgan Chase be able to subsidize their purchase of another investment bank with federal money?

You can't have it both ways. Either it is okay to bail people out in the name of economic stabilization, or it isn't. If it is okay to bail out investment banks, it is okay to bail out homeowners. If it is not okay to bail out homeowners, it is not okay to bail out investment banks.
4.13.2008 12:49pm
Zed:
If buying were cheaper than renting, that would open up an arbitrage opportunity which would quickly be closed up. Otherwise, everybody would be able to buy that piece of property and immediately turn around and rent it out for more money. This is, of course, not possible, because the market would have driven up the price of buying to match the price of renting.

Furthermore, there are always irrational people who believe the ownership-is-crucial mantra and drive the prices of buying up even further. Thus, renting is always cheaper than buying.
4.13.2008 12:50pm
Fearless:

went on tent camping vacations


I think tent camping rocks. And its not because it is the only thing I can afford. I don't consider too much of a sacrifice.
4.13.2008 12:52pm
AnonLawStudent:

All I am saying is this. If it is okay to help investment bankers in the name of economic stabilization, it is okay to help homeowners in the name of economic stabilization.

Those who think it is okay to help the former, but not the latter, show that they are not really about personal responsibility and taking the consequences for your actions after all. Why shouldn't the share holders of Bear Sterns lose more of their money than they would have without an intervention? Why should JPMorgan Chase be able to subsidize their purchase of another investment bank with federal money?


Problems with individual homeowners tend not cause systematic instability. Collapse of a major bank WILL almost certainly lead to cascading failures. (NB: The too big to fail problem is a policy and statutory issue beyond the scope of the present discussion.) That equity holders in Bear got some cash was a necessary evil in order to grease the skids. It wasn't ideal, and they likely wouldn't have gotten very much in bankruptcy, but they had a very valuable ability (which the market valued at $10/share + government guarantees) to leverage the bankruptcy. For that matter, we aren't sure that they wouldn't have gotten anything in bankruptcy, because Bear experienced a liquidity insolvency, not insolvency in the classic sense.

Contrary to your assertions, it isn't at all hypocritical to say that the federal government has a proper role in maintaining the banking and monetary system, but that it has no place bailing out individual homeowners. Alternatively, one can look at the Bear Stearns issue as a bailout of both . Individuals - even those who have done everything right - certainly wouldn't be able to get mortgages if the credit markets collapse; hell, most probably wouldn't even have jobs.
4.13.2008 1:10pm
Fearless:

If buying were cheaper than renting, that would open up an arbitrage opportunity which would quickly be closed up. Otherwise, everybody would be able to buy that piece of property and immediately turn around and rent it out for more money. This is, of course, not possible, because the market would have driven up the price of buying to match the price of renting.


It depends on what you mean by cheaper...

If you are talking about risk adjusted prices, maybe your right. Except, the amount of risk is uncertain, which prevents arbitrage from working perfectly.

But if your talking about just prices, and this is what most people talk about when they talk about cheaper, your wrong.

Rent can be higher than on mortgages as compensation for the risk that the person renting will not pay and also as compensation for the administrative overhead that goes with renting but does not exist with ownership.

Presumably, since on average, renters tend to have worse credit than homeowners and because they have less to lose by not paying, the risk premium they have to pay will be higher than the risk premium that people holding mortgages pay. Also, there are administrative costs associated with renting which discourages people from entering the market.
4.13.2008 1:11pm
Fearless:

Contrary to your assertions, it isn't at all hypocritical to say that the federal government has a proper role in maintaining the banking and monetary system, but that it has no place bailing out individual homeowners. Alternatively, one can look at the Bear Stearns issue as a bailout of both . Individuals - even those who have done everything right - certainly wouldn't be able to get mortgages if the credit markets collapse; hell, most probably wouldn't even have jobs.


It is hypocritical. Helping many individual homeowners would also help stabilize the economy. Just as much as the bail out of Bear Stearns.

If Bear Stearns were allowed to fail, that wouldn't destroy the economy. It would destabilized to some degree. But many homeowners going through foreclosure also destabilizes the economy to some degree.

Now, if you are saying that in some particular cost-benefit analysis, you think we should bail out investment banks but not homeowners, that is not necessarily hypocritical. As long as you are open to the idea of bailing out homeowners but not investment banks in a world where the numbers turn out a little different.

But, if instead you are saying we should not bail out homeowners as a general matter of principle, or because of moral hazard, then you are a hypocrite. There is moral hazard when you bail out Bear Sterns.

In fact, who is most responsible for this mess? Less sophisticated homeowners whose eyes were bigger than their stomachs, or the sophisticated mortgage sellers who took on irresponsible risks enable homeowners to bite more than they could chew?

I believe that the sophisticated mortgage sellers are more responsible, precisely because they are more sophisticated and should have known better. Call me crazy or elitist if you must, but I don't have the same expectations regarding the financial sophistication of a garbage man compared to an investment banker.
4.13.2008 1:19pm
Gaius Marius:
You can't have it both ways. Either it is okay to bail people out in the name of economic stabilization, or it isn't. If it is okay to bail out investment banks, it is okay to bail out homeowners. If it is not okay to bail out homeowners, it is not okay to bail out investment banks.

You are comparing apples with oranges. Not bailing out the individual homeowners will not lead to an economic collapse. Not bailing out Bear Stearns would have very likely led to an economic collapse of the monetary system on par with the Great Depression. Recall that by the end of the trading day on that Friday last month when the price of Bear Stearns' shares dropped by 80% that everyone was looking at Lehman Brothers as next in line to collapse. However, when the Bear Stearns/JPMorgan deal was disclosed and the Federal Reserve's role was publicly disclosed, all the rumors regarding Lehman Brothers quickly died and the equity markets became confident that Ben Bernanke was not going to let the monetary system collapse on his watch as it did in 1929.

