How A False Housing Boom Can Be Prevented
One reader wants to discuss how we can prevent a housing bubble from occurring again. “I think we should talk about how a false housing boom can be prevented. I can think of some protective measures that could of prevented this false run-up of prices.”
“Lenders use to have check and balances on to much speculation purchases. The flippers would not of been able to get 100% or low down loans in past markets. Can we have loose money without abuse ?”
“Since the housing market is tied to interest rates, should better protections be put in place on interest-only loans/ARM’s to prevent neg. equity potential, perhaps higher down payment requirements or insurance required to prevent loss.”
“What percentage of a society can really afford home ownership under the best of circumstances? Should the tax laws be reformed to penalize flippers/investors for short term flips? Should realtors in practice be allowed to purchase property and sell them one month later, thereby creating a false market, without a penalty tax? Just making suggestions for possible discussions.”
‘Can we have loose money without abuse ?’
Here is where I intend to focus my energy. I am going to ask my representative why do we need a Federal Reserve? Name one function they perform that can’t be taken over by the Treasury, ect.
These repeating bubbles of credit/debt, and the resulting bail-outs are a problem.
The Fed is supposedly an independent body, while Treasury is under the president’s thumb. If you really want to see inflation go haywire in close correlation with the presidential election cycle, then turn over control of the money supply over to the Treasury.
the keyword being “supposedly”
Or look to the history of life before the Fed, and why the Fed was created in the first place: numerous currency crises causing runs on banks. Even with the Fed, it still took the bank holidays of the Depression to create bank reserve requirements and other mechanisms that are supposed to cushion shocks to the system.
I’m not saying the Fed has always lived up to its calling, but I would also suggest that getting rid of the Fed wouldn’t necessarily be better.
Also, if another agency was performing the functions of the Fed, what would be the difference?
Even less independence…
I would say that minimum standards need to be set. Requiring that the “owner” need to be at least 20% exposed to the mortgage would be a good start. No more complex, or piggy back loans. In addition, I would also require the financial institution “mark to market” on a yearly or bi-annual basis and require the “owner” to make up the difference in a fixed amount of time. This prevents “jingle-mail.”
I would also require shorter payback periods. Reduce mortgages, by law, from 30years to 20 or even 15 years. This reduces the leverage seen when interest rates drop or rise. Just make it so non-judicial foreclosure is unenforceable when the period of the loan extends beyond a certain horizon.
Outlaw HELOCs.
Make profits from houses just as taxable as profits from other sources. While I am against income taxes in any arena, if we are going to have an income tax, let us not subsidise home speculation. No more mortgage interest write offs.
Void trust deeds if lenders did not exercise due dilligence in vetting the borrower. No more no-income, no-document loans. Debt ratios would be reintroduced.
Fraudulant appraisals should be prosecuted under the various fraud statutes. RE agents that pressure appraisers to “find the value” would lose their license and be prosecuted for fraud.
Require that lending institutions hold a high percentage of their mortgages to maturity or payoff. No more FNM. No more wraps. If WaMu writes a $500K mortgage, they hold it, and hope their borrower pays off, and the collateral holds value. This would also put lenders in a position where they could be out of funds available for loans. When San Diego lenders fill up with loans, they won’t be able to get cash from Dallas to keep lending. Dallas would have more money for their market, and San Diego would have less. This would help prevent “bubbly” areas.
Eleua-
Not all of these ideas may be practical to implement, but your creativity in helping solve the problems are commendable.
The main thing I agree with you on is to “make all the players accountable”. Flippers, lenders, etc. all need to be responsible for the outcome of each action.
At the moment, we have a lot of freewheeling actions without much negative repercussion. An analogy might be “$50 fines for any armed bank robber that gets caught”. In other words, the “risk” is so low to the potential “gain” that everybody and their brother will start robbing banks!
Your ideas sound like you’ve been drinking kool aid. Total B.S.
How so? It would seem that people that approved of the current, fraudulant and irrisponsible pardigm are the kool-aid drinkers.
Do tell…
In my opinion, the FED is to blame 100%.
I think the big problem came form the secondary markets… the MBS market. Rates have been so low that investors are thirsty for yields. This has created such thin credit spreads that everything could be securitized. Lenders could take any loan and get it off its books in no time.
If a regulated 20% LTV ratio had ben in place, appraisals would have been forged even more! Or banks would have simply lent the cash down and securitized these loans instantly.
The FED lowered the rates TOO FAST for TOO LONG! Investors knew they were taking no risk and that’s what created the bubble
Ben,
I don’t think the FED is so bad. Look at Volcker. He did things right. The only reason Bernake may not be able to do what Volcker did is because now we have a trade deficit, but that deficit is also a result of what politicians did. And the great depression is as well. If Hoover and FDR were more responsible there would be a so-so depression, not a great depression. So the FED is not the main problem IMO. We need to restrict loans, I gess there has to be an additional agency that does that. FED plays with rates, and another agency sets loan standards, downpayment minimums, etc..
