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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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How’s this for a topic: was this the week that the global housing bubble really started to burst?
‘International banks are scrambling to sell their holdings of Spanish mortgage debt at a steep discount, fearing that the country may be sliding into the worst economic downturn in its modern history. Mikel Echavarren, director of the property consultancy Irea, said Spain’s housing market was far weaker than the official statitics suggest, warning that prices could fall 20pc to 25pc.’
‘All kinds of ploys have been used to disguise the true extent of the price falls, which we think are 5pc to 7pc already. Buyers have totally abandoned the market. We’ve had a wave of negative sales as people pull out of commitments already made,” he said.’
‘The housing market has crashed, according to dramatic figures released by one of New Zealand’s biggest real estate companies. Figures out from property giant Barfoot and Thompson show house sales have dropped nearly 60%, hitting a 10 year low. ‘We’ve got a lower number of sales because people aren’t prepared to accept the prices purchasers are offering at the moment,” says Phil McAlister, a property expert.’
‘A Derry estate agent last night warned that the city could be on the verge of a housing meltdown. Already an unprecedented number of houses are up for sale in the Derry area. Earlier this week Mike Smyth from the University of Ulster predicted the housing market in Northern Ireland could see falling prices for the next three years. Rosaire McLaughlin, debt counsellor at Dove House said that on her books she had three people facing repossession orders, and homeowners with more than £1m of mortgage arrears. ‘People on fixed rates who have had to renegotiate their payments have been hit hard,’ she said.’
‘Realtor Jim Common has been riding high on one of the most bullish markets in Canadian history. Just don’t ask him about this year. ‘It’s been miserable,’ the ReMax agent said. ‘Buyers just seem stopped dead in their tracks.’
‘The buyer still reigns in Edmonton’s housing market, where the number of homes for sale has skyrocketed by 268 per cent from a year ago. Figures released Thursday by the Realtors Association of Edmonton show there were 9,464 residential properties available in the city area — up by a whopping 1,220 homes from February. That’s the third-largest inventory in Edmonton history.’
‘What we were observing in US and global financial markets was similar to the classic pattern in financial crises,’ said New York Federal Reserve Bank president Timothy Geithner in testimony to the Senate Banking Committee yesterday. He cited ‘a self-reinforcing downward spiral’ of asset sales, ‘higher volatility and still lower prices.’
Many in Ireland and England have lost money in the Spanish markets hoping to cash in on vacation rental units.
In the US the foolish attempts by US government to prop up housing using tax payer dollars would be wasteful and bound to fail. Housing prices will and should allow to fall to meet incomes otherwise the end game will be future buying activity will stall.
The governement injecting taxpayer dollars to prop up housing is like injecting amphetamines into a malnutritioned and as a result dying man for the hopes of keeping him going. The true problem is food .. feed him.
In the US, housing woes come done to income and jobs. If the job market is diminishing along with income, nothing the government does to prop up housing will work. It comes down to real income. Preservere jobs, increase minimum wage, stop helping companies to ship jobs elesewhere with the help of your tax dollars. etc.
Preservere should be Preserve
BTW being able to afford the initial high price of a house is not just the problem.
1. You have high rapacious real-estate taxes. Does anyone complain to the school board anymore to try to force them to cut spending instead of raising your taxes? Janitors in public schools can make in excess of $70 with overtime. You are paying a percentage of an overpriced house anyway in realestate taxes.
2. Energy costs on the McMansion are too high. How about deep tax credits for making the home energy efficient? A tyvek wrap can go a long way.
3. Insurance on the McMansion is too high. You are paying based on an overpriced house again.
4. Food price inflation.
5. Job export/loss and wage stagnation and/or decline.
6. Cost of petrol is too high and hence cost of driving to work from your out-of-the way McMansion.
These are the problems that government should fix instead of propping up housing with your tax dollars.
Correction: Janitors make in excess of $70k/yr with overtime.
You posted four replies to your own message. That beats Prof. Bears record.
Yeah, it’s totally impressive.
Don’t look now, but the volume chart suggests your asset class of choice may have peaked.
But that’s not the asset class of my choice.
Are you confusing me with someone else?
I have many favorite asset classes; did anyone notice copper is almost $4 a pound? Time to hoard old pennies. The real question is, what is my least favorite asset class?
RE: copper is almost $4 a pound? Time to hoard old pennies.