If JPMorgan did not purchase Bear Stearns, Bear Stearns was clearly going to file for Chapter 7 Bankruptcy and there would have been a run on Lehman Brothers, which in turn would have filed for Chapter 7 Bankruptcy thereby commencing a wave of bank failures unseen since 1929. In such a monetary system collapse, the individual homeowners facing foreclosure problems would have had even larger problems to confront than losing their homes.
4.13.2008 1:34pm
Gaius Marius:
It is hypocritical. Helping many individual homeowners would also help stabilize the economy. Just as much as the bail out of Bear Stearns.

"Helping" individual homeowners by giving them a bailout will only artifically sustain the real property price bubble that needed to pop and is only now slowly deflating -- finally. There is no dispute that real property prices bubbled to ridiculous peaks during the last few years, which was beginning to prevent even middle class buyers from purchasing a starter home in certain markets (e.g. California is a prime example). As with any asset class that experiences a bubble (e.g. tech stocks in the early part of this decade), there will always be a reversion to the mean -- eventually.
4.13.2008 1:41pm
AnonLawStudent:

If Bear Stearns were allowed to fail, that wouldn't destroy the economy. It would destabilized to some degree.


Not true. Even in the most traditional areas of banking, e.g., accounts with the Federal Reserve, settlement will not occur until end-of-day or may even be delayed by several days. In contrast, securities trades have traditionally settled on T+3 days. Given the amount of money that each of the major banks handles on a given day, even a brief delay in settlements due to a bankruptcy would result in cascading insovlencies across the other major institutions. If you question the amount of money on float at any given time, consider these staggering statistics from the NYSE alone.
4.13.2008 1:46pm
A. Zarkov (mail):
"Once it is paid off, your housing costs consist of taxes and maintenance."

That's your cash flow not your cost. You must include opportunity costs. The owner can either sell the property or rent it out. So in a sense the owner always pays rent. If he own a house that's too big for his needs, then he can always rent it out, and rent a smaller place and come out ahead economically.
4.13.2008 1:54pm
Gaius Marius:
I believe that the sophisticated mortgage sellers are more responsible, precisely because they are more sophisticated and should have known better. Call me crazy or elitist if you must, but I don't have the same expectations regarding the financial sophistication of a garbage man compared to an investment banker.

It takes two to tango in this dance -- neither the mortgage seller nor the home buyer is more responsible than the other. The sub-prime home buyer has a spotty credit record and therefore has difficulty obtaining a traditional mortgage. The sub-prime mortgage seller is in a position to provide the sub-prime home buyer with a loan that the buyer could not otherwise obtain on traditional terms. Hence, a demand and supply was formed to create a market for sub-prime mortgages.
4.13.2008 1:54pm
AnonLawStudent:
Piggybacking on Gaius,

I again emphasize that Bear Stearns suffered a liquidity insolvency NOT a classic insolvency, i.e, it essentially suffered a bank run. Source: Chairman Bernanke. [Search for "early warning" - it's about midway down the page]. Unlike FDIC-insured commercial banks, investment banks have no structural protection against runs. Thus, you combine (i) a very real risk of actual insolvency due to unsettled trades with the failed bank with (ii) the resulting bank runs causing liquidity insolvency, and the result is a cascading collapse. And yes, that IS an "economic collapse."
4.13.2008 1:59pm
A. Zarkov (mail):
The economic advantage of renting over owning depends on the market for housing. One is not always better than the other. But the idea that owning must be better because all you have after 30 years is a pile of rent receipts is false. In the long run housing tracks inflation because housing prices are mean reverting. In markets like the one we're in right now, it's clearly economically better to rent than to own. I sold my house at the peak, and today I rent a house at less than half the costs of owning it. Rents tell you the true demand for housing. Right now the income/price and rent/price ratios are way out of whack. Eventually this will correct, and falling prices will cause these ratios to revert to their historical averages.

When you own a house you are consuming, not investing, except for bubble markets.
4.13.2008 2:10pm
Fearless:

It takes two to tango in this dance -- neither the mortgage seller nor the home buyer is more responsible than the other.


It takes two to tango. Neither the patient or the brain surgeon is more responsible for the outcome of brain surgery.

Give me a break. Your living in total lala land if you think that garbage men are equally sophisticated regarding finances as investment bankers.

But if your right, I do know one thing. Investment bankers should be making much closer to minimum-wage.


The sub-prime mortgage seller is in a position to provide the sub-prime home buyer with a loan that the buyer could not otherwise obtain on traditional terms. Hence, a demand and supply was formed to create a market for sub-prime mortgages.


And the only reason that the sub-prime mortgage seller is in the position is because they were like a dyslexic brain surgeon.

Isn't wonderful that people could finance houses they couldn't afford. Isn't it wonderful that these banks helped them do that. That had nothing to do with rising house prices at all.
4.13.2008 2:21pm
Fearless:

"Helping" individual homeowners by giving them a bailout will only artifically sustain the real property price bubble that needed to pop and is only now slowly deflating -- finally.


I think that instead of letting Bear Sterns slowly deflate, we should pop that bubble.

Give me a break.

We want bubbles to slowly deflate. Not pop.

Slowly deflate = economic stability.
Pop = economic dislocation.

Its the same damn thing. The US Economy WOULD survive the failure of Bear Stearns. Just as the US Economy WOULD survive the popping of the housing bubble.

The fact is, those of us who value economic stability do not like the quick popping of bubbles. That is why those who value economic stability will tolerate the bailout of Bear Stearns (even though they don't deserve it). And that is why we will assist homeowners.

Finally, you are fools if you think that bailing out excessively wealthy investment bankers but not ordinary Americans will fly politically. People are not idiots.
4.13.2008 2:27pm
Fearless:

I again emphasize that Bear Stearns suffered a liquidity insolvency NOT a classic insolvency, i.e, it essentially suffered a bank run.