The Fed’s duel mandate is the pursuit of price stability and full employment. It’s time to expand the definition of price stability to include asset/equity prices.
well, maybe we should first of all fix the definitions.
both price stability and full employment are targeted by continually adapting the calculations (with the statistics of 50 years ago, US unemployment would be around 12% now and inflation at least 8%).
And obviously, the FED has a good reason for ramping up the money supply, because they simply get to keep 1% of every dollar that they print/lend into existence. With the cost of those created dollars close to zero, that is about the best deal in the world you can get.
Once the housing finally crashes, no one will every want to buy again. I believe that because people will get burned so bad that there will be no real worry of a hosing bubble for generations to come.
Perfect typo Housing Bear - “hosing bubble” - sums it up perfectly
“Once the housing finally crashes, no one will every want to buy again. I believe that because people will get burned so bad that there will be no real worry of a hosing bubble for generations to come.”
No. The cause of speculative bubbles is rooted in human nature. And human nature isn’t changing. History is replete with the pain caused by speculative excesses. But the pain was never great enough to keep history from repeating itself.
“hosing bubble”–clever!
Mad Tiger,
Agreed. Here is a post I just added to Eleua (above), but applicable here. It addresses your “human nature” comment, as well:
…“make all the players accountable”. Flippers, lenders, etc. all need to be responsible for the outcome of each action.
At the moment, we have a lot of freewheeling actions without much negative repercussion. An analogy might be “$50 fines for any armed bank robber that gets caught”. In other words, the “risk” is so low to the potential “gain” that everybody and their brother will start robbing banks!
I agree, nothing to worry about repercushions just look at the Demoncrats with their AMNESTY bill. The RINOs are just as bad (Specter, McCain, Graham, and Frist).
hey bear - i just got back from a cc o/h tour. i haven’t seen this many since the 90’s. howz things down your way?
Until our generation begins to die off…we learned many of these lessons in the 1920s, right?
I wish I could agree. However, the last housing bubble only ended 15 years ago. There will always be a reason why “it’s different this time”.
I wish this were true, but look at our ancestors across the pond - they’ve had WILD swings - but continue to go with the flow, speculate, recover, boom bust, boom bust. Optimism is forever and never wanes. Generally this is a good thing.
How do we prevent another false housing boom?
Never ever ever ever let people forget this one.
Somewhere out there in the world, there’s a Michael Moore type person picking up a video camera, and documenting all of this nonsense.
Next year, probably toward the end of 2007, or the beginning of 2008, we’ll get to see the new documentary on the housing bubble.
We really need a ‘SuperSize Me’ type vehicle to break into the mainstream, and capture everyone’s attention.
Also…
We need an Oprah show about the housing bubble.
There’s an enormous amount of women out there who don’t poop unless Oprah says it’s okay.
Did you folks hear all the girls talking about DEBT after the Oprah show on it?
Man, it was like an alarm bell went off.
Those two things will be a nice start.
Problem is, of course, Oprah owns Real Estate.
Might take a while for her to accept what’s happening.
My wife spent half the weekend watching the LDS (Mormon) general conference. President Monson (no. 2 man in the LDS hierarchy) warned the faithful about the dangers of home equity borrowing and, more generally, about the danger of assuming too much debt. I wonder how many recent Utah specuvestors were listening…
Was Joseph Smith a specualator?
I know he was accused of fraud…
LOL.
(Just having some fun. If you’re Mormon, please don’t get bent:)
Many of his followers are fraud victims. In fact, anecdotal evidence I have heard (from LDS relatives) says that Utah is the fraud capital of the US. I wonder if that is a coincidence?
GetStucco, I didn’t realize your wife and you were LDS morons.
Only she is — I was posting on this blog while she was hearing from the General Authorities about the perils of HELOCS.
BTW, hedgedude, thanks for taking time away from your analysis activities to insult my wife’s religion. You have shown us again and again what a high class dude you are.
I guess people forgot about president Hinckley’s advice to buy only a modest home and to pay it off as quickly as possible. UT seems to be the next bubble. I’m seeing offers over asking price and prices are going up quite quickly. Seems that most of my neighbors are doing option ARM and I/O loans. The dumb Californians are buying up houses sight unseen because they think it’s cheap. This disease (the housing bubble) has spread everywhere.
I suspect that many of the folks who ran up the UT prices in the past couple of years are non-LDS Californians, but also that the local church members bought at steadily increasing prices completely oblivious to bubble inflation. Several of my wife’s relatives bought homes in new developments and moved last year, for instance…
There is a movie already out there called “Maxed Out” I put the link on here last week. Check it out.