I remember one builder of tract affordable ranch homes in the early 70’s using 4″(!) copper piping even for the plumbing waste lines!
So much for build quality anymore.
“Don’t look now, but the volume chart suggests your asset class of choice may have peaked.”
My favorite a$$et is my wife…and she (and the volume) is only getting better…even after 17 years. Now if I could only get her to read this post I might have an evenbetter weekend LOL.
I thought that would be a good topic last week — you had plenty of articles on it then.
But my question is different — how will this affect the U.S.? Will it end the “decoupling” scenario, where global growth prevents the U.S from spiraling downward?
Will it cause the dollar to crash, as net savings countries have losses to cover back home?
Will is cause the dollar to stabilize or even rise, as people conclude that all the other countries are skewed too?
Finally, what does a global bubble, in places with different cultures and economic systems, say about human nature or our modern globalized society?
‘“decoupling” scenario, where global growth prevents the U.S from spiraling downward’
“Decoupling” is dead as a doornail. I never thought of it as anything other than another ploy served up by the great minds on the Street to lure greater fools to buy overvalued assets.
It depends on how you define decoupling. IMO Asian economies are decoupled from USA, but the financial systems are not. The coming collapse in USA should serve to cut the financial system ties, or at least make them less relevant. Increasing demand for goods in these countries will offset US demand over time. Asia has over 3 billion people. Also, Europe does more business with Asia than we do now.
In answer to WT, I don’t see how this scenario is dollar-positive. Foreigners are already retrenching, for example not buying as much US Treasuries. We are not the only goods market today, and we are certainly not the best investment market.
“Asian economies are decoupled from USA, but the financial systems are not.”
Do you believe the Asian economies are decoupled from their financial systems?
“But my question is different — how will this affect the U.S.? Will it end the “decoupling” scenario, where global growth prevents the U.S from spiraling downward? ”
A good question. Lots of paper wealth is going away in the first world countries because of RE deflation, will this be the end of emerging economies blistering growth? Probably yes but ? I told my friend at work to pull out of his emerging market mutual funds because of this.
Inflation isnt so great either, because then, rather than housing bailouts, we worsen the lives of those on fixed upcomes and make the social security issues worse. Unfortunately, the government needs to just admit housing has become too expensive based on incomes, and needs to revert back to the historical mean and publically state that position. It also needs to run a few foreclosure programs. Not on how to keep your house, but how to let it go. No great shakes. The only real role for the government is to prevent severe failures in the banking industry that would threaten our economy to the core, and to create a program to auction off the excess housing cheap at no reserve auctions.
“…we worsen the lives of those on fixed upcomes and make the social security issues worse.”
I am surprised the AARP is not screaming; they must not have a clue. These folks represent a significant voting block, but I suppose the political culpability for inflation is harder to trace than that for honest taxation.
They don’t get it.
In any case, how are you going to distinguish between “monetary debasement” and “growing world demand for food”?
You can always blow smoke up their collective @sses.
I think the AARP cares more about keeping their assets (real estate bought 30-40 years ago) inflated than they worry about their SS and pension payments.
“Unfortunately, the government needs to just admit housing has become too expensive based on incomes, and needs to revert back to the historical mean and publicly state that position. It also needs to run a few foreclosure programs. Not on how to keep your house, but how to let it go. No great shakes. The only real role for the government is to prevent severe failures in the banking industry that would threaten our economy to the core, and to create a program to auction off the excess housing cheap at no reserve auctions.”
This is what needs to happen. However I’m not expecting many in government to say housing is overpriced relative to incomes. Those that own don’t want to hear that the price of their house must fall and government doesn’t want to acknowledge much less remind people that their incomes are stagnant or falling. I wonder if the best we can hope for are the the right measures, but with an explanation that is more palatable rather than accurate.
Yes. I agree government should say housing is overpriced relative to incomes.
How many in the government are homeowners themselves that don’t want to see, hear or speak about how “housing has become too expensive based on incomes, and needs to revert back to the historical mean?”
Thanks Tim. Another great post!
“In the US the foolish attempts by US government to prop up housing using tax payer dollars would be wasteful and bound to fail. Housing prices will and should allow to fall to meet incomes otherwise the end game will be future buying activity will stall.”
Brings to mind the Dalrymple Maxim: Misery increases to meet the means available for its alleviation.
The Dollar is going to be severely devalued in the not too distant future, I expect a 50% reduction by year’s end.
