The Shakedown Of The Real Estate Market Is Upon Us
It’s Friday desk clearing time for this blogger. “Lizzette Nieves keeps the blinds down during the day, makes sure someone is always at home and never leaves the house after sundown. In her Venetia Groves community in Homestead, vandals have targeted vacant homes — a trend on the uptick as the homeowners’ association no longer can afford to operate guard gates. More than half of the neighborhood’s homes are facing foreclosure. ”I’m actually afraid to go out,’ said Nieves, who works for a Homestead title company. Like many, she is behind on her mortgage payments and the value of her home, bought for $210,000 in 2005, has fallen. (It’s now worth about $50,000).”
”’If I have to let my house go, I’ll let it go,’ she said. ‘I’m not going to live in fear.’”
“More than 234,000 or 58.2 percent of Las Vegas homes with a mortgage are underwater, according to a report. An additional 14,088 mortgages, or 3.5 percent, are near that point, bringing the total to 61.7 percent of all outstanding mortgages.”
“Steve Bottfeld, executive VP of a Las Vegas housing consultant, says anyone who bought a home from 2004 to 2007 is underwater and many aren’t going to get government assistance. People should be educated that homeownership is important to wealth and that the housing market goes in cycles, Bottfeld says. ‘It is important that people stay in their homes and not walk away,’ Bottfeld says. ‘They would be walking away from their investment. If they hang onto it, it will come back.’”
“‘It is amazing, stunning and a catastrophe,’ says Richard Plaster, founder of Signature Homes. ‘At every breakfast or dinner table, there is a discussion going on about ‘what are we going to do.’ It is going to be hard-pressed on why people should stay in their house. People have no choice if they are rational.’”
“Plaster says the government’s plan to help reduce foreclosures doesn’t go far enough because it won’t aid those who are so far underwater and will walk away even though they can afford their mortgage payment. ‘It is simply not going to help those way underwater, which is what most of Las Vegas is,’ Plaster says.”
“Foreclosures are through the roof in New York. More than 1,700 city homes were in some stage of foreclosure last month, a 44% increase from January, according toRealtyTrac. Manhattan saw the biggest surge in foreclosure action, with 331 properties receiving notice, up 549% from January and up 402% from last year.”
“‘The increase in foreclosure activity from January to February is somewhat surprising, given that many of the foreclosure prevention efforts and moratoria in place in January were extended through most of February as well,’ RealtyTrac CEO James Saccacio said.”
“In the next couple of weeks, Howard Mack will peel off the carpet in the living room of a house he just bought in Sunrise and install wood floors. He’ll give the two-bedroom house a coat of fresh paint. Then, he’ll begin looking for a tenant. Mack and his partners paid $59,000 for the 1,000-square-foot home and plan to collect about $1,300 a month in rent, he said.”
“This is the ninth house that Mack has acquired with cash in less than six months. He says the group has enough cash to buy at least 40 more South Florida houses in the $50,000 to $80,000 price range. ‘Prices will continue to go down, but we decided to start buying now because the fundamentals make sense,’ said Mack, who anticipates the rent income will cover expenses and generate a profit.”
“‘It’s like the wild, wild west out here,’ said Laura Graves, a Coldwell Banker broker. ‘Buyers are throwing out crazy offers. Sellers are desperate but don’t want to act as if they are. The shakedown of the South Florida real estate market is upon us. Liken it to a hurricane, and it’s a big one.’”
“Americans battered by the biggest slump in home prices on record are facing higher property taxes as local governments struggle to plug budget deficits. ‘The value you pay your taxes on went up while market value went down on half our properties,’ said Chris Jones, the appraiser for Escambia County in Florida’s northwest tip. ‘Try to explain that to a homeowner.’”
“‘They’re maintaining a housing-tax bubble even though values are falling,’ said Arthur Purves, president of the Fairfax County Taxpayers Alliance…from Vienna, Va.”
“An initiative drive launched Friday could give Arizonans a chance to cut their property taxes. Dubbed Prop. 13 Arizona, the measure would roll back the assessed value of homes and businesses to what they were in 2003, before speculators helped spike prices. Phoenix resident Lynne Weaver, who crafted the initiative, acknowledged that…those who bought at the top of the housing market would be paying higher taxes than their neighbors who had been there longer, even if the homes were identical.”
“She said, though, there’s nothing inherently unfair about that. First, she argued, there is nothing fair about the current system, calling the valuations placed on homes by county assessors ‘random and arbitrary.’ Beyond that, she said it makes up for past inequities.”
“‘Is it fair that I’m sitting here in my house and someone down the street decides to sell their house like mine … and some fool, somebody comes along and pays an astronomical amount for the house? Now everybody in the neighborhood is penalized with higher taxes because of that person’s decision,’ she said.”
“As the region slogs through its fourth year of falling home prices, buyers have snatched homes for up to 70 percent below the previous price. But that doesn’t mean their tax bills will be that low. County officials in San Diego and Riverside counties said some foreclosures will probably be taxed at levels higher than the sales price.”
“Randall Smith is prepared to fight his assessment. His company, Smith and Butler Construction in Carlsbad, purchased a foreclosed house in Vista with fire damage for $100,000, in a neighborhood where homes typically sell for about $240,000. He said they will spend about $80,000 fixing up the property. He hasn’t received a property tax bill yet, but chances are it will be for well more than the $100,000 he paid for the house.”
“‘Who cares what the comps are? It should be valued at what it sold for,’ Smith said, adding that he doubts the county valued properties below their sales price during the huge appreciation through 2006. ‘When you buy it at $200,000 and someone else bought it at $500,000 a year later, you know they would tax you at that new rate,’ he said. ‘It’s a one-way door.’”
“Local mortgage defaults hit a new record in February, as the foreclosure crisis spread from lower-priced neighborhoods deep into the well-heeled corners of North County, a report showed Thursday. Kurt Kinsey, a real estate agent in Oceanside, said foreclosures will probably be most prevalent in areas such as eastern Carlsbad, where new developments such as Bressi Ranch and La Costa Greens attracted buyers with little down payment into higher-risk loans called Alt-A and Option-ARMs. Many of those products carried low fixed payments for three or five years and then adjusted upward.”
“‘That will force a lot of them to default,’ Kinsey said.”
“How many homes end up as bank-repossessed foreclosures may depend on the success of President Barack Obama’s $75 billion proposal to lower home payments for struggling borrowers. Ward Hanigan, founder of a San Diego investment firm that buys foreclosures, said the plan will not do much, largely because investors and borrowers who owe more than the value of their homes cannot qualify for any government help.”
“‘We had a huge rainstorm with subprime, and we’ll be pounded with these Alt-As and Option-ARMs, and the ground is just saturated,’ Hanigan said. ‘We can’t absorb it.’”
“The Stimulus Bill has passed- so now what? What exactly does it mean for home buyers? In a nutshell it means if you can afford and qualify to buy a home, do it now. ‘Home affordability in California is at an all time high at 59 percent, according to the California Association of Realtors,’ said Joe Engle, president of LoanSmart Inc.. ‘It is the perfect storm to get the housing market moving in the right direction.’”
“Foreclosure rates in the Vallejo-Fairfield area rank in the top 10 in the U.S., with one in 111 homeowners losing their house. Joining Fairfield and Vallejo were Stockton, at number three, Modesto at four, Merced at five, Riverside-San Bernardino at six and Bakersfield at seven.”
“For Marc Tonnessen, Solano County assessor-recorder, the increased foreclosures mean more homes will experience a temporary reduction in value. Tonnessen said his department has already done reductions on 30,000 homes and likely will make temporary reductions on 30,000 more in the near future.”
“‘Wow, that’s huge,’ he said after hearing the stats. ‘I don’t know if we’re at the bottom or not. It’s hard to tell. We’re still seeing values decline. We may be dragging along the bottom. It could occur at any time.’”
“The sounds of nail guns and buzz saws, noise pollution to some, but the sound of money to others. Florida Training Services President Jeff McGinley remembers 2006 when the sound of construction was common around the state. ‘It was a crazy time but it was good for a lot of companies, but now it’s all pretty much down.’”
“Representative Carl Domino has a plan to boost construction by increasing home sales. ‘Last year housing values went down by about 15% in the state. If there were more buyers it wouldn’t go down.’”
“Growers of landscape trees and shrubs in South Florida saw their business plunge with the crash of the housing market. To stay afloat, many have turned to new crops, planted less, plundered their retirement fund or even threw crops away. One tree farm owner, who didn’t want his name used ‘because it will hurt my business even more,” said, ‘We could not be doing worse. We don’t sell anything. Our sales are down 95 percent from what we sold the past few years.’”
“‘The problem is basically most of the nurseries down here were closely tied to development,’ said Eddie Cequerella, who owns the 60-acre Real Trees Farm in South Miami-Dade County. ‘When there are no homes or golf courses being built, there’s no need for our product. I myself have thrown away palms. Others are throwing away oak trees and tabebuias. I’ve seen nurseries throwing away beautiful royal palms. A few years ago, they were worth $450 to $600. Today there is no demand and everyone’s got them.’”
