Foreclosures Caused Primarily By Falling Housing prices
The Boston Globe reports from Massachusetts. “The recent spike in home foreclosures in Massachusetts is caused primarily by falling housing prices, and not by rising mortgage payments, according to research released yesterday by the Federal Reserve Bank of Boston. The contrarian report suggests the common understanding of the foreclosure crisis is somewhat mistaken. Unaffordable loans don’t cause foreclosures directly.”
“Even as subprime lending became more common, even when people fell behind on mortgage payments - during the economic downturn in 2001, for example - foreclosures were rare because house prices continued to rise. In part, people were able to escape trouble by selling their homes at prices high enough to cover their debts.”
“But the research also suggests that troubled borrowers tried harder to make the necessary payments, in the expectation they would profit eventually.”
“Conversely, when prices started falling, people struggling to make payments had less incentive to find the money. Housing price movement ‘plays a dominant role in generating foreclosures,’ the report concluded.”
“One implication of the report is that current attempts by local and federal officials to help borrowers may be ineffective.”
“The number of foreclosures will be determined mostly by ‘how far housing prices fall,’ said Boston Fed president Eric Rosengren, who introduced the report yesterday.”
“Rosengren highlighted a reason for optimism. On a typical subprime loan, the interest rate increases after the second year. Historically, most borrowers either sell or refinance before the rate resets. Rosengren said investors were never counting on a long-term income stream.”
“‘It’s not like they expected the borrowers to be there for 30 years,’ he said.”
The Standard Times from Massachusetts. “U.S. Treasury Secretary Henry Paulson offered encouraging news for cash-strapped homeowners Monday, announcing that an agreement was near on a proposal to help thousands avoid foreclosures by temporarily freezing their mortgage rates.”
“However, area banking and mortgage experts still have questions about how the freeze will be implemented and what its long-term effect will be on the mortgage industry.”
“‘There are a number of other people who took loans, who are able to make the monthly payment as it stands now,’ said Tom Farmer, a spokesman for the state’s affordable housing bank. ‘A lot of these folks are working two jobs, three jobs, but they are making the payment.’”
“Questions remain on how a rate freeze would be implemented and what kind of effect it would have on the mortgage industry. ‘I don’t think you’d want to freeze them for a long time,’ said Rick Presbrey, CEO of Housing Assistance Corp., a Hyannis nonprofit. ‘Unless you have somebody who understands the long-term consequences of that, I’d be real careful with that.’”
“‘A lot of these have been packaged and repackaged and sold on Wall Street to other investors, so you have to get everyone on board, which isn’t always easy to do,’ said Carl W. Taber, senior VP of Citizens Union Savings Bank in Fall River.”
“David Brennan, senior VP of Cape Cod Five Cents Savings Bank agreed, adding: ‘To some degree, those investors are going to be asked to take the hit.’”
The Metrowest Daily News from Massachusetts. “As of October there were more than 6,000 foreclosures statewide, three times the number of foreclosures during the same time period last year.”
“‘Lenders have apparently lost patience with borrowers, and it’s pretty clear that a lot more Bay State homeowners are going to be getting a visit from the Grinch this year,’ wrote Warren Group CEO Timothy Warren Jr.”
“Eric Rosengren, president of the Federal Reserve Bank of Boston, said the recent foreclosures stemmed in part from interest rate spikes after two- to three-year lower introductory rates expired. Rosengren said lenders, market analysts and borrowers alike expected borrowers would sell their properties or refinance their mortgages before interest rates went up.”
“‘People expected that this product would have a problem if we got into difficult economic circumstances, but I don’t think people anticipated that we would see as elevated a problem as we have under what happened in a fairly benign economic situation,’ said Rosengren.”
“He estimated that 26 percent of subprime mortgage holders would be able to refinance given their credit scores and current market conditions.”
“‘It’s expected that foreclosures are going to increase in 2008 so it’s just a question of what can we do at a state level to minimize that impact. I think no matter what the adjustable rate, mortgages are going to go up,’ said Phil Hailer, spokesman for the state Department of Housing and Community Development.”
The Republican from Massachusetts. “Statewide, there were 6,324 foreclosure deeds through October of this year, compared to 2,112 at the end of October 2006. There were just 2,634 foreclosure deeds in the state for all of 2006.”
“Foreclosure deeds in October jumped 119.5 percent, from 333 last year to 731 this year. Deeds are also up from 673 in September 2007.”
“Foreclosure deeds…means properties whose ownership has changed. ‘The property belongs to somebody else,’ said Katie Curnutte, spokeswoman for the Warren Group. ‘They’ve either gone out to auction, or the lenders have bought them back.’”
“Meanwhile, more petitions to foreclose were filed in Massachusetts during the first three quarters of 2007 than during all of 2006, The Warren Group said.”
“Through September, the latest for which statistics are available, foreclosure petitions in Massachusetts were 21,055, compared with 18,926 for 2006. In September, petitions were 2,509, up 34.1 percent from 1,871 a year earlier, the smallest percentage increase all year.”
“‘Petitions to foreclose in September might have fallen when compared to August, but I think we’ll see petitions during the rest of this year continue their steady upward march,’ said Warren. ‘August’s numbers were incredibly high, but we will probably see them matched before too long. Petitions may seem to have calmed a bit in September, but that is likely temporary. I think we’ll see more record-breaking numbers before the end of 2007.’”
“Meanwhile, many Massachusetts homeowners with subprime mortgages are finding they need to find new lenders to refinance as they seek to avoid foreclosure. Eight of the 10 largest subprime mortgage specialists in Massachusetts are no longer lending in the state.”
“Last Friday, Gov. Deval L. Patrick signed a compromise bill that aims to bar lenders from issuing mortgages that borrowers can’t repay and creates a new licensing system for certain mortgage brokers.”
The Daily News from Massachusetts. “Late last month, Gov. Deval Patrick signed a bill written by Sen. Susan C. Tucker Rep. David Torrisi to improve state oversight of the lending industry while providing resources for people at risk of losing their home.”
“Tucker said the new law is meant to end abusive lending practices but won’t help everyone. ‘The intent of our legislation was to put a halt to the whole game that created this crisis,’ Tucker said. ‘The bill is not a rescue plan.’”
“Every town in the Greater Newburyport area saw the number of foreclosures rise in the first 10 months of 2007 as the home financing crisis rapidly spiraled across the state. The ripple effect is likely to depress already declining home values even more, experts say.”
“‘There’s a ripple effect foreclosure sales have on overall values in eastern Massachusetts,’ said Thomas Callahan, executive director of the nonprofit Massachusetts Affordable Housing Alliance. ‘It depresses the market most severely on your block. But when there are so many foreclosures in Essex County, you can get to point that all of those foreclosures on the market have an effect of dampening values going forward.’”
The Boston Herald from Massachusetts. “As the subprime market collapse spirals, a local law firm has created a new group to deal with its impact. Boston-based Mintz, Levin, Cohn, Ferris, Glovsky and Popeo’s new subprime practice group has been meeting for about a month, group co-chairman Richard Moche said yesterday.”
“‘It’s the biggest financial story of the year, and the impacts will reverberate for a while,’ said Moche about the subprime mess, and its ensuing international investment woes.”
“Now, at Mintz, Levin, the group’s two dozen lawyers - who specialize in litigation and bankruptcy law, as well as governmental investigations, insurance coverage, and white collar crime - are helping financial institutions, investment groups and insurance companies deal with subprime-related legal matters.”
“‘There may be investors in companies that have subprime exposure, and the investors may feel that the companies didn’t adequately expose the risks,’ Moche said about the firm’s potential clients. ‘In other cases, there may be government investigations, where regulators are trying to assess the landscape, and people will need to respond, not necessarily as targets, but as witnesses.’”
“Mintz, Levin decided to form the group after three separate clients approached the firm for subprime-related help, Moche said. ‘It’s been a very recent development,’ he said.”
The Union Leader from New Hampshire. “The continuing wave of foreclosures on subprime mortgages prompted U.S. Rep. Paul Hodes to meet with lenders, lawyers and regulators yesterday. Hodes termed the failure of subprime markets unprecedented in its scope, noting that it is being felt around the world by business and residential borrowers.”
“Foreclosures, up 100 percent in almost every county in the state, come in the midst of the worst housing slump in 16 years, Hodes said. Predictions are that 4,300 homes will be taken by the end of 2009.”
“Subprime lending quadrupled in New Hampshire over the past four years, rising from about 5,000 a year in 2003 to more than 20,000 in 2006, accounting for one third of all new mortgages in that time.”
“A New Hampshire Bankers Association said in a study released in August that subprimes account for 70 percent of foreclosures, although they make up 13 percent of all mortgages.”
“A proposed state law would impose licensing requirements on mortgage bankers, brokers and originators. ‘We’re trying to stop the monkey business,’ Hodes said. ‘Frankly, they were playing fast and loose with sound lending practices.’”
“Hodes said, ‘the fact is we’re going to have some rough times going forward with mortgage foreclosures. There is no easy way around that.’”
“Hildreth urged homeowners who suspect they will run into a problem with their mortgages to contact his office early. His office has held borrower conference sessions around the state, but turnout has been disappointing, he said.”
The Eagle Tribune on New Hampshire. “The housing slump could translate into savings for some school building projects, according to managers at several construction companies.”
“‘It’s sort of a buyer’s market,’ said Steve Ingram, an owner of Ingram Construction Co. in West Swanzey. ‘If I had a municipal building or a school to do, or even a private building, this would be the time to do it.’”
“‘Because of the fact there are fewer projects out there and work is less plentiful, contractors are willing to reduce (profit) margins,’ he said.”
“Statewide, construction company managers and owners are battling one another for jobs by cutting their profit margins, Ingram said. ‘The margins are smaller,’ he said. ‘They just have to be.’”
The New York Sun. “New York City could face a budget gap of more than $6 billion for fiscal year 2011, the city comptroller, William Thompson Jr., predicts in a report issued yesterday.”
“‘New York City’s economy is at a turning point,’ Mr. Thompson warned. ‘Turmoil in the nation’s housing and mortgage markets has reverberated through the financial sector, threatening to produce a marked slowdown in local economic activity.’”
“Mr. Thompson said in the report that the ‘collateral effects’ of the housing crisis are likely to include financial losses and layoffs that will ‘fall disproportionately on New York firms and workers.’”
And house prices are falling because we had a housing bubble that must deflate. All this activity from government and the RE industry is doomed to fail because they refuse to recognize the nature of the problem, and therefore are frozen into a false set of solutions. Wake up media, wake up government!
Say I have a secure job and a home that I purchased with a fixed rate loan at less than 30 percent of income. As my pay goes up over time, the payment-to-income ratio goes down.
So if the value of my home falls, how does that cause foreclosure?
In the situation you just described, agreed, I don’t see why there would be a foreclosure.
I read it more as this:
Bubble or no bubble. a lot of Americans live paycheck to paycheck and people are always running into events that cause financial stress, layoffs, illness, divorce. When home prices are rising, these folks can unload the house without a problem. But when these events happen during a housing decline, they can not cover the loss or choose not to, b/c it’s a declining asset.
Lots, but what are the real percentages? Aren’t a large number of US homes owned outright? I’m sure a good number of foreclosures will hit, but not everyone is in the situation to loose their pressboard box.
It’s most likely going to hit the less educated (those that got taken advantage of) and the overly materialistic types.
Wake up Virginia Beach!
It’s most likely going to hit the less educated (those that got taken advantage of) and the overly materialistic types.
You *do* know, right, that only 25% of us get through college?
And that the net savings rate has been ZERO throughout this boom-crash?
I don’t have a college degree. I see the bubble, and have followed it since ~2004. I’m saving more money now than ever.
I see the advertisements in my metro area, and I have observed the mortgage brokers and Realtors targeting certain portions of the market. I’ve listened to their advertisement talk radio shows, and heard the people who call in.