You know the old saying, “a second marriage is the triumph of hope over experience?” So goes the next housing bubble, when it happens, and it will.
Thanks for telling us about ‘Maxed Out’.
I can’t wait to see it on DVD.
Do you know if it’s out yet on DVD?
I know it’s about credit stupidity…right?
“There’s an enormous amount of women out there who don’t poop unless Oprah says it’s okay.”
WTF?
I actually contacted the producer of “American Jobs” and suggested he look to the housing bubble. He was aware of it, and made me wonder if he was talking on the project already.
People have very short memories when it comes to unpleasant things. Everyone is Texas has completely forgotten the housing crash of the late 80’s and the RTC auctioning off 10’s of thousands of properties.
“Those who do not remember the past are doomed to relive it.” - Santayana
Not all of us. It permanently changed my outlook since I was working on the front lines of it. I still, 13 years later, am very reluctant to buy any house, and have been renting the entire time.
This is true. I experienced the s. cal bubble in 80’s. and know what it is like to live in a dwelling that has lost half its value. Not so bad if you can stay there long term, but I could not. My “bubble” experience is the central reason for not buying right now - even though I am more than ready.
Even some who do remember are doomed. The only way to protect human beings from themselves is to have the necessary institutions in place. Mortgage lending practices would be a good place to start.
M T,
Well said. Low down and “No Doc” loans have got to go…
“Investors” have to have something to lose in order to be truly considered as a good loan prospect.
You can’t. These cycles are as old as time. It will take a long time but the next group of speculators, who are probably 12-17 years old now and younger, will make the same mistakes. Fear and greed are two primal instincts and there will always be those who prey on them for profit.
I wouldn’t have believed this could happen again so soon after the 1980s bubble but once I understood that most of the people who are participating now were not directly affected by that, it was easy to see how it could happen.
TXchick –
I believe you are right. Most recent SD homebuyers I know are from the under-30 set. Each generation seems to need to learn the hard way when it comes to financial manias and the risks they impose.
Those dam gen x ers. They have the world by the balls.
You nailed it. There are new people born all the time and they’ll ALWAYS think “it’s different this time” when it really isn’t different. If tulip bulbs can bubble then anything can bubble. Houses, stocks, and precious metals are obvious targets so they are doomed to bubble on a fairly regular basis.
Tako John,
Yep, anything that promises “instant riches and caviar dreams”. Humans, by nature always want to take the easy route (myself included)… but it is the diligent, studied and those that act not on impulse or mania, but on practical intuition that can carve out a consistent good return on their time and investment.
TXchick,
I agree. Sure you could pass lots of laws and make lots of regulations about housing, and the next generation will simply have their bubble elsewhere to start with. Around the peak of that bubble, the money will start flowing into housing again.
When the government needs to increase the money supply, the money has to go into some asset whose prices can rise. If the money goes under the mattress (as in Japan during the 1990s), the increased supply cannot have its intended effect of goosing the economy. So money creation has to continue until prices start to rise in some asset class somewhere.
The $64 billion dollar question is: which asset class is next?
My guess is technology and biotech stocks after one more wipeout.
Cash!
txchic, there are bubbles and then there are manias. bubbles occur about every 15-20 years and manias are once in a generation. the current housing situation is nothing less than a global mania.
Same with the hedge fund bubble. The WSJ this morning has a sidebar on the Money & Investing page which reiterates the point I have often made here — that hedge fund activities have snuffed out the volatility which characterizes healthy markets (a face of the conundrum). Instead, what you see is a very high level of correlation across asset classes which were traditionally viewed as “diversified.” In particular, indexes of hedge funds, MSCI EAFE, and the Russell 2000 all showed a higher-than 94% 5-year correlation with the S&P 500 looking back from 2005, while only the Russell 2000 showed higher than 50% 5-year correlation with the S&P 500 as of year 2000.
Such a high level of systemic risk will end badly. The upsides are that hedge funds will likely be outlawed, or at least heavily regulated, in the wake of the inevitable financial crisis which will come about thanks to their industry’s gambling activities, and that anyone associated with the industry will be reviled for their role in bringing down our country’s financial system.
“The upsides are that hedge funds will likely be outlawed, or at least heavily regulated, in the wake of the inevitable financial crisis which will come about thanks to their industry’s gambling activities, and that anyone associated with the industry will be reviled for their role in bringing down our country’s financial system.”