Well, this is based on your view that you know more about the value of the assets held by Bear Stearns than the market.

So much for efficient markets. It all blows up in your face now, doesn't it.

If the market cannot value Bear Stearns properly, then exactly when should we believe that it allocates resources optimally in other circumstances?

The bailout of Bear Stearns has massive implications concerning the free market. People cannot just say, bail out Bear Sterns, because this is a "liquidity insolvency" and not a "classic insolvency" (i.e. markets are allocating resources in an irrational manner) and then say that we should consider market outcomes to be sacred.

That is the bottom-line. It IS hypocritical to bail out investment banks because of market failure, but not bail out homeowners because of market failure.
4.13.2008 2:36pm
AnonLawStudent:
Just because "bailing out excessively wealthy investment bankers but not ordinary Americans will [not] fly politically" does not mean that "people are not idiots." Quite the contrary, actually. Indeed, the "excessively wealthy investment bankers" have shouldered quite a load in the last year or so trying to keep the economy afloat.
4.13.2008 2:36pm
Fearless:
AnonLawStudent,


Indeed, the "excessively wealthy investment bankers" have shouldered quite a load in the last year or so trying to keep the economy afloat.


Yeah, shuffling paper around ensuring the "efficient" allocation of resources. Thank goodness for the investment bankers.

And they have shouldered quite a load trying to fix the mess their previous failures to allocate resources properly has caused, haven't they? They do deserve credit.

Kind of like the brain surgeon who does a second surgery when the first one didn't go quite right.
4.13.2008 2:41pm
AnonLawStudent:

Well, this is based on your view that you know more about the value of the assets held by Bear Stearns than the market.


It has nothing to do with my view. It has everything to do with the SEC's view, i.e., the outside party with access to the most data. We MAY later find out that the value of the underlying assets had some correlation to the problem, see Northern Rock, but runs are the traditional way of [mis]handling Nash's blonde-in-the-bar scenario. Given your statement, I have to ask if you understand the concept of liquidity insolvency? Assuring liquidity is widely understood as THE major role of the Fed in the modern economy.
4.13.2008 2:44pm
Fearless:

It has everything to do with the SEC's view, i.e., the outside party with access to the most data.


Oh, so your saying that a government agency has a superior view concerning the value of Bear Stearns than the market? Okay... That's what I would like to call a market failure.

A liquidity insolvency is when the market fails to value assets according to their "true" value. Do I get a lollipop?
4.13.2008 2:48pm
AnonLawStudent:

Yeah, shuffling paper around ensuring the "efficient" allocation of resources.


I'm glad to know that you think BoA's shouldering of Countrywide's massive obligations, and Morgan/Chase's shouldering of Bear Stearn's is merely "shuffling paper." They certainly could have given Uncle Ben the finger and put taxpayers on the hook for a whole lot more than they may be now.
4.13.2008 2:48pm
Fearless:
Do you have a better description of what they do besides shuffling paper? Because, I don't see them building bridges. =)

I see them paying for bridges to be built. But I don't see them building bridges.

Shuffling paper, my friend, is what investment bankers do.
4.13.2008 2:55pm
AnonLawStudent:

I don't see them building bridges. I see them paying for bridges to be built. But I don't see them building bridges.


The economic term is "intermediation," in simple terms, a collective handshaking and risk assumption service. Most market participants find it quite valuable. But, by your definition, I guess the designers and production managers at Boeing don't actually "build" airplanes either. The laborer may denigrate those who provide intellectual assets, but his labor is a virtually worthless commodity without them.
4.13.2008 3:04pm
SirBillsalot (mail):
Zarkov wrote:

The economic advantage of renting over owning depends on the market for housing. One is not always better than the other. But the idea that owning must be better because all you have after 30 years is a pile of rent receipts is false."

I think what you meant to say is that the economic benefit of financing a purchase rather than renting depends on the market. Fee ownership without a mortgage is obviously better. And as others have pointed out, for an owner its an achievable goal. Renting doesn't end unless you buy.

The decision whether to rent or finance through a mortgage really depends mostly on how long you plan to live in your home.
4.13.2008 3:16pm
A. Zarkov (mail):
"I think what you meant to say is that the economic benefit of financing a purchase rather than renting depends on the market."

Suppose you have enough cash to buy, should you rent or buy? In today's market you rent. I have the cash to buy, but I rent because rent/price favors me, and real estate is a depreciating asset for at least the next 5 years.

If you have the cash to buy should you finance or use your cash? That depends on a lot of things. Interest rates, your tax bracket, how long you plan on living in the house etc.

I hope I understand you correctly. If not then please correct.
4.13.2008 3:57pm
Fearless:

The economic term is "intermediation," in simple terms, a collective handshaking and risk assumption service. Most market participants find it quite valuable. But, by your definition, I guess the designers and production managers at Boeing don't actually "build" airplanes either. The laborer may denigrate those who provide intellectual assets, but his labor is a virtually worthless commodity without them.


That is ridiculous. Having domain knowledge and designing an airplane is an entirely different realm than what these investment bankers do. I would bet that most investment bankers (not all) do not even have half the brains of a good Boeing engineer.

Anyway, my point is not to denigrate investment bankers. You seem to want to do the opposite and put them on a pedestal as Olympian Gods who are "carrying the load."

All I have to say is that they are the ones that fucked up. Ultimately, they are the people determining how money gets allocated, and they sent money into the housing market like there was no tomorrow. Securitization and all that.

All I am saying is this.

If even the gods of the market have to come crying to the government like little bitches, they better not pretend like they picked themselves up from their own bootstraps. They are now crying to be bailed out of the mess they created.

The principle is this.