I shouldn’t have said less educated, I should have said less intelligent because there are lots of people who make it through college who I wouldn’t qualify as smart or intelligent.
‘So if the value of my home falls, how does that cause foreclosure?’
I saw many Texas millionaires walk away from underwater assets, if they could.
I don’t imagine these Texas millionaires walked away because they couldn’t have afforded to keep making the payments? Hence I would argue that falling prices did not “cause” the foreclosure — rather it was a rational economic decision based on a legal environment which made it less costly to walk way from one’s financial obligations than to live with them.
I think that was spelled out pretty clearly, people didn’t want losses only gains so they walked out on the loan.
The comments came from the FED. Do you really think a FED governor would say “We printed too much money and the resulting credit bubble resulted in inflated house prices that can’t be supported by current wages.”?
The Federal, state and local governments are acting like 5 year old kids. The fingers are pointing everywhere, while the cookie crumbs and cholcolate chip smudges are all over their faces.
You 100% can’t foreclose on a house with no mortgage. Since the foreclosure proces relys on having a lien on the property that secures a loan, it’s obvious that the loans are at least a necessary condition, if not an outright cause. Falling house prices don’t fit the criteria for a necessary condition.
Lack of affordability is not a necessary condition either. In the absence of loans homes that aren’t affordable simply would not sell until priced appropriately.
The whole foreclosure problem is centered on loans, specifically loans that are not being paid per the contract terms.
climber, I certainly agree that it centered on loans, but I also believe falling house prices are a “necessary condition” for a tsunami of foreclosures — eternally rising house prices would (as Ben’s post describes) prompt homedebtors either (a) to find the money to hang on, or (b) to sell in a hurry, which was easy. Of course, the loans were at the heart of the rapid price increases and of the assumption that the increases would continue endlessly, and the unwinding loans feed the decline in prices as well.
“Lack of affordability is not a necessary condition either. In the absence of loans homes that aren’t affordable simply would not sell until priced appropriately. ”
Along these lines for a long time I have thought that the prices (of houses, cars, shoes, clothes, food, travel) in the US are artificially high because a huge chunk of the population buys using credit. If loans didn’t come so easily, via credit cards, for example, there would have been less demand for the goods and the prices would have been lower. Am I thinking right? When I lived in a couple of Asian countiries for a brief period on a company assignment, I was flabbergasted to see how cheaply people lived there. Good food, clothes, travel, etc were all a fraction of the US cost. I felt we are over-consuming in the US, because we can charge, and thus drive up prices. Even a 1 or 2% over-consumption above the equilibrium (supply=demand) can perhaps create a singularity and make the prices rise asymptotically!
Again, sonce I am not an economist, would like to know if am I thinking right. Thanks.
yes, you are thinking right. Credit ramped-up in the 20th century, one-for-one with increasing prices.
When credit disappeared in the 30s, prices fell.
“The fingers are pointing everywhere, while the cookie crumbs and chocolate chip smudges are all over their faces.”
I have one just like that.
“If the value of my home falls, how does that cause foreclosure?”
It doesn’t, if you’re in a house that you can afford over the long haul. That’s the crux of the problem, and why all this bailout talk won’t do much….there are a lot of people in houses they simply cannot afford. The government can’t “fix” this problem.
Plus, if you’re lucky enough to get some of your income in currencies other than $US, the mortgage gets even cheaper. This is our situation exactly.
“Say I have a secure job and a home that I purchased with a fixed rate loan at less than 30 percent of income. As my pay goes up over time, the payment-to-income ratio goes down.”
“So if the value of my home falls, how does that cause foreclosure?”
If you have to ask this question PB, then you’ve missed a lot of what’s gone on here. We’re talking folks who bought homes fearing they would be priced out forever or miss an opportunity at riches. So, they buy a house they wouldn’t normally of bought, with payments they really couldn’t afford, all in the hopes of striking it rich or climbing the property ladder. I can’t tell you how many folks I’ve talked to over the years that said they can’t stand the house they bought, but it was thier way of getting their foot in the door. Now, they’re strapped to a massively depreciating asset, living on Top Ramen to afford the mortgage/mortgages, and now enduring this as they watch as rents fall and they guy that makes less money than them is living twice the lifestyle. Why would they walk? Sorry, the question is why wouldn’t they walk. I laugh at all the bail-out plans because all that these football humping monkeys are gonna get for their efforts is the middle finger of the FB who doesn’t want to be bailed out. And they wonder why the FB that’s is in trouble isn’t contacting their lenders to work something out. They don’t want to work it out.
“that said they can’t stand the house they bought”
Well said. This very scenario played out over millions and millions of couples! They didn’t buy what “they” needed (or even “wanted”). Instead they bought what they thought would “appreciate” the most! Curb/flip appeal.
Now whether that be pergraniteel, gated community, ocean view or whatever! For all the outrageous escalation in prices I can’t recall speaking to but a handful of people that were actually happy with their “property ladder” RUNG! Seems many homes were just fine as long as you got home from work and locked the front door and didn’t socialize w/ any of your neighbors?
Just think of all the people who bought unrenovated 50-year-old 400K-450K starter homes in the DC suburbs in iffy neighborhoods with iffy schools. That’s the area I know best, but judging from burbed.com, I bet the same scenario went on in the Bay Area–the buyers weren’t crazy about those houses, but they were all that they could get, and prices were going up all the time.
“They don’t want to work it out”
Gotta lov the government at work. First they make the perpetrator the victim so that they can bail them out on the back of the American taxpayer and the perpetrator only wants victim status to walk away without penalty. In the meantime the government legislators get that warm and fuzzy feeling of having done something good.
It is indeed obvious that Republics can’t govern their way out of a paper bag. Regulation and enforcement 5 years ago would have prevented this mess. The perps are on Wall St., not Main St.
Can someone explain to me why it would be a ‘taxpayer bailout’. Aren’t they talking about freezing the teaser rate? Why would that impact the taxpayer.
I’m against any bailout, just FYI - but I’m looking for clarification.
The money comes from proposed tax exempt municipal bonds that must be approved by states/counties. That’s the hilarious part of the whole plan: there’s no way that there is time for states and municipalities to approve these bonds. One of the last things Paulson said (with a sh#t-eating grin on his face) was, “Congress needs to get this done.” He’s trying to push the responsibility away from himself and onto congress. To me, Hank Paulson is the biggest villain - enthusiastically selling mortage-backed securities at Goldman-Sachs, then, being smart enough to see where things were going, aggressively shorting them, then, as the new treasury secretary, studiously ignoring the problem though he was obviously aware of where this was going. He personally profited every inch of the way, and has been in a position where he could have acted at least 9 months ago to encourage tightening of lending standards. He knew where we were headed, and said nothing.
The bail out is for the lenders who really are the paymasters of the pols.
So if the value of my home falls, how does that cause foreclosure?
It doesn’t. A point that has been made on this site, repeatedly.
The cause is REFUSAL TO MAKE PAYMENTS.
It’s not about ability, it’s about willingness. Why pay for an “investment” that is a loser.
If these were houses in the traditional sense, you still need a place to live. The basic problem is housing became poker chips in a game of asset inflation. GAME OVER.
I’m taking my chips and going home.
Professor Bear - It is all about incentive.
First, the premise that pay goes up over time is suspect - just ask any manufacturing worker or someone in IT who has been outsourced.
OK, assuming you are dealing with a government permaworker or someone in say, health care, who gets regular raises - You have an asset worth 25% less than you paid which needs monthly payments. At the same time, you have to pay more to fuel your SUV, contribute to health care co-payments, pay your cell phone and cable bills, and hopefully save some money for your kid’s college, your retirement, your parent’s long term care needs, and, perhaps, a rainy day. Are you going to keep paying for a house worth less than you paid at an even higher monthly payment after reset, perhaps by working overtime or getting a second job when others either get no reset increase (or just walk away and rent?)
That is why a bailout plan will fail. This particular one is no different than the status quo (case by case modification) except that the Fed is encouraging local governments to sell tax free bonds to soak up some of the SIVs now that the Super-SIV fund looks like it is never going to exist.
As soon as a person/family has to write a significant check to close if they need to sell, the house is likely to end up in foreclosure. People, in general, will not write checks at the closing table and will rather walk. Even if they have the money ($100K, $200K, …) in the bank, savings, etc…!
There are several waves of foreclosures coming as we bounce down the cliff from ledge to ledge. We’ll bottom when it is cheaper to buy than to rent (after all expenses of ownerships are factored in).
Amen. Politico’s, Used Home Salespeople, and the MSM believe that falling prices are the problem when falling prices are, in fact, the solution.
The problem? Affordability.
The MSM and Gov’t officials and economists are not stupid. They know exactly what is going on. “Affordability” is intentionally ignored. I wonder if someone’s plans for SS and medicare have been interupted now that boomers can’t support their retirement by the sale or reverse sale of their homes.
Ack! You can’t mention the “A” word - affordability - in public! How else can we create modern-day serfs if houses are affordable?!
Yes, people that flat out couldn’t afford their home were going to get foreclosed on no matter what. But we’re talking about adding on top of that folks that could possibly eak it out who will opt for walking away. Had home prices at least remained stable many would sacrifice to work it out. But with home prices falling and showing no signs of a turn around, leaving the keys on the counter and walking becomes the popular choice. Thus, falling home prices compound the foreclosure problem.
ll this bailout talk has gotten me thinking; I admit I still don’t completely understand why everyone says things will be as bad as they say they will be.
Let’s say nothing is done about this economic collapse. What is the worse that can happen? Will it really affect ordinary people that much?
1. People lose homes - they walk away and get a rental, and life will still go on.
2. Goverment loses revenue in the form of lower property taxes or lower sales revenue - results in some lay-offs and loss of some services, or rise in some fees. But it still functions.
3. Some retailers go out of business - businesses related to housing - furniture, home-improvement stores. But the stuff they sold was over-priced to being with, and they had to offer financing to move stuff off their shelves.
So perhaps such stores do need to go out of business. If your goods are priced too high for the average person, then you are setting yourself up for a loss. Unless you have a business that caters to the ultra-rich, you are in trouble because you got too greedy.
4. Banks lose money. Perhaps they should because they are the ones that lent money to anyone who could fog a mirror. This would results in say more lay-offs; but they got greedy and screwed buyers (debtors) when they could.
5. Wall street firms lose money - these are the same folks that have been getting $100K+ bonuses. Hopefully, they were financially smart enough to save some of it; else what’s the point of working in the financial industry.
6. Folks in the real estate related industry will be affected - realtors esp. Most realtors I know do this part-time, hopefully they saved some of thoese commissions they made in the last 10 years.
Will this really be as bad as some here are saying? So what if the malls are less crowded; so what if the flights are less full because people are travelling less? So what if a house costs less now than it did 2 years ago?
Everything was over-priced to begin with; there was no “value” in a lot of the things available for sale. Retailers got greedy and bit the hand that fed them, so to speak.
Why should a plastic, Christmas tree that was shipped here from Kowloon Bay, HK cost $400? For an ordinary person, $400 is a lot of money. Why should a blouse made in China cost $80 when it really cost the manufacturer / retailer only a few cents or $1.00 at the most? Florists get flowers from the Latin American countries for pennies and yet, one has to pay $25 for a simple, floral bouquet?
Same with furniture, electronics, cosmetics, cars, food, you name it, it costs more than it should. I for one, have been waiting for things to come down in price for a long time. So let it just crash and let’s return to a saner level of pricing for everything soon.
Boy, you need to get out of the trees so you can see the forest. Over 70% of our economy is based on consumption. We produce very little, most of which is housing. The so called robust economy you’ve been a part of the last 6 years has been a fake, based entirely on funny money channeled into housing. You take away the housing boom and we’d already be deep into recession, and possibly already finding the solutions to get our way out of it. Instead, we prolonged the pain and inevitably made the problem 10 times worse.