GS - I’ve been waiting for months for you to make this very point and say something like this…
Used to be waaay back in the ole days that when you said you were owner/occupier that was checked. Likewise, income, assets, etc. Bank account balances for the last two years? Yep, just to make sure mom and dad weren’t fronting the downpayment. Get this, if you aren’t old enough; when I bought a property in 1995 they din’t like that we had two new paid off automobiles (and a motorcycle). That wasn’t a reasonable household cost structure. They actually assumed we’d be making payments on two autos as part of our total household debt calculation.
Prevent bubbles? Easy; 40% maximum TCO (total cost of ownership) based on purchase price regardless of changes in asset value. 10% down with special circumstances, 15% for favorable treatment and 20% for best rates. These for primary residences. Secondary, 20% down at least. Don’t care vacation, for a child, rental. 20%. I call this “no skin no win.” This is actually very generous compared to other investment leveraging puts, calls and such. Generous for a reason; investment in housing in the US is a good thing and needs to be encouraged. Does the census even ask about indoor plumbing anymore? 40 years ago it was a health/environment concern.
ARMs? Fine, they’ve been some awesome investments on both sides. This is betting on the point spread, harmless arbitrage, not pawning your work tools. Neg-Ams? Baaad, Vinny the Knife does this not Vincent the Banker. While we are at it, time to stop laundering real estate loans through “sophisticated lending strategies.” The underlying asset and debtor information needs to stick with the cash flow.
These above are all “stick to the rules,” “play fair,” “don’t get greedy” guidelines. The next are less common sense but still valid; restore the rental housing tax breaks. Streamline real estate transfers by eliminating (phasing out) the need for escrow, title and such (archaic). With the process streamlined RE agents and brokers prices will approach legitimate pay for services rendered levels. Finally, remove arbitrary government assesmets of taxes from the process. Prop 13 is a decent half-measure, I’m suggesting a small dose of Georgist policy as well.
There ya go. The housing crisis solved. For the remainer of my first term as First Poobah and Most High Potentate I promise to save the endangered dust bunny.
I agree with your point that down payment requirements would have done the trick. Unfortunately, the horses have long since fled the open barn, and closing the doors now (bringing back downpayment requirements) would simply make the bubble pop instead of slowly deflate…
Oh, I agree. The question was prevent the NEXT bubble. This bubble is quite a bit trickier. Tricky only because it is going to be tough to tell 20 million familes that they are not homeowner material.
Fix a mess is always harder than prevent a mess. This mess? Wow, tough call. Slow consumption and tighten credit and under no circumstances offer amnesty. Guessing, like I said a tough problem.
The one real variable in this bubble as I have pontificated before
is the greatly increased participation by foreigners. I think it will be interesting to see how many of them disappear and how many of them get ground up in the same mill as the U.S. born idiots. I have seen stories written about people from places like Vietman, Thailand, India and others who have long cultural histories of living with poverty and having modest aspirations completely going against their ingrained teachings in this mania and will be VERY interested to see how this all plays out.
‘Those whom heaven helps we call the sons of heaven. They do not learn this by learning. They do not work it by working. They do not reason it by using reason. To let understanding stop at what cannot be understood is a high attainment. Those who cannot do it will be destroyed on the lathe of heaven.’
–Chuang Tse
A Lot of the risky purchases were from flippers and people buying 5 houses ,(not homeowners just looking for affordable long term housing needs .) These purchases drove the prices up in alot of areas creating a false demand and now making it unaffordable for the first time buyer owner user type buyer.
How about foreign flippers
Like the guy profiled in the Forbes flipping article Ben posted last week? Now THAT’s a toxic soup if I ever saw one!
I’m not sure that it is better to have a slow deflation instead of a rapid price drop. If prices don’t drop quickly, we could have a decade or more of stagnant price, erroded only by inflation. That results in fewer sales, and is bad for the economy.
also, a slow deflation would be much more benign for overstretched homeowners, and those who were prudent and saved their cash will end up paying for it. This would teach the public exactly the wrong lesson.
I hope we get a quick crash that is severe enough to stick for at least some generations.
Just how small a dose of George? Do remember he claimed it was only land that must be taxed and not either labour or production. Henry George was far more influential than most economists acknowledge from the 1890s to the early twenties — remnants still exist. ‘taint only communism or capitalism — George was advancing a third model.
Robert Cote,
Looks like you stirred some mud on this one. Way to go! I agree with a lot of what you have written.
House Flippers Work With No Net:
http://www.latimes.com/classified/realestate/news/la-re-fliptax2apr02,0,4735064.story?coll=la-home-realestate
tate/news/la-re-fliptax2apr02,0,4735064.story?coll=la-home-realestate
A flipper in the LA Times article bought his house in 2004 for $400,000 and plans to list it soon for $1.2 million. Nice work if you can get it …
Apparently humans need to be protected from housing bubbles .I was shocked when I found out how loose the Loan underwriting was in the last 3 or 4 years . For starters I don’t think you can have no down loans . The borrower has to have a stake in the home. Lenders can’t risk the financial security of this nation with risky loans.