Market failures happen. And there is nothing wrong with bailing people out when they do. Even if they are paper shuffling investment bankers.
4.13.2008 4:09pm
A. Zarkov (mail):
"Finally, you are fools if you think that bailing out excessively wealthy investment bankers but not ordinary Americans will fly politically. People are not idiots."

The Bear Stearns matter is too opaque to see what's really happening. They were part of the lightly regulated "shadow banking" industry. As such they normally don't have access to the Fed as a lender of last resort. And they shouldn't because they are essentially unregulated. Regulation is the price you pay for that access. Now we don't really know how bad off Bear Stearns was or the rest of the shadow banking industry because of Credit Default Swaps and other derivatives putting liabilities off balance sheet. FAS rule 143 makes this possible. So we really don't know if the Fed truly had to bail them out to save the banking system.

My solution for the Bear Stearns problem.

Do what Norway did in the early 1990s. Nationalize Bear Stearns. Fire the managers without benefits. Tell the investors that they lose. They get nothing. Then recapitalize and reorganize Bear Stearns. Finally when it functions properly privatize it again. This should eliminate the moral hazard problem
4.13.2008 4:10pm
Fearless:

The economic term is "intermediation," in simple terms, a collective handshaking and risk assumption service.


And you must agree that they quite simply, fucked up, in providing this service. Period.

Its financial malpractice.
4.13.2008 4:11pm
Gaius Marius:
It takes two to tango. Neither the patient or the brain surgeon is more responsible for the outcome of brain surgery.

Fearless, your analogy is ludicrous! A patient is passive and unconscious while the brain surgeon is doing all the work. In the case of sub-prime mortgages, the sub-prime mortgage buyer is neither unconscious nor passive but an active participant in a transaction with the sub-prime mortgage seller.

Also, you cannot interchange the terms "mortgage seller" and "investment banker." That you do so in your previous post indicates that you truly do not know what you are talking about. The "mortgage seller" or loan originators that either work for a mortgage company or a commercial bank. After the "mortgage seller" has sold the mortgage, the mortgage then goes on the mortgage company's or commercial bank's books. Since the commercial bank has to keep a certain debt to equity ratio pursuant to federal regulation, a commercial bank is constantly looking to remove loans off its books so that it can continue extending credit to businesses or individuals, which helps grow the economy. One way for commercial banks to move loans off their books is by selling the loans on the secondary market. The foregoing is achieved by investment bankers who take the loans from commercial banks and slice/dice them into collaterized debt obligation securities to sell to investors such as hedge funds or other investment banks, etc. When you understand the secondary markets for CDOs, perhaps you can begin to participate meaningfully in a discussion regarding the topic of the original post.
4.13.2008 4:31pm
Gaius Marius:
Give me a break. Your living in total lala land if you think that garbage men are equally sophisticated regarding finances as investment bankers.

But if your right, I do know one thing. Investment bankers should be making much closer to minimum-wage.


Fearless, as I stated in my prior post, investment bankers did not originate the sub-prime mortgages. The originators of the sub-prime mortgages were mortgage brokers or loan officers at commercial banks who are paid by commissions to sell sub-prime mortgages. It does not take sophistication to sell a loan; one just needs good sale skills.
4.13.2008 4:40pm
Gaius Marius:
We want bubbles to slowly deflate. Not pop.

Slowly deflate = economic stability.
Pop = economic dislocation.


No kidding, Sherlock. However, bailing out the defaulting homeowners will not even deflate the real property price bubble but will instead re-inflate it.
4.13.2008 4:44pm
Gaius Marius:
Its financial malpractice.

There is no legal authority that exists that would support the notion of financial malpractice in a lender-borrower transaction. At least not in the United States (perhaps in Vladimir's Ilyich Lenin's mind). When we quit dumbing down individuals in this country, maybe individuals will learn to read contracts or consult with an attorney before they execute contracts.
4.13.2008 4:49pm
Tony Tutins (mail):
risk assumption service

But the investment bankers treated the subprime mortgage bundles as if they were investment-grade securities, instead of pieces of garbage that made junk bonds look like T-bills. It's as if they believed that if you bundled enough dogs and cats together, you'd have a Thoroughbred horse that could win the Kentucky Derby.

Gaius Marius -- when you have a bunch of con men out telling suckers that homes are affordable, you can't assign more responsibility to the suckers than to the con men. The con men were out there every day, handling a dozen suckers a day. The suckers were buying houses for the first time in their lives, in most cases. Only a used car salesman would be able to sympathize with the magic mortgage brokers.
4.13.2008 5:06pm
Dan Weber (www):
Slowly deflate = economic stability.
Pop = economic dislocation.


If the housing market is overvalued, what's the economic benefit for prices to take a long time to return to normal?


I will say that there is real collateral damage that can be done to third-parties by the sub-prime implosion. If half the houses in your neighborhood go empty because the owner/occupants are defaulting, it will have a distinct effect on you, and not just on your home value.

A. Zarkov's plan sounds the best I've heard so far. It encourages people to stay in the house, and gives them a way to get back. It gives more benefit to those who supplied down payments. And it still frees up some housing stock from people who don't want to stick around or were just totally out of their housing league.
4.13.2008 5:14pm
Glenn W. Bowen (mail):

A. Zarkov's plan sounds the best I've heard so far. It encourages people to stay in the house, and gives them a way to get back. It gives more benefit to those who supplied down payments. And it still frees up some housing stock from people who don't want to stick around or were just totally out of their housing league.


pair it up with mandatory federal funds matching rent to be saved in accounts as a personal pool for whatever any other renter wants to spend it on, and you have... a winner.
4.13.2008 5:42pm
Harry Eagar (mail):
'Well, this is based on your view that you know more about the value of the assets held by Bear Stearns than the market.'