Sounds scary! But makes sense. So no bail-out would in fact be better because this would be behind us sooner.
But because it would be too painful for the irresponsible in the short-term, let’s lengthen the time the pain will be felt and spread it around so it’s shared by the responsible too.
People who could make the payment comfortably walked in Austin’s 1980s bust in droves when they were upside down. And they didn’t even need a lifechanging event. Just got tired of paying the $1000 mortgage + expenses when they can rent the same house for $500.
All this activity from government and the RE industry is doomed to fail because they refuse to recognize the nature of the problem
Cui Bono?
I think our government well recognizes the problem, but is loathe to admit it publically. They are not trying to save distressed homeowners, rather they are trying to mitigate the damage done to the financial system in a manner that doesn’t scream tax-payer funded bailout. They are buying time…
“They are buying time…”
And they are dispensing hope. The hope will inspire the FBs to keep up with their payments and keep the system intact.
At this part of the cycle, the decline part, the Yuns and other real estate spokespersons, along with the MSM, are acting as our friends: Their BS keeps the much needed and much sought after hope alive and buys the time needed for RE prices to slowly correct.
WTF? So even if people have their dream house and can afford it, they’re going to go into foreclosure because the value went down? I guess we should bail them out and just pay off their mortgage, the poor dears. Can’t have them suffer the indignity of a falling value. Now we’ll see how many love their dream home they had to buy no matter the price.
This is another major issue. No bailout for the insurers?
http://www.marketwatch.com/news/story/bond-insurers-seek-new-capital/story.aspx?guid=%7B789076C9%2DEB01%2D4B39%2DA072%2DFE2758DB7070%7D&dist=hplatest
instead of 10-20 years of increasing growth (albeit slower/lower) the markets chose to get it all in 5 years. It was expanding and increasing in line with economy and buyer/seller expectations.
suzanne researched this ?
according to research released yesterday by the Federal Reserve Bank of Boston.
coulda come to the blog !
A budget shortfall in 2011 in NYC?? Sure, why not, but the more immediate impact will be felt with the bonus announcements and subsequent layoffs.
Assuming that everything is cut back, with the exception of Goldman, the ripples will be felt everywhere in nyc.
Why is the “Massachusetts Affordable Housing Alliance” trying to minimize foreclosures when the foreclosures will do more for making housing affordable than this group ever did. Sure the people who are getting foreclosed on are in trouble, but this is more than offset by the greater benefit of affordable housing.
It’s not unlike what I said above. Everyone refuses to acknowledge the true problem and therefore are unable to address it. If they did, they would be helping people get through foreclosures, not trying to stop them.
they are still looking for that “soft landing”
It’s more than that. There is still a great love for the financial innovations that created this mess. Even though selling off loans as soon as they are written turns out to be bad for risk, and investors are having a hard time selling off assets that were packaged in CDOs, the financial community is still in denial about the need to reform and possibly do away with all these new sources of profit they have been introducing which have now blown up in their faces. The real problem is the bubble in housing prices and the cause is tomfoolery in the banking system–many layers of it.
Yes - since the housing market is inflated and will come down - we need to help make “soft landings” for the families going through foreclosure. Help them through the foreclosure process. Help them understand their rights and how to save up first & last months rent so they have a place to live when they finally move out of their house.
Actually, I was thinking more along the lines of a “how to” pamphlet on how to live under an overpass or a bridge. If they show a good attitude about it, then maybe throw in a free blanket.
I agree Ben, but what do you mean “get through foreclosures?” Should they be given a stipend towards rental and moving costs? I think the real problem is the public in general lacks any integrity. If they think they can get a deal of some bucks to get through foreclosure, they’ll do it, if they think they can get a mortgage rate freeze by proving they can’t make the payments, they’ll go spend like an banshee so they can prove they can’t make the payments, if it becomes wise to walk away from a declining asset, they’ll walk from their mortgage obligations because it’s cheaper. People actually used to take on extra work or sell their things in order to keep their homes with little regard to the current value - it was the family home - now it’s just a commodity. Bankruptcy used to be a shame and one only took that route when there was no other choice, now it’s the smart thing to do.
Not being a believer in government programs, referring the FBs to proper charities or counseling groups. Do they need to file bankruptcy? What schools are available for the kiddos? etc. I think they are making things worse by encouraging these folks who will ultimately default to hang on.
All I can say about the shame thing, is that it’s long gone and when the chips are down, people will do what’s best for their families.
Best for their families should include setting an example and teaching their children about honoring responsibility, sacrifice for what you want or believe in, acknowledging your mistakes and attempting to fix them. What are these kids being taught about how you get through hard times? All I see as an example is when times get tough you blame everyone else, do whatever you want, don’t worry about screwing someone else, you don’t need tenacity or integrity, screw the system and party on. That IMHO is how we got into this mess to begin with - greed is good.
But charities are gov’t sponsored I thought? Faith based initiatives and all that mess. My friend was looking into it, and these people sit on boards of many chairities, each which seems to receive funding from the gov’t. So by managing a large number of faith based chairities, they are able to take home huge amounts of pay or some such.
“People are smart.” - Di-tech
LOL
“People are smart.” - Di-tech
Now we people are considered smart. We were dumb 2 to 5 years ago for staying out of real estate though. We are the people that the Ditech ad is referring to. Note the ad did not air until sometime this year.
Another problem is the death of the “easy money for doing nothing” model of housing-flipping might cause people to wake up and start asking embarassing questions, such as why wages have basically been declining since 2000, why inflation is out of control, why our jobs have been outsourced or insourced, and so on. Letting the sheeple wake up is not good!
War and religion are a good ways to divert peoples attention to the financial spiral, but at some point when they wake up poor homeless and without a job they start paying attention.
Thinker,
I love it! The irony is too much. Great point.
Like all politicians, they will act the same way. They are courting those who will loose their homes as additional constitutents.
Its all politics, not solutions to their problems that they profess in the charters(goals).
Just one person’s opinion!
“Why is the “Massachusetts Affordable Housing Alliance” trying to minimize foreclosures when the foreclosures will do more for making housing affordable than this group ever did. Sure the people who are getting foreclosed on are in trouble, but this is more than offset by the greater benefit of affordable housing.”
Um, because then they’ll be out of a job? LOL
“The number of foreclosures will be determined mostly by ‘how far housing prices fall,’ said Boston Fed president Eric Rosengren
I totally disagree . . . if FB’s make payments they agreed to in writing, there are no foreclosures . . . I have a mortgage and I make my payments. If my house value is cut in half, I still make my payments.
Toxic ARMS, greed, stupidity and poor financial planning, (resulting in missed payments) are causes for foreclosures . . . price declines are the result of an imbalance in supply and demand. Banks are not foreclosing because values are falling you idiots, they are foreclosing because FBs are not making their payments!!
And another thing, as a commercial banker, I would much rather have a borrower making payments on an asset with declining values, than own that asset myself.
‘they are foreclosing because FBs are not making their payments!’
That’s just on the surface. Most of these people never could afford the full payments in the first place and when the resets hit (or even before, it seems now) the lower prices prevent the much anticipated refi.
‘many Massachusetts homeowners with subprime mortgages are finding they need to find new lenders to refinance as they seek to avoid foreclosure. Eight of the 10 largest subprime mortgage specialists in Massachusetts are no longer lending in the state.’
‘the research also suggests that troubled borrowers tried harder to make the necessary payments, in the expectation they would profit eventually. Conversely, when prices started falling, people struggling to make payments had less incentive to find the money. Housing price movement ‘plays a dominant role in generating foreclosures,’ the report concluded. One implication of the report is that current attempts by local and federal officials to help borrowers may be ineffective.’
It shouldn’t be expected that people will continue to pay into a ponzi scheme once they see it for that. Debt or no debt.
Ben you just confirmed my point . . . “Most of these people never could afford the full payments in the first place” I referred to this as stupidity and poor financial planning.
and “when the resets hit (or even before, it seems now) the lower prices prevent the much anticipated refi.” I referred to this as Toxic ARMS and greed, with a dose of stupidity thrown in (borrowers still have to make payments on the refi).
“It shouldn’t be expected that people will continue to pay into a ponzi scheme once they see it for that. Debt or no debt.” So you are suggesting that smart and skeptical people (those who see this as a ponzi scheme), once they recognize it, should all throw in the towel, stop paying their obligation, uproot their family, trash their credit, allow their home to go into foreclosure and find a place to rent until prices rebound??
Sorry, maybe I’m the exception, but I’m not one of those.
I agree that some homedebtors should stop making their payments and walk because they are so F’d, but certainly not all. Again, when you stop making your payments, you trigger the foreclosure action . . . the drop in value does not.
Perhaps we can agree to disagree?
It’s an important distiction, because it gets right to the point of whether these schemes to keep people in the houses will or won’t work. As you see it, if the government can just get the rates low enough, foreclosures will stop, regardless of price movement. IMO, the defaults will increase no matter what, because the housing bubble is deflating and it makes no sense (in most cases) to keep paying if one has the ablility to walk. Which they do.
In every market I have followed, foreclosures took off as soon as prices merely leveled off. They don’t even have to actually fall much. This is proof, IMO, of the speculative nature of most of the house purchases on the way up.
‘…the point of whether these schemes to keep people in the houses will or won’t work.’
And these schemes just won’t. They can’t. This mess is enormous. There isn’t enough money to bail out all those who want a bailout. There just is not. The public is just BARELY becoming aware of all this, and lots and lots of FB’s are still clinging to hope of a ‘rebound’ but when the magnitude and scope of the problem actually seeps into those pointy wee noggins I betcha they all just quit. No more hoping and praying and crap. Foreclose, goodbye. What else CAN they do?
Last post of the day, I promise. Have to work too.
As I see it, political schemes to prevent foreclosures are an attempt to apply a band-aid to a gaping wound. In short, they are pure rhetoric, limited in scope and will fall well short of providing a real solution to our problems. I do not advocate a bailout or artificially low interest rates, as I believe market forces will eventually prevail and prices will drop to where housing is once again in line with real wages and crazy loan programs are curtailed. True, some homeowners will walk and rightly should, however, there is probably still a good number that reside in their home and plan to “ride it out”. True also that defaults and foreclosures will increase, but IMO mostly due to cash flow issues (ARM resets, job loss, other debt, weak rental market, etc.).
I think you are giving people who made poor decisions in getting into a home with a toxic loan, too much credit for making the decision to walk when upside-down. I don’t think most will walk due to value, I think they walk due to cash flow. This is not the Mensa crowd we are talking about here.
I don’t believe it takes an ARM reset to flush out weak hands. These people are already weak before a reset, hence, “it’s the price, stupid”. I do believe resets will merely wash out weak hands sooner.
“I don’t think most will walk due to value, I think they walk due to cash flow.”
That depends on how long prices drop and stay down. Loss of cash flow would be more valid in cases where a quick restoration of bubble prices is expected (IMO the scenario FBs, MSM, REIC currently cling to).
But push this out five or ten years - and imagine prices are still no where near their 2005-2006 peaks. Then loss of value will motivate the remaining FBs to walk.
In any case there don’t appear to be many out there who yet fully grasp the real possibility of it taking half a lifetime or more to see 2005-2006 prices again (present company excepted).
“Comment by Olympiagal
2007-12-04 09:16:15
‘…the point of whether these schemes to keep people in the houses will or won’t work.’
And these schemes just won’t. They can’t. This mess is enormous. There isn’t enough money to bail out all those who want a bailout. There just is not. The public is just BARELY becoming aware of all this, and lots and lots of FB’s are still clinging to hope of a ‘rebound’ but when the magnitude and scope of the problem actually seeps into those pointy wee noggins I betcha they all just quit. No more hoping and praying and crap. Foreclose, goodbye. What else CAN they do?”