But what becomes of the Pound & Euro?
England is in a much bigger mess than us. Houses went up many multiples more there, and the cost of living is absurd ($9 gallon of gas, $35 large Pizza Hut pizza) and they don’t grow much food, in a world suddenly lacking it.
German & Swiss citizens didn’t participate in the housing bubble, but their banks went all in.
Ireland & Spain might just be the cause of the breakup of the Euro, as the other senior members are highly cognizant of the possibility of these 2 rotting apples, spoiling the rest of the barrel’s contents.
Other tiny (NZ) or moderate bubbles (Australia & Canada) just add fuel to the financial fire.
China doesn’t get talked about much on here, but friends that travel regularly there, tell tales of posh condos built on spec, that sit unoccupied for years, this on top of the Shanghai stock exchange falling almost 50%, recently.
What does it all mean to each of us on an individual basis?
All currencies are highly suspect, and there’s only one alternative.
Gold.
Gold? No, war.
There is precious little an individual can do if war comes our way, but your financial future is up to you, the individual.
My father was in an occupied country in Europe, the duration of World War 2.
His family’s stash of Austrian/Hungarian 10 & 20 Corona Gold Coins was the key that opened the door, to buying almost anything, on the black market.
The other item that was almost as highly valued, was cigarettes.
Now that’s a topic.
Will cigarettes hold up as well as Gold if we have another global war/depression scenario? I’m sure that my friends who are burying assets in the woods will want to know.
The nicotine guillotine addiction will not go silently into the night…
Indeed. I wonder how well tobacco keeps? One wouldn’t need to stockpile cigerettes per se, just tobacco really. Paper (or some other material to provide smokability) could probably be found anywhere anytime.
My mother-in-law fled Vietnam in the 1980’s after a re-education camp experience. The only form of payment the people who could smuggle you out of the country took… Gold.
Under a dollar collapse scenario, there’s no way the bond market can maintain the fiction of low future inflation.
Therefore, it still makes more sense to be a debtor than a creditor.
same thing in india, property prices rose 3-5 times in last 5 years. and heavily dependent on US/Europe IT/BPO work
How about the government is trying to put a floor in housing price declines by trying to inflate the price of everything else from food to oil. This is self defeating since it leaves people with less money to pay the bills.
Just this morning, a friend sent me an editorial piece crediting the Ireland boom of recent years to peace, to agricultural and infrastructural subsidies, and to sudden Internet literacy. I told her that if she hadn’t presented any particular explanation, I’d have likened Ireland and Spain to FL, AZ, and NV: relatively exurban regions where the global housing-credit bubble could expand unchecked. And will now pop more viciously than elsewhere.
Ok, the house prices and sales are going to drop a lot. We know this from Stockton, Ca., Tampa, Fl, etc. What we are missing is the MBS, SIVs, etc that enabled this global housing market bubble. I said in an earlier post in the Bits Bucket that Bear Sterns is a harbinger of problems. It is not required that the insolvent companies be based or traded on WS. Their collapse will effect the global economic system just the same as if they were Bear Sterns falling apart on WS.
The Europeans or Asians could easily start these dominoes falling. That is what globalism and tight-coupling imply. Some European company goes insolvent and the counter parties are being called to pay off and then there you go - Bear Sterns with a Spanish or French or British accent … or Chinese for that matter. Especially Chinese since they have the least transparent and forthright stock market laws.
IMO, that is what the final result will be. Unfortunately the central banks can’t fix them all. Someone is going to miss one and the dominoes will start… sort of like V for Vendetta.
Roidy
Thursday, April 3, 2008
Soros: Financial crisis worst since ’30s
(Cover of The New Paradigm for Financial Markets)
Investor and philanthropist George Soros says the financial system as we know it is broken. He talks with Kai Ryssdal about his new book in which he offers what he calls a new paradigm for the financial markets.
Soros: “We are living in an era of wealth financial destruction, if you can just preserve your capital, you are doing fine.”
Which means: Go to cash.
Cash is nouveau-risk
cash which one ?
The spendable kind. The kind you buy things with. M0 and M1.
The other Ms are iffy, their existance is questionable.
The crap they call money that is on the balance sheets of a lot of hedge funds is destined to vanish, just as the equity of people’s homes is destined to vanish.