What assets? BS didn't have assets, it was leveraged 31:1. All it had were obligations.
4.13.2008 7:04pm
DeezRightWingNutz:
Since the commercial bank has to keep a certain debt to equity ratio pursuant to federal regulation, a commercial bank is constantly looking to remove loans off its books so that it can continue extending credit to businesses or individuals...


Can you explain how selling a loan (an asset of the bank) for consideration such as cash or another note changes either the debt or equity side of the debt/equity ratio that banks are trying to manage?
4.13.2008 7:19pm
unwelcome guest:
you people who say that individual homeowners' problems are qualitatively different are forgetting that it is the fact that individual homeowners were having problems with payments that led to the financial instability in the first place. Only it is much much cheaper to address the source - homeowners. And there was massive fraud on these mortgage products, that while most followed the law by burying the real costs on page 4 of a 14 page loan doc in small print, is still meant to mislead.

If anyone has actually seen an adjustable rate mortgage doc will know what I am talking about. The quoted rate is an APR that assumes that LIBOR will be 0.5% (but does not actually say that anywhere in the docs), and required payments actually increased even though interest rates went down in the adjustment period.

Displacing large numbers of homeowners has to lead to financial instability - those displaced will have zero credit, no money to buy goods, etc. More than one investment bank is at risk from the assets that they have to write down when homeowners default. Bailing homeowners out is better for our economy than giving JP Morgan the gift of Bear Stearns risk free (that first billion is a joke - add it to the purchase price).
4.13.2008 7:22pm
Curt Fischer:
From the study discussed in the Globe article:


Of course some gap between ownership costs and the cost of renting is reasonable since owning can allow for the accumulation of equity. While the mortgage payment includes some payment toward equity, whether or not a homeowner ends up accumulating any equity will depend to a large extent on the movement in house prices and the point in time when the house is sold. At the moment, prices are falling sharply almost everywhere.

While it’s not possible to know if these price declines will continue or will be reversed, it is possible to set an anchor from which to evaluate future prices. At an annual price to rent ratio of 15 to 1, the cost of owning and renting are approximately equal, so this would be reasonable to set as target to which house prices will adjust.

Table 2 calculates the equity that homeowners will accumulate in their home after four years assuming the set of housing costs in the low, middle and high cost scenarios in Table 1.



I have never owned a home, so I know little about the true costs of ownership. But this 15-to-one ratio is interesting. I remember reading this and other articles which said that the ratio is closer to 19 or twenty.

The report does not source their use of the 15-to-one ratio or even discuss thoroughly why they chose it. Because the report estimates equity accumulated by a homeowner after four years of house price moving downwards toward this 15-to-1 price, they calculate that homeowners will have negative equity in most cases.

Of course, if the house value is tending towards towards a price determined by the 19-to-one ratio, the answer would seem to change.
4.13.2008 7:55pm
AnonLawStudent:

Can you explain how selling a loan (an asset of the bank) for consideration such as cash or another note changes either the debt or equity side of the debt/equity ratio that banks are trying to manage?


By regulation, banks are required to maintain certain levels of risk-adjusted capital - the specific amount required is a proportion of total deposits - in the form of cash and cash-like securities. IIR, a "well capitalized" depository institution must have a leverage ratio >5%, total risk based capital > 10%, and Tier 1 RBCR >6%. (There are lower levels of regulatory allowable capital, but there are also significant incentives for a bank to remain "well capitalized"). If capital falls too low by any of these measures, the appropriate regulator may step in under the prompt corrective action provisions of the banking laws. Large banks actually tend to have more than the capital levels required by regulation because it makes the capital they obtain from the market significantly cheaper. It's significantly more complicated than a simple debt-equity measure - too much to explain in a blog thread.
4.13.2008 8:03pm
Uthaw:
Displacing large numbers of homeowners has to lead to financial instability - those displaced will have zero credit, no money to buy goods, etc.

Why? They'll still have their jobs, they'll rent a place, they'll pay cash for things (as they should!), life will go on.

when you have a bunch of con men out telling suckers that homes are affordable, you can't assign more responsibility to the suckers than to the con men. The con men were out there every day, handling a dozen suckers a day. The suckers were buying houses for the first time in their lives, in most cases.

Nah. A lot of the "suckers" were trying to get something for nothing, or to buy properties for a quick flip, and they knew it.


the more time that passes the clearer we begin to see the extent to which many borrowers themselves may have participated in creating the mess from which we are preparing to rescue them. As more mortgages go bad and enter foreclosure, their details are coming under scrutiny, and the facts are not always pretty. They suggest that while lenders became too careless and some brokers were clearly swindlers, many borrowers were more than simply naïve or overly optimistic; a good many were probably cheating. Any federal legislation package that provides the financing to rework millions of thousands of subprime mortgages quickly is likely to reward quite a few of these chiselers...

One measure of the possible extent of the fraud: BasePoint Analytics took a look at millions of subprime loans and found that in 70 percent of cases where mortgages go bad quickly (exactly the kinds of mortgages that account for a chunk of today’s rising default rates), there was some misrepresentation by the borrower, broker or appraiser, or some combination of the three. Those loans were five times more likely to default quickly than mortgages without falsifications.

4.13.2008 8:46pm
Aleks:
Re: just wait until the flow of folks out of foreclosed homes and into the rental markets starts to spike rents and this will be introduced and passed post haste.

Not going to happen: we overbuilt on housing so there's a glut of rentals on the market. For example, numerous condos are going to end up as apartments instead. This is already happening. And more to come as people who have to move for jobs, etc can't find buyers and rent their houses out instead.

Re: Non-recourse is more limited than you might think. In California it applies to purchase loans for a primary residence.

