Mr. Bernanke, How Much Should I Borrow For A House?
I asked this question as a weekend topic. “Mr. Ben Bernanke,
“Since you and the President have taken it upon yourselves to drive house prices higher, I thought I’d cut to the chase and ask you how much I should pay? You may know that house prices here in Flagstaff are really high compared to local wages. But the President has an answer to that; the new subprime ObamaLoan!”
“So with funding on its way, and market forces wiped away with trillions of printed money (thanks to you) and artificially low interest rates (also thanks to you), I just need a hint on how much to borrow. See, I don’t want to be left behind. I want to get in. And I understand your position is that this is going to save the economy. Boy, I want some of that glory!”
“So how much? $500,000 should create a few jobs in Flagstaff, right? And if millions of us borrow that much, happy days will be here again, right? I promise you and the President that if you give me an ObamaLoan, I will submit multiple offers, over asking, even if no one else is bidding for the house. And if you’ll let me, I’ll borrow and buy multiple houses, and not even rent them out so as to keep inventory low.”
“Anyway, just shoot me an email and let me know if $500,000 is too low. I’m really glad you know just how much houses should cost, all over the country, at the same time. - Ben Jones”
One said, “I’m sure it’s an innocent oversight, but you forgot to promise Mr Bernanke that you will pay back that loan.”
I replied, “That’s easy, because when I buy these houses with my ObamaLoans, my wages will go up. Bernanke said so.”
Added another, “Not only that, but after a few years the houses you bought will be worth 3x what you paid for them. You’ll then be able to refinance them, pay off the loans and buy even more real estate.”
One asked, “Are we going to blow through the 2006 peak RE prices and what should the Federal Reserve do different this time? Last time I remember irrational exuberance statments and not much else. it kinda crashed on its own when the loans started going bad. All the leverage off the bad loans came crashing down very quickly. Will the same thing happen again?”
And one said, “P.S. I don’t hate Ben Bernanke. But with bubbles blowing right and left in every corner of the global economy, U.S. household home ownership and labor market participation plummeting, and the greatest U.S. wealth gap since 1929 in the wake of the great Wall Street bankster heist of 2008, I can’t say I much care for his policies, though.”
“P.P.S. You totally missed the last bubble when it inflated right under your nose and imploded, and now you are totally missing the echo bubble, even as your very own QE3 MBS purchase policy blows it up a little bigger every day of the year.”
The Washington Post, October 27, 2005. “Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.”
“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”
“Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.”
“‘House prices are unlikely to continue rising at current rates,’ said Bernanke, who served on the Fed board from 2002 until June. However, he added, ‘a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.’”
“Fed Chairman Alan Greenspan and Bernanke have both said it is unrealistic to expect the Fed to identify a bubble in stock or real estate prices as it is inflating, or to be able to pop it without hurting the economy. Instead, the Fed should stand ready to mop up the economic aftermath of a bubble.”
“In late 2000, looking ahead to the possibility of a sharp fall in then-lofty stock prices, Bernanke concluded, ‘history proves . . . that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.’”
“And in words that might come to mind if housing tanks, he said the economic effects of falling asset prices ‘depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers.’”
‘One said, “I’m sure it’s an innocent oversight, but you forgot to promise Mr Bernanke that you will pay back that loan.”’
Repayment doesn’t matter, as the loans are federally guaranteed against default. Further, since they are securitized into MBS, the Fed can buy them as part of its $40 bn a month in QE3 purchases of MBS, and bury them on its toxic mortgage Superfund balance sheet forever. Once buried, toxic mortgage debt can never harm a single investor.
do you think all the principal on the US treasuries the FED has bought will ever be paid back once those treasuries mature?
In reality once a bond matures the issuer is suppose to pay back the money borrowed , correct? during the time of the bond the issuer pays a little interest for the benefit of using that money over whatever time is agreed upon by the two parties. If a bond is sold to someone else before maturity then the new owner gets the interest payments and gets their principal back when the bond matures.
I just dont see where all the real buyers will be to buy all these treasuries at such low rates.
I think part of the plan might be simply to issue more treasuries to pay off maturing treasuries. Seems like there will always be unlimited demand for treasuries from the FED.