I know kids! We’ll put on a SHOW! And the money we raise from that will pay back our creditors.
What happens when you lose your job and find a job 500 miles away? You put your house on the market that you could have made the payments on and find out that you are going to have to pay 150k to get out of it. You could make the payments of 2 or 3k a month, but 150k?? At some point any rational human has to make the choice between feeding and housing their kids with the job they can find and letting the house go. This is especially poignant when you start realizing that the shortfall on the house may be 3 or 4 times your gross annual salary.
RE: Massachusetts homeowners
If there is any collective group preeminantly focused on housing valuations, it’s the ostentatious, material possession, possessed denizens of Mazzholeland.
All you had to do in order to amass a RE based $500k marker on your net worth statement was to just sit in some non-description house you bought in the early 80’s and do nothing.
Subsequently the inflation of these housing equity allowed these people to flock to the northern regions to lord their housing inflation wealth and arrogance over the locals by purchasing desireable recreational properties at previously unheard of prices, thereby locking the majority of lesser incomed natives out of their indigenous second home or retirement amenity market.
That these liberal hyprocrites with their gaz guzzling SUV’s, NIMBY zoning, and digustingingly overbuilt McMansions are now bombarded with housing debacle news on top of their work, and rapidly diminishing quality of life stresses is the beginning of what I hope will be a ready comuppance to their miserable, ‘ME FIRST-Get outta my way, you stupid hick-I got money” urban character demeanors.
“‘ME FIRST-Get outta my way, you stupid hick-I got money” urban character demeanors.”
Geez…. that sounds remarkably familiar to the sneaker wearing, Vulva driving fools that invaded VT.
RE: New England.
Here’s one for ya, Exeter-from Jim Knustler.
It’s an interesting perspective.
Remarks by James Howard Kunstler
at the meeting of The Second Vermont Republic
October 28, 2005
——————————————————————————–
When we think about the destiny of our land, there are a few questions we might ask:
What do we mean by ‘our land?’
What has been holding it together?
Who are we?
And who will we become?
For about 210 years we have been a federal democratic republic composed of more than a few states, eventually adding up to fifty. At times, the citizen’s identity has shifted from allegiance to a particular state to the republic as a whole - as when Robert E. Lee, for instance, famously declared that he was first a citizen of Virginia.
Lately the tendency has been for citizens to think of themselves first as Americans, and secondarily as New Yorkers or Virginians or Vermonters.
What has held us together - at least since the convulsion of the Civil War - is a common culture and especially the common enterprise of a great industrial economy.
For much of our history, including the first half of the 20th century, we were a resourceful, adaptive, generous, brave, forward-looking people who believed in earnest effort, who occupied a beautiful landscape full of places worth caring about and worth defending.
Since then, lost in raptures of easy motoring, fried food, incessant infotainment, and desperate moneygrubbing, we became a nation of overfed clowns who believed that it was possible to get something for nothing, who ravaged the landscape in an orgy of wanton carelessness, who believed they were entitled to lives of everlasting comfort and convenience, no matter what, and expected the rest of the world to pay for it. We even elected a vice-president who declared that this American way of life was non-negotiable.
We now face the most serious challenge to our collective identity, economy, culture, and security since the Civil War. The end of the cheap fossil fuel era will change everything about how we live in this country. It will challenge all of our assumptions. It will compel us to do things differently - whether we like it or not.
We are at or near the all-time maximum global oil production peak. We do not have to run out of oil to find ourselves in trouble. When world demand for oil exceeds the world’s ability to produce oil, all the complex systems we depend on will de-stabilize.
Everything from national chain retail, to the Archer Daniel Midland Cheez Doodle and Pepsi model of agriculture, to the arrangements for heating our homes and lighting our cities will begin to wobble. Some of these things will fail us and begin to change our lives.
At the same time, we will be tempted to join a worldwide scramble for the world’s remaining oil - most of which belongs to countries whose people don’t like us - and the nature of this contest may be very violent.
Our suburbs will prove to be a huge liability.
They represent the greatest misallocation of resources in the history of the world.
The project of suburbia represent a set of tragic choices because it is a living arrangement with no future. And that future is now here in the form of the peak oil predicament.
Because they have no future, our suburbs entail a powerful psychology of previous investment that will prevent us from even thinking about reforming them or letting go of them. That’s why vice-president Cheney said the American way of life is non negotiable.
There will be a great battle to preserve the supposed entitlements to suburbia and it will be an epochal act of futility, a huge waste of effort and resources that might have been much better spent in finding new ways to carry on an American civilization.
We might, for instance, have invested in restoring our national railroad system, which we will need desperately, because no other project we might undertake would have such a profoundly positive impact on our oil consumption.
But instead we will try desperately to make cars that get better mileage, so we can continue being car dependent and continue building out and elaborating the infrastructure for a living arrangement with no future - the subdivisions of the McHouses, the strip malls, the big box pods, the deployments of hamburger shacks and pizza huts.
In the service of defending suburbia, the American public may turn to political maniacs, who will promise to make the country just like it was in 1997, before we started having all these problems.
In the course of this long emergency we face, life and politics are apt to become profoundly local. Many of my friends wring their hands over George W. Bush, whom they regard as the second coming of Adolf Hitler and who think the Federal government will regulate every inch of their lives. I tell them, in the long emergency the Federal government will be impotent and ineffectual - just as they were after Hurricane Katrina - and that the Federal government will be lucky if they can answer the phones five years from now, let alone regulate anybody’s life.
I tell them, life in America is going to become profoundly and intensely local, and it will be the local politicians you’ll have to worry about.
American life will become intensely and profoundly local because the complex systems that hold this nation together are going to fail.
We will have to grow a lot more of our food in the regions where we live. That won’t be easy. A lot of our best ag land close to our towns and cities has been paved over. A lot of knowledge has been lost.
We are going to have to reconstruct local economies, local networks of interdependency - and that will not be easy given the methodical destruction of economic infrastructure to our communities by Walmart and the rest of the national chain companies over the past forty years.
As these severe challenges arise, different regions of the United States will cope differently.
The sunbelt will probably suffer in equal proportion to the degree that it benefited from the cheap oil fiesta of the past several decades - because it squandered its wealth in building gigantic suburban metroplexes that have no future. Atlanta, Dallas, Orlando, Charlotte. The people in these places will be full of grievance and bewilderment, and they may seek comfort in the romance of firearms in seeking to defend the indefensible entitlements their failing suburbs.
The people in Phoenix and Tucson will have dreadful problems with water on top of their problems with oil and the loss of cheap air conditioning. They may not be able to grow any food of their own, locally.
In Las Vegas, the excitement will be over. The capital of a something for nothing culture will be left to the wind, the tarantulas and the gila monsters.
California, the most tragic part of our country -because it was once the most beautiful and is now most lost - will have many of the previously mentioned problems and the prospect of awful ethnic conflict.
I am describing a nation that may not hold together far into the 20th century. I would like to be wrong about this, but it hard to look at the big picture and come up with a different set of conclusions.
All parts of the United States are going to endure hardships in the decades ahead, but some regions or states may be better prepared, or just luckier. I tend to me more optimistic about the future in New England, The mid-Atlantic States, the upper Midwest, and the Pacific Northwest (if it can escape the wrath emanating out of California.)
I include Vermont in this list, of course. This part of the country enjoys some advantages: an armature of towns scaled to the requirements of life in a lower energy world; a lot of good agricultural land; a civic tradition of responsible local governance; a set of regional collective character traits we associate with New England Yankees at their best: rectitude, discipline, perseverance, and allegiance to the community.
I’m personally not an advocate of national breakup or secession. I grew up with United States and I have been, until recently, been pretty comfortable with the idea that we would stick together no matter what.
But in the Long Emergency all bets are off for politics, economics, and social cohesion. Turbulence will be the rule and we will have to do our best to make sure that the just prevail over the wicked, and that the weak are not trampled, and that the best that was in us as a people can somehow be rescued from dumpster of memory.
Anyway, I’m a New Yorker, an upstater, and I don’t relish the idea of patrolling the waters of Lake Champlain in a solar electric gunboat to keep you Green Mountain boys and girls from chopping down the Adirondacks so you can bake all that granola you are reputed to subsist on.
However things turn out, I hope you’ll let me across the border from time to time to see how things are going.
Thanks very much for your attention and good luck figuring all this out.
Exactly! They sound just like Republicans!
RE: Exactly! They sound just like Republicans
Sorry WeinerDogMan-This is TED KENNEDY/BARNEY FRANK
country!
And we wish to thank you for your federal tax dollar contribution in covering the $12.1 billion in cost overruns for the Big Dig which continues to leak million of gallons of water as we speak!
“That these liberal hyprocrites with their gaz guzzling SUV’s, NIMBY zoning, and digustingingly overbuilt McMansions”
Odd - OUR infestation of 2nd homeowners arrive with their SUVs and Hummers sporting Bush/Cheney bumperstickers. Hardly ‘liberal’ and a lot more “Screw you, I’ve got mine and I want more, more, more, more - I’m still not satisfied and need to consume more, more, more and show off”.
Here is what 2nd homeowners do to a market. This is a county of 8,436 pernanent households and 13,297 housing units - and the difference are the 2nd home summer people.
Right now there are 539 houses for sale and 955 vacant parcels. Median income in the county is around $44,000. It is 5 hours from the nearest city with more than 15,000 people.
Here is a breakdown on the number of properties for sale and the % of thecounty that could buy in those ranges. I used the US Census income groups and assumed a 30 year fixed at 6 1/4%. 539 houses are 4% of the supply, and the number of listings were double that until October when many took them off the market for the winter.
Highest price % listing % of locals w/
to lowest income able to afford
114 21.15% 2.6% (or even less)
(54 are $1,000,000 – 5,000,000 so local affordability ????)
76 14 .00% 1.9%
109 20.22% 7.4%
78 14.47% 9.4%
89 16.50% 25.0%
38 7.05% 19.8%
21 3.89% 12.9%
8 1.48% 11.3%
0 9.7%
Not only are the 2nd homeowners trying to sell, they are defaulting into foreclosure. The rate is 1::92 of all properties and 1::58 of 2nd homes. 97%+ of the defaults are 2nd homes with exploding ARMs. They are defaulting mostly in the $350,000 and up range with the grand prize winner being a $1,700,000 foreclosure.
A $580,000 2nd home-condo would need a strong credit score but would have probably jacked the debt/income ratio into subprime territory. Ditto that $850,000 ‘cottage’ and that $1,200,000 waterfront ‘cottage.’
They get no sympathy around here. The locals find it funny and love to watch them lose the place to the out-of-state lender likeWaMu
“Odd - OUR infestation of 2nd homeowners arrive with their SUVs and Hummers sporting Bush/Cheney bumperstickers. Hardly ‘liberal’ and a lot more “Screw you, I’ve got mine and I want more, more, more, more - I’m still not satisfied and need to consume more, more, more and show off”.
Wow… BULLSEYE.
Sorry - I can never thing to accept a chart.
Number gofrom L to R
Number on market (starting with highest price group)
% of listings in that price group
% of locals which ‘might’ be able to afford that price class
RE: Odd - OUR infestation of 2nd homeowners arrive with their SUVs and Hummers sporting Bush/Cheney bumperstickers. Hardly ‘liberal’ and a lot more “Screw you, I’ve got mine and I want more, more, more, more - I’m still not satisfied and need to consume more, more, more and show off”.
Nothing odd about anything.
But I’ll tell ya, the day you work as a UPS XMAS driver helper and walk into the yards of literally hundreds of homes getting to observe what vehicles have plastered on their bumpers, is the day you can talk to me about Republicans havin’ the dibs on the crass displays of greed and overindulgence.
