The Housing Bubble

Reality check: Apple was raised by the dead by Steve Jobs and became incredibly profitable. The board rewarded him financially. Where is the conflict? By modern standards this and other compensations Steve Jobs have earned are a pittance. The only argument is about whether this could potentially have complicated tax returns. Why not just adopt a Fair Tax that eliminates all of this by doing without the income tax, thus putting shareholders in control? When did Capitalism become inherently criminal? There are a lot of issues with this that should not be taken lightly. The nature of our society is indeed at stake.

Mole Man,

Are you perchance an Apple employee? Even if Jobs worked miracles or if he is richer than Croesus, he is still not above the law.

“If the loan goes 12 months without a default, the lender has NO LIABILITY for the loan (that will be changing to 24 months in June). If the loan does default within the 12 months, the lender has to buy it back. This is what caused Ownit & MLN to fail.”

This points out a huge problem with policy measures that kick off periods of abnormally high real estate appreciation (i.e. 1997-2005). During that period, risk is low, because even subprime buyers who get stucco’d can sell their homes for enough to cover the loan balance. But now that the period of abnormally high appreciation has run into an affordability hurdle that even liar and suicide loans cannot clear, and prices are leveling off. Prices are flat-to-falling, and suddenly foreclosures are sending the sh!t back into subprime lender’s faces.

Excellent!

even the droves of jobless realtors could get in on this. Great idea!

Where would the 2-4% commission come from?

White collar bounty hunters: great idea.

The IRS does pay comissions…something leads me to believe that people committing mortgage fraud may be inclined to not pay taxes on those illgotten gains…

“Where would the 2-4% commission come from?”

The government saves the cost of hiring somebody to do the job less efficiently at higher cost.

Count me in for financial support……

I don’t have the knowledge, expertise, or info resources …..but I do have money.

Everybody adds what they can to “the cause”…..each according to their ability and resource.

Click on “Dan” for email and let me know what I can do.

Count me in for financial and other support. I have access to title information because of my relationship with First American Title.

Paladin — continuing kudos for your diligence. When you seek the contributions, perhaps you can publish a snail mail address for those of us who do not like to use PayPal.

I’m in, Paladin. Also, let me know if you need someone to help with research or other duties — I’ll help as much as possible. No doubt, some other posters here might be able to help, as well.

I honestly think it will boil down to a grassroots effort to really end the speculative financing games which have created this whole “affordability crisis” in the first place. Aside from much grandstanding, it seems the regulatory agencies are not doing much about it.

Keep up the good work!!!

“…that they were relatively safe from a credit source perspective,…”

I believe the take home messages are:

1) It is much better from a household finance perspective to be a “deadbeat” than to carry a revolving charge balance;

2) The cost of the ongoing drain on your household net worth from steadily accruing interest on your charge balance may be outweighed by the risk that they can tighten the screws on you (in the form of higher interest rate or card cancellation) on fifteen-days notice.

I thought up an appropriate description for lenders who refer to financially-responsible households as “deadbeats”:

SCUM-SUCKING PARASITES

Cash Substitude/convienence only.

100% agree. Let’s you track your expenditures in quicken (we only spend about $400 / year in cash now, everything else is recorded). Also gets us 1% cash back, 5% on groceries, gas and drug stores. They bill my checking account every month, automated. I never even click a mouse.

I’m being paid for convenience. It’s amazing that I get away with it year after year.

In some ways the deadbeats are actually taking advantage of those who make minimum payments. For example, I get cash back on every purchase I make and always pay in full at the end of the month. The only way this is possible is if there are credit fools who subsidize my usage of the card. So, in a way, I guess that I’m taking advantage of fools just like mortgage brokers, realtors, and the rest of the RE industry. I’m going to have to go shred my card now, the moral ambiguity is killing me;)

I have a question. Am I the only one that still will refuse to get one of the cash-back, or frequent flier mileage credit cards? I understand what is being said about getting paid to charge things. That, on the face of it, seems like a win. I just think that, even if you pay off your balance every month (bunch of deadbeats), that you are still being encouraged to buy stuff you don’t need.

Here is how I look at it. I have been told a thousand times by people that we “have to buy” a flat screen TV. I live in a small apartment and our 25″ TV from 1994 still works just fine. I have no need for that new 42″ plasma TV. Sure, I would like it but I don’t need it. I think if I had one of those cards I might say, “what the heck. I get miles (or cash back) so I may as well break down and buy it.” I would love to see a study on what impact those incentive-based cards have on spending habits.

I treat credit cards, now that we’re debt free, like the Devil himself. I don’t care what offer is out there for cash-back or any other bonus. I don’t want it. Am I all alone here?

I just think that, even if you pay off your balance every month (…), that you are still being encouraged to buy stuff you don’t need.

If you believe the above statement, then stay away from all credit cards, as you are doing.