“do you think all the principal on the US treasuries the FED has bought will ever be paid back once those treasuries mature?”
Why does it matter if the fiat money printing press owner has the Treasurys in its possession?
well they do have all the treasuries on their books. I’m just saying that at some point in the real world those treasuries mature and the US govt is suppose to give back principal.
How many more people will go into poverty this year from inflation?
What “inflation”?
I recall reading that the US government has never paid back what it borrowed for WW2. I don’t know if that’s true, but your questions are missing a larger point. With the direction we’ve taken, none of the government debt will ever be repaid, and probably not even much of the interest.
‘The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for. The $61.6 trillion in unfunded obligations amounts to $528,000 per household. That’s more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt.’
‘The (federal) debt only tells us what the government owes to the public. It doesn’t take into account what’s owed to seniors, veterans and retired employees,” says accountant Sheila Weinberg, founder of the Institute for Truth in Accounting, a Chicago-based group that advocates better financial reporting.’
Now we’re told, we’ll grow out of it. We’ll inflate it away. Time will tell. But at it’s core, the premise behind central bank money creation is that you can get something for nothing. That a corporation can print wealth. I don’t buy it.
“…the premise behind central bank money creation is that you can get something for nothing. That a corporation can print wealth. I don’t buy it.”
Economists don’t buy it either, actually, and anyone who says otherwise is lying. I recall one of the first things our freshman economics professor told the class was, ‘There is no such thing as a free lunch.’ My freshman physics professor shared the same wisdom (I think it was dressed up as the Second Law of Thermodynamics, or somesuch…).
They must know something we dont because no one seems very worried about all this debt.
Some will say, but isn’t wall street getting rich from this money printing? Yes, but that is a transfer of real wealth from one to another, not a creation of wealth. But then won’t wall streeters spend it and benefit us all? Or put another way, why doesn’t the central bank just create a trillion dollars and give it to bloggers like me, who will then spend it and the economy blossoms. Setting aside the inequality issues, why wouldn’t this work?
The central banks of the world are already doing this in a way and have for years and we’re still in a funk. Let’s say the Fed loans me a billion bucks at really low interest rates. What do I do with it? Try to find a way to make a return on it. This money flows into all sorts of yield chasing activity, and simply forms economic imbalances like bubbles. Then something blows up, like junk bonds, and here’s your newest crisis.
In the Washington Post article above, Greenspan and Bernanke are said to believe that the Fed can’t see bubbles, only “mop up” after they form. This is saying, “we could be creating a bubble that’s going to put millions out of work right now and we wouldn’t know it.” That’s a heck of an admission.
That’s a heck of an admission.
I see the problem of central banks is that they are able to strangle an economy, but they are not able to produce real economic growth. In between they are able to produce bubbles, which eventually tend to strangle an economy by the way they burst.
The source of real economic growth lies elsewhere.
‘no one seems very worried about all this debt’
How about the riots in Europe? The bank account looting in Cyprus? The one-after-another debt ceiling thingys in DC? The sequester? The student loans? I understand that some think debt is just forgiven willy nilly every day. But what I see is the bankers wanting every dollar they can get and more.
“Try to make a return on it.”
Party-pooper.
If a bank handed me a couple of million bucks by just fogging a mirror, I might just have to change it into an easily transportable form, and disappear
……..change my name, and start partying 24/7/365. And change my name to “Makin’ it Rain”.
‘The source of real economic growth lies elsewhere’
Allow me to think out loud, but in a slightly different angle. What’s the source of real wealth? (Because I can grow by stealing from my neighbor, and endless growth isn’t sustainable).
In a basic form, I grow wealthy by producing something via my efforts or knowledge. Then I preserve this wealth by not spending it. If I’m smart, I’ll invest this deferred spending into something that is also productive, giving me a return, further adding to my wealth. (This has the added benefit of providing capital to productive aspects of the economy). If a large enough group of citizens take this path, a nation becomes more wealthy.