Apologies if this has been addressed before, but I was wondering about the subject of “bailouts”. What is and isn’t bailout, and why? When are the taxpayers actually on the hook and when is that just perceived and not real? The FED is not an official gov’t agency, it is a private bank, so how does the FED finagle taxpayer guarantees, if in fact they do? What real damage can any of the “bailout proposals” do?
how does the FED finagle taxpayer guarantees
Geithner = FRB of NY President = former Treasury official on Lawrence Summer’s team. Connect the dots…
My vote for future FRB chairman…
N.Y. Fed’s Geithner explains Bear Stearns deal
By MarketWatch
Last update: 12:03 p.m. EDT April 3, 2008
“In short, we judged that a sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy, with lower equity prices, further downward pressure on home values, and less access to credit for companies and households.”
It seems to me that what they are trying to prevent from happening on a disorderly basis is exactly what is coming down on an orderly basis — lower asset prices reflecting real business (or in the case of housing) or household income, and credit access limited to debts that could be repaid.
The Federal Reserve is essentially providing an insurance policy against bad debt, and that’s the nature of the bailout of Bear Stearns. No one wants to buy Bear Stearns assets because they believe (rightly) that the assets are worth less than their valuations. So the government provided JP Morgan 30 Billion in guarantees. Which means, If Bear Stearns assets further depreciate, the difference will be picked up by the gov’t.
Whenever the government offers lending rates, money or other tools that private investors are unwilling to make themselves, its a bailout of risk. Since the government is a no-risk institution (it essentially can collect an unlimited amount of money, by force, from its citizens) it means that companies like JP Morgan can risk buying potentially worthless assets like Bear’s holdings knowing full well that the risk is mitigated by a government guarantee that they’ll pay if the assets turn out to be bad.
Morgan/Fed = parent/subsidiary, nothing more.
If you don’t like the Federal Reserve Note system, you can opt out or you can fight to change it. But the Fed is not the US government and never can be.
I understand that the Fed is not part of the US government, but how does one opt out of the Federal Reserve Note system?
The people who run the Fed are part of the government, does that count? Appointed by the president, the board of governers is an agency of the US government. According to the Fed’s website anyway…
The Fed didn’t guarantee anything; it actually purchased the securities through an LLC that it formed. The LLC will be managed by Black Rock Partners (fee not disclosed).
The “Fed” is an official government agency. The Federal Reserve System consists of the Board of Governors and 12 District Banks. The banks are owned by their members but dividends are limited to a 5% return and the bank officers must follow policies set by the Board of Governors. The Board of Governors (which includes its staff), is an independent federal agency and all of its employees are government employees. The majority of the governors are appointed by the President of the US; the minority are appointed by the District Banks. Profits of the 12 District Banks, less dividends paid, are turned over to the US Treasury.
There can be 3 types of bailouts; management, creditors, and shareholders.
An FDIC receivership is not a bailout in that management loses their jobs, creditors get what’s left over after the FDIC is reimbursed (usually nothing), and shareholders are wiped out.
An FDIC assisted merger is a bailout of creditors but a wipeout for shareholders and management. In an assisted merger the FDIC either buys bad assets, at par, from the acquiror, or guarantees certain acquired bad loans. In this case FDIC (taxpayer) money goes to the acquiror and the creditors of the acquired bank (an insolvent institution) become creditors of the acquiror bank (a solvent institution).
The Bear Stearns acquisition by JPM was an assisted merger that will put many in management out of work and that resulted in big losses to shareholders. Creditors of BS were rescued in that they became creditors of JPM (BS was insolvent). Government money was used to induce JPM to acquire BS. It took the form of the purchase of mortgage related securities, value and collectibility unknown, for $29 billlion (net) by the Fed. If say the Fed collects only $20 billion on the assets then the creditors of BS were bailed out with $9 billion in government money.
Shelby “gets” the problem with the Fed’s policy stance. Weekend discussion topic: Has this always been their policy stance? Did the $29 bn Bear Stearns guarantee set a precedent?
Thursday, April 3, 2008
Bear Stearns deal called necessary
Bernanke testifies at Senate committee meeting
Head of government agencies and investment banks went before a Senate committee to defend the Fed rescue of Bear Stearns, saying greater economic harm would have resulted if action weren’t taken. Bob Moon reports.