There’s another way to think about it though. The spouse and I used to pay cash for everything, but it really got to be a pain to have the cash on hand. (Debit cards were not yet available.) Enter the credit card.

For us, it is cash: This means you don’t spend what you don’t have. If some other poor schmuck is willing to provide you a bunch of tracking services/cash back, then great cuz all of your purchases just got incrementally cheaper.

If you don’t autodebit the amount at the end of the month, then it’s not cash, it’s credit. This is a violation of the rule above.

NYC I think you are correct in theory. People will spend more even if they don’t need to carry a balance. But I work hard, and I don’t want to only live with bare essentials. I have 40% of my pay put away before I ever see it. Then if I buy things I can pay off every month, it is with the income that is left over from a very stringent savings plan. My wife and I don’t have a TV (I have not had one for 25 yrs.), but I have been looking at one of these flat TV’s to pair up with a DVD player so we can watch movies at home. Do I need one, obviously not, but I didn’t need the bird feeders in my back yard either, and i cannot tell you how much I enjoy watching the birds while I have morning coffee. Not only that–I travel for business regularly–I cannot imagine trying to do that without a CC.

Like the fellow who posted above, I too have the Citibank American Express Dividend Card - 5% cash back on Groceries, Gas, and Drug Stores. I don’t worry that I’ll suddenly start driving 30% more in my car, or that I’ll start buying 10 pounds of bananas that I won’t eat.

We have the same Citibank card. I’ve contemplated the whole “morality” thing WRT getting money for nothing — on the backs of those less fortunate, perhaps? Yes, there is guilt, but they are the ones offering it. They have to know some of their borrowers will gladly take their money without giving any in return. Guess that’s one of the reasons for the very high interest rates.

Good to see lots of us “deadbeats” here on Ben’s blog.

Those of you with a Citicard better check your rewards. Citicard dropped the 5% cashback to 2% a couple months ago.

They were counting on you never even noticing.

I just think that, even if you pay off your balance every month (bunch of deadbeats), that you are still being encouraged to buy stuff you don’t need.

You have to be a clever deadbeat. We keep a personal and business credit card with no annual fees that give us miles for travelling and pay full balance every month. About once every two years we get a free international plane ticket, and that is a huge savings. The cc company is willing to give me all this credit hoping I will turn into a revolver, but I don’t take the bait, that’s it.

that’s real discipline - good for you.

I just continue to use debit card since my periodic bouts of brain discombooberation lead me to late payments on my CC.

Although when I used checkbook only, or cash money, I spent less. Think I’ll go back to old school method.

GetStucco, because things always more quicker in the US, and it isn’t “different” this time. In addition, in the US booms and busts are far more intense.

My sentence above is ambiguous but sincere. In Europe, business cycles appear to take longer, starting up a business take far longer, switching between jobs takes way longer (”2 week notice” -> more like “12 week notice” in Europe). Europe seems generally less likely to experience the pain of a bust, and is willing to accept fewer and less pronounced peaks.

Hope this makes sense…if you wish I could clarify futher, at the risk of being verbose.

first of all, mortgage rates in Europe are still VERY low, just barely above four-century lows in most countries - they certainly don’t hurt yet. The other factor is probably the US free market at work.

Speculation and new construction increased strongly in the US over the last few years, which was a major factor in popping (or at least stopping) the bubble in many areas. In Europe new construction is limited in most countries, so RE speculation tends to move to different countries every few years, keeping the bubble alive and expanding. With Hungary and Romania now in the EU/euro community, we suddenly have new TV programs about ‘investing’ in Hungarian real estate and RE agents specialising in RE in these countries (of course, the best deals are already gone, now that they are targeting a mass market audience).

Regarding credit standards, I think the crazy lending was simply not necessary until recently, because there were so many other factors (mostly government manipulation) supporting the housing market. Only in the last few years crazy lending became a necessity, otherwise with the every increasing RE prices there would not be enough new buyers left. The traditional banks are playing along now in this crazy lending game, but only because other companies started taking market share with aggressive lending (and probably also because the ECB encouraged the banks to do so).

AmazedRenter: I agree, but not about the ‘always’.

Some EU countries, especially the Netherlands, have a reputation for financial speculation. In 1979, the average home price in the Netherlands declined 40% within 1.5 years, erasing all the gains of the previous five RE speculation years. That is quite a bust compared to the average US bust!

Also, the price runup in the current bubble is (far) bigger in many EU countries compared to the US.

@Amazedrenter:”Europe seems generally less likely to experience the pain of a bust, and is willing to accept fewer and less pronounced peaks.”