“At the peak of the building boom, Cequerella said, he would sell about 2,000 plants a month, everything from ground covers to 30-foot palms. Very little besides shrubs for hedges are selling now, he said. ‘I do a lot of brokering,’ he said. ‘I’m buying material for 40 to 30 cents on the dollar. People are desperate. People ask me, ‘What can you pay?’ They’re trying to get jobs and underbidding.’”
“Two model homes at the corner of Freeman and Galligan roads are a constant reminder to residents of this small town of growth that never came. The homes, part of a Warrenville-based Neumann Homes development called The Conservancy, were left abandoned in October 2007 when the company filed for Chapter 11 bankruptcy.”
“The plan was for The Conservancy to feature 985 homes, 6 miles of hiking trails, four onsite parks and multiple tot lots with children’s play equipment. Homes would be priced from $320,000 to $340,000.”
“More than the housing market has slumped in the past year. ‘The economy has changed,’ Gilberts Village Administrator Ray Keller said. ‘There’s a large supply of housing on the market that has yet to be absorbed. As we move forward, we’ll have to wait and see who ends up with the property and what their interest may be.’”
“The United States is returning to the ’sane’ underwriting practices of yesteryear, so money has necessarily become tighter. But if you have a good credit score and money saved, the good news is you can get an incredibly low interest rate on a home purchase or refinance right now, according to Mike Sante, Chicago managing editor of an the Internet site dedicated to financial analysis and information.”
“‘We are experiencing truly record low mortgage rates right now,’ Sante said. ‘We tell people that if they can get a 5 percent mortgage they should be doing handsprings down the street. That is a mortgage that you want to keep forever and not refinance,’ he said. ‘Don’t be greedy and sit back and hope for a 4 percent mortgage. We don’t see that happening.’”
“‘Don’t let the possibility that rates will go a little lower put the kibosh on a great mortgage deal right now,’ Sante said.”
“The subprime mortgage crisis is over, Sante said. Now mortgage experts are seeing people in trouble who have lost their jobs. They are driving a second wave of defaults. And yet another wave remains to be felt. Those are the $750 billion worth of option adjustable rate mortgages, Sante said.”
“These (current) requirements were standard for 30 years before the insanity hit. These were the rules that kept us from getting in trouble and for the great majority of buyers, what they are now requiring is pretty sound. People need to realize that houses are expensive. You have to have some cash to get one,’ he said.”
Another great week! My thanks to those who support this blog. Please check back this weekend.
“58.2 percent of Las Vegas homes with a mortgage are underwater”
——————
That’s just unreal.
It’s articles like this that make me thank my lucky stars that I sold when I did. I checked zillow recently and my house was down about 60% in value from what I sold for. And zillow was always more optimistic than reality indicated.
I knew this was going to happen. But still seeing it actually come true still takes my breath away.
I regularly remember the Realtor who owned the unit below me and who sold it in mid-2007 (it is now in foreclosure) telling me, at that time, “Vegas. That’s what’s hot now.”
The realtor meant that the weather and the craps tables were hot. Well, at least the weather.
All of those houses are underwater only if they are ‘marked to market’. If they can be assessed at more fair prices, say ten years into the recovery, then they are eligible right now for a heloc upgrade! Get ready to ‘cash-out’ all over agian, everybody!
In their wet Ponzi dreams.
pressboardbox,
You say it in jest but there is a whole lot of pressure by the banking taskmasters to do just that.
test
“the value of her home, bought for $210,000 in 2005, has fallen. (It’s now worth about $50,000).”
BWHAHAHAHAHAHAHAHAHAHA!
Eat it…
If the conditions are as she describes, I’d bet her home is actually worth zero.
It’s a shame L-E can’t effectively go after vandals.
What’s sad is that $210K was LOW for Vegas in 2005 … I mean, if you can fog a mirror and get a $700k cash out purchase loan deal au Serrin, how much of a credit risk do you have to be to only get $210k? Sounds like she must have put down a DP, or she would have walked away already?
Actually, this is sort of sad, because while $210K is fairly high in normal times–so maybe it was more house than she ought to have bought (=don’t put all your eggs in one basket)–it sounds like she actually got a house she could afford and didn’t try to reach for the moon … yet she will still lose big.
I know we’re all about doing due diligence around here, and since she worked for a title co. she really should have known better, however … however … it really is unfair to see people with earnest money and honest intentions getting shafted by the actions of the specuvestors.
Most of us here (well, except me–I was in school and quite happily renting/subletting in 2005) seem to have been shafted by the bubble simply by being unable to settle down and buy. Instead, folks here have had to navigate a jungle of broke LL’s and topsy-turvy financial markets for the last few years. Fortunately, a lot of the people here used some common sense and managed to avoid losing their nest egg (some even profited off the madness by selling near the peak). This blog has been a breath of fresh air as well as a great font of good info and advice. When Yahoo Finance was advising America to go into debt up to their eyeballs, HBB was a loan voice in the wilderness crying, “What goes up, must go down.”
PS: when will the masses crucify Orman and Kiyosaki? Cramer is (kind of) getting his (again), but he wasn’t the only pied piper.
Gator,
She’s in FL not Vegas…. or are you writing figuratively considering the entire damn housing market was casino like?
I regret the callousness of my post above. Why?
My 10 year old daughter had a school friend over yesterday evening. When my wife picked this girl up from her house to bring her here, the girls mom unloaded on my wife about their housing saga. These people came out of Brooklyn in 2006 and bought in Dutchess County at the very peak. The got two notes (80 and 20 presumably to preclude PMI) that have already reset. At this point, the only bills they are paying is the mortgage notes and power. My wife indicated they look beat up and worn out. I’m certain their daughter will be a casualty of her parents stress and pressure.
Let the shakedown continue!
Until housing is once again affordable for the average person, without the financial games.
Until the people who caused this are burned badly enough to think twice the next time, for at least a generation.
This won’t happen again for 100 years. Everyone who was alive when this bubble burst have to die, and then another 10-20 years has to pass, so that even those who’ve heard stories about the “Great Housing Bust of 2006″ are dead.
And frankly, because of technology, it may not happen then either. You have to remember, EVERY word we are saying here, and is being printed in all the papers/news outlets will be saved forever. It will take some really bright RE agents (if they still exist, which is doubtful) to come up with NEW reasons to get someone to buy.
Don’t be so optimistic. Short Attention Span.
Everything that happened the last time around was in print, in the library, if you cared to look it up.
Heck, you could just rent Coco-Nuts, or so I’ve heard (haven’t seen it yet).
1980’s: The Money Pit
1990’s: Glengarry Glen Ross
Sheeple
are Smart™get ShornYep - seems like this is a 20-30 year cycle really.
I don’t remember what I had for dinner last night.
Well, no not really, but what Did you do 3 days ago?
Short attention spans are in large supply.
Hi, guys. So, sorta serious question here. I have a chance to attend a lunch where Harvey Goldschmid (http://en.wikipedia.org/wiki/Harvey_Goldschmid) will be speaking on “The Current Financial Crisis.” Needless to say, if I can make it, I am going. Hey, it’s only $15.
Any suggestions for pithy, pointed yet still polite questions?
(Hey, the guy was my Corporations professor. When I started that class I didn’t even know companies could have different classes of stock. He did a good job with the teaching.)
Oh, and sorry I’ve been kind of AWOL this week. I caught the really nasty virus that is invading DC like the Visigoths. At least by staying home for a few days I managed to avoid the bronchitis that everyone else is getting as secondary infection.
Take care.
Hope you get better soon.
Thanks. Feeling better now. Not entirely back, but way better.
While you are sick…..talk to as many NAR people that you can….close up.
Now, now, now. Talking to NAR people is not a nice thing to suggest to a sick woman. I need to save my strength.
No questions for the former SEC commissioner?
Where are the indictments? How about that.
Over the last few years there have been instance after instance of market manipulation: internet pump and dumps, bogus Blackberry rumors. Remember the infamous Buffet buying rumor from early last year? Every time, you can find option or futures activity in the millions of dollars before the manipulation. Hedgies and others are profiting big time, brazenly breaking the law–the evidence is everywhere. So where are the indictments?
Professor, would you still have donated money to Dodd for President in 2007 had you known that Chris Dodd was a “Friend of Angelo” ?
“Like many, she is behind on her mortgage payments and the value of her home, bought for $210,000 in 2005, has fallen. (It’s now worth about $50,000).”
________
And none of the locals would touch it.
There’s settling problems.
Then, there’s the South Dade Landfill with this:
“Materials Accepted
Garbage, trash, yard trash, off-road and automobile tires, construction and demolition debris, and dead animals.
Asbestos is also accepted but you must obtain authorization form the Miami-Dade Department of Environmental Resources”
Of course, it’s in a flood zone.
Sounds like South Dade is really taking it on the chin, between the failed RE market and the failed “ornamental plants” business.
Those who go back to food crops in Homestead will prosper in the end.
“Those who go back to food crops in Homestead will prosper in the end.”
That’s the hope Palmy!