…
Treasury Undersecretary Robert Steel called Bear Stearns a special case, but Alabama Republican Senator Richard Shelby wasn’t convinced:
RICHARD SHELBY: Well we can’t send the signal, if you take the risk and you’re too big to fail, the Fed’s going to come running, and the Treasury’s going to back it, and the taxpayer’s going to be on the hook — can we?
Not to suggest that laws count for much at the upper rungs of the financial world, but was the $29 bn guarantee of the BSC deal even legal in any sense of the word?
Did the $29 bn Bear Stearns guarantee set a precedent?
If it did set a precedent, what does that mean for other financial institutions? Shareholders? Taxpayers? Can we expect to see more of this behavior, or was it a one-time “special case,” as Treasury Undersecretary Robert Steel said?
And, ultimately, was intervention on behalf of Bear Stearns warranted or not?
Do Senate proposals to respike the home building industry’s punchbowl imply the sector has bottomed out? (You can probably guess my answer…)
P.S. Is anyone looking at this as a short entry point?
Thursday, April 3, 2008
Wall Street is betting on home builders
Construction workers build homes in San Ramon, CA
The money on Wall Street is again flowing into home building. Marketplace’s Jill Barshay reports on why investors are betting against the housing bust.
KAI RYSSDAL: The Senate’s still debating its fix for the housing industry. But the smart money on Wall Street has already bought in to better times. Our New York Bureau Chief Jill Barshay reports.
JILL BARSHAY: Even the stocks of the shakiest home builders rose 5 to 7 percent today. Parrish Glover tracks the industry at Morningstar. He says Wall Street is betting on home builders because Congress may take steps to prop up the housing market.
Parrish Glover: For an industry, where cash generation has been minimal, it’s absolutely huge.
The Senate is debating a $6 billion tax break aimed at home builders. The bill would also give Americans a $7,000 tax credit for buying a newly built home.
‘The Senate is debating a $6 billion tax break aimed at home builders. The bill would also give Americans a $7,000 tax credit for buying a newly built home.’
I did an interview with a national magazine this week on these things. We’ll see if it runs. As I told the reporter in some detail, this will only cause more overbuilding and cause widespread pain among all house holders. This should become apparent to all about a year or two later, should it pass.
Can’t say you weren’t warned congress.
So a one time $6billion tax shift off of shack builders is a good thing considering the consequences or am I missing something?
Congrats on the mag piece, if it runs, you’ll let us know, right?
“How’s this for a topic: was this the week that the global housing bubble really started to burst?”
Good choice for a weekend topic.
My parents were visiting D.C. last weekend and we had a breakfast get together with friends and family members on Sunday morning.
My brother in law and my dad’s close friend are senior manager level people at one of the GSEs. As a longtime reader of this blog, I’ve always been interested in their take on the state of the housing market, and up until last fall, these folks tended to poo-poo all the gloom and doom talk about a housing crash….you know, they felt that subprime was just a small percentage of the total housing market and that we were just going thru some hiccups in the fall, but that things would turn around.
Well, last Sunday, these same folks were much less sanguine about housing and the overall economy….but not really gloom and doomers yet either. They talked about places like Dallas, for example, and how its multi-family housing market was “booming” and also felt that places like Atlanta were poised for a recovery since so many people were moving to Atlanta (probably from Florida, but they didn’t say where the migration was coming from).
Bottom line is, I think a lot of “experts” (Shiller, GSE execs, Paulson, et al) want to believe that ONLY the once super-frothy markets are at risk and also economic basket cases like Detroit….but that there are many metro areas that will recover in short order.
How do you know what they “believe” v. what they may be forced to “trumpet” for multitudinous reasons?
They are trying to smooth this problem. That doesn’t make the problem go away of course just schmear it over time like cream cheese on a bagel.
There is method to the seeming madness. No bank can capitalize instantaneously. All this is doing is making sure that the strongest ones survive while the weakest ones will go under anyway.
“these folks tended to poo-poo all the gloom and doom talk about a housing crash”
Not all of them. I heard through the GSE grape vine already back in spring 2006 that the housing bubble had popped.
Talked to my CPA’s office for the first time in eight months, yesterday. Ended up talking to the partner for about 20 minutes. She said this year is unusually…uh…complicated. Reason? Foreclosures. Wrong-way equity. Job losses. Real estate people and mortgage people in particularly bad shape (obviously); but others, as well. This is O.C., California. The office has been in business for 30 years and the woman I spoke with couldn’t recall a similar…”sense of frustration.”