Unless the mortgagee knows that the mortgager has substantial assets it's rare for them to go after the deficiency. Defaulted HELOCs and second liens may be turned over to a collection agency to try to shake some money loose but after six months or so even these generally end up charged off.

Re: Our society and our liberties are in large measure based on the secure and verifiable ownership of property; encouraging renting instead of home-ownership creates a larger class of people with no stake in our society/country

We are not talking about turning half the country into renters, just doing so at the margins. And the foreclosure crisis will turn a lot of these people back into renters anyway. The country will not be harmed if we return to the renter/owner percentages that applied a generation ago.

Re: We never received any political campaign mail the whole time we were renting, in two different states.

It's very easy to get your name on the politicians mailing lists. Simply register as a partisan voter. Or suscribe to a partisan journal.

Re: Thus, renting is always cheaper than buying.

If that were true there would be no rentals because it would mean all landlords would take a loss. No, in a normal market buying must be cheaper than renting so that the landlord can turn a small profit, making it worth his while. I know this was true in the 90s. I rented out a house I owned to friends (who eventually bought it) with the rent the exact amount of the house payment; I could have easily asked $100 or so higher in rent. Today's upside down market is very unusual in this regard.

Re: Displacing large numbers of homeowners has to lead to financial instability - those displaced will have zero credit, no money to buy goods, etc.

Nonsense. The "displaced" people will still have their jobs, and since they will be paying less in housing costs they should have more disposable income. Their credit will take a hit resulting in higher interest rates and lower limits, but unless they declare bankruptcy they will not be without credit.
4.13.2008 9:18pm
A.C.:
Tony Tutins -

It takes a while to get on the junk mail lists. If renters truly are transient, the mailers never find them. But anyone who stays in one apartment for a few years will register in the system eventually and get as much junk mail as anyone.

Good renters -- the ones who pay on time and make good neighbors -- have pretty much all the attributes of good homeowners. They may be younger, recently divorced or widowed, new to the area and shopping for a house, or whatever. And, as I said before, they may be waiting out silly bubbles that make it impossible for them to buy at a specific time. People like that don't need government help to deal with landlords. Chances are they can find landlords who appreciate their business and treat them as good customers.

Bad renters, on the other hand, don't turn into good homeowners just because they suddenly have mortgage contracts instead of leases. Feckless people who don't manage their finances well are apt to stay that way, even if they are in a house they might gradually come to own. The exception is if the process of buying a house itself imposes some discipline. Someone who can clean up his credit and save a down payment is changed by that experience -- not just by having the house itself.

If you take away the barriers to entry, a lot of feckless renters will become feckless homeowners. They'll have mortgages without the kind of discipline that getting a mortgage used to require. Alternately, if you make the barriers to entry too high for most people, you don't provide any incentive for the flakier sort of renter to change. This won't matter for people who are disciplined by nature, but it does matter if you think housing policy is about creating civic virtue.
4.13.2008 9:26pm
EPluribusMoney (mail):
The economic advantage of renting over owning depends on the market for housing. One is not always better than the other.

Renting would seem always worse than buying unless you were in the time of a housing bubble which over the last 100 years was almost never.

Assuming you are wise and get 15 year loan, the result after 15 years is a free and clear home vs. a pile of 180 monthly rent receipts.
4.13.2008 9:49pm
EPluribusMoney (mail):
"Finally, you are fools if you think that bailing out excessively wealthy investment bankers but not ordinary Americans will fly politically. People are not idiots."

What percentage of sub-prime borrowers do you think actually vote versus investment bankers and related parties?
4.13.2008 9:51pm
DeezRightWingNutz:
If Bear Sterns was bailed out, weren't the shareholders, and not the investment bankers the primary beneficiaries?
4.13.2008 10:00pm
Cornellian (mail):
That 50K in equity, and perhaps a bit more, has been wiped out as prices return to historically normal levels. Unlike those who put no money down, they can't just walk away, and unlike many others, they didn't buy beyond their means, so they aren't in foreclosure, but have seen their life savings evaporate.

Their life savings hasn't evaporated. They've still got a place to live that just happens at the moment to be worth less than what they paid for it. If they continue to use it for its intended purpose (i.e. live in it rather than try to speculate on the buying and selling of it), there is no reason to think that one day it will eventually be worth more than they paid for it. Even if it stays at that value, they've still purchased the right to live there, which is hardly worthless.
4.13.2008 10:07pm
Elais:
I'm a renter and I sure get plenty of political literature around election tme. Guess my vote is worth just as much as a homeowner's vote here. Yay me? I think I also have a stake in society, because I live in it. I also take offense at people claiming otherwise.
4.13.2008 10:12pm
A. Zarkov (mail):
"Renting would seem always worse than buying unless you were in the time of a housing bubble which over the last 100 years was almost never."

Home prices oscillate about a trend line that tracks inflation. Since real estate is illiquid and prices are very sticky, the oscillations are fairly smooth with long periods. When you buy in the negative cycle and sell in the positive cycle, owning beats renting because of the capital gain. Otherwise the reverse is true. The winners crow a lot and most people believe real estate is a good investment. Owning also tends to make people overspend on improvements because they think it's an "investment." But it's not, it's really consumption. When you do a careful calculation including opportunity costs you will see it's easy to lose money buying real estate. Owning a house with a mortgage is essentially a forced saving plan like a Christmas Club.

Owning is fine and I've been an owner myself. But it's a consumption activity, not investment. Consumption is fine, that's why we work.
4.13.2008 10:34pm
Gaius Marius:
Gaius Marius -- when you have a bunch of con men out telling suckers that homes are affordable, you can't assign more responsibility to the suckers than to the con men. The con men were out there every day, handling a dozen suckers a day. The suckers were buying houses for the first time in their lives, in most cases. Only a used car salesman would be able to sympathize with the magic mortgage brokers.