I’m convinced they WILL experience the pain of a bust and all the consequences that will go with it. And a recovery will be far slower than in the States. Europe has massive social security and pension obligations in an aging society. Europe has a massive (but mostly unproductive)immigration from Muslim countries. And Europe is not a nation, just a united(?)trade market, and a 13(of 27) countries artificial euro currency. When things turn bad, Europeans will fight eachother in an economic(I hope)war, weakening it’s position as a world player, with all the consequences that go with it.

… also, a big chunck of EU pension obligations is invested in mortgage paper and real estate (both in the US and EU). In the Netherlands the pensions funds will be bankrupt even before RE prices return to the historic trendline. Massive pain for taxpayers ahead …

I suspect that there is another dynamic that further separates the “realities” of the EU housing markets from our own: without knowing the numbers, I think that that would be far more purchases due to relocation, per capita, here in the U.S. In the Netherlands, for example, assuming you want to remain in your own country, where are you going to go? Will it be far enough away to justify the cost and risk of buying or selling? Seems to me, then, Europe would have a greater proportion of move-up buyers than we do. As for first-time-buyers, no clue, as I suspect Europeans have a greater tendency to remain in their parents’ house than we do. Speculators, such as those who think Romanian properties are hot, are another matter altogether.

Chip: yes, think you are right. In Netherlands, people move to another home once every 7 years or so; most of these are people who are moving up (within the same area). Despite relatively small distances, most people would probably relocate if their work moves by 100 km or so. And 100 km can make a huge difference in price here (although not as much as 10 years ago). As for the firstimers, despite all the starter subsidies etc., the average age of the first home buyer has increased from about 26 to well into the 30’s within the last 15 years, because even the cheapest homes are no longer affordable for starters (except those with a parent piggy bank).

The EU RE speculators have been making loads of money for 10-15 years now, with all the leverage even simple government workers could become RE millionaires. Times still are good if they are clever enough to stay ahead of the crowd and move to other countries / other types or property from time to time. In the Netherlands income from asset appreciation (mostly RE speculation / mortgage extraction) was on average a really big chunk of family income in recent years; for those that are actively speculating it’s probably far more than their job income.

“Speculation and new construction increased strongly in the US over the last few years, which was a major factor in popping (or at least stopping) the bubble in many areas. In Europe new construction is limited in most countries, so RE speculation tends to move to different countries every few years, keeping the bubble alive and expanding.”

nhz –

You seem to be coming around to my view that building a gazillion tract homes on every available unbuilt plot of land tends to have a depressing effect on prices…

The same happened across Europe, Canada, Asia and the rest of the world. You can include the gazagazabizillions homes in Papousia too.

GetStucco: yes, sooner or later it has to depress prices. However, we won’t notice until the easy money runs out and I still don’t see that happening (despite lower home prices in the US, but nothing shocking yet I would say).

And I’m not sure if this is really different from what is happening in Europe, it just seems to be happening faster in the US. The new EU countries and those on the EU border are changing into one large building pit as well, I’m sure they will run out of qualified buyers sooner or later. But as long as the ECB keeps providing credit at rates far below actual inflation, I don’t see an end to this madness.

Funny you mention that GetStucco. We have silician mobster in Montreal, that is now in prison in New York. The S.O.B. Rizzuto is supposed to be worth 1 billion dollars. And most of his filthy money is managed by a cousin based in London. Most of the money is invested in real estate. Bankers just love these crack dealers.

I think they call them “cokeheads”.

I would prefer “crackedheads”.

“Most of the money is invested in real estate. Bankers just love these crack dealers.”

I hope someone does a careful accounting in the aftermath of the bubble to determine just how much real estate investment was due to organized crime parking their money somewhere it could be easily concealed.

Well it was done in Japan. After the implosion of the real estate bubble, the BOJ estimates the bad loans in real estate were made to Yakuzas (japaneese mafia) represented 35% of the loans. It’s probably the same percentage in the US and in the rest of the G8. Except Russia where it’s probably 80%.

And I heard tales there were some serious problems during the foreclosure process. Literally point-of-a-gun debt foregiveness.

same situation in the Netherlands: over the last five years or so there has been a long series of drive-by shootings in the Amsterdam area involving high profile RE tycoons and their banker/lawyer friends. The Dutch mob (mostly drugs profits) invested huge amounts of money in real estate in the nineties. Their investments multiplied thanks to the housing bubble and when some drugs deals went sour some years ago, they wanted their money back soon - that’s where the problems start with real estate.
Even in low-profile cities probably a big chunk of real estate is owned by the mob, of course not in plain sight but everything owned by obscure corporations (most of them based in Amsterdam). The police has been investigating things for years, but up to now not much has been reported in the media. Wouldn’t surprise me if we never hear the filthy details, because of all the politicians and high level government workers that are involved in the game.

P.S. What anyone else says about whatever blog at this point does not matter. The lense of history will view this blog very favorably, and DL and LAY will be derided for then next century the same way we laugh at Irving Fisher’s “permanent high plateau” comment so many long years after 1929.