It shoulda stayed that way, tomatoes, cukes, some smuggling here and there….
For the New Years predictions at HBB, I predicted a 50% correction for FL and that some properties would be bought for the back taxes.
Baring the Tres printing $7 T in new Bush $20,000 bills, the prediction stands.
50%: Oh, I think FL is correcting more than that … more inventory, less ppl, and the runup was 200% plus in many places.
Homestead: Robert Is Here
They’re on the end of the BRT line from Miami now.
I saw the house building in Homestead in maybe 2006. Seemed kind of sad to ruin good farmland like that. I hate sweet corn but the rest of that produce is mmm mmm good.
Palmy - went through Mango for the first time last week. Really nice, in the southern part. Just a couple of miles from I-4 but it felt just like old Florida.
Any Nation stupid enough to have listened to soccer Mom/PT RE agents and basement-based errand boy brokers DICTATE how much house that they could afford and were pre-qualified with them, deserves this much PAIN….and More !
40 lashes each with the JT so they don’t walk…they hobble away
“If they hang onto it, it will come back.”
I tried that with my youth–it doesn’t work!
Some prices from the Florida 1926 bubble still have not come back…
Neither from the dot.com bubble.
And in the early 1990 California crash, the prices came back after 7 years. Of course, the peak was much smaller, so if we extrapolate, the prices will come back in…umm…30 years.
Regarding the so called Prop 13 initiative measure filed last week, there is no doubt that property tax reform is long overdue however this “slash and burn” measure reads as if it was written by someone in way over their head.
Like their failed initiative offering during the last election cycle, it is poorly thought out, it has incorrect spelling and more importantly does not appear to meet the constitutional and statutory requirements necessary for initiatives to be placed onto the ballot.
Those who improved their property after 2003 would not pay their fair share since the taxable value can not be increased for any reason. The worst case scenario is that you purchased a lot for $10,000 prior to 2003 and then built an identical $1,000,000 home to the one next door. Your value would be $10,000 and your neighbor’s $1,010,000. Under weaver’s system, your neighbor would pay $5,050 each year in taxes as compared with your $50 payment. Now imagine switching places with your neighbor!
More importantly, if we ignore the many drafting problems, it would shift the tax burden substantially. Of great importance to some, it does not address how property purchased on 12/31/2003 is to be valued and most importantly it would decimate local services.
If you were one of the lucky ones to have a $50 tax bill, know that your children will make up for it when they buy a home. Don’t you think that Washington has with its “bailouts” shifted just about enough of the tax burden onto our children and grandchildren without a measure like this to exacerbate the situation?
The Arizona Tax Revolt has been sharing its extensive knowledge of the property taxation system and our carefully architected solutions with the Legislature. The end result of this work will be a couple of strike everything bills to be submitted by Senator Gould. Keep an eye out for these in the coming months and ask your representatives to lend their support for passage.
Respectfully,
Marc Goldstone, Chair.
http://www.ArizonaTaxRevolt.org
Apologies if this is a repost:
http://finance.yahoo.com/family-home/article/106732/Suburbia-R-I-P
The suburb has been a costly experiment. Thirty-five percent of the nation’s wealth has been invested in building a drivable suburban landscape, according to Christopher Leinberger, an urban planning professor at the University of Michigan and visiting fellow at the Brookings Institution.
Already low or middle-income families priced out of cities and better neighborhoods are moving into McMansions divided for multi-family use. Alison Arieff, who blogs for The New York Times, visited one such tract mansion that was split into four units, or “quartets,” each with its own entrance, which is not unlike what happened to many stately homes in the 1930s. The difference, of course, is that the 1930s homes held up because they were made with solid materials, and today’s spec homes are all hollow doors, plastic columns and faux stone facades.
There is also speculation that subdivision homes could be dismantled and sold for scrap now that a mini-industry for repurposed lumber and other materials has evolved over the last few years. Around the periphery of these discussions is the specter of the suburb as a ghost town patrolled by squatters and looters, as if Mad Max had come to the cul-de-sac.
“The difference, of course, is that the 1930s homes held up because they were made with solid materials, and today’s spec homes are all hollow doors, plastic columns and faux stone facades.”
-but the countertops are granite. That is all that will be left. Arcaeologists will discover ‘granite patterns’ arranged in the shapes of neighborhood road patterns and think the granite slabs were aligned in this array to communicate with some ancient gluttony god.
LOVE THIS!
I also love “The Motel of the Mysteries,” especially the part about the sacred points on the toilet paper.
My friend has a house built in the late 1920’s. No insulation in those walls!
But it’s Florida! Just open a window!
(roflcopter)
I can one-up that. Freshman year (Fall ‘75) I roomed in a building built c. 1840. Other kids were playing extreme frisbee (didn’t call it that, though) in the hall. The fist of one went through the plaster wall, came out with a handful of straw. We all took turns sticking our heads in hole, checking it out. Oh well, time for another tequila sunrise; chase it with a 16 oz. Iron City.
Oh yeah, and would someone please turn down that Starland Vocal Band? Please?
How about tombstones? Granite is forever.
Ive read about this phenomenon but have yet to see it first hand. I live in the city but hang out in the ‘burbs a lot visiting friends who fled once they popped out a kid or two. My parents and inlaws both live in McMansion-y suburbs too. And as far as I can see it’s still white middle class families with kids that live there and not the “low income” (read illegals and other minorities) residents.
I saw a bunch of ghost towns on a recent trip to Georgia. It was eery. You first think, Wow, bet they’d take almost anything to sell these.” Then you think about having no neighbors, wondering if your house will be broken into while you’re at the store or work and all that. And 4-8 residents out of a planned 60-80 sharing the cost of maintaining the community pool, clubhouse and entrance. If those were to go into disrepair, even fewer people would be interested in buying or the prices would be hammered further.
It must really suck to have bought the house of your dreams and to have been proud to be one of the first in your neighborhood, only to watch the whole place die.
So that’s the difference then. New subdivisions vs. old established ones. The ghost towns are happening in new areas. But not because the suburban model is broken, but because of your basic supply and demand where there is too much supply and not enough demand. If anything this will make the well established suburbs even more in demand as people eventually will want nothing to do with any new areas.
R.I.P. 2007-2008…The years that The American “DEMAND” Died
It will make the more established suburbs more desired. Qualification for and availability of credit (or cash or some combination of both) will determine the real demand.
Very interesting report notag. Thanks. I’ve long found these Florida subdivision tracts incomprehensible. What retired person really wants to live in an area where he cannot walk to the store? Even worse, no corner bar. Some time ago we visited a very nice place called Bonita Springs which prided itself on having “no commercial establishments”. You had to drive 20 minutes to pick up a loaf of bread. My wife, who loves her morning rolls fresh from the bakery, immediately nixed the place.
Oh god, yeah. One of the only good things about Amherst MA was being able to go downtown early in the morning and pick up a croissant (breakfast of champions).
Once people get into their 70’s and especially over 80 driving becomes very difficult & dangerous. Some of these ‘communities’ have golf carts but seriously, do you want to spend your golden years eating whatever the ‘community’
cafeteriadining court deigns to cook up? Come on.And I hear ya about the pubs, but those can be dang loud at night … especially in the rougher NE ‘hoods where you have drunken fights in the early AM. (Women screaming at their men, men trying to kill each other over some perceived slight, that stupid drunk guy/chick who has to pick a fight with somebody, bottle smashing teenagers.) Worcester, MA was like that…
“…‘Prices will continue to go down, but we decided to start buying now because the fundamentals make sense,’ said Mack, who anticipates the rent income will cover expenses and generate a profit.”
Rental Rule: As housing prices come down..so do rental revenues
It is a bit more complicated then that. For example, if housing prices came down but incomes went up by enough (before prospective buyers had a chance to make up for a net worth deficit due to the market crash and recession), one could see rising rents while home prices were still low, due to a dearth in demand. In fact, we saw this back in 1996, when we bought a condo for less than the amount for which it would have rented.
One could also see rising rents in response to a housing crash in progress, as new entrants to the local real estate market avoid catching falling knives by renting, thereby accelerating the housing crash while rents are stable. I believe we have seen something like this in San Diego for the past couple of years.
What you are unlikely to see is unemployment surging past 10 percent, with no sign the rate of increase is slowing down, coupled with rising rents and falling home prices. Falling employment tends to put a serious damper on both rental and home purchase demand, at least at the high end of the market, as many folks need to downsize their living space to reflect a loss in income and credit. One could, however, still see an increase in low-end rents even during a recession, but high-end rents and home prices are likely to crash pretty hard.
“‘It’s like the wild, wild west out here,’ said Laura Graves, a Coldwell Banker broker. ‘Buyers are throwing out crazy offers. Sellers are desperate but don’t want to act as if they are. The shakedown of the South Florida real estate market is upon us. Liken it to a hurricane, and it’s a big one.’”
contrast to:
‘Home affordability in California is at an all time high at 59 percent, according to the California Association of Realtors,’ said Joe Engle, president of LoanSmart Inc.. ‘It is the perfect storm to get the housing market moving in the right direction.’”