I have no sympathy for the "suckers" who spend more time at the video rental shop trying to figure what DVD to rent for the weekend than the time spent reading through the mortgage documents.
4.13.2008 11:08pm
Jmaie (mail):
And there are HUGE tax benefits from owning a house. Consider it a 30% discount on all your mortgage payments. This is a big deal.

A hypothetical $600K California house, 20% down payment, 30 year mortgage at 6%, $100K annual income will yield about an 8% discount over the life of the loan. Counting maintenance it's more like 6%.

This house will likely rent for $2,000/month. Mortgage, taxes and insurance will cost a little over $3,600. With the discount you're at about $3,400.

Rents may be higher in Boston but this is a long way from comparable.
4.14.2008 1:47am
Uthaw:
Rent vs. Buy - it may take some time for the lines to cross, but eventually they do, and then the buyer wins. In recent years, too many people thought they could win by buying within a year or two... in a sane market, it's more like 7-10 years.
4.14.2008 2:17am
Curt Fischer:

A. Zarkov: Home prices oscillate about a trend line that tracks inflation.


Uthaw: it may take some time for the lines to cross, but eventually they do, and then the buyer wins.


It is difficult for me to reconcile these two statements. Is the buyer "winning" predicated on the buyer not having to put any money down to buy a house? Or on having to keep is hypothetical down payment under the mattress rather than in the capital markets if he decides to rent?
4.14.2008 8:46am
Dan Weber (www):
If anyone has actually seen an adjustable rate mortgage doc will know what I am talking about. The quoted rate is an APR that assumes that LIBOR will be 0.5% (but does not actually say that anywhere in the docs), and required payments actually increased even though interest rates went down in the adjustment period.

Can you show us an example of this? I'm asking because I'm genuinely interested in seeing. Surely out of all these bad loans someone must've scanned their mortgage docs and put them up on line.

I have no doubt that there are dishonest brokers. I had one lie directly to me back in 2003 when things were still good (but they were giving me a good rate, and I immediately called my lawyer, who was the best investment I ever made).

But it's pretty rare for them to put their lies down on print. When I used an ARM I remember one of the sheets showed exactly how high my mortgage payments could theoretically rise.
4.14.2008 9:52am
Andy Freeman (mail):
> Market failures happen. And there is nothing wrong with bailing people out when they do.

That conclusion depends on how many/big you want your "market failures" to be. (And no, these weren't "market failures". These were folks who hoped to make out and were wrong.)

When you bail out lenders who make bad loans, you're telling them that there's no reason to avoid bad loans. When you bail out borrowers who can't pay back, why should they care whether they can pay back?

All of the parties involved expected to make a profit on the deal and they were going to keep that profit. Why shouldn't they take the loss? Why should they be compensated by someone who wasn't going to profit?
4.14.2008 11:07am
Tony Tutins (mail):
A hypothetical $600K California house, 20% down payment, 30 year mortgage at 6%, $100K annual income will yield about an 8% discount over the life of the loan. Counting maintenance it's more like 6%.

This house will likely rent for $2,000/month. Mortgage, taxes and insurance will cost a little over $3,600. With the discount you're at about $3,400.


So in the first paragraph you discuss apples (discount over the life of the loan), and in the second paragraph you discuss oranges (instantaneous cost of renting vs. buying). My actual $600K California house costs me less than $1000 a month for mortgage, taxes, and insurance, because I fixed my housing costs years ago by buying instead of renting. That's $1000 a month I'm not putting into rent.

Gaius Marius: When I bought my house the lender verified my application to the tiniest detail. I was questioned about underestimating my bonus payment -- every assertion had to be right on, neither higher nor lower. Borrowers can reasonably expect lenders to act in their own self-interest, by not making loans that they don't expect to be repaid. I expect mortgage lenders to know what "due diligence" entails, not a couple of high school graduates.
4.14.2008 11:38am
David Chesler (mail) (www):
Going back to the 70% figure, I don't believe it.

More than most places that have both a large rental market (in much of the country, only the very young, the transient, and the losers rent) and a large private ownership market (not NYC) ownership costs are close to rental costs in greater Boston, and there are plenty of owner-occupiable two-families for folks who want all the disadvantages of being a tenant and all the disadvantages of being an owner, with the added bonus of the disadvantages of being a landlord.

Renters get a small income tax deduction on their Massachusetts income tax. (This was part of the deal that brought in Prop 2.5, the property tax limiting measure.) Owners get a large federal income tax deduction for mortgage interest and property tax payments, but this may be at the opportunity cost of not taking the standard deduction.

In 1996, a time when housing prices were rising much more quickly than inflation (after an early 90s drop, especially in condo prices) I was getting a deal paying $750/month for a small 2-bedroom in a two-decker near Davis Square, and paying about $30/month for renter's insurance. (The subway was finished and a lot of businesses had opened, but the neighborhood hadn't completely gentrified.) With a baby we needed a bigger place, and we wanted to be closer to my in-laws in suburbia. With savings, my wife's after-tax retirement fund [big, big mistake because she had to withdraw from the state pension plan to touch that, and that meant waiving her disability claim for a disability she had but was not aware of yet - that's unusual, and nobody is bailing me out for that] and parental contributions we put about 10% down (saving some for furnishings) and bought a house. Our monthly cost for mortage, water &property tax, property insurance, and PMI came to about $1250/month with a 30-year, 6-7/8% mortgage.
The cost remained fairly constant od course since I haven't moved. (More property tax, now no PMI.) My house might not sell today for what it would have sold for 2 years ago, but it's still a lot more than what I bought it for.