In the past the risky loan lenders always wanted a big margin between the appraisal and the loan ,(someimes 30 to 40% ).Those Lenders weren’t dumb, they knew they might get the housse back. Going on these risky loans/low down loans only created a demand for housing , ( that normally would not be there),driving the house prices up.I am actually really pissed that this happened . Its hard to believe .If it means that only a certain percentage of home ownership is possible under more conservative underwriting practices ,so be it .
Agreed, Amigo.
I agree 100% that the 20% down, “check the credit and sources of income” process is necessary. Greed is a basic human emotion and easy credit does nothing but feed it. People need to be protected from themselves at times.
The way to stop the bubble from growing is to prevent idiots purhcase these houses at astronomical prices from only a year or two ago.
I do not care if these jackasses and the banks that lend to them go under (and they eventually will).
What upsets me is that the tax payer will have to eventually pay the bill to clean up the mess.
Anyone remember what a savings and loan use to be?
Sure they put a couple of people away for some scandals, however, that was it.
This is happening again and I am tired having my tax money pay for these morans.
I agree with you. It just irritates the hell out of me to have to pay for these idiots. I’m getting very impatient waiting for the market to correct. It takes a lot of discipline to sit on the sidelines and wait.
You can do it Arizona Dude. I’m in the same predicament, but we gots to do… what we gots to do!
Should have put Hillary and Bill away too, over Whitewater S&L.McCain got his di-k cut off with the RE deal with Keating along with Sen Cranston (rip) and some other politicos. Are our memories that short? Don’t get me talking about the Clinton administation selling Elk Hills Naval petroleum reserve to Occidental (Gore owns 500,000 shares).
I am so sick of whiney Republicans…they have been driving the bus for how long now??? and all they can do is complain about the Clenis ™—BIll Clinton’s Penis for those confused.
The economy, the housing bubble… It is doing exactly what it is supposed to do. It is benefitting the people it is supposed to benefit. You will see this really come home to roost AFTER the bubble pops.
If it isn’t benefitting you, and it isnt going to benefit you unless you are a Ranger or Pioneer, well, that’s because it’s not your economy, silly.
Check out “Rolling Back the 20th Century” by William Greider. It’s from three years ago.
http://www.thenation.com/doc/20030512/greider
For the last 70 years, certain Republicans — who now control the party — have been operating on the premise that the New Deal was somehow made up from whole cloth for the express purpose of tormenting the wealthy, and only for that purpose. So the New Deal has be eradicated like the Incas. These folks seem to have forgotten that the economic system they want to take us back to used to fail roughly once a generation. There were depressions in 1877 and 1893, and a bank panic in 1907. That’s one of the reasons the Great Depression merits the adjective, to set it apart from the other failures of the system.
So take away the safeguards against another Depression that were an essential part of Roosevelt’s programs, and whaddya think is gonna happen. Did you say, “Another Depression?” If so, you get a gold star on your on your pink slip. And this time around, there will be no way for another FDR, should we be fortunate enough to produce one, to do a darn thing about it. Don’t forget, Roosevelt paid for the New Deal in part by running up the deficit. That’s hard to do when your national credit is maxed out and your collateral is gone.
Are they consciously trying to cause a depression? I tend to think not. I think it’s more a case of if one happens, no big deal. It’s not like anyone they know will have to live in a car. (And if someone they know does have to live in a car, that person will no longer be someone they know…) Plus, market forces will get us out of it, just like they would have gotten us out of the last one if that goddam commie Roosenfeld hadn’t stuck his fingers into everything. So there’s no real downside for them.
There’s no way to legislate away boom and bust cycles. Every law has unintended consequences. A new regulation in one sector creates more appealing investment opportunities in others.
It’s easy to blame realtors, lenders, appraisers, etc. for their greed, and many of them deserve this blame. But greed is a universal human attribute that has been present in every boom and bust cycle (and always will be).
Probably the best thing to do is just to educate people on the history of financial manias. If everyone knew and accepted bubbles and collapses as a normal part of the capitalist system then things would progress much more smoothly. Easier said than done, but it’s the best option available.
There’s no way to legislate away boom and bust cycles. Every law has unintended consequences. A new regulation in one sector creates more appealing investment opportunities in others.
Are you out of your mind? (with all due respect)
Because of lax regulation, this thing has taken us to heights that were non imaginable 5 years ago.
No or very minimal downpayments, no job pay verifications, credit scores that are often manipulated. All this was due to de-regulation.
It is exactly for this reason that these idiot banks are crying foul now that the regulators are saying enough is enough.