Let’s see… when the market falls apart, its like a really bad storm going through… But somehow this Perfect Storm makes things better to buy? Ummm… no. We’re not there yet. Get rid of the foreclosure moretoriums and I’ll sing a different tune (after the pig goes through the python).
Got Popcorn?
Neil
It is the perfect storm to get Used Home Sellers moving on to a new career.
Another thought…
“The United States is returning to the ’sane’ underwriting practices of yesteryear, so money has necessarily become tighter. But if you have a good credit score and money saved, the good news is you can get an incredibly low interest rate on a home purchase or refinance right now, according to Mike Sante, Chicago managing editor of an the Internet site dedicated to financial analysis and information.”
Let’s see… best time to buy a home is when its really tough to get a mortgage. So if you have money and a good credit score, you should expect the ‘reward premium’ for standing on the sidelines to grow as we return to ’sane’ underwriting practices of yesteryear.
Let’s see… I seem to remember reading about 50% down payments being the norm during *tight* credit. Now, I’ve been big on the return of down payment; but I do not expect we’ll see 50%. But for Coastal CA… I’m not thinking there will be enough mortgage insurers sticking their fingers into the dike to keep it from going underwater. I could see 50% being required on jumbos. It used to be the norm for super-jumbos. My… there are a lot of homes for sale that require a jumbo loan.
Got Popcorn?
Neil
FHA loans only require 3.5% down. As long as the govt stays involved in housing, this madness will never end. Well it will end eventually I suppose when every last American has lost $50K in real estate and collectively the country wakes up.
I think that what is happening in many places is that word is out that bottom-feeders can get into an FHA house for virtually nothing - the seller arranging on the side to cover their tiny down payment. Then they never make a payment. How long do you think it will take for them to be physically evicted, versus from a rental unit? I think the taxpayers will be burned more and more with zero-payment defaults as word spreads that it’s like 6-12 months of zero rent.
FHA is the new sub prime lender.
http://tinyurl.com/aratmg
“I think the taxpayers will be burned more and more with zero-payment defaults as word spreads that it’s like 6-12 months of zero rent.”
No doubt about Chip. As of last fall FHA loans have been going bad at a rate of two dozen a day.
“I think the taxpayers will be burned more and more with zero-payment defaults as word spreads that it’s like 6-12 months of zero rent.”
Correct me if I am wrong, but I believe the principle on FHA loans are taxpayer guaranteed, meaning the lender is protected from making an FHA loan even if it is clear the buyer is going to go into foreclosure, while the taxpayer is the automatic bag holder.
But please correct me if I am wrong, as I don’t claim to be an expert on FHA lending rules.
Actually, FHA rules presume fraud if a borrower makes no payment or only one payment on a loan. I’m not sure, but I think the FHA then has the right to kick the loan back to the originator… Of course, if the originator is broke, I don’t know who’s left to hold the bag.
Well bob,
It seems you don’t know who the sucker is.
You know what that means in Vegas…
One neighborhood that interests me is Old Town Alexandria, VA, just accross the Potomac River from DC. Quaint 17th & 18th c. townhouses. But according to Realtor.com more than 50 of them are for sale - for
$1 million or more. LOTS of correction need in 22314.
Yes, I know that ‘hood well. It’s once of the nicest areas in greater DC, imo. (Unless you are gay, then it s—s because it’s in Virginia… sigh.)
HOWEVER. Please, walk around Old Town and take careful note of the location of the various houses. Some blocks are very much more desireable than others. Only a few blocks from the nicest rows you will come across the PJs. Yes, really, P.R.O.J.E.C.T.S. Now, these are decently built, brick housing units, fairly low, with yards with washing lines and trees, but it’s still gubmint housing.
You need only walk a few steps from the high end boutiques to come across Wendy’s and empty lots.
Many old cities have the rich and poor cheek by jowl, true, but some blocks are more ‘enclave’-ish, while others are right next to the pain and should be discounted accordingly. (Think about what security will cost you, also risk that your block will go down in value over time.)
Since the mid-1990’s, DC area has seen a reclaiming of ‘old town’ areas, with nicer tenants going in, fixing up of buildings, and generally a valuing of properties that had been overlooked. But this doesn’t go on forever, and in the mania there are probably some blocks that went “upscale” that certainly will not stay that way.
If I were you, I would get some GIS layers of Old Town Alexandria and look at proximity to various factors like boutiques (good), bars (maybe not so much), the water, the Metro, the public housing, the high rises (ug-ly), etc. Also, look into the parking sitch. And develop a model for what you think these units are worth–after all, you’re talking about a major investment. Then you can compare to the wishing prices on the actual units and determine what’s a deal and what’s nonsense.
I have a suspicion that more marginal areas are going to want higher prices (for being “newer” “renovated” “dedicated parking” “luxury”) because somebody went head over heels in debt to buy/build the unit during the boom time. These are exactly the units I would avoid.
I think one of the biggest lies of the housing bubble is going to turn out to be that new construction is better. Even if you ignore the construction quality (which you shouldn’t), the instability of newer neighborhoods and the ones that underwent urban renewal is going to be epic.
You are always going to be in trouble in a neighborhood that is overwhelmingly owned by people who bought during the bubble. In DC, parts of Capital Hill (not all of it) might duck this fate, but that is all I can see. The other good places are going to be the ones that were good before.
Doesn’t the fact that interest rates are being held artifically low make this a horrible time for real-estate “investment” in general? Even if it is tough to get a mortgage: When interest rates go back up, house prices will drop.
Yes, it most certainly does. Interest rates have nowhere to go but up, and when they do go up; as you point out, it will force home prices down.
And, it’s not “tough” to get a MTG. It’s just not like it was during the boom. You know, they want you to actually have a job, and income; silly things like that. And they don’t want to lend 10X your income on a home anymore either; so I suppose you could say it’s hard to get a loan for 800K if you make 80K a year.
Tough to get a MTG (in my book) is NOTHING other then 20% down 720+ FICO, 2.5X income as max allowable loan amount. And, I’ve said many times (and still say), if that were to become the case tomorrow; home prices would fall 50% across the board overnight.
“Representative Carl Domino has a plan to boost construction by increasing home sales. ‘Last year housing values went down by about 15% in the state. If there were more buyers it wouldn’t go down.’”
I couldn’t have said it better myself.
(i’m not sure exactly what he said, but i couldn’t have said it better…)
I believe he’s saying that if more people bought houses, prices would rise.
I think the problem is that people are only buying ONE house, if that. Soaking up all that excess inventory means that people have to step up and buy more than one. After all, they’re great investments with all those tax write-offs and everything, and once inventory tightens up then prices will recover.
(hahahahahahaha)
It really amazes me just how stupid some of these people are. And they’re grown-ups!
That reminds me of that BS econ class I took in college. One thing I did take away from it: PRICES ARE SET ON THE MARGINS.
Mr. Market, meet Ms. Margin. I think she has some pent-up aggression and anger management issues going on right now. Love in the insane asylum.
There are few things worst in business than you and all of your competitors just sitting on the SAME massive, expensive inventory with little or NO demand.
How’s that Dream Price and your House A$$ET HOLDING COSTS Hanging there Mr. & Ms. Wile E. Flipper ?
“‘Who cares what the comps are? It should be valued at what it sold for,’ Smith said, adding that he doubts the county valued properties below their sales price during the huge appreciation through 2006. ‘When you buy it at $200,000 and someone else bought it at $500,000 a year later, you know they would tax you at that new rate,’ he said. ‘It’s a one-way door.’”
DON’T BUY UNTIL THERE ARE ENOUGH COMPS TO PREVENT THE ASSESSOR FROM SCREWING YOU ON YOUR ASSESSMENT. EVENTUALLY A PREPONDERANCE OF EVIDENCE IN THE COMPS WILL FORCE THEM TO ACKNOWLEDGE THAT THE FORECLOSURE PRICES ARE THE MARKET VALUE.
Is it really true, as our top economic policymakers’ words and actions suggest, that the U.S. government can guarantee anything and everything they want for free? Some savvy observers appear to have taken note of this amazing guarantee facility which is available at no cost to insure whatever the U.S. government chooses.
Financial Times
Wen calls for US fiscal guarantees
By Geoff Dyer in Beijing and Alan Beattie in Washington
Published: March 13 2009 19:19 | Last updated: March 13 2009 19:19
Chinese Premier Wen Jiabao on Friday urged the US to take measures to guarantee its “good credit”, expressing concern about the “safety” of his country’s huge holdings of US government debt.
Mr Wen’s shot at the US’s deteriorating fiscal position – on the eve of this weekend’s G20 finance ministers’ meeting – was paired with a promise to increase China’s public spending this year to boost its economy if needed.
One cannot simply look at interest rates charged different racial groups and summarily conclude the group charged the higher interest rate was victimized. For example, suppose the buyers in one group used subprime loans to purchase homes at far higher price-to-income ratios than the buyers in a second group. At fair market prices, with other things equal, group one would have to pay higher interest rates to cover a higher probability they would go into default, since their home purchase puts greater strain on the family budget.