Simple enough. So why don’t we see more of this activity? First, many occupations today aren’t really productive, but rather a segment of the larger consumption economy. And what can people do with deferred spending anyway? Savings accounts don’t return much. So we see yield chasing, risk taking, such as buying the stock of a flavor-of-the-month cell phone manufacturer (that actually makes the phones in China). The stock goes up, then maybe it goes down. But I don’t see much wealth created in walkie-talkie gadgets made in China. The incentives are just all wrong.
What would Mr Bernanke say to my question? He might say, “buy what you can afford”. To which I would reply, “but I don’t have a 20% down payment, and much of what I earn would go toward interest and principle”. Since there’s not enough deferred spending to borrow, somebody has to come up with the money. Mr Bernanke says, “I can do that.” And Mr Obama will see to it that I don’t have to put down 20%; 3% will do. But what about the risk that I lose my job or don’t want to pay this money back or just plain find the debt too much to handle? No worries there; the Federal government will back this loan. Again, the incentives are working against real wealth creation. Instead of deferring spending, I consume monies I don’t even have.
But what I see is the bankers wanting every dollar they can get and more.
Which is why I don’t believe there will be “cramdowns”
My freshman physics professor shared the same wisdom (I think it was dressed up as the Second Law of Thermodynamics, or somesuch…).
And I concur with both professors on a fundamental level—and yet I find myself wondering:
Is it possible to have some form of an economic placebo effect from central-banker liquidity that has a non-zero return?
The placebo effect is _real_—in other words, it can be scientifically proven to exist with well-structured double-blind studies—even though the “drugs” patients are given in such studies are definitely _not_ real.
Could the appearance of taking actions via money have any similar effects?
I see the problem of central banks is that they are able to strangle an economy, but they are not able to produce real economic growth.
I would argue that they cannot really strangle an economy, at least not what I refer to as the “true” economy.
IMHO, there are really two economies: one that is cash-based, driven by fundamental needs, and very hard to tinker with; and one that is debt-based, driven by rates and borrowing, and dealing primarily in non-fundamental needs.
The former is the economy that soldiers on even in the midst of a massive downturn such as GD-I and our current economic malaise. The latter is the one in which almost all bubbles occur.
I would posit that the Fed can MASSIVELY affect the latter, including either pouring gasoline on it, or strangling it as you suggest; it has much less effect on the former, having a hard time to drive it either into boom or bust.
I will be the first to admit that this is not a perfect model, and there are some things that are clearly in a blurry area in the middle—such as the debt-driven bubble in housing, somethin that is traditionally a fundamental need. But I think there is some amount of truth to this model.
I like it.
“Or put another way, why doesn’t the central bank just create a trillion dollars and give it to bloggers like me, who will then spend it and the economy blossoms. Setting aside the inequality issues, why wouldn’t this work?”
That’s an easy one. It’s because you aren’t a banker.
“the Federal government will back this loan.”
They’ll backstop the lender, not the borrower so you’re still out.
Also…. delayed consumption has a powerful effect on ones personal economy and bank account. Myself, Bill in LA, Karl Morris and GoonSquad are testament to that.
delayed consumption has a powerful effect on ones personal economy and bank account.
Me three.
“The Exponential Power of Delayed Consumption”
http://www.mydollarplan.com/the-exponential-power-of-delayed-consumption/
“Delayed consumption has a powerful effect on ones personal economy and bank account.” Totally agree!
I just dont see where all the real buyers will be to buy all these treasuries at such low rates.
You’re missing the obvious: that real buyers will not be buying all of these Treasuries at such low rates.
But I’ll happily buy some for, say, twenty cents on the dollar after rates return to something approaching reasonable longer-term rates.
Does is matter if the Fed’s balance sheet swells to $450 trillion?
The discussion about creating jobs in the bits bucket is applicable to this topic. Bernanke’s plan is to boost house prices to lower unemployment. As far as I know, this concept wasn’t even challenged. So I buy a house. The mortgage brokers, lender, realtor makes a few bucks. Was anything created or produced? And it’s a one time thing. What about next month? It’s the same with building houses. Some say a new house creates 3 jobs, but for how long? If building, buying and selling each other houses was a net job creator, the bubble would never have stopped going up.
So why are we collectively sitting around waiting for the Federal Reserve to make employment magic with easy money and bond buying? Are we really so out of ideas in this country that repeating what we just went though is all we got?