I do not have a problem if some investor who is willing to loan his own money on a property and ends of losing the money-however, history tells us the idiots sitting comfortably behind their desks at these banks will be bailed out by the TAX PAYER-you and me.
That does not mean these real estate agents, loan underwriters, etc. They will be exempt from paying taxes because McDonalds does not pay the much. As a matter of fact, they will be eligible for the earned income tax credit.
Regulations are the way to go when tax money is involved.
My mind is intact, but thanks for asking. I stand by my assertion: you’re not ever going to get rid of bubbles in any asset class, no matter what the laws are. We’ve had real estate bubbles with the kinds of regulations in place that you mention (not as severe as this bubble, of course).
You can make it harder for bubbles to form with stricter laws but you’ll never get rid of them. They’re a part of human nature.
I agree that bubbles and manias are part of human nature; however, the current bubble got much more sever because the risk was removed and the current buyers are gambling with other peoples money.
This is new as far as I know; in most of the previous manias in history, the players were fully responsible for their own losses and usually couldn’t gamble more than their own capital (or some part of future income). That way, at least the lesson will stick for some time when things go wrong.
I agree that bubbles are part of human nature, so they can’t be prevented per say.
That said, I think there are some things that can be done specifically in respect to the housing market:
No negative amoritization loans
No teaser rate loans
Full chart of delta in cost at each reset point on ARMs, showing positive and negative 1%, 2%, 3% and positive 5% and 10%
Closing costs can’t be financed - cash only, from buyer
No Fannie/Freddie - or at least limit them to bundling loans with >=20% down (this may be the key one)
Fannie and Freddie do only bundle loans that are 20% down (or have a subordinated loan for the remainder who eats the who would accept all losses up to 20%). Now Countrywide or whomever else can bring to the market other ABS paper that meets what ever standards they wish (just as you or I could issue bonds that met any sort of standard–no one buys our proposed bonds).
What is really needed are some occasional losses to remind underwriters why they can’t just shovel money out the door.
The Lenders are the only ones really that can prevent housing bubbles because housing is so loan dependant . If a area skyrockets in one year it needs to be examined by the appraisal departments on what is causing the abnormal increase . Not that you stop buyers from buying what they want , but you make them take more of the risk by higher down payments in a abnormal increasing market.
You mean like increasing margin requirements on volatile or worthless stocks? Well, gollleeee, Gomer, that’s a great idea!
Yes, like the new requirement that were put in place after 1929.
You might not agree with this , but I think we should have a tax penalty for short term flippers . Isn’t it the goal of any society to have as many people owning their own home as possible .Isn’t this the American Dream .
I mean a penalty beyond short term capital gains .
Also for short term (anything) stock gains. Let’s just tax it all, ie confiscate all profits but let the sheeple take all the losses. That sounds fair to me doesn’t it?? Don’t all cheer and clap at once.
Or betterr yet let’s have the ‘government’ own every thing. Then since I’ll be the grand humbug, life will be so sweet. don’t you think.
Some communities apply an extra tax if the home is not lived in by the seller.
That would be a fine idea if you ask me.
Thomas Jefferson wanted an ammendment to the Constitution that the USA would live under a jubilee cycle. this cycle which goes back to the Egyptians and ancient jews forgave all debts ever 50 years. The economy would naturally start to correct the excesses as people refused to extend or grant debt as the end of the cycle approached.
Almost everything is, or was, regulated to some degree due to previous bubbles and greed. But the Wall Street crowd eventually gets their lobbyists to deregulate something under the guise of unshackling the economy, and bingo, the next bubble is ready to be inflated. Problem is the sharks know when to bail out because they will scuttle it too, and the losers sink with the ship. Since the U.S. doesn’t seem interested in manufacturing durable goods anymore, it’s going to be bubble after bubble. No wealth creation, just lateral moves, i.e., from your account to theirs. The housing bubble’s losers are going to want a bail out, and maybe Hillary will promise them one; anything to get elected, right?
Hell, you want to see a REAL bubble? Try the one in private equity funds and hedge funds. The public generally is not in tune with that but there’s a bubble in those equal to or greater than the housing bubble. Talk about a money grab! 30 year old managers making 20M per year and more???? Ever seen the fees these vultures charge the companies they take private before they IPO them a few years later for another kiss at the cash cow? How about all the naked short selling and PIPE funding abuse you read about by these people?
This stuff is only lightly regulated and the regulations are toothless, and yet, it really affects the retirement funds of millions of average people who “invest” in the stock market through mutual funds, DRIPs, etc.
Let’s hope that mess doesn’t blow up at same time that housing collapses. As I recall, the last time the LBO scam went down, it blew up a couple of years before housing did.