I am not claiming that blacks had a greater incidence of using subprime loans to purchase homes they could not afford than did other racial groups, but rather that one needs to look deeper than these racial advocacy groups bothered to look to draw any meaningful conclusions about whether discrimination occurred.
US black rights group sues banks for racist lending
9 hours ago
WASHINGTON (AFP) — The NAACP African-American civil rights group on Friday filed lawsuits against US lending titan Wells Fargo and the US branch of Britain’s HSBC, accusing them of “institutionalized racism.”
“African-American homeowners who received subprime mortgage loans from these lenders were more than 30 percent more likely to be issued a higher rate loan than Caucasian borrowers with the same qualifications,” the National Association for the Advancement of Colored People (NAACP) said in a statement.
The lawsuits were filed in California, the group said.
Wells Fargo was quick to respond, denying the allegations, which it called “totally unfounded and reckless.”
“We have never tolerated, and will never tolerate, discrimination in any way, shape or form in any of our business practices, products or services,” Wells Fargo said in a statement.
“We have been working with the NAACP for the past two years to develop a partnership that would benefit the NAACP, its constituents and our communities, so we are dismayed that the NAACP has chosen to abandon that constructive dialogue in order to pursue this litigation.”
The problem, PB, is that the data shows that the would-be debtors are equally qualified. That means they had the same income-to-debt ratio, the same credit score, the same of everything (deemed by the bank to be) relevant to making the loan. Of course, as has been pointed out on the HBB repeatedly, you can make anyone a default risk if you only offer to them terms that are impossible to meet unless everything goes perfectly — high interest rates, neg-am loans, loans with teaser rates that reset to usurious rates after a short time, and so forth.
But, on discrimination, it is much easier to establish the prima facia case in the case of lending than in many other areas. Employment? Very unclear what employers may desire. Rentals? Small landlords often don’t even advertise. Arrests? The data is not very good on criminal involvement by race (you really don’t believe blacks are laundering all that drug money, do you — in what, all the banks that blacks own?). The only fact on criminal involvement I have seen is that the research shows that 100% of drivers violate some law during their trip, meaning police officers have a great deal of discretion in whom they stop.
Unlike the examples above and many other situations, banking has only one criterion, and it is very clear–can the debtor pay back the loan? Whatever algorithm they used to evaluate that question for members of one racial group must give you the same answer when you evaluate members of other racial groups with the same characteristics. Otherwise, the bank treated some group differently. And that, my friend, would meet the conventional definition of discrimination.
IAT
Oh STFU NAACP, please!
The CRA was set up to specifically force banks to lend money to black people who couldn’t otherwise never qualify to get a loan. In order to make those loans, banks had to charge higher interest rates due to the higher risk. And now that black people who could never otherwise qualify a loan were given a higher interest rate on loans that the banks were forced to make….well it’s racist.
And some people want even more govt intervention in housing and the economy in general?
well said.
But wrong… (hopefully my long explanation why will materialize).
How can one tell the reason why one group was more often charged a higher rate than another? After all, a mortgage loan is a contract between two parties. If I were going to get one of those, I would inform myself about what interest rates were for people like me (with respect to credit rating, not skin color) and would walk away from anyone who tried to overcharge me. In fact, our household could have easily financially hung ourselves by purchasing a home at the bubble peak with a high risk loan, but we avoided doing so; hence there is no way we could have even been included in the (nonrandom) sample used to do the study.
And then there is the question of whether, after all legally allowable factors in the lending decision have been taken under consideration in the right hand side of the logistic regression equation, some racial groups still have a higher residual default rate. I don’t know the answer to that one, but I bet a mortgage loan underwriter could tell you.
What I do know is that if two racially distinguishable groups have equal default risk and a particular lender or group of lenders systematically overcharges one of the groups, then an opportunity is created for another lender (or group of lenders) to cherry pick the discriminated group by offering them lower interest rate loans (if even behind closed doors) until the arbitrage opportunity is eliminated by market forces.
Er, as for drug money laundering, it’s laundered through legitimate businesses (fronts). The trick is not to deposit TOO much cash, an amount that would be suspicious for the business you supposedly have. White and black criminals both know this game.
But back to the point, what happened was ‘affiliation fraud’ where the mortgage broker, which was introduced in the Black community typically through church groups, of the same racial or ethnic group as the lender, “steered” the borrower to a subprime/garbage loan so they could make a bigger commission.
We saw many examples in the Black community where a person with low IQ (or an elderly, easily confused person) who had been set up originally with an affordable loan was conned into signing their title over to a scammer (from the church) and ended up losing their home. Really, really scummy.
There were MANY examples of MTG brokers LYING to their customers (marks) about their credit score and eligibility for credit. Whites were victims of these scams as well. What I saw here in Florida was that Blacks were not trying to buy some ridiculous house (though prices in their ‘hoods did go up), but I did see that Blacks were more trusting in financial matters. They thought that the law would protect them against predatory lending.
A lack of knowledge about money, finance, and the law has tripped a lot of people up.
“Of course, as has been pointed out on the HBB repeatedly, you can make anyone a default risk if you only offer to them terms that are impossible to meet unless everything goes perfectly — high interest rates, neg-am loans, loans with teaser rates that reset to usurious rates after a short time, and so forth.”
What if 100 pct of white people offered such terms said NO (like our household did) but only 90 pct of black people offered such terms said NO? The resulting data would be interpreted by your regression “analysis” as proof of discrimination, even though the lender offered exactly the same terms to applicants in both groups. The problem is that there is a supply side of the market (the lender’s offer) and a demand side (the borrower’s willingness to accept). Your data is missing an endogenous selection variable, which is the borrower’s willingness to become a FB, and this could potentially differ by racial groups.
This example is representative of a fundamental flaw which contaminates most regression analysis done by economists, which is pretending that a convenience sample is randomly chosen (i.e., through a controlled experiment). Check out this reference if you want to educate yourself (or if you would rather, keep on blathering on and on about discrimination “proven” by fundamentally flawed studies):
* Statistical Models and Shoe Leather
* David A. Freedman
* Sociological Methodology, Vol. 21, (1991), pp. 291-313 (article consists of 23 pages)
* Published by: American Sociological Association
* Stable URL: http://www.jstor.org/stable/270939
Abstract
Regression models have been used in the social sciences at least since 1899, when Yule published a paper on the causes of pauperism. Regression models are now used to make causal arguments in a wide variety of applications, and it is perhaps time to evaluate the results. No definitive answers can be given, but this paper takes a rather negative view. Snow’s work on cholera is presented as a success story for scientific reasoning based on nonexperimental data. Failure stories are also discussed, and comparisons may provide some insight. In particular, this paper suggests that statistical technique can seldom be an adequate substitute for good design, relevant data, and testing predictions against reality in a variety of settings.
PB, you’ve raised a lot of interesting points that, if it were most situations, would be relevant. But lending is not like other situations, the data available is different and better, and thus the criticisms are not relevant:
1)Banking is highly concentrated. There are precious few mom-and-pop banks to which one may turn. So, the claim that people can just refuse ignores that refusal is costly, too.
2)Banks have to, by law, base their decisions on the financial data they collect on applicants. Thus, the feds know all the variables allowable into the model.
3)You are using Becker’s “discriminators will lose out to non-discriminators” view. That view has been shown to be wrong both analytically:
Goldberg, Matthew S. 1982. “Discrimination, nepotism, and long-run wage differentials.” Quarterly Journal of Economics 92: 307-319
which provides a taste theory of discrimination that results in unending discrimination, and empirically.
4)You (and others) seem to be suggesting that if blacks faced discrimination in lending, the claim implies whites (or some other racial group) did the discriminating. In other words, you think the claim means we should now be blaming someone other than blacks. But there is nothing in the claim that banks discriminated against X that implies not-X did the discriminating. I believe this conflation of charge and blame is what is driving much of the emotion (as suggested by the observation above about church groups and so forth).
5)They don’t have a convenience sample. They have the population of applicants (or, if they don’t, the Feds do). Banks can only lend to applicants, so you have the population of people from whom banks can choose. Thus, one could argue that standard errors are of no value because, having the population, you don’t need to test whether the coefficient is sufficiently precise. Further, having the population, selection issues are irrelevant.
6)Would I like to have more data. You betcha! I’d love to know all the products offered to each applicant. Alas, standard economic theory states that one can use what people select as a revelation of their preferences. As there is no economic theory that claims blacks will prefer higher interest rates than do whites, the preferences revealed by these patterns are the preferences of banks.
7)For a more up-to-date, non-blaming theoretical treatment of discrimination in general (race, sex), see:
Lucas, Samuel R. 2008. Theorizing Discrimination in an Era of Contested Prejudice: Discrimination in the United States. Philadelphia, PA: Temple University Press.
IAT
“They don’t have a convenience sample. They have the population of applicants (or, if they don’t, the Feds do).”