BTW-Are you invited to the Deval Patrick XMas Party @ his 10,000SF summer home in the Berkshires this season?
I hear the spiked egg-nog is good.
I wonder where my evil self, the atheist hawkish, yet otherwise libertarian hetro$exual hedonist would fit in? Umm. I indulge in travel but stayed out of real estate.
‘ME FIRST-Get outta my way, you stupid hick-I got money” urban character demeanors…..
That sounds like all the AZZh*les that have been invading Florida from everywhere up North since my childhood.
The “i got the Union-money big-time job and am coming to a neighborhood near you. I can buy you.”.
Dealt with this my whole life. The last 6 years were just much worse.
The number of foreclosures will be determined mostly by ‘how far housing prices fall,’ said Boston Fed president Eric Rosengren
I totally disagree . . .
- I absolutely agree, this is very nice and fresh statement.
Most purchases were done with little to no money down, Juan Sixpack views only the here and now - ‘My payment is xxx and my house KEEPS going UP in value - wow, I can get a refinance and buy a boat and Hummer!
With his loan becoming delinquent and his home value upside down he walks!
Fiesty group today. Too bad I have to work.
His loan becoming delinquent means he’s not making his payments, Right? If he keeps making his payments, he keeps the house . . . no matter what the value drops to.
But the house was supposed to make him rich, not responsible.
Touche’
“But the house was supposed to make him rich, not responsible.”
“Touche’”
Bingo. Let’s all remind ourselves what Subprime means, after all. And it’s not just Subprime. I have plenty of AltA friends who will not be able to swing a higher payment once their mortgage resets in 5 years.
It all comes down to home prices not supported by wages, but by non-existent lending standards and high-risk loan products. There’s no getting around it.
Lisa - it’s not just subprime. There were many that chose ARMS even when they could get an unbelievably low fixed rate. There are plenty of prime ARMS, too.
Blue Skye’s comment goes to the exact question that underlies the apparent disagreement between Ben Jones and Flatlander. The question is, how much of the run-up was due to people speculating in buying houses they didn’t intend to occupy. And it’s very hard to unravel the answer to this. My rehab-flipper cousin would’ve already sold his Fla place and be working on another, but the market doesn’t now encourage him to do that. His present frame of mind is, he and his wife can make enough money from other work to support both the Fla condo and the Penna house. However, his most recently adopted line of business is drying up, and he is considering applying for other jobs (at age 55+). Hmm. These people are not likely foreclosure candidates, but it might depend on whether push really comes to shove, vis-a-vis the Florida place. The Penna place is all paid for, I think.
“Lisa - it’s not just subprime. There were many that chose ARMS even when they could get an unbelievably low fixed rate. There are plenty of prime ARMS, too.”
I agree with you 100%. But for now, the bailout is focused on Subprime.
But what happens in 2008, as the Fed starts to realize that it’s not just Subprime, but Alt A & Prime loans and Heloc’s? Then what? A rate freeze for everyone?? If I’m an Alt A buyer making $150K a year who bought an $800K house, guess what, I won’t be able to afford the reset either.
F: His loan becoming delinquent means he’s not making his payments, Right? If he keeps making his payments, he keeps the house . . . no matter what the value drops to.
I think the real problem is that many people who took out fixed rate loans have monthly payments that are far too high in relation to their incomes. Which makes sense, because median home prices are way out of whack in relation to median household incomes. This means that to stay afloat, many are using their credit cards and carrying balances in order to pay for day-to-day expenses. And every so often, they are floating these credit card balances into “home equity loans” that are supposedly for repairing their homes, but in reality a way to escape high credit card rates. But this cycle of home equity loans is possible only if the home’s value exceeds that of the first mortgage. As home prices collapse, homeowners are finding out that their escalating credit card debts can no longer be rolled into their home equity loans. Eventually, they have to choose between using their income to pay for food (using their credit cards) or to pay their mortgage/home equity loans. People have to eat.
So they keep their credit cards and hand the house keys over to the bank. And ironically, if their lender allows a short sale, they are financially better-off doing this (and renting), as compared to continuing to struggle to make their mortgage payments. By choosing foreclosure, they have more disposable income, and far less need to use a credit card just to buy food.
People are using their credit cards to stay afloat because they insist on living beyond their means. It looks like most are just not willing to cut back, sell off the extraneous junk and stop with the spending and buying to prove they are something they’re not. Seems we’re all a bit feisty this morning. The freeze proposals were discuss at the dinner table last night in our house and left us all very angry and frustrated running through all the scenarios of what we chose not to do that now looks like it’s going to really pay off to have done. Didn’t buy without regard to loan terms, didn’t refi a bunch of money out and live large for a while and now cry poor and get to keep everything.
‘People have to eat. ‘ -apparently they also have to buy nintendo wii’s and stuff like that which I am sure is going on the credit cards instead of mortgage payments. People have already thrown in the towel on home loans and are spending that money elsewhere now. This economy is completely running on empty…
I believe virtue is it’s own reward. And unlike the FB’s, I sleep at night.
Btw, the way you describe Americans with credit sounds a lot like Americans with food. “Unwilling to cut back,” lol.
It looks like most are just not willing to cut back, sell off the extraneous junk and stop with the spending and buying to prove they are something they’re not.
‘People have to eat. ‘ -apparently they also have to buy nintendo wii’s and stuff like that which I am sure is going on the credit cards instead of mortgage payments.
I think it’s more fundamental. The fact that people have to choose between food and mortgage payments is why property prices will fall no matter how low interest rates get. Let’s take the example of Montclair, an affluent township in New Jersey. Its median household income is perhaps $83,000. Its median home price is $580,000. This means a downpayment of about $120,000 and a monthly payment of $3,000, with good credit ratings. There’s also a monthly property tax payment of $1,000. That’s $4,000 a month in basic home ownership expenses - excluding repairs, utility bills, etc. On a pre-tax salary of $7,000 ($6,500 after Social Security taxes). Let’s say they pay $1,000 a month in state and federal income taxes. This leaves $1,500 a month to cover food and utility bills, health insurance, car payments, gasoline bills, and so on. I’d be very surprised if they weren’t using their credit cards (and balances) to cover food expenses.
The housing bubble, not overconsumption, is why American households have record levels of debt. An LCD TV costs a few thousand bucks. An overpriced home is overpriced by hundreds of thousands of dollars. You get more TV when you pay more money - with the housing bubble, you don’t get more house when you pay more, you just pay more money. This is why the American homeowner will end up having more purchasing power after ditching his home (assuming the bank allows a short sale) - the cost of renting is 1/2 the cost of homeownership.
To complete the arithmetic I have outlined above, the $1500 remaining every month after taxes and mortgage payments will have to cover the following costs:
- Basic econocar payments - say two Honda Fit econoboxes (with 20% down) - of $250 per car or $500 a month
- Childcare costs of $600 a month (probably an underestimate)
- Car insurance payments of $100 per car or $200 a month
- Gasoline costs of $150 per car or $300 a month
- Utility payments of $300 per month for heat, A/C and electricity
All told, the expenses shown above total $1900 a month. This means that before buying any food, this household is short $400 a month. How can they not avoid dipping into credit cards to pay for basic expenses (and eventually rolling these credit card balances into home equity loans)?
This is why a housing crash - at least in Montclair NJ - is practically inevitable. Retirees who bought when home prices were cheap probably have low monthly payments and few day-to-day expenses. Working couples with children are priced out of Montclair.
The number of foreclosures will be determined mostly by ‘how far housing prices fall,’ said Boston Fed president Eric Rosengren
This statement is simplistic and disingenuous, though it makes for a good sound byte in the media. The number of foreclosures will be determined by liquidity in the mortgage market for refinancing, the availability of jobs at prevailing wages to allow for debt servicing, and the extent of mortgage fraud and speculation in a given area.
The statement is simplier than everyone is making it out to be. The Fed is saying that the problems are being caused by the bubble deflating. I.E., if prices would just keep going up, no one would have a problem. It’s a truism; it’s also a vapid, empty statement which explains nothing and helps no one.
So many of the purchases between 2004 and 2006 were speculator driven and “real estate always goes up “,gotta get in on the money tree investments .These speculators had short term goals to either flip the appreciating property or refinance the ATM machine . A additional % of home buyers just bought in because of fear of appreciation pricing them out of the market . Most of these buyers didn’t have skin in the game ,therefore without appreciation ,their short term goals will not work and they couldn’t afford the payments or cash flow on a rental as a investor/landlord .
The real estate frenzy/mania was very much a price appreciation driven market and home and loans were sold on that premise .
The industry would say ,”Don’t worry about your teaser adjustable loan ,just refinance when you make a mint on appreciation or sell,you can’t afford not to buy”. With real estate going down ,these borrowers have no motive to keep the property and they can’t afford the payments anyway .It was a investment risk in which these borrowers got caught holding the bag in a market that turned down on a dime .Borrowers were willing to commit fraud on their loan applications in order to get in on this RE investment scheme ,so now high payments become a issue when your property is going down in value and you can’t refinance or do the short term flip you intended as a buyer . Property going down in value is the sole reason for most of the foreclosure and 70% of the foreclosures were these low down sub-prime no doc type loans .
You got to go back to how real estate and loans were sold during the mania years and understand why people were willing to go on low down toxic loans . Borrowers didn’t have very much skin in the game and it was a investment scheme dependent on real estate always going up and the use of leverage that stupid lender with their easy money were willing to give . Many purchases were based on price appreciation therefore prices declining are causing the foreclosures because now not being able to afford the payment or being able to flip or being able to refinance is the issue .
I 100% agree with you!
Federal Reserve Bank of Boston reports ppl fight harder to save their homes if prices are rising rather than falling, and this is reported as a “contrarian” view. They were also very, very vague as to the number of ppl that could afford to keep the home but let go into foreclosure anyway. My last ounce of respect for the Fed is gone. These are statements you find in a 5th grade book report, not the kind of statements you expect from the experts.
If they are trying to imply that ppl who could afford the home are letting it go into foreclosure anyway because it has gone down value, rather than trying to freeze rates, doesnt the government have a moral responsibility to make sure that borrowers are held personal liable for any deficiency? In my view, in both scenarios, while the borrowers were not completely responsible for the problem, their hands are too dirty to be asking for any help.
‘doesnt the government have a moral responsibility to make sure that borrowers are held personal liable for any deficiency?’
The British had debtors prisons. It was one of the things the colonials rebeled against, IIRC. In Texas in the 80’s, it became commonly accepted that the smart thing to do, once underwater, was to let the lender have it back. Commercial or residential. I’m not making a moral judgement, just saying how it was.
I was thinking more of wage garnishments, but let me ponder the prison idea.
The only way to force the people to pay into a ponzi scheme is by mandating automatic payroll deductions like they do with the other ponzi schemes (SS comes to mind, for instance). Otherwise we can all count on these folks skipping out on their signed obligations as their get rich quick schemes coming crashing down around them. Does anyone have any question in their mind about how these deadbeats are going to view other “inconvenient” moral obligations going forward?
BTW, I’m not at all implying that having the gov’t involve itself in contracts between private parties is appropriate.
If the government held the mortgage, the house would be a real debtor’s prison.
Human nature didn’t change. What changed was the way lenders invented a way to play “hot potato” with the risk. This led them to write notes that were inevitably going to go bad.
Let the lenders eat their shit sandwiches. Let the deadbeats walk away. The banks knew they were deadbeats to begin with. If the banks fail now, it’s because they have it coming.
BURN BABY BURN
Gator is probably correct - the easiest way for the gubmint to help the FB’s is to prohibit recourse - to Federally make any attempt to recover a shortfall on foreclosure illegal, and to make illegal the credit reporting of a foreclosure.
The FB’s walk (saved) ready to spend another day, and the Banks and lenders carry the can.
Housing prices will crash as every FB runs for the exits, and the prudent savers make out like bandits.