Michael Milliken, where are you????
Don’t tell our hedgefundanalyst that you think there is a bubble in his line of business, because he is not listening.
He has a vested interest in denying it. I think what he has been saying is, yes, there may be a bubble, but it isn’t going to burst. Where have we heard that before?
txchic, the bubble you speak of in hedge funds is a myth.
The boom in hedge funds is a natural evolution of a true efficient free market, advances in technology and the post-bubble overhang.
any potential bubbles are gone. levered strategies in the market neutral space generally unwound in 2005 as Fed rates made leverage too expensive given the dearth of opportunities. credit related strategies have also not been en vogue for at least a year now.
many funds in these strategies have lost approximately 50% of capital in the last 2 years. but smart allocators like myself moved away from market-neutral strategies to more directional beta driven strategies like long/short equity which are generally unlevered and have net exposure between 30-70%.
if the permabears on this board are hoping for a market crash, then better to be 30% exposed with a hedge fund, then 100% exposed with a mutal fund.
I know that what you are saying about credit strategies is true but would you deny that there about 20 times as many hedge funds now as there were in 1998 at the height of the LTCM debacle and that rather than their being a vehicle for risk takers with outsized returns for the risk, they’re now just sucking up pension money and trying to make 8%?
Sorry, hfa, not buying it.
GM Market Cap - $12.8 billion
GM Defaults Swaps - $1 trillion
OOPS! Hit wrong button.
These kinds of ridiculous numbers only occur because of hedge funds. It’s just because these guys are “the smartest guys in the room” that they’re arrogantly ignorant of their own blind spots.
“txchic, the bubble you speak of in hedge funds is a myth.
The boom in hedge funds is a natural evolution of a true efficient free market, advances in technology and the post-bubble overhang.”
Speaking of morons…
txchic, if hedge funds could only make 8% (btw, up 4-5% in aggregate net of fees through the first 3 months of the year), then that makes it a piss-poor asset class, not a catalyst for worldwide collapse.
to link to the theme of this blog, 8% is still a helluva lot more return than residential wannabe landlords in bubble states.
the fact that there are 20x more hedge funds is once again due to technological advances, research capabilities, reduced trading costs, which have all led to market liquidity. there are 20x (and then some) more blogs than in 1998 as well, it doesn’t mean there is a bubble in blogs.
Hillary voted for the bankruptcy bill. I believe that will kill her candidacy before it ever really gets going (i.e., she is not even nominated)
But I wanted to see Bill as the First Lady!!!
The housing market/crash of the early nineties is seared into my brain, probably more than most because I was in lending and dealt with the problems/foreclosures. When I explain to people what happened and that prices dropped 35-40% (in SoCalif, and that it took 11 years to break-even), they have a blank look and many don’t believe me. So you can’t count on people’s memory to prevent the next bubble.
Robert Cote makes some excellent points in this topic. And yes, you have to tell millions of people that they are not homeowner “material.” This is based on their income, spending habits, credit history and lack of savings/reserves. These unqualified have been getting loans the last few years and the outcome of this loose money will be seen.
The only real way to prevent houing bubbles, (since it is the most leveraged asset), is regulation based on the sensible lending standards that have been thrown out these last few years. The big lenders keep or sell loans. Even those loans sold, are serviced and possibly guaranteed by lenders. When too many loans go bad, prices will fall and affect all home loans, endangering the banking system.
Sensible Lender ,
This is my greatest fear ,that the banking system will be compromised . Retirement accounts are at risk .Its a serious problem . I just hope the majority of people hang in there and make their payments until things get better.
Banks have lost all sense of standards. Can you comment on why now?
That’s a interesting question .don’t know the answer yet .
Housing is more bubble prone than other assets because it is hard to sell short. Homebuilders are the only source of new supply. One of the common characteristics of bubbly housing markets is the high level of regulation on land use, zoning and construction. IMO if you want to prevent bubbles, regulate the supply less.
that is a factor, but there are many others.
e.g. the fact that capital gains on homes are (nearly) tax free in many countries, the fact that you can use huge leverage and that it is easier than everywhere else to gamble with other peoples money (110%, no downpayment home loans etc.)
Improving education would help too. Every town with good schools has a housing premium. I wouldn’t say that premium is a bubble, but premium towns do have worse bubbles. If all school districts were decent, a lot of families would shop only for a house not a neighborhood.
The school districts are decent BECAUSE of the surrounding neighborhoods, and the cycle (good neighborhood-good school) perpetuates itself.
