July 14, 2013

There Are Those Who Are Forever Blowing Bubbles

Readers suggested a topic on winners and losers. “All this talk of people being rich because their primary residence has increased in value (a 2x increase in house value and a dollar will get you a cup of coffee), got me to thinking: Just who exactly are/were the actual winners and losers of the housing bubble? What were the actual impacts on individuals’ net worth outside of primary residence?”

1) Seniors with savings. 500K in savings would yield 25K with 5% interest. Now it yields maybe a one to two thousand dollars. Ouch.
2) Pre-bubble property owners net result was higher property taxes.
3) First time buyers saddled with heavier debt loads as a result of higher prices.
4) The taxpayer, bailing out the bad decisions of lenders and debtors.
5) People who lost their houses to foreclosures or forced into short sales.
6) Flippers who didn’t get out before the music stopped (prices plateaued).

1) Flippers who did get out before the music stopped.
2) People who moved to a lower priced locale.
3) Financial company executives who saw record bonuses before and during the financial crisis.
4) Realtors.
5) Loan originators.
6) The Fed, which got a lot more power, despite being asleep at the switch.

Others options for the winners/losers categories?”

A reply, “I’d lump mortgage brokers in with realtors, although I woudn’t say that they were in general winners. Many of them made some major income during the bubble, but how many saved any of it and/or are still have an income?”

The San Francisco Business Times. “The Bay Area housing market is on fire — and we’re about to get burned. The median home price in the Bay Area ballooned by 43 percent during the past year to $620,000 in June, up from $435,000 a year ago, according to ZipRealty. The Bay Area leads the nation in year-over-year growth, followed by Sacramento with 41 percent, Los Angeles with 31 percent, Las Vegas with 30 percent and San Diego with 25 percent. But, what do rising home prices really mean? I asked economist Christopher Thornberg of Beacon Economics, who is best known for rightly predicting the 2008 mortgage crisis (even though no one agreed with him).”

“In the short term, rising home prices are good for people who were underwater, meaning they owe more than their house is worth, because their homes will go up in value and their mortgage won’t seem as horrible. Employment is up in the Bay Area giving people courage to buy and pay for homes. But, in the long term, rising home prices chop away at affordability, which can be detrimental to the entire economy.”

“For all the talk of regulations pushing employers out of California, the more likely culprit is housing prices. ‘You go very quickly from market that is enjoying the welcome, positive impacts for existing homeowners to employers saying ‘Holy cow, I can’t pay my workers enough money for them to afford to live here,’ Thornberg said.”

From Latina Lista. “When I was growing up, relatives talked incessantly about retirement, which generally meant going to live with a daughter and her family. When social security kicked in some older relatives became more independent especially those who had bought a home and paid it off. They could rent out a room or two to a close friend.”

“The ideal, however, was to own one or two houses that could be rented out. That was the Mexicans’ Individual Retirement Account (IRA) only better because they did not have to pay an agent or be at the whim of the stock market. The best part of it was that the houses were paid for by the rents.”

“The lessons I learned from my relatives kept me alive during the summers after I became a school teacher. I would save $200 and every summer buy a fixer-upper, which I would sell later to finance the following summer’s venture and pay the household expenses for my family. If I would have kept this up, I could have wound up with ten to 20 houses. They were cheap at the time – cost $8,000 to $10,000 – no money down. However, priorities are set by your values. I gave the houses away in a divorce settlement, and turned to more productive pursuits.”

“I thought that I would die young; I didn’t like being a peasant landlord; and I expected my children to have the same opportunities that I had. The times changed, and today it is the exception rather than the rule that someone can buy a house, let alone two or three houses, and expect to live off the rents.”

“The FHA and the GI Bill made houses more accessible, but they also inflated prices. There was a slight rise in housing costs during the 1950s, with a correction during the 60s and 70s. By the 1980s, a boom again made buying that extra home more difficult. In the LA area, prices came down briefly only to jump up again in the latter part of the decade. In the 90s, the patron saint of the working class — William Jefferson Clinton — ended the regulatory acts of the 30s, and that ended ability of the housing market to correct itself, making the housing bubbles of the first decade of the 21st Century inevitable.”

“When the Depression of 2008 came about I looked for a silver lining. I hoped that prices of homes would come tumbling down, and maybe my relatives’ grandchildren could walk away from the inflated prices they had to pay for their homes during the decade of the bubbles. Many had paid $450,000 for homes in marginal neighborhoods, which seemed a bit excessive – especially when the value of that home fell to $275,000. There was no way my relatives could keep making those house payments, or much less buy an extra home for retirement.”

“What finally burst my bubble though was the rise of the hedge funds, which are today for all intents and purposes in control of government. I recently read a series of articles in a community newspaper called Tribuno del Pueblo on the takeover of the family housing market by the super rich. It wrote that this was organized by the largest bankers and hedge-fund operators, who have seized control of Fannie and Freddie Mae, grabbing half the nation’s mortgages and some 200,000 homes. Rounding off the collusion between the speculators and government, the Obama administration is selling off tax liens to the former super-rich.”

“It is a new age and there is no room for the peasant landlord of my father’s times. We don’t have the capital to compete. Recently a friend was trying to buy his first home. He followed the newspaper ads hoping to buy a foreclosure. The brokers refused his multiple bids on foreclosed residential homes. They tried to sell him ‘for sale’ homes that had already been bid up above the asking price. Probing around he learned that the broker had reserved the foreclosed house for a local politician whom he represented at auction.”

“Well, there are those who are forever blowing bubbles. They are dreaming for the days that they could buy a home as an investment for old age and then pass it on to their children or grandchildren. But the truth is that those are only dreams, and today we are living the nightmare.”

Bits Bucket for July 14, 2013

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