A “win/win” for everybody but the cause of the problem, the lenders, and those who purchased the toxic CDO’s from the lenders.
“it became commonly accepted that the smart thing to do”
being a criminal and ripping people off is always smart … as long as you don’t get caught and punished. It’s just never ethical, moral or honorable.
‘doesnt the government have a moral responsibility to make sure that borrowers are held personal liable for any deficiency?
- If and when the goverment does something the !hit will hit the fan!
- They will need to ‘Extend Help’ to future buyers who were truly qualified BUT stayed on the sidelines. This HELP would be in the form of 150k credit toward the purchase price. This will solve future hard feelings that the bailout was only for FB.
‘….150k credit toward the purchase price.’
ROFL
that’ll be the day…
every house on MLS will be increase in price by 150K
The rate freeze is supposed to be for people who can afford the teaser rate payments but can’t afford the reset rate payments. I guess that means that if someone decides you can afford the payment after the reset, you won’t get the rate freeze. I haven’t heard any info about how they are going to determine this. Will they make people bring in their tax returns? Contact their employers? Look at the original loan application? Throw darts at a dart board? Read goat entrails? Where are they going to find that many goat entrail experts?
I forsee defensive divorces with the house being put in one spouse’s name to try to qualify for the freeze if it is ever even implemented on a large scale. People deeply enmeshed in a particular community (especially kids in a particular school) might want to stay in their neighborhood for a few years even if the house isn’t appreciating. If nothing else, it would give them some time to realize they aren’t as smart about money as they thought they were.
“The rate freeze is supposed to be for people who can afford the teaser rate payments but can’t afford the reset rate payments.”
Okay, if these folks have to start hauling in their mortgage application and tax returns, etc. I think the game’s up. I’m willing to bet there’s a lot of fraud just waiting to be exposed.
Heck, if I were in that position, I would probably just go into foreclosure rather than run the risk of being nailed for mortgage fraud.
Again, we’re talking Subprime here.
Lisa - we would use the application/tax return scheme in divorce cases where husbands were lying about income. We would simply present them with a tax return that showed one income and a loan application that showed another and ask which one of them did they lie on or did they want the court to determine it for them. 99 out of 100 begged to settle on the spot. The best part was seeing the smug run out of their faces. Now don’t everyone beat me up - these were specific cases of highly paid men - one comes to mind a cardiologist that said he only made $30K/yr.
Oh, I won’t beat you up. Deadbeat dads ssssuck. Me and my sisters and brothers had some mighty hungry times growing up. Thanks, dad.
‘ very vague as to the number of ppl that could afford to keep the home but let go into foreclosure anyway.’
Who could know that? And it was the Globe that called it contrarian.
Since the cc companies reserve the right to change their terms whenever the whim strikes them, even on past debt, and the lenders of housing are now reaching for every panacea possible to offload the pain onto others, I see no “moral issue” with homedebtors taking a cold, realistic look at their prospects and taking action accordingly. Why should they be the only ones held to a “moral standard”?
A mortgage is a contract, nothing more or less. It is, presumably, an agreement that meets both party’s expectations. That one party did not do their due diligence properly up front (confirming the financial integrity of the mortgage applicant) is unfortunate but simply business.
Business is not moral or immoral. Its business. Either both parties make sound judgements or either or both pay a price for their error. This is not to say that business isn’t better accomplished by “moral” parties, it most certainly does have better outcomes when both parties have “character”.
However, the issue of “character” in a transaction has always been subjective. Many don’t think twice about the matter. Most experienced (and successful) business people give it a ton of weight however. Most people understand the concept of “buyer beware” as well. Unfortunately, when greed becomes the LARGEST factor many people (on both sides of the equation) ignore the fundamentals most likely to protect them in the long run.
“Character”, in all facets of life, only becomes critical when things go awry. As long as housing prices went up, the types of loans given to the worst borrowing candidates, were moot issues. Now, as things unravel, “character” is everything once again.
Everyone in this process is getting what they deserve. Unfortunately, those of us who did not participate in this debacle will likely suffer as well from the backsplash.
A mortgage is a contract, nothing more or less. It is, presumably, an agreement that meets both party’s expectations. That one party did not do their due diligence properly up front (confirming the financial integrity of the mortgage applicant) is unfortunate but simply business.
And unlike most contracts, you have weeks, if not months, to review the terms and hire a lawyer if you don’t understand something, and you sit in a room with all interested parties at signing where you have every opportunity to read every word of it and back out.
“you have every opportunity to read every word of it and back out.”
Which is exactly what I did on my last purchase when I found 20 “exceptions” to the so-called “title search” that had been “performed”. I said it was unacceptible and the bank lawyers left the room and came back and indemnified me for the “exceptions” that they hadn’t bothered to research whether they had been paid off on the title or not.
I agree. If the lenders actually wanted to get paid, they should have underwritten.
Spike66 says “I see no “moral issue” with homedebtors taking a cold, realistic look at their prospects and taking action accordingly. Why should they be the only ones held to a “moral standard”?”
Hammer hit’s nail….Absolute truth in this statement. Why do we hold individuals to this “moral” standard when corporations are given the ability to act accordingly without any “moral” reguard? IF the banking/lending/realestate industries had exercised PRUDENT, let alone MORAL standards, perhaps they could have avoided some of this pain that they have brought onto themselvs. Business is business and the individual should NOT be held to any greater standard than than a corporation.
Monkey see, monkey do ha ha Poo on you!
We hold people to moral standards because they are human beings - business entities are not. Business has basically one function - to make money. People are supposed to have morality & character on order for us all to form relationships and care about each other and the good of all. If we’ve lost that completely now, and people should have no moral obligations then the housing bubble is the least of our problems.
“Why do we hold individuals to this “moral” standard when corporations are given the ability to act accordingly without any “moral” reguard?”
Because we’ve bought into a warped ideology that all business is good and people are inherently bad. Therefore, people (you and me) should be subject to set of rules to conform to. But Business interests? Hell no! They don’t need to be regulated…. no rules…. no boundaries. The ideology says we cannot tax them, that they are full of virtue and character and that they would never ever bring harm to anyone or anything.
Nuts isn’t it??
Wait a minute — business people are human beings too.
Are you saying they get an exemption from morality because they did it for the profit motive?
Well, didn’t the FBs?
Comment by are they crazy
2007-12-04 10:08:55
We hold people to moral standards because they are human beings - business entities are not. Business has basically one function - to make money. People are supposed to have morality & character on order for us all to form relationships and care about each other and the good of all. If we’ve lost that completely now, and people should have no moral obligations then the housing bubble is the least of our problems.
My point here is that it is a contractual obligation not a moral obligation. Moral obligation was thrown out when the lending industry let loose their sales people to write contracts that were questionablt at best. Were they morally obligated to consider the larger impact on the individual who borrowed the money, their firm that lent the money, the financial system? NO they were not, in their own view they were providing products that their clients wanted. The legal contract was the tool and the rules were on the contract and it is ONLY that contract that matters here. Morality is only being used as a tool to get paid and if they were getting paid I would seriously dbout that we would hear any thing about what is the “moral” thing to do. Do I think that there is a lacking of morality in society today? Yes I do it’s part of how we got here.
Good point. It was not that I expected them to provide the data, but more a jab at the use of the word “contrarian” in relation to statements that seemed plainly obvious. I am still puzzled.
But just to add a point ,when you have the amount of fraud that took place with loan applications ,you have gone beyond “just business “,and now you have a fraudulent business scheme that became widespread .
Lenders have the right to deny recourse if the borrower committed fraud on the application . In this mania the realtors and loan agents helped the borrowers commit fraud and even encouraged it .The mania got out of hand and real estate purchases and refinances just became a matter of getting in on the investment no matter how false the loan application was or how toxic the loan was. With faulty fraudulent hit the mark appraisals supporting this real estate investment scheme,the RE market turned in to a criminal false value market ,that is now crashing . Cash back fraud and bogus incentive deals became widespread and set the fake values in a number of areas that are now crashing . Fake speculator demand that drove prices up in bubble area is also to blame for fake rising prices . Real estates true value is determine by a willing and able buyer in a arms length transaction . Millions of purchases in which the borrower didn’t qualify long term is a false value market .
We are the victims of widespread crime in lending and the government want to trash the dollar and bail these criminals out along with the banks thats closed their eyes to faulty appraisals and bogus loan applications .Crime is destructive ,always have been ,always will be .
RE: the RE market turned in to a criminal false value market ,that is now crashing
Housing Wiz-A very apt and appropriate description.
Regards
“U.S. Treasury Secretary Henry Paulson offered encouraging news for cash-strapped homeowners Monday, announcing that an agreement was near on a proposal to help thousands avoid foreclosures by temporarily freezing their mortgage rates.”
“Popsicle Paulson”
Lets go for broke and freeze housing values while we’re at it ! That’ll do the trick ! (wink wink)
fudge$icle
I am still waiting for “trading curbs” on housing prices: something like a house cannot go down in “value” more than 5% a year. Anything to keep the Bubble going!
Mo Money …If the power that be could freeze the prices they would . As it stands now ,its very hard to lend on homes that are declining in value and it’s very hard to give a loan on a property that doesn’t have the value anymore .This is the problem ,how can lenders loan on property where the value is not there anymore .Investors don’t like to make 135% loans .
The decline in real estate values is the sole reason for the problems .Add to that the huge excess inventory in which few qualified buyers can absorb that inventory with prudent lending standards and you have a real problem .
Short of giving grants for the difference in the decline in RE value to FB or lenders ,the only course this mess can take is massive losses for the stupid lenders .If the lenders can spread out the loss they will ,or if they can transfer the loss to the taxpayers they will
.
Affordable housing is the only thing that will cause the excess inventory to be absorbed ,with of course money available to make those loans ,and buyers being able to qualify .it will be a crying shame if homes are bulldozed rather than people getting into affordable housing . With the potential for lawsuits with this housing mess the government is between a rock and a hard place .
Pop Quiz….
“How much “liquidity” has the Federal Reserve “pumped” into the $12.7 trillion U.S. banking system since March 2007?
a) $1.2 trillion, which banks have used to firm up their balance sheets
b) $600 billion, which banks can now use to make new loans
c) $16 billion, all of which has been drawn out of the banking system as currency in circulation
If you answered c, move to the head of the class. Investors who answered a or b have not only been misled by analysts and media stories, but have no idea how irrelevant the Fed’s actions are likely to be, except on short-term market psychology.”
16 billion is 0.13% of 12.7 trillion.
percentage-wise, that doesn’t sound like much.
Your statement is false and misleading. You are probably referencing repos, not money supply. Money at zero maturity has increased $800 billion this year.
http://research.stlouisfed.org/fred2/data/MZMSL.txt
http://research.stlouisfed.org/fred2/series/MZM?rid=61
Re:Watcher
Was your reference to the post regarding the $16B of Fed injection? If so, I would respectfully beg to differ….
Just based on the Tier 3 assets of the largest 5 investment banks, they are for all practical accounting purposes “insolvent.” Ref the latest sale of subprime investments by E-Trade at 11-27 cents on the dollar. Throw in SarBox, and that is my take on why Sec Treas is hollering so loud about a bailout. He KNOWS what is coming by March ‘08 if he doesn’t step in front of the moving train.
got deflation?
“Mr. Thompson said in the report that the ‘collateral effects’ of the housing crisis are likely to include financial losses and layoffs that will ‘fall disproportionately on New York firms and workers.’”
well, like all the “experts” like to say, all real estate is local! Pro AND con, dude.
Let’s multiply this budget gap of more than “$6 billion in NYC” times every city in America. Can you say pot holes?
No, no, no. It’s different here! Buy now, or next year it’ll be 2,000 per sq ft as the Dow tops 30,000 …
Even a Times story the other day had various buyers, identified as Wall St. types, taking to the sidelines, betting prices are heading south. It’s sort of like that moment in the Masque of the Red Death when a reveler turns up wearing the forbidden color.