Be not mistaken, some of the best and brightest teachers are in the worst performing schools. It’s not money that makes a good school, it’s what comes into the school (smart, capable, knowledgeable students). Don’t believe me? Volunteer in both good and bad schools (try a variety, just to make sure). In the underperforming NEIGHBORHOODS, you get kids coming into kindergarden who have never held a pen, pencil or crayon; don’t even recognize numbers or letters of the alphabet; don’t know basic colors or shapes; cannot comprehend causal relationships, etc. I don’t care what you do as a teacher, you will never be able to bring these kids (as a group) up to the level of upper-middle class kids who come into kindergarden with all these skills and more.
It’s the PEOPLE in the neighborhoods that need to be fixed, not the schools. Trying to find a neighborhood with a “good school” is code for trying to find a neighborhood with upper-middle class people.
I’m on a roll. Policy should deemphasize housing as an investment. That means take away tax deductions on mortgage interest. The more similar owning is to renting, the better. Let the American Dream stand on its own two feet.
Last point. The Great Unwashed did not cause this country’s housing bubble. The steepest runup in prices has been in places were highly educated rich people live.
I am also concerned about the market comp method of appraisal during a housing boom . Just because a bunch of stupid buyers buy something does not mean the value is there in a housing frenzy . Why does the stupid herd establish price ? Maybe additional check and balances should be applied during these times . I know I keep saying this, but a correct solid appraisal is the back bone of any good loan .
No, you’re right. The Great Unwashed were used by the smart money just as they were in the tech stock bubble of the late 90s. It’s really quite diabolical, isn’t it. I thought “The Truman Show” was quite the interesting movie and quite apropos to all of that.
I don’t understand.
1. Get rid of the Mortgage Interest deduction. (I personally have “benefited” from it, but the benefit is false, because the savings are simply taken up in higher housing prices, and taxation is less fair.)
2. Require lenders to have at least 15% down payments
3. No captial appreciation exemption if home is held less than two years, (with exception for any of the owners death, or becomming incapacitated)
I agree with you Robert… plus that Mortgage Interest Deduction is kind of a “token” deduction anyway- when someone is paying 10X more interest on that overinflated house price and mortgage they just signed up for.
Actually, why can’t homes be treated exactly as an investment? If homes were appraised strictly on their value as a rental property, you’d never have a disjoint between the two that’s indicative of a bubble.
That’s a very good point, TJ.
I am really concerned about “actual” inflation being considerably higher than “reported” inflation, and if that is true, all the price increases for the past 5 years may be justifiable, and savers like a lot of people on this board are essentially screwed.
What’s the point of earning 3-5% when inflation is a lot higher? All the naive folks who bought into the housing hype may be rewarded and that really pisses me off.
There’s a difference between cost inflation (CPI) and wage inflation. It’s the wage inflation that eats away at one’s savings. As far as housing is concerned, high cost inflation (exempt housing calculations) are DEFLATIONARY where housing is concerned, if wage inflation is not keeping up. It means there is less money available for housing expenses (if food and gas now cost $300 more per month, you have that much less in your budget, you will try to lower costs elsewhere and housing costs could come down in this situation).
Which is to say, incomes are not keeping up with increases in the cost of living. So increasing the cost of housing makes it less and less affordable for more and more people, a situation that can’t really be sustainable in the long run.
Been out of town and just read this update. You are missing the point.
Forget regulation, forget trying to prevent future bubbles — let the market decide. All of CA is inflated due to regulations, all of Texas is normal due to no regulations. Eliminate all tax preferances, give the lenders carte blanc. But don’t subsidize anything from the government.
What a concept!
I second that! I’d rather we had choices about whether we want to run with the herd and die with the herd - than if we had no choice at all but to live in one centrally managed economy (which we seem to be slowly evolving into).
However it is tough to read articles about retired seniors being forced out of their apartments for condo conversions and I think that needs to be addressed.
Last night while reading the local papers in my area, I realized that Manhattan Beach is being split into two on the subject of undergrounding utilities. There are older people who have been there 30, 40, 50 years in their older smaller homes, and then there are the young hot sports stars in their multi million dollar mansions. An individual house assessment for undergrounding runs anywhere from $30000 to $67000. (A few years ago when they were starting to talk about doing this the original estimate was maybe $8000.) This is pocket change to the likes of Tiger Woods, but not your average retiree who is retired from Northrop. The folks on the poorer side of town are outraged that they are being told to borrow against their home equity to come up with the money for undergrounding, and I don’t blame them. Since when could a municipality in this country coerce somebody to go into to debt? MB is being sued and I hope the plaintiffs win this one.
It’s this kind of stuff that ought to be outlawed. Some local politicians are probably getting their palms greased. How do you prevent that? Nobody complains about these goings-on while times are good.
To Brad,
Thanks for the URL post. I went to HS with Herb R. and his brothers in Ridgecrest. Interesting to see some of their history since I left. There dad ran one of two grocery stores in town at that time.