RE: not really gloom and doomers yet either
They need to lose their jobs.
Then you can go back and ask for perspectives.
Psychology of recession
Did Hoz or anyone else on the blog see this…?
http://www.amazon.com/Currency-Trading-Dummies-Business-Personal/dp/0470127635/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1207319087&sr=8-1
Oh lord! Not this folderol now.
What shall we call the American Mrs. Watanabe?
Should the Bureau of Land Management, which controls 264 million acres of U.S.A. land, be forced to distribute one or two acres per credit-worthy tax-paying legal resident (with free and clear title), to compensate for the Big Bailout? Keep your $600 stimulus check. I’ll take two BLM acres in Utah. Thanks! Uncle Sam!
‘the Big Bailout’
Reference please….
Sorry, Ben. If it’s true that “credit-worthy” taxpayers (those not involved in subprime mortgages or ill-conceived heloc’s) will be shouldering an economic burden (moral hazard) induced by the Federal Reserve’s policy of subsidies to corrupt Wall Street investment banks–and, in addition, a burden due to the Federal Government’s policy of debt relief to distressed homeowners with unorthodox mortgages; if this is true, than I am characterizing this as “the Bailout,” for lack of a better term. (at the moment)
Sorry, Ben. I used “Big Bailout” as a catch-all phrase to cover the policy of the Federal Reserve to rescue by subsidy the Wall Street investment banks (not to mention print money like crazy, devaluing my cash); and, additionally, the Federal Government’s intended policy of relieving debt burden on the millions of high-risk mortgage holders at the expense of credity-worthy homeowners and renters.
You write about the Big Bailout all the time. Most recently you wanted to see if one of them “runs”.
If I’m in a boat and it’s taking on lots of water, and I’m bailing as fast as I can with a small cup, but failing, is there a bail out? I’m bailing out lots of water. To me there is lots of bailing out going on in the market. To you, the ship is going down no matter what (and you most certainly might be right), so “there’s no bail-out”. Is this a fair statement?
That would be quite a disaster - it’s bad enough with the states fighting for federal land out here - ever hear of the Sagebrush Rebellion?
Yes, I lived in the Intermountain West during the Sagebrush Rebellion. Wow…that was a long time ago. I haven’t even heard that phrase for 25 years.
Okay, I’ll just take 1/2 an acre. I’m not going to build a factory on it. : )
OK, but it has to be waaaay out in the Big Empty…
This from the previous thread sounds yummy:
******** ******** ********
Comment by BubbleViewer
2008-04-04 06:00:25
“It does seem to me that the system is set up for those that like to game it.”
Read “The Creature from Jekyll Island” by G. Edward Griffin. This housing bubble is just a variation on a scam that has been going on a long time. Griffin describes it eloquently and shows how taxpayers always end up footing the bill.
Everything has happened exactly according to plan. It helps to know the playbook ahead of time. Read “Creature.”
******** ******** ********
I’ve been meaning to ask for this for a while, now: What books should I be reading? I need something with which to feed my obsession at those irritating times when I become too exhausted to sit up and collapse on the floor next to the computer, where I can’t see the screen very well and scrolling is impractical. Besides _extraordinary popular delusions and the madness of crowds_, what else is good to get me through these brief periods where I can’t refreshrefreshrefresh?? Thanks!
“The Creature from Jekyll Island” by G. Edward Griffin.
Damn, that is a great book. It really opened my eyes. He gets a little too New World Orderly but maybe he’s right.
I’d love to know of any other books of this caliber.
“The Creature from Jekyll Island” by G. Edward Griffin.
There are nine holds on this book right now in my regional library system.
How about the housing bubble, the credit bubble, and college price bubble?
We’ve remarked on how lots of people HELOCed phony home equity for Hummers, plasma screens, granite countertops and perhaps gambling. But one long-time use of second mortgages (that fusty term) was putting the kids through college. Indeed, that’s how my parents put me through college (that and my own earnings).
Well, private colleges seem to have increases their costs and charges not in proportion to people’s income, but in proportion to people’s ability to borrow. And tuition soars at public colleges when tax dollars dry up. What happens when the ability to borrow goes down?