Here’s another thing about Bernanke’s plan. Who can say house prices won’t just fall again? Because to accept that they won’t is to believe that Bernanke picked the exact bottom in house prices to start this program. Not supply and demand, not market forces or what the market will bear. But a group of people sitting around a table in DC decided that. People that were key actors in this housing bubble disaster in the first place.
The Link Between High Levels of Homeownership and Unemployment
Richard Florida
May 09, 2013
Reuters
Homeownership is a vaunted cornerstone of the American Dream. It’s long been viewed as providing a path to financial security and the good life. And it’s often posed as a barometer of the health of the economy writ large. it’s been center stage, after all, in the ongoing conversation about the economic crisis and recovery. The American government has provided substantial incentives to spur homeownership for decades.
But, in recent years, a growing chorus of economists have argued that America may have gone overboard in its pursuit of homeownership. They suggest that high rates of homeownership distort the economy, tying people to places and restricting the ability of workers to move to jobs.
A new working paper provides powerful evidence of that higher rates of homeownership may in fact be connected to higher rates of unemployment.
…
“tying people to places,and restricting the ability of workers to move to jobs”
You mean “restricts their ability of chasing their jobs willy-nilly across the country at the whims of their employers, as the work chases the lowest taxed/lowest regulated job market”.
‘as the work chases the lowest taxed/lowest regulated job market’
Like to Mexico or China? Except I can’t immigrate to Mexico and get a job.
Precisely.
I could make tons more money in Europe or China, but my certificate is invalid over there. And I’d need an invite, I can’t go over there and set up shop.
There ain’t no such thing as a “free market” when it comes to employment.
There ain’t no such thing as a “free market” when prices of neccessities are controlled by a limited number of cartels.
Except I can’t immigrate to Mexico and get a job.
I think most Americans are clueless as to just how hard it is to emigrate to another country. While we hand out work visas like Halloween candy, most other countries keep their drawbridge raised.
“Except I can’t immigrate to Mexico and get a job.”
But many jobs can migrate to Mexico and get a worker (albeit probably not home renovation, since homes are immobile capital).
” I can’t immigrate to Mexico and get a job.”
Nor Canada.
Comment by X-GSfixr
2013-05-11 09:03:31
“tying people to places,and restricting the ability of workers to move to jobs”
You mean “restricts their ability of chasing their jobs willy-nilly across the country at the whims of their employers, as the work chases the lowest taxed/lowest regulated job market”.
————
Excellent post, GSfixr.
With globalization, and the rapidly changing job market, it makes little sense to borrow hundreds of thousands of dollars to live in a box with a roof which you cannot move- or get out from under.
Exactly!
Bernanke didn’t “pick” the bottom. Rates were very low while prices were crashing. Cash buyers picked the bottom.
Logical leveraged buyers with down payments would not want to buy while prices were crashing, regardless of interest rates…they knew you had to pay back the debt and might need to move (which they couldn’t do if they were underwater).
The Fed’s ZIRP is giving the price rebound an unhealthy dose of rocket fuel…and ObamaLoans will be the match to light the fuel.
‘Bernanke didn’t “pick” the bottom. Rates were very low while prices were crashing. Cash buyers picked the bottom’
If it was cash buyers, what do rates matter?
In any case, when Bernanke targeted houses to raise employment, he became committed at those price levels to raising prices. If house prices fall, his whole save the universe plan will fail. That means he said, this is the bottom as far as the Fed is concerned. IMO, it wasn’t the bottom, they will fall again, probably lower than most can imagine, and his plan will have failed. And the economy will head down; probably already is.
It’s not that Bernanke didn’t do everything he could. But that resurrecting the housing bubble was doomed to fail. Now I don’t know if these fed guys care. Maybe they just wanted something to buy time, foam the runway for banks. Maybe they want to crash the economy, I don’t know.
Whether cash or dumb money, they didn’t “pick the bottom”. They picked an entry point. And they better have an exit strategy ready very soon.
Based on rental rates, I find it hard to believe there is a significant additional leg down for this cycle, and consequently believe that this cycle has bottomed.