“The recent spike in home foreclosures in Massachusetts is caused primarily by
falling housing prices,crazy loans…I just get back to work and have to read this stupid crap from the Fed…..plus listen to the Treasury and their bail out crap…..what the hell???
And if weren’t for the crazy loans, prices wouldn’t have skyrocketed. As Ben asserts, the price is the problem.
The cause of the housing bubble and its subsequent collapse can’t be isolated to just “easy loans,” “the expectation of rising prices,” or a “greedy populace.” Everything conspired together in a complex, interrelated system. However, if I had to hold anyone accountable, it would be the manager of the system… and that was Alan Greenspan. He was intelligent enough to understand the implications of his reckless “rate sale,” he knew all the players on Wall Street and what they were up to, and he had the power to have suggested another course of action. Like most of the governmental disasters of this decade, the housing bubble can ultimately be attributed to a failure of leadership. (And perhaps also, in Mr. Greenspan’s case, to the absolute and uncritical adoption of Ayn Rand’s simple-minded, unrealistic economic principles. John Galt R.I.P.)
I’ve read a little AR. She was big on morals, and I don’t think you can find that in AG’s behavior as Fed boss. Plus, the Fed is more like mafia, also immoral.
Actually, foreclosures are caused by people not paying the mortgage (or perhaps in some cases taxes). How many foreclosures there will be remains to be seen. The ‘experts’ really aren’t more clued in to the real estate mess anymore than the average person. I don’t think we really have financial ‘experts’ per se simply because no one can really predict where the market will go, unless you’re an inside trader or something along those lines. I’ll make my own guess for the Boston area (even though I’m not in Massachuttsetts): you will have around 250000 foreclosures in the metropolitan area with an average loan amount of $356K. Anyone can be a financial expert, it doesn’t take much to be one with the standards we have. All what one needs is a good stage name and a catchy theme. Call yourself King Kahuna. Queen Shaneequa. Ca$h Cow Cindy. Foreclosure Freddie. Snuggling Stacy. Make up something funny or cool and people in this country will be dumb enough to listen to you. I predict that the average house price in MA will be at its 2000 levels WITHOUT inflation adjustments within a couple of years. Have fun!
I have had posters from MA assert that their bubble started around 1996.
Prices started trending upwards in 1996, but based on my observations on the ground, did start going up in a way that was divorced from economic fundamentals until late 1999. That was the point it started to cost more to own rather than to rent. Very bubbly in the course of 2000, as stock market profits were being invested in real estate and the luxury end of the market went through the roof.
I thought 9/11 would cause the market to reset to fundamentals, but after a few months of little buying or selling the free money spigot was opened and by 2002 the market was not just expensive but plainly unaffordable.
In 2003 the underwriting standards went out the window and kept the party going until late 2005. By then there were not many greater fools out there, so prices stabilized at outrageous prices.
I thought the NE and BAHstin would go down the fastest,but FL has them beat this time
Lived in Boston for 30 years. The first run up, in the 80s was driven by demand from boomers like myself who, with relatively modest incomes, were in a 50% tax bracket and, after tax and inflation, had a negative carrying cost even with a 15% mortgage.
That changed towards the end of the 80s as marginal tax rates were lowered along with inflation. By 90, even with an 8% mortgage, you had a positive carrying cost. Of course, houses had doubled with the halving of mortgage rates but by that time the supply of housing had ballooned somewhat with the advent of condo’s. Hence the decline around 1990. By 1995 however, the tech and investment business around Boston were in full bloom and prices escalated again by virtue of increasing wages.
The last wave, however, was simply teaser driven. Wages and employment have been flat, population has actually declined and housing prices escalated simply by virtue of the “housing is a great investment” meme.
Now all of the above stimulation is gone and the prices will fall back 40% (in real dollars) over the next few years. Prices are 20%, nominally, off peak here already. After the decline is over don’t look for ANY appreciation around here till 2017 at the earliest.
I worked in Beantown on a 2 year project from 98-2000. My sense was that anything east of 495 was pricey no matter what a’la NYC but I can’t confirm the direction of the price trend at that time. I’m sure the beantown natives can weigh in on it.
I lived there for 3 years. Even in 1998, rent was insanely expensive, and this in my opinion is what caused home prices to rise earlier. There was not the same huge delta between rent and own ratios. People probably figured that if they were going to blow $1,500 a month on a crappy one bedroom apartment for rent, then they might as well spend $2,500 on a house.
A key detail for Boston is that in the late 90s BU, Northeastern, and the other colleges were heavily pressured by Menino to expand their on-campus housing. Rents were expensive because every two-bedroom flat had six Northeastern undergrads, each paying 600$ per month. By 2002 thousands of beds were added to student residence systems, and the bottom dropped out of the rental market.
By then the condo market was off doing its own thing with no regard to the rental value of the units - if you did not have 50% equity, you would be cash-flow negative. Yet local banks were offering home equity loans to 125% of appraised value!
“Even in 1998, rent was insanely expensive, and this in my opinion is what caused home prices to rise earlier. There was not the same huge delta between rent and own ratios.”
When I bought my first home in ‘96, my mortgage was equivalent to rent, and I had a way nicer place to live. So it made total sense to buy, build equity and have a nice tax write-off every year. But at the current rent versus own ratios, no way.
Yay Menino! Maybe that’s why my old LL burned down his place a few years after I left. Hahaha!!
Rents were RIDICULOUS in Mass, so I high-tailed it out of there. You are totally right about the students doubling, tripling, sextupling up in substandard housing (especially in Brighton). My sister did the same. Had a “bedroom” in the erstwhile living room, and strung up a sheet for privacy.
Got used to paying 50% or more of my income out in rent. Good times. Not!
I agree that Boston’s bubble started much earlier than other places.
As you may recall, the area experienced a significant real estate bubble in the late eighties. At the time, after much looking my wife and I chose to continue to rent in spite of being called fools by a few friends. In 1992, two years after the bubble had burst, we made a low ball offer on a condo in the Back Bay. The sellers were offended by our offer and so we withdrew it. Two months later, the broker called us and said the owners were willing to entertain our offer. They tried to make us go higher, but we didn’t. In the end, we bought the place for 2k more than our original offer. At the closing, one of the owners literally cried. Perhaps it was because they had to bring 35K to the closing. Or maybe because they had invested a lot of effort improving the place in order to flip it. They had bought the place at the top of the bubble in 1989. Oh well, it didn’t work too well for them.
Interestingly, condo prices in the area stayed fairly flat until 1996 when prices started to go up. In the summer of 2000, one of our neighbors placed her crappy condo for sale asking 500 dollars per squared foot. I was astonished that she would have the cojones to be so bold. I was even more astonished when she sold it one month later.
That event prompted me to create a spreadsheet to compare renting versus owning. Lo and behold, I discovered that at that time renting was a MUCH better deal than owning our condo. So we decided that it was time to bail out. Most of our friends thought we were weird; after all prices only go up, right. We sold our unit in September 2007 for 2.5 times what we had paid for in 92.
Being a curious George, I kept tabs of the unit to see if it got sold. About two years later, the place got sold for the same price (factoring inflation). So if you consider the costs associated with closing and selling, the new owner already lost some money.
This long story is just to tell you that in my opinion condos in the Back Bay peaked around 2001 or 2002, but the most significant appreciation happened in the late nineties. By 2005 it was clear that the bubble was popping.
We rent still. Maybe after 2010 we’ll look into buying again, maybe later.
I have had posters from MA assert that their bubble started around 1996
I can attest to that. I started looking for a house in Mass in 1999. Based on traditional lending standards, many houses were a stretch even then. Interest rates on prime 30yr fixed were around 7.5%
The only thing I felt I could reasonably afford was a condo 45 minutes outside of boston, but with easy rail access to the city. It was a distressed sale that had to be gutted, but I was able to get it for $110K + $25K in remodeling costs. This was in 2000. Condos just like it had sold for $85K in 1997, approx. 59% increase in value over 3 years. I sold my condo in 2003 for $215K, another 59% increase. 118% increase in approx. 6 years, starting around 1997…
I attribute this real estate bull run in Mass to the strong tech/finance job market and wage inflation in Boston from about 1996 to 2000. Around this time, the $250K/500K capital gains exclusion on primary residences also took hold, boosting interest in leveraging up on housing.
When the FED dropped interest rates to nothing in 2001/2002, that boosted housing in Mass again, driving prices up because of increased affordability on loans. Somewhere between 2003 and 2005, loan standards dropped and subprime/altA/nodocs took off, as did rampant speculation and the condo conversion craze…
MA has a lot of tech and that’s when the tech boom was really getting going. I assert that Denver’s boom started about that time too, maybe a little earlier.
RE: I have had posters from MA assert that their bubble started around 1996.
The cost for the Big Dig Southeast expressway project was originally estimated @ $2.9 billion.
Eventual tally is ended up at around $15 billion.
And BTW-The thing is leaking like a sieve.
The overrun monies lined a lot of people’s pocket’s.
Ditch-diggers were pullin’ in $80k-dump truck drivers $150/200k.
And these guys were the pikers.
The professionals scored millions.
Ya gotta say $15 billion in waste, corruption, and featherbedding can keep a fair number of people afloat for quite awhile.
I needed an electrician to do a few thousand $ of work in 2002. I had to call someone in from way out of town - skilled tradesmen in unions were flat unavailable in those days.
God only knows what those guys are doing now for work.
RE: God only knows what those guys are doing now for work.
All retired and living the good life up on some New Hamphsire or Maine lake or pond.
Same shit happened with the nuclear power plant project up in Seabrook NH during the early 80’s.
I knew a pipe-fitter making over $100k+ which was hefty chunk of change in 1980. He drove a Benz and invested his windfall in a bunch of multi-unit’s. He never worked again.
He told me as soon as a section of welds on a line got finished and inspected, somebody would run a fork-lift truck into the completed work causing it to fail inspection and be re-done. A trucker who delivered some timber for my house said the riggers contract stated that no scaffolding could remain for more than 10 days. After that, it was to be torn down-burned-and then reconstructed in order to keep everybody on pay-roll.
Public Power Service of NH which was the utility involved in the project which eventually went bankrupt.
I think its all about psychology. People believed that it was an “investment” and so money that would have gone into other investments was funnelled into insane overpriced real estate. No it is no longer starting to be perceived as a good “investment” so why would you or I or anyone with a brain keep throwing good money into the pit when you can walk away and hopefully buy it back cheaper someday? And what about all those flippers and specuvesters that are out there and this isn’t even their primary residence?! Of course they would throw in the towel. This is merely the downside of “ponzism”, and we are just seeing the tip of the iceberg.
Yes, indeed. It is so very hard to replace the organic intensity of a mania with decree. Like wishing for the hot n’ sweaty of of the backseat 20 years into a marriage.
These gov plans won’t work for the simple reason that the energy that got us to this point is gone forever, and it can’t be replaced by something as energy-negative as a government program.
The whole bailout lingo floating around these days infuriates me these days because it is being done with a complete void of input from anyone on either side. It is assumed that everyone outside of the banking and lending industry will be a-ok with the fact that a bailout will loudly read that it is perfectly ok to purchase things beyond your means and that come major trouble, you won’t pay for the consequence.
In my opinion, even without a bailout plan, there’s still not much of a major consequence for failing to repay debt. The worst that can happen is that your credit sucks for 7 years. Big whoopity-doo.
So here we are with yet ANOTHER set of regulations that will in essence make people in this country even less responsible than they already are. It seems like the only person I’ve read about thus far who has had any clue as to what measures to take would be Gov Patrick because at least he is proposing a measure that would tighten lending standards in the first place.