There is one (of several) flaws in your argument — I have neither the time nor the patience to point out all of them. You are interpreting the pool of all loan applicants as the population, when in fact it is a (potentially biased) sample of the population of potential home buyers. My household could have (endogenously) selected itself into that sample circa 2005, but we did not, choosing instead to rent a rather smallish abode compared to the temporary lap of luxury in which we could have landed ourselves had we been willing to financially hang ourselves with a subprime loan. Hence we had no opportunity to contribute to the percentage of loan applicants on whom the lenders forced ‘unfairly high’ interest rates.
PB, everything in your comment is correct, except the conclusion. Your points would be relevant for many issues, but the feds are only concerned with one question: when two people apply for a loan, are they treated the same.
Several weeks ago you mentioned that you thought I had a good grasp of statistics, but was limited in my economics understanding. Today I’ll note that you have a good grasp of the statistics, but a limited understanding of their application in the legal arena.
I find a lot of your comments to be witty, insightful, and very helpful PB. This, however, isn’t one of them.
IAT
“As there is no economic theory that claims blacks will prefer higher interest rates than do whites, the preferences revealed by these patterns are the preferences of banks.”
Whether blacks prefer higher interest rates to whites is the wrong question, and the question is empirical, not theoretical. The right question to ask is whether more blacks than whites would be willing to sacrifice household financial stability for the pleasure of living beyond their means, and I suspect the answer may be yes, especially if government programs explicitly encouraged them to indulge.
Do you have any evidence to the contrary? (I suspect not…)
IAT –
I similarly find many of your comments insightful, but apparently in this realm you have revealed a preference to align yourself with the bastion of political correctness.
PB, why is this concept so difficult for you to grasp? They said that the applicants were equivalent. That means:
The same earnings
The same outstanding debt
The same quality of neighborhood for the house
The same cost of the house
The same size mortgage
The same credit history
The same age
The same sex
The same work history
Can you tell me something else that is allegedly different and relevant? If it is different by race, that doesn’t matter, because the analysis is based on people who are the same on that factor despite it differing, on average, by race, as long as that factor is a legitimate factor for the bank to use.
So, the only way that your explanation for the discrepancy (blacks are willing to commit financial suicide) works is if blacks with equivalent characteristics as whites are offered worse terms. If so, that’s discrimination.
You obfuscate matters when you bring the social scientists’ concern (wanting to estimate a structural parameter) with the legal concern (wanting to see if people who apply are treated the same). In the first all your claims about your family not applying for the loan and such are relevant. The legal issue, however, does not concern itself with people who refuse to apply — the banks long ago established they should not be held accountable for making loans to people who do not ask for a loan. They can’t now turn around and explain the racially disparate loans they made to equally-qualified applicants on the basis of adverse selection into the pool of applicants. Again, that’s a legitimate statistical question, but an illegitimate legal one.
IAT
PS–I’m not being PC, I’m being American Discrimination is injustice, and patriots stand against it. Yet, as I already indicated, in the vast majority of cases one cannot use regression models to establish discrimination. Yes, I’ve read Freedman. And Rubin. And Holland. And more. In fact, I’ve contributed to that literature. In the vast majority of situations regression is not helpful. In lending, however, it is.
IAT
“They can’t now turn around and explain the racially disparate loans they made to equally-qualified applicants on the basis of adverse selection into the pool of applicants.”
I just don’t get this argument that banks would discriminate against one ‘equally qualified’ applicant in favor of another on the basis of race, unless there is a missing variable in the regression which explains the basis of the discrimination, as this would amount to leaving money on the table for a rival bank to collect. Perhaps you could explain the theoretical basis of your counter to Becker’s argument (though I have to confess I did not know I was citing his argument)? Or is it that you think banks would be willing to forgo profit opportunities for the pleasure of discriminating against a racial group in a way which is likely to get them into trouble? This simply makes no sense whatever.
PB, after all that has happened — liar loans, bogus appraisals, 30/1 leverage ratios — you really want to hang your hat on the claim that discrimination is irrational, so they certainly wouldn’t do it? C’mon.
I am not a mind-reader. I cannot tell you why. But I can tell you what. Regression models do work for lending, and those models tell us that equally-qualified people of different races buying equivalent properties were treated differently. That’s the burden of proof I need to meet, and it has been met. I don’t have to become a psychic or psychologist to explain why they did that. That’s for the banker’s therapist.
IAY
Let me try one more time to illustrate why I think your assumption that nonrandom sampling makes no difference is incorrect. Suppose we have two groups who are identical in all aspects you mentioned (The same earnings
The same outstanding debt
The same quality of neighborhood for the house
The same cost of the house
The same size mortgage
The same credit history
The same age
The same sex
The same work history) except they differ in two respects:
1) Group 1 has blue skin and group 2 has purple skin.
2) Due to cultural differences, the Blues have a higher are willing to pay higher rates on loans than are Purples.
Now suppose lenders offer two types of loans: high interest and low interest (if you think it is possible for all banks to charge identical interest rates on all loans, please stop reading, and I give up). Blues are only willing to borrow at low rates, while Purples are indifferent between borrowing at high rates or at low rates. Fifty percent of loan offers are at high interest rates and fifty percent are at low interest rates.
Now suppose that a regression analyst collects a data sample which includes 1000 Purples and 1000 Blues. All the Blues borrowed at low interest rates, while all the Purples borrowed at high interest rates (as they were the only ones willing to pay them). The regression analysis will naturally prove discrimination against the Purples, even though the lenders made the same offers to both groups, and the Purples were the ones who chose to sign the papers to repay the high interest rate loans, while the Blues would not have even bothered applying for such loans, and hence were not even exposed to them.
Dang — I got my Blues and Purples mixed up somewhere along the line. I hope that did not obscure my point…
(Trying again…)
All the Purples borrowed at low interest rates, while all the Blues borrowed at high interest rates (as they were the only ones willing to pay them). The regression analysis will naturally prove discrimination against the Blues, even though the lenders made the same offers to both groups, and the Blues were the ones who chose to sign the papers to repay the high interest rate loans, while the Purples would not have even bothered applying for such loans, and hence were not exposed to them, giving the appearance that lenders only offered high rates to the Blues.
Maybe I need to adjust my low interest loan assumption to include some Blues. Here is a story: Suppose that each loan offer is either high or low interest rate with probability 1/2 and each applicant is Blue or Purple with probability 1/2. Thus 1/4 of (potential) loan applications involve each of the following pairings:
(Blue/high rate)
(Blue/low rate)
(Purple/high rate)
(Purple/low rate)
However, since Purples reject all high rate offers, the resulting data has the following proportions:
1/3 (Blue/high rate)
1/3 (Blue/low rate)
1/3 (Purple/low rate)
Again, your regression analysis will prove discrimination, when none in fact existed.
PB,
You provide a crystal clear statistical illustration that re-states a point you have made repeatedly. My disagreeing with your point is not because I do not understand it. I disagree with your point because it is statistically correct, yet legally wrong.
The problem with your analysis is this: If the banks offer the same rates to both groups, but blacks (or blues, or whatever) always take the high loan when offered, while the others reject it, any banker aware of the law willstop the practice! Why? Because it is discriminatory in effect, and the law considers such procedures discriminatory (disparate impact principle). So, even if your “perfect case” were true, it would still be legally liable discrimination.
Another reason why regression models work in lending, but not elsewhere — we know all the factors banks are allowed to use. That is not the case in many other areas.
I suggest you take a look at some of the citations I listed above. I am happy to provide additional ones but, not today, I am heading out. The ones I have provided will clarify many of these issues. Discrimination is at the nexus of statistics, sociology, history, and economics. If one bases one’s analysis on one field alone, one will consistently mis-analyze the phenomenon. And, the first step to mis-analysis is to presume that discrimination is irrational and thus it cannot exist. The last 10-30 years of business history should tell us — rationality’s not the standard businesses consistently use.
Take care.
IAT
IAT — Thanks for an enjoyable debate, and if I said anything offensive, I apologize.
‘So, even if your “perfect case” were true, it would still be legally liable discrimination.’
To the extent you are correct, I disagree with the law. I don’t believe the law’s purpose should be to interfere with an individual’s right to financially hang himself in exchange for short-term enjoyment. I guess I am just more libertarian at heart than you are if we disagree on this philosophical point.
I read the dialogue above, which was extremely informative, btw, and I have my own anecdotal comment.
I was in a situation some 20 years ago where I was buying a property and was offered a mortgage substantially higher than the prevailing rate. I’m black hispanic. I accepted it for a variety of reasons: 1) I was young, utterly inexperienced and uncomfortable dealing with the whole mortgage process. 2) My mortgage broker recommended to me that I falsify a rather minor detail on my application, but it weighed on my conscience. And due to #1 above, I feared that I would be somehow caught in the lie and disallowed or worse, so when the offer came through, I grabbed it. 3) The bank was an established first tier institution and I assumed that the rate that they offered to me would be the best I could hope for. 4) I was aware that I hadn’t done due diligence but I was also in a situation where I needed to immediately relocate so I just wanted to get the affair over as soon as possible. 5) I felt confident that I could pay the loan at the higher rate.