Now, in addition to the disappearance of home equity, you have the disappearance of the student loan market.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a8p51DTC.Pzk&refer=home
“No municipal bonds backed by student loans were sold in the first quarter, the first time that happened in almost 40 years, according to Thomson Financial…Without the ability to finance, public authorities in Michigan, Missouri, New Hampshire, Texas, Pennsylvania and Iowa have suspended or limited their origination of loans, according to an April 1 report from UBS AG. The squeeze means students and parents have fewer options to fund college educations. University financial-aid offices are scrambling to update lists of active lenders and help students find less costly private loan alternatives.”
So how will this affect young people whose parents didn’t save? Will the higher education sector have to cut costs, and if so how?
And what does this mean for a guy who has neither AC or cable and rides a bike to work, but has lots of college savings? My kids get to go anywhere they want, because cash becomes acceptance criteria one? Or the cost explodes far beyond my savings, as colleges try to suck of money from anyone who has some?
May well cull the crowd. There is a good percentage that shouldn’t go to College in the first place. It is not a right, sounds harsh but when I look around our local campus it’s evident. Nothing wrong with Tech & Community Colleges for many. Cost is far less, I have watched this in my family.
Most college graduates have no real job skills and are qualified only to be office workers, sales clerks, and car sales people. Additonally, such skill-less graduates learn nothing about the arts and humanities, nor do they learn how to think clearly, write coherently, or appreciate literature. For them college was a waste of their own, and the taxpayers’ money.
Inelasticity of demand greatly distorts the college tuition game, and the schools know it. Sure, if a true depression came about, enrollments would go down at some of the priciest of places, but talk to anyone involved on the financial side of a private school and they’ll tell you that Mommy and Daddy will sell their plasma if necessary to ensure that their little snowflakes can get that $40K/year education.
Most Ivies and the other upper end private schools now reject about 7 or 8 applicants for each one they accept. Even if that number dropped in half, they’d still have no problem filling their classrooms.
University economic policies makes defense spending look like a model of frugality and efficiency. Don’t forget too that some schools have eye popping endowments that will enable them to ride out all but a total meltdown. Harvard has something like $34 billion, and about 15 schools have more than $10 billion.
They’re doing just fine, thank you very much.
Let’s be honest about higher education in it’s present form…
Judging from the results of the past 20 years, most are nothing more than glorified diploma mills.
Big picture concerns:
1) Was America’s economic system originally founded on the basis of laws designed to reward households and banks to engage in stupid behavior?
2) Given that we have devolved into this system of economic management, how do our future prospects look?
1. no
2. significantly important
what can I do? sometimes I try the hard talk, but that upsets people. I’m trying to find the compassion and empathy. No crocodile tears round here.
A friendly word to fellow bloggers. “Pooh-pooh” is the phrase you want to use when reporting on those smug relatives expressing their contempt or impatience. “Poo-poo,” on the other hand, is reserved for those of us who have to change diapers every day. And I don’t mean my own, thank you very much.
Hear, hear.
Poo-poo here; here, poo, here; poo, hear hear!
WHEEEEEEEEEEEEEEE. This is fun. Can we do more of these?
What if I want to “poo-poo” on someone to show my contempt or impatience?
Yes. This method is particularly effective during airline flights.
“Lawmakers from California to Kentucky are trying to save money with a drastic and potentially dangerous budget-cutting proposal: releasing tens of thousands of convicts from prison, including drug addicts, thieves and even violent criminals.”
“Officials acknowledge that the idea carries risks, but they say they have no choice because of huge budget gaps brought on by the slumping economy”
http://news.yahoo.com/s/ap/20080403/ap_on_re_us/prisoners_early_release
___________________________________________________________
When your local or state government runs out of money, not only do the convicts get released into society, so do the out-of-work cops.
they do this to scare the taxpayers into accepting a higher tax
Can’t get money from a dead money tree, can you?
Exactly - they could cut down on pet projects and social programs, but its always “Uh oh, we’ll have to step educating kids, fire the cops, release the criminals, and let houses burn to the ground after firing all the firefighters.”
Of course, the population never seem to wise up to it, and our increasingly Pravda-esque MSM never call the spenders out on it, instead referring to those who think we should actually live within a budget extremist right wing crazies.
Even if Congress shoveled billions of fiat bucks at the states, who believes the states would buy use them to buy houses at inflated prices? Remember the tobacco legal settlement. The money was supposed to go to anti-smoking efforts but as soon as the states got it they split it among the various special interest groups. Same thing here; buy houses but lay off teachers? Buy houses but don’t fix roads? Buy houses but cut heating assistance to seniors? Not gonna happen.