Lastly, these politicians aren’t looking at the problem correctly.It is assumed that everyone who took out such loans must be lower income, lower class citizens. In truth, cities like Boston, NYC, SF, LA, and Miami are full of educated, highly paid professionals who bought anyway due to the one simple fact that housing prices were out of reach.
If measures are passed to effectively ’save’ highly paid professionals from their mistakes, then this in turn does nothing to help the economy. If the upper 10-20% of the earning public can’t afford their homes, then what in the hell will measures that only serve to keep prices out of reach longer do to the other 80% who can’t afford a home period?
How is it that bailout talk is always about borrowers? Lenders had every reason to know that these were bogus, toxic loans that would blow up eventually. They thought they could sell everything far enough downstream that it wouldn’t matter, like an old school industrialist dumping leftover toxic sludge into the river that runs through town. If we are going to get tough on anyone it should be the bankers who made all of this possible.
Hear, hear. The bankers may not be fiduciaries to the borrower, but they are fiduciaries to their stockholders, and had a duty to not be reckless. Half the population has below-average intelligence, and half of them have below-average education (a truly horrifying thought). I am much more inclined to let the fools off the hook and to put the blame on those who presumed to be lending out other people’s money.
Massachusetts had a six month mortgage freeze in the early 90s. I doubt it helped many borrowers in the end, but it sure punished the lenders but good.
How is it that bailout talk is always about borrowers?
Right! And people get the “two sides” wrong. The two sides aren’t
The Bank vs the Borrowers
They are
(The Bank AND the borrowers) vs (The Shareholders, account holders, and Taxpaying Americans with savings accounts)
Nobody EVER seems to get this right!
So right renven and Xenox . From day one of my knowledge of this bubble ,I felt the true victims were the parties you mentioned . Lenders have a duty not to pass on fraudulent paper and faulty appraisals .These high risk loan notes were rated AAA ,but they were based on a fake appraisal market and fake income and fake owner occupy .The borrowers were just as fraudulent as the lenders that process those loans in the great big fat real estate investment scheme of making money off property .So many agencies and companies breach their duty in favor of closing their eyes to fraud in favor of making money that it isn’t a joke . The players in this RE game thought real estate going up would hide all sins ,and the criminals just planned on leaving town .
RE: These high risk loan notes were rated AAA ,but they were based on a fake appraisal market and fake income and fake owner occupy .The borrowers were just as fraudulent as the lenders that process those loans in the great big fat real estate investment scheme of making money off property .So many agencies and companies breach their duty in favor of closing their eyes to fraud in favor of making money that it isn’t a joke
Wiz~This is the human factor all the derivative formula’s in the world couldn’t account for.
Oh well-all gone.
It’s about the borrower because they were the ones that bought and agreed to pay. No one forced anyone to buy more house than they could afford or to take out toxic loans. Gambling, drugs, questionable sexual practices - it’s all available so therefore everyone should partake and then blame the suppliers when they screw up their lives?
And when their spouses, children, neighbors, or investors become collateral damage, that’s their fault for getting in the way of Hurricane Self-Destruction?
Come on, we ban Pb in children’s toys because of the damage those brain-damaged kids cause society, not because we feel sorry for poor kids; time to reign in the banks because their stupid loans are f@cking it up for all of us.
If you are waiting for Joe Shmo to man up and only sign for obligations he intends to repay, I have advice for you: don’t hold your breath.
‘The worst that can happen is that your credit sucks for 7 years. Big whoopity-doo.’
I agree, and one of the reasons I refuse to let people tag me a doom and gloomer. Lower prices will be great, so lets get on with it.
after they pay their deficiency judgements enforced by lenders.
I have always been in favor of some sort of punishment for borrowers that lied on loan applications with intent to profit from real estate . We should call this housing mania the CRIME WAVE that it was .
how’s biz ?
I sell to service contractors (not builders) and I ‘m nuked, off 40%.
Maybe I’ll get a gov job and you can pay for me………..
Good luck with that plan now. The layoffs are coming, the layoffs are coming…
Me, I’ve got two years in. Hopefully, I’ll have almost 3 when TSHTF big-time around here. There are 163 slots in my job classification, and I’m 89 on the list. *crosses fingers*
i totally agree about the pricing….way way to high. I think that started the chain reaction of bs mortgage products and lets throw the uw standards out the window to get people to buy homes. i think it needs a correction of 30-40% from summer levels to bring back a sane market. i dont see it happening any time real soon so this can get drawn out for a year or two. i dont think its a matter of sellers simply lowering their prices. i think they are fully leveraged and thats is a huge contributing factor.
Silly rabbit. I thought the Massachusetts Affordable Housing Alliance existed to encourage the building of affordable homes for the working class.
Instead it exists to prop up inflated used home prices so that landlords can afford Beemers.
Instead it exists to prop up inflated used home prices so that landlords can afford Beemers.
LOL. Actually it’s an Infiniti G… more ponies for the price and better reliability, but thanks for bringing it up.
Yeah, but nobody sticks their arm out the driver’s side and flips the bird when they’re cut off by an Infiniti.
Exactly why I drive one gator…
I’ve seen a lot written about falling prices - agreed. I’ve seen less written about supply. The nasty confluence of too many houses built in too little time with delusional financing and television shows showing everyone how to get rich flipping seems to be as big a problem as falling prices.
As a renter, one who plans to abandon CA for NE, I’m looking forward to excellent rents on a large supply of houses there.
Foreclosures are caused by one thing: People not making their payments.
And why can’t they make their paayments?
Because
1. They got *adjustable* mortgages back in 2005 when interest rates were at a 40+ year LOW (DUMB!)
2. They could only afford the “teaser” rates and had no way of paying when the rates went up (DUMBER!)
As has often been said here, if you only paid a teaser rate, and put no money down, you’re hardly a “loser”! You got to live in a nice house for a couple of years (and in many cases had a line of credit that you won’t be paying back!)
If house prices didn’t fall, won’t these people still not be able to make their payments? True, they’d be able to sell and not be in debt, but most of these deadbeats will never be on the hook for the difference–or even the taxes on the forgiven debt–so it hardly matters.
And why can’t they make their paayments?
Despite how long and hot the run was, , the crap table finally cooled off.
Some walked away early, winners. Some lost everything. Some gambled with borrowed money and are stuck bad.
Baby won’t have no shoes.
“1. They got *adjustable* mortgages back in 2005 when interest rates were at a 40+ year LOW ”
According to the Union Leader article Mr Jones posted, it appears the interest rate didn’t matter.
“Hildreth said that when local banks try to intervene and help some troubled borrowers, they find they can’t afford monthly principal payments, let alone interest, on a restructured loan.”
BTW, what’s going on with oil prices? Is there another Amaranth type situation occurring under the radar?
imo, because Chavez got spanked.. OPEC is talking about raising output.. Iran seems less threatening.
Many times, when Ben quotes a sob-story in the paper when people complain they can’t afford their payment, a little math reveals that even a 0% mortgage over 30 years (i.e., divide the total amount owned–orignal house price + HELOC’d amount by 360) would be unaffordable, too!
If someone moves into a home and agrees to pay for it, and couldn’t even afford to pay it off w/o interest, then they committed Fraud. There’s no other way of looking at it. Why is the government trying to help these people?
And any “help” merely props prices up, making houses not a good value for responsible people.
Well, their STATED-INCOME loan said they made a fortune, so everything must be good, right? Oh, wait - that’s fraud, too!
I don’t think Govt is trying to help ‘these people’ .. It is trying to avoid the overall economic hit that a steady diet of 10,000 foreclosures a day throughout most of ‘08 will cause..
“If someone moves into a home and agrees to pay for it, and couldn’t even afford to pay it off w/o interest, then they committed Fraud.”
How is it Fraud if they didn’t hide the fact that they couldn’t afford to pay it off? And what makes you think the lender’s goal is for them to “pay it off,” rather than to have the borrowers make payments indefinitely on an asset that the lender retains title–an even better deal than revolving credit on a MasterCard or Visa? Let’s be real–these are just renters with deficiency liability, and this “bailout” is of the lenders, not them. FBs, stupid, knife-catchers, they may be, but they didn’t perpatrate any fraud against the lenders, who could care less about their ability to ultimately repay.
If someone moves into a home and agrees to pay for it, and couldn’t even afford to pay it off w/o interest, then they committed Fraud. There’s no other way of looking at it. Why is the government trying to help these people?
Because they vote, DANG IT! Democracy is two wolves and a sheep voting on what’s for lunch.
How many of these FBs could afford their original loans whether teasers or not? How many HELOCed and refied and and just spent with wild abandon? How many in the housing related industries were making huge buckaroos and didn’t save anything? How many lied on applications about income or residency to get a lower rate? So many got hundreds of thousands in perceived equity, tax free, and now cry they can’t afford their mortgage or shouldn’t have to pay for it because the value went down. We’ve all talked about people using houses as ATM machines, buying houses they couldn’t possibly have afforded, taking crazyass loans and living like there was no tomorrow. Now they all want a bailout or be able to walk away. It’s just too disgusting for me to even think about anymore. I’m going to go swim and try to clear my head, make a pot roast for Chanukah dinner and ignore the news for the rest of the day. I just need a break from all this.
Speaking of Hanukkah, I hope you will do your part..
http://tinyurl.com/2jch8r
I think that we should call the planned government interference in the mortgage market just what it is, “Single Family Home Rent Control”.
And I really am getting tired about hearing of people buying their “Dream House”, but then I guess that we are working off two different
definitions of the term. Mine something that I always wanted, saved for and can now afford; theirs, something in their mind that they never thought they could move into and claim title to but pay for.
I have a really outrageous idea. Hear me out…
Lets say that for the good of the country’s economy we do need to do something about the housing bubble. Lets say that we need to inject $50 billion dollars into the system. The question then essentially becomes, who gets the money ?
Some people say we should help the homeowners that are in trouble. I say “Why ?” Why would we give these people money ? They were the ones that proved they didn’t know how to budget or spend money well. Why give them more ?
Some people say we should bail out the banks. The same banks that pay their CEOs millions of dollars and give $100K bonuses. I say they don’t deserve it.
How about we reward the people that have shown they know how to properly handle money ! THE RENTERS ! Give them the $50B and let them buy houses. Let the FBs go bankrupt like they should. That will teach them a lesson. The banks can make some money writing mortgages for the RENTERS that spend their $50B on housing.
Seriously, if the Fed really wants to fix this problem they need to inject money into the system such that someone buys a bunch of houses. The only people that don’t have houses right now are renters. No way should we be giving money to the FBs. Or the banks.
I have thought of your point . Give down payment grants to qualified renters ,(when the prices go down to affordable ),to absorb the excess supply of housing .Put the gamblers and borrowers that committed loan application perjury back into the rental projects, whereby they can never purchase again until they save a down payment and prove true ability to qualify for a long term loan on housing ,(after they pay a penalty for loan forgiven ).
let the greedy lenders and Wall Stree investment houses take their losses and fail if they fail . Pay off FDIC insured accounts because savers should be rewarded and go after all the criminals that took advantage of the housing boom . Raise interest rate and save the dollar and control global money supply ,or at least control lending by having standards that must be adheared to .Than perhaps in order to stimulate the economy ,start rebuilding roads,bridges ,and lbring back the manfacturing base to America ,so Americans can have jobs that replace the real estate driven economy .Reward savers and restore the moral fiber of America by rewarding good behavior and punishing bad behavior . Also,start working in a frantic pace to replace oil dependance by alternative energy ,and ask that Americans do more to conserve . Take away the power of the corporations( by greater import taxes) with their outsourced slave labor, and restore balance with the employee/employer realtionship that went haywire in America recently and in the past .Solve the immigration problem in one way or another . Work on the high price of medical care until it becomes more affordable to Americans . What to do about SSI and medicare is a whole different topic ,but it’s another problem facing America .