So, other than the fact that my mortgage broker and everyone involved in the loan process was NOT black, I would say I pretty much fit into the stereotype PB outlined above. I did occasionally wonder in the following years whether the broker and loan officer had guessed, because I was black, that I’d settle for a higher rate (hence discriminating), or whether, as PB speculates, they made a high-ball offer to everyone who came along who looked naive, and I was just foolish in not making more of an effort to bargain it down.
In any event, more recently, I went looking around for a bigger place and again, I was offered, by two different banks, a mortgage that was close to 2 percent higher than the prevailing rate. Despite that fact that by then I had a 800 credit rating, zero debts, substantial assets, etc. And no hanky-panky on my mortgage app. One of the banks’ applications was entirely electronic so they had no direct way of knowing my minority status except through my last name and from my current and prospective residential tracts. So, if they did discriminate, it would have to be on that circumstantial basis. Particularly, the neighborhood I was moving TO was a minority neighborhood with an above average default rate. It stands to reason that the banks would make a higher offer in that case. But also, it also stands to reason that if I wanted the very best offer, I’d need to be prepared to shop around. And it seems to me that that is something, when dealing with mainstream institutions, a substantial portion of blacks are a bit uncomfortable doing. We tend to overpay for cars, for groceries, for clothes, and while there are doubtless pockets of discrimination in society, I think some of it falls upon us — for some of us, we haven’t quite accepted within ourselves that we’re no longer 2nd class citizens — and for those of us who feel entitled to first class service, in some cases we just don’t realize that even for white folks, fair treatment doesn’t just fall in your lap. You have to work for it.
PB,
Thank you for an enjoyable debate as well. Nothing you said was offensive, and I am not easily offended. And, I apologize if anything I said was offensive, too.
As for the law, anti-discrimination law deserves scrutiny — many on all sides are unhappy with different aspects of it. Perhaps that is something for another discussion some other time.
IAT
“…they made a high-ball offer to everyone who came along who looked naive, and I was just foolish in not making more of an effort to bargain it down.”
All offers that are not the minimum-priced offer might be construed as high ball — this is the essential nature of decentralized markets! And BTW, on reflection, I believe my wife and I overpaid for our previous loan, but we did not have time to shop around for a better deal. Of course, there was no problem from a discrimination standpoint, as we are white, and hence our government does not care if we get screwed by greedy lenders.
The danged stock market seems to have bobbed its way up and down through enough day-to-day gyrations to equal a fifty percent haircut!
Financial Times
Stocks still missing entertainment value
By John Authers, Investment editor
Published: March 13 2009 19:59 | Last updated: March 13 2009 19:59
Politics, investment and entertainment inevitably impinge on each other from time to time. But anyone trying to mix them should take care.
That is at least one of the lessons from the past two weeks, which have seen US stocks drop to their lowest since August 1996.
First, President Barack Obama attracted ridicule, and anger, for a foray into investment advice.
“What you’re now seeing is profit and earning ratios starting to get to the point where buying stocks is a potentially good deal,” he said, “if you’ve got a long-term perspective on it.”
He presumably meant price/earnings ratios. The reaction showed that Americans disliked being given investment advice by their commander-in-chief. His obvious discomfort with basic market terminology attracted ridicule among professional investors.
He added that he did not look at the “day-to-day gyrations of the stock market” and that the stock market “is sort of like a tracking poll in politics”. “It bobs up and down day to day,” he said. “If you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”
Critics complained that he was trivialising the damage the stock market had done to people’s savings, and that the market was not “bobbing up and down” under his watch, but falling relentlessly.
Buy stocks now, or get priced out forever!
Wall Street Journal
* March 13, 2009, 3:27 PM ET
Stock Market: “Sale of the Century”
By David Wessel
The market selloff has gotten so bad, says Obama economic adviser Larry Summers, that the Dow Jones Industrial Average today — adjusted for inflation by the Consumer Price Index — is at the same level it was in 1966 when Lyndon Johnson was president.
“Although there could be many ways to question this calculation, that the market would be at essentially the same real level as it was in 1966 when there were no PCs, no internet, no flexible manufacturing, no software industry, and when our workforce was half and our net capital stock as a third of what it is today, may be regarded by some as the sale of the century,” he said in a speech to the Brookings Institution.
BTW, the stock market went through one of its great historic bear markets beginning in 1966, not to end until 1982 or so. Don’t take my word for it, but rather look it up in Robert Shiller’s Irrational Exuberance — see the P/E chart near the beginning of the book. There were three great secular bear markets in twentieth century U.S. economic history, each lasting for 16 years or more, and each taking the P/E ratio (not profit to earnings, Barry) from 25 to well under 10, by Shiller’s calculation of P/E, which uses a less volatile trailing average earnings estimate than the current earnings-based measure used by Wall Street shills to sell you stock.
The first one ran roughly from 1901-1921; a second from 1929-1945; the third from 1966-1982. The latest one began in 2000, and has at least another seven years to go to match historic predecessors.
But if Summers says the price was good back in 1966 and the price is just as low now, I guess now is a good time to buy stocks…
One problem that exists today that didn’t in the 1966-82 period is that the US has gutted and hollowed out businesses, factories and corporations backing these stocks NOW.
Can you say…we have a recognized, new and improved, Lack of CONfidence in the Wall Street Fun and Game Fraud Boyz ?
Mikey –
Not that I really disagree with your point, but there were some serious structural problems in the late 1960s that may have helped account for the slow burn of share prices for the ensuing 16 year period after 1966. I lived in the midwest at the time, and saw the burned out city where rioting had occurred, and the shuttered manufacturing plants which used to churn out GM automobiles. One could argue that Detroit (and its midwestern manufacturing base) has been on a downhill slide since at least the early 1960s, if not before, which continues through today, and the Chrysler bailout of the early 1980s interrupted a very long term trend.
To his credit, at least Summers did not try to pick a bottom. (So far, those who have tried have ended up with very smelly fingers.)
Wall Street Journal
* MARCH 13, 2009, 3:40 P.M. ET
Summers: Timing of Turnaround Is Unclear
By TOM BARKLEY and HENRY J. PULIZZI
Lawrence Summers, a top adviser to U.S. President Barack Obama, said Friday that he is confident that the administration’s plan to boost growth and revive financial markets will work, though he acknowledged that the timing of a turnaround is unclear.
In what he called “the boldest economic program to promote recovery and expansion in two generations,” Mr. Summers told the Brookings Institution that the administration is aggressively tackling the problem through the stimulus package, financing stability plan and efforts to support the housing market.
“No one can know just when its positive effects will be fully felt. No one can predict when this crisis will be resolved,” he said in prepared remarks. “But in resolution, I am confident there is enormous opportunity for both Americans and for the United States of America.”
Can anyone recall W talking about a post-bubble economic growth model? I consider this a promising sign — at least OBwan gets it!
From the WSJ article linked above:
Separately, President Barack Obama said his administration is working to address blockages in credit markets, and create a model for sustainable long-term growth.
“It is very important even as we’re focused on the financial system and the credit markets, that we are laying the foundation for what I’m calling a post-bubble economic growth model,” Mr. Obama said after a meeting with former Federal Reserve Chairman Paul Volcker, who leads the White House’s Economic Recovery Advisory Board Chairman. “The days when we are going to be able to grow this economy just on an overheated housing market or people…maxing out their credit cards — those days are over.”
“We are spending every day working through how to get credit flowing again so that businesses large and small as well as consumers are able to obtain credit so that we can get the economy moving again,” the president said.
““The days when we are going to be able to grow this economy just on an overheated housing market — those days are over.”
Well may I ask then why he is spending $275B to prop up the inflated prices of homes via foreclosure bailouts and 3.5% down FHA scam loans that people are getting and not even making 1 payment?
Or are these types of questions off limits and give me a 1-way ticket to unpatriotsville for daring to dissent from THE ONE’s vision?
I would be interested if anyone has any insight to how propping up home values fits in with the plan to stop relying on an overheated housing market to prop up the economy? Perhaps Rahm Emanuel could offer a clarification?
Now to seal the deal wouldn’t it be great if the federal government enacted a new federal property tax say for 10 percent of the homes value. If you want homes to go down fast that would do it. Imagine if you owned (sorry rented from the bank) a 500K home and had to pay 50K a year to the feds, if that happened that 500K would be worth about 8 dollars. Think this is an impossible senario–well maybe, but it tax revenues continue to fall it could become reality.
“How many homes end up as bank-repossessed foreclosures may depend on the success of President Barack Obama’s $75 billion proposal to lower home payments for struggling borrowers. Ward Hanigan, founder of a San Diego investment firm that buys foreclosures, said the plan will not do much, largely because investors and borrowers who owe more than the value of their homes cannot qualify for any government help.”
Is that $75 billion just for San Diego County, or is it supposed to solve the foreclosure crisis for the whole country?
To get an idea of the magnitude of the problem we face here in San Diego, let’s do a rough order of magnitude calculation:
- About 1 million households live here (3 million residents).
- Say about seventy percent of them own homes, amounting to 700,000 homes in the area.