Now for someone moving in, the same apartment, slightly fixed up, goes for over $2000/month, and a comparable mortgage to buy a house like mine with a 5-3/8% mortgage would be about $2400. Fudge what you will about the opportunity cost of investing the downpayment, and house appreciation/depreciation (one shouldn't buy this year if one doesn't have to) but there's no 70% difference.
4.14.2008 1:01pm
A. Zarkov (mail):
David Chesler:

By picking an individual case one can demonstrate almost anything. In the Boston and New York areas rents seem high and the buy/rent choice might very well favor the buy option. But that's not typical of the US, and especially California. Go on Craigs List and compare the the cost of renting and buying a single family detached house in either the LA or SF areas.

When you say " ... in much of the country, only the very young, the transient, and the losers rent ..." I have to take exception. More than 50% of the residents of California rent. In my case, I could buy a house for cash, but I choose to rent because of the significant economic advantage at this time. If rents should rise, and housing prices fall a lot then I'll buy.

Until recently home owners weren't aware of the significant risks associated with owning. They thought "real estate never goes down." Ergo you always own an appreciating asset. But that was never really true. The year-over-year monotonic increase in the US median home price was misleading. It failed to adjust for inflation and the increasing size of residential property. The US median is also a pretty useless figure because until recently "all real estate was local."

Looking at home price data on Schiller's web site, it looks like the return on the DOW was twice the return on residential real estate between 1984 and 2007. That includes the bubble years for both assets. However a comparison is tricky to do because one can borrow 80% to 100% of a home, but only 50% for a stock. So real estate has much greater leverage. Stocks are also far more volitile and liquid than real estate over short time periods. So one has to make adjustments for both risk and liquidly preferences. This is more a subject for an academic paper than a blog.
4.14.2008 2:06pm
Shertaugh:
Let's cut taxes . . . that'll solve everyone's concerns here because it'll generate so much new revenue that the bailout will be paid for and we'll have plently of left over cash to buy back T-bonds, thereby propping the dollar back up and cutting our borrowings from China.
4.14.2008 2:33pm
Ed Weston:
I suspect that most of the people who object to "bailing out homeowners" recognize that "homeowner" is a deceptive term that includes a LOT of speculators who own(ed) DOZENS of homes. Perhaps things are different in other parts of the country, but my firm is pretty well "in the trenches" in this matter here in the southwest, and we are NOT seeing a huge upswing in foreclosures of owner-occupied housing. There is the occasional exception, but for the most part, lenders are foreclosing out the flippers, then shedding the inventory at much lower prices than were being paid a year or two ago. They're selling at fire-sale prices, because they really don't want the expense of holding these properties.

I could be way off base, but it looks from here like this is just what first-time home buyers needed to get into the market. If someone is going to be "bailed out" in this situation, it strikes me that its the lenders and a bunch of greedy speculators who miscalculated cash flow based on unrealistic assumptions.
4.14.2008 4:01pm
David Chesler (mail) (www):
A. Zarkov: I discussed Boston because that's the opening of the quoted Boston Globe article. I understand that Boston is atypical. I thought it was atypical in that the [short-term] difference between owning and renting is much smaller in Boston than in most places.
4.14.2008 4:24pm
Dan Weber (www):
Ed Weston, it's interesting to hear that most defaults -- so far -- aren't in owner-occupied homes. But have those numbers been checked against the claimed-occupancy fraud that people buying investment property are doing (as claimed in a link provided in the above comments)?
4.14.2008 4:47pm
Tony Tutins (mail):
OK. My sympathy is reserved for those who can no longer afford the place they live in, not for anyone who thought he could get rich by flipping houses during the housing bubble. Risk takers should know what they're doing, whether they be house flippers, day traders, gold bugs, or what-have-you.
4.14.2008 10:02pm
unwelcome guest:
Dan Weber - I could show you an example of this - it was my own ARM, which I have since refinanced to a 15-year fixed at payments not much more than the reset rate payment. I bought a cheap house with an ARM when enrolling in law school. The quoted APR and the big number on the first page of the loan pages was 5 7/8. On page three in small print, it said that my starting rate was 6 3/8, and that adjustments would be 5.25% over higher of LIBOR or some other rate I forgot (with a max increase the first year to 8%). The starting rate was never quoted to me, only the APR, neither was the reset rate. I do not recall seeing these numbers at closing (I probably assumed I would sell before the 5 years was up). It did not say what the assumptions that went behind the quoted APR were, but when the rate reset to 7 7/8 in July 2007 at the same time the 30-year fixed had decreased significantly from when I took out the loan, I got out the calculator. I was stupid to only look at the quoted APR, I know now.

I am lucky - I need no bailout, I have excellent credit and good income - I was able to refinance easily and I actually rent that house out at a profit. But I can see how others would be much less fortunate. And I was absolutely livid when I discovered that the rate that could go up and down with the market (as they said) in reality could go only one way.
4.15.2008 1:18am
IB Bill (mail) (www):
This may have already been said, but I think the federal government should do nothing and let the market sort it out. I think those who got burned through their own fault should absorb the lesson. I think those who suffered some kind of catastrophe should get help through the normal safety net (social security for disability, for example.)

Right now, the government is teaching an important lesson -- not only can you be irresponsible and jump all over a business bubble, but those who didn't join the madness will pay for those who did.

It's a very clear message, and that's my take-home. It doesn't matter that I was responsible and didn't bid up the prices to insane levels. It doesn't matter that I carefully shopped for a good deal, and got one, even at the top of the market, which is when I bought. It doesn't matter that I didn't borrow anything near what banks were willing to lend me. So not only did I get screwed when people went mad bidding up housing prices, now I'm going to have to help pay for their madness with my tax dollars.

OK, I got it now. Strangely enough, I still think it worked out better the responsible way.
4.15.2008 2:05pm
David Donar (mail) (www):
Owning a home is still the american dream. But I agree that these home flippers need to pay the price for their actions. A house, first and foremost, should be a home.

Big Bad Subprime Lender
4.15.2008 9:50pm