A true bridge to nowhere…
Topic: should there be mandatory age discrimination in home loans such that no one can get a loan that is not fully paid off by the time they are 65?
Of course not, on every philosophical dimension imaginable. I don’t understand this disgruntledness with the idea of old folks getting loans that will outlive them. Are we going to require that people not have financial liabilities when they die? Why not restrict loans on people in the military, or those who smoke cigarettes? Why not just nationalize the lending industry, and let Congress make all the rules?
“Why not just nationalize the lending industry, and let Congress make all the rules?”
If that’s what it takes to clean out the trash I’m all for it.
Topic: bankruptcy reform
An optimal bankruptcy system should be painful for both the person who borrowed and the person who lent the money. So how about this:
A person can declare bankruptcy at will. They lose their ability to acquire new debt. Interest rates on all outstanding debt is set to zero. Wages are garnished at 30% until their current debts are paid off.
Painful for the borrower who must pay their debt back and live a reduced lifestyle.
Painful for the lender who loses interest on their money but eventually receives their capital back.
Consumer sentiment at 35 year low
http://biz.yahoo.com/ap/080404/consumer_fear.html
FED stimulation causes inflation and consumers cut back on spending.
Producers (1968): Sell 25,000% of a play, hoping it flops.
Producers (2008): Sell 25,000% of your hedge play, be surprised when it flops.
Quote from Ben:
“The bubble is bursting all over the globe now, and IMO posters should begin to realize that the media (and some blogs) just use this stuff to get attention. As for me, I’m going to focus on the biggest financial event of our lifetimes, not some insignificant media side-circus.”
This is what I’d like to read about. Exactly what do people envision this event to be like, and how will it likely unfold? How will this utimately affect us all? What can we do to survive?
RE: What can we do to survive?
Don’t live in or near a major city.
And buy a gun.
When all those welfare vouchers become worthless, the recipients are gonna come looking for somebody to blame.
LA riots redeaux.
Which inning are we in?
Found in ebay residential.
1 home in Westlake Trails-1.02 acre reduced$546,000. to $1,600,000.+
Home in Fredericksburg,near Austin, hill country, 3rd to last sentence in Description states
” Prices are only going up”.
Does that sound like “now is the time to buy”?
A weekend topic should be how to capitalize on the shareholder dilution happening amongst wall street firms. As raising capital is currently their modus operandi, existing shareholders are losing their shirts on both ends, dividends and lower share price. However, market capitalization is still near peak levels. How can one have some assurance that stock offerings will be supplanted by the usual reductions in force that are common in non-financial corporations?
Okay, many of you have been waiting, and now it’s happened. People are finally postponing cosmetic surgery due to the declining housing market and job instability related to the housing market:
http://tinyurl.com/4s43oy
Now, before anyone gloats too much, here’s my suggestion for a weekend topic–what would you cut back on if you had to take a pay cut, or lost your job?
I’ll go first. I’d probably eliminate my land-line phone, and eat fewer sweets. Have you seen the prices on cookies & cakes lately?
Don’t think it can’t happen to you, even if you never made a dime off the bubble. I think virtually everyone will suffer for the excesses documented on this blog over the last few years.
Ben, I know this is beaten to death regularly around here (including a bit above), but I’d love to see a separate topic on inflation.
Food prices for many of the items I buy at the local grocer have increased by 15-25% or more just in the last few months, and the local cafe I go to, which only opened 7 months ago, just increased its prices 25%. While there has been some MSM coverage of inflation issues, I think they are really underplaying it - cheese at my local grocer has literally gone up 25% just in the last couple of months, and milk 20%, and many other items similarly. Even without accounting for gas (which has now gone over $4 a gallon for the mid-price gas at the place down the block), it seems inflation is screaming way out of control, like nothing I can recall in my adult life. I think others here have observed similar changes (?), and it seems worth a topic of its own to discuss and record our observations in depth.
If securitization of FCB’s capital outflows is execarbating the inflationary pressures in Emerging CUB…and if the quants using 30 years of bond theory programming, exacerbate emerging market commodity markets…
looks like a bad circle for the CB’s.
Securitization wrapped in bond theory surrounded by sacred cows of dollar hegeonomy?
I’m not sure if thats viable going forward if the steerage in the USS Titanic start looking for a way out.