- Say the value of area homes is off by about 40 percent from a peak level of about $500,000 per home.
- A loss of $200,000 for each of 700,000 homes adds up to a total home equity loss of $140 billion, for San Diego County alone. Now remind me what was that $75 billion dollars for the whole country supposed to fix?
I apologize that I am too unmotivated to get more accurate data than my round figures, but I suggest the order of magnitude is in line with what a more accurate and careful calculation would show.
I’m against the bailout, but, PB, that’s a silly “analysis.”
1)The bailout is not to take everyone who’s house is worth less than when they bought it and restore their paper losses. So, the 700,000 San Diegans who lost $200,000 per house are not getting $200,000 per house to restore their investment on that basis.
2)One is bailout eligible if one owes no more than 105% of the “current” value of the house. Thus, by your numbers, SD can expect to receive approximately $0 of the federal bailout. I know my calculation is kinda rough, but I think I have the magnitude right. More important, the roughly $0 SD can expect to get frees the $75 billion for areas of the country that might actually be salvageable.
The bailout is a bad idea, and probably more window dressing than anything. But, the SD example is pretty . . . unhelpful. The truth is the hard hit areas will get virtually nothing out of this plan.
IAT
It is silly to refer to my illustration as an “analysis,” which it is not. I merely meant to illustrate that $75 bn in bailout money is a drop in the bucket compared to the magnitude of the problem. I am sorry if you have a hard time seeing the point I was trying to make, but perhaps to hammer it home, you could try figuring out the collective home equity loss for the whole country, then figure out how much of it is borne by households who used MEW to leverage themselves up to the hilt right up until the crash, and then think about how many of those households are out of work and out of money to pay their mortgages. I am sorry this has to be spelled out in so much detail to make my point, as I am sure you are bright enough to connect the dots yourself with a little effort.
“Thus, by your numbers, SD can expect to receive approximately $0 of the federal bailout.”
I know that. I was trying to be sarcastic, but I guess my effort failed.
your effort dident fail the majority on this blog prof. Bear. I for one always enjoy your postings. You provide me lots of eye opening data. Keep up the great work!
Thanks, glad to hear that some readers did not confuse my sarcasm with analysis, and perhaps even found a bit of humor in it.
PB, I know you were trying to be sarcastic, and, yes, the effort failed. It failed because your illustration is . . . silly. It’d be like saying, “My employer gives me $1000 to spend on dentistry ths year, but how is that going to help my hurting ankle?” It’s not. It is not meant to help the hurting ankle.
San Diego is not a target of the bailout. All of California is not a target of the bailout. And, anyone underwater to any substantial degree is not a target of the bailout. You make it sound like they believe $75bn is going to restore everyone directly, and if they did believe that they’d be stupid. In fact, they’ve very precisely (if unwisely) targeted a very small set of homeloaners. And, they’ve talked optimistically (i.e., politically) in an effort to restore faith in the system. I wouldn’t think anyone on HBB would be confused by the difference between their talk and their action.
Finally, we long ago established that the marginal consumer sets the house price. They may be thinking that if they backstop a small set of homeloaners they (think they) can afford to backstop, they can stop the slide, on the thinking that their efforts will establish the new “marginal buyer.” I disagree with that theory, but it does have some logic, flawed though it is, behind it, and, further, is a far cry from suggesting $75bn will directly bail out everyone.
IAT
Contrarian signal inflation is on the way?
Wall Street Journal
* MARCH 13, 2009, 9:48 P.M. ET
With Deflation Possibly Near, This Economist Is All Abuzz
Long Calling It, Mr. Shilling Says Investors Can Profit
By LARRY LIGHT
SPRINGFIELD, N.J. — While most investors fear deflation, Gary Shilling is looking forward to it.
The idiosyncratic economist manages about $100 million for clients from a small office here. For many, many years, he has predicted an era of falling prices that never arrived. Now, finally, it just might.
He has a batch of advice for investors on how to weather deflation: Don’t expect your house’s worth to rebound. Stash your money in apartment real-estate trusts and conventional Treasurys. Don’t invest in companies that carry a lot of debt or in inflation-protected Treasurys.
The last time deflation appeared was in the Depression. U.S. prices slid 32% from 1929 to 1933. Suddenly, many observers these days fear that the popping of the housing bubble, along with the financial crisis, could be pushing the U.S. toward a new deflationary era. The consumer-price index including food and energy dropped 0.8% for December, year over year, and was flat for January. When the February CPI is reported on Wednesday, many expect it to be flat or negative again.
“U.S. prices slid 32% from 1929 to 1933.”
Hummmmm… Should we believe the California Association of Used Home Sellers’ gloomy statistical evidence that prices are already off by way more than 40 percent?
For release:
Thursday, Feb. 26 2009
C.A.R. reports sales increased 100.8 percent; median home price declined 40.5 percent in January
LOS ANGELES (Feb. 26) – Home sales increased 100.8 percent in January in California compared with the same period a year ago, while the median price of an existing home fell 40.5 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.
“Statewide sales in January edged past the 600,000 threshold for the first time since October 2005,” said C.A.R. President James Liptak. “The strength in California home sales in recent months signifies that the market is gradually working its way through the large numbers of distressed sales that have followed in the wake of the troubled mortgage problem. With favorable home prices and historically low mortgage rates, affordability in the California housing market is now at its highest since the start of the decade.”
…
The median price of an existing, single-family detached home in California during January 2009 was $254,350, a 40.5 percent decrease from the revised $427,200 median for January 2008, C.A.R. reported. The January 2009 median price fell 9.5 percent compared with December’s revised $281,180 median price.
The Pandemic of Fear is Upon Us.
I sure wish I did not feel it in my own life, but fear is contagious, and few are as brave as the Ben Jones’s of the world.
Wall Street Journal
* OPINION: DECLARATIONS
* MARCH 13, 2009
There’s No Pill for This Kind of Depression
Six months after the collapse, a “pandemic of fear.”
By PEGGY NOONAN
It is six months since Lehman fell and the crash (or the great recession, or the collapse—it’s time it got its name) began. An aspect of the story given less attention than it is due, perhaps because it doesn’t lend itself to statistics, is the psychic woe beneath the economic blow. There are two parts to this. One is that we have arrived at the first fatigue. The heart-pumping drama of last September is gone, replaced by the drip-drip-drip of pink slips, foreclosures and closed stores. We are tired. It doesn’t feel like 1929, but 1930. People are in a kind of suspended alarm, waiting for the future to unspool and not expecting it to unspool happily.
Two, the economy isn’t the only reason for our unease. There’s more to it. People sense something slipping away, a world receding, not only an economic one but a world of old structures, old ways and assumptions. People don’t talk about this much because it’s too big, but I suspect more than a few see themselves, deep down, as “the designated mourner,” from the title of the Wallace Shawn play.
I asked a friend, a perceptive writer, if he is seeing what I’m seeing. Yes, he said, there is “a pervasive sense of anxiety, as though everyone feels they’re on thin ice.” He wonders if it’s “maybe a sense that we’ve had it too easy in the years since 9/11 and that the bad guys are about to appear on the horizon.” An attorney in a Park Avenue firm said, “Things look like they have changed and may not come back.” He contrasted the feeling now on the streets with 2001. “Things are subdued. . . . Nine-eleven was brutal and graphic. Yet because there was real death and loss of life folks could grieve and then move on.” But today, “the dread is chronic. . . . Tom Wolfe’s Masters of the Universe were supposed to be invincible. The pillars of media were supposed to be there forever. The lawyers were supposed to feed through thick and thin. Not anymore.” He quoted Ecclesiastes: “The heart of the wise is in the house of mourning; but the heart of fools is in the house of mirth.” We are worried, he said, “about a way of life, about the loss of upward trajectory.”
The wise were mourning in 2005, while the fools were mirthing it up.
We have been a bit ahead of the game, no? Maybe that is why I don’t feel nearly as glum as Ms. Noonan’s artsy lawyer friends…
Some good news to report, we’re producing less trash!!! http://www.latimes.com/news/local/la-me-trash25-2009jan25,0,5995857.story
‘It is important that people stay in their homes and not walk away,’ Bottfeld says. ‘They would be walking away from their investment. If they hang onto it, it will come back.’”
In Vegas, people who don’t walk away will be dead and buried before home prices come back.
Here is what this genius Mr. Bottfeld said in 2006. Why does the media continually quote these guys after being so wrong so often?
“Bottfeld predicted the housing market will be ready for another boom by the end of 2007. “We have the same conditions that formed before the previous boom,” Bottfeld said.
From In Business Las Vegas Nov 3-9, 2006
“It is important that people stay in their homes and not walk away,’ Bottfeld says. ‘They would be walking away from their investment. If they hang onto it, it will come back”
Wow!!…The Pets Dot Com Sock Puppet HAS finally found WORK !
Nieves: another NAR-complex fellow traveler (she worked for a title co.) who doubled down by investing in RE. (Duh! That’s like Enron! Work for the co. AND put all your retirement in its stock!)
America: the land of unlimited opportunity, boundless optimism, and a dearth of horse sense.