If the Fed keeps rates this low, and the PTB are successful in giving loans to people who don’t have a dream of repaying the debt, we will rebubble and recrash.
Based on rental rates, I find it hard to believe there is a significant additional leg down for this cycle
RW, I fear you are missing that rental rates are being manipulated as well, and thus are not a good indicator of where the bottom actually should be.
All of the shadow inventory, by which I mean both the already foreclosed, and that not-yet-foreclosed inventory, is being withheld from the market. If that inventory were on the market, being bought by cash investors and rented out, rental rates would be lower than they are.
Thus, the true bottom should be lower than current rental rates suggest it should be.
“Based on rental rates”….
Rental rates are falling my friend.
It’s not the rates. It’s the MBS purchases. Remember when the Fed said it had to buy MBS because market rates weren’t right? In other words, the Fed decided what market rates should be, and are working to enforce that decision.
PIC,
Nearly all of the shadow inventory is currently occupied.
Look up “zombie foreclosures”. This is the shadow inventory that is currently vacant, and truly the housing that, when coming onto the market will add vacant supply without adding a new renter on the other side of the supply/demand equation.
That current number is estimated at 300k, of which 90k is in the state of Florida.
In the context of a housing market of over 100 million housing units, 300k vacant falls within the 90% confidence interval in the Census vacancy survey–it simply isn’t that much additional supply.
Wrong again.
100 million housing units? You can’t even be honest about the number of housing units in the US. There are 130+ million. You know it. So why lie? Why? Why continue to lie to the public?
Furthermore, over 25 million of those housing units are empty.
“over 100 million housing units”
For my point, precision was completely unnecessary.
We know what your ‘point’ is. Its to deceive the reader.
For those of us waiting… if inventory is low now, how will that change?
It will change when the houses the builders are building don’t sell and the houses that are currently on the market sit and sit. They can control letting foreclosures and bank owned back onto the market, but they can’t fix if there aren’t enough buyers wanting to buy at the offering price. Try as they might with - cherry picked examples in news stories, loosening of standards for loans, deliberate misrepresentation of why median prices are going up, etc, etc.
I think I’ve seen the stall already happen here in Phoenix but just not get recognized in the shill media yet (which won’t until its too obvious to ignore). All the reports of 25 percent increases YOY are rear view mirror views of a time when prices where drastically lower than now, spiking investor demand. Now it’s just a con game for that last musical chair where temporary statistical anomalies are being reported like they are a trend because they support the story being shoveled.
“It will change when the houses the builders are building don’t sell and the houses that are currently on the market sit and sit.”
We’ve already seen this. There is a home across the street with a For Sale sign in the yard. They listed it in early March for $550K, then lowered it to $515K over the next month, with no Dutch auction sale. Zillow sez the home is no longer for sale, but that is not what my eyes tell me.
The current Zestimate shows $480K, after a 30-day increase of $20K. At this rate of appreciation, if they just can hold on for six more months to relist, they will be able to sell for $600K — a $50K increase over their original wishing price!
‘The home ownership rate declined yet again in the fourth quarter of 2012, according to a new report from the U.S. Census today. It now stands at 65.4 percent, down from 66 percent a year ago and from a high of 69.2 percent in 2004. If you include the 5.3 million borrowers who are delinquent on their mortgages or in the foreclosure process, per Lender Processing Services, the real home ownership rate is even lower.’
‘according to a recent Raymond James report: ‘Renter household formation remains at the strongest level in decades. Roughly 1.32 million new renter households were formed in the past year (including owner conversions), while the number of owner-occupied households declined by 175,000. Resident turnover and move-outs to homeownership remain near historic lows for most operators. Incoming leasing traffic is more than offsetting move-outs while paying higher rates.’
http://finance.yahoo.com/news/guess-whos-driving-demand-apartments-172703548.html
More rent even as rents increase. And there’s this; we often see reports that ‘foreclosure sales are only 20% of sales, down from the peak of **%.’
Having 5% of sales come from foreclosures would be a huge amount.
The number of sales coming from non-distressed sellers is the other side of the foreclosures. That’s a tiny amount. Why isn’t it bigger?
‘Why isn’t it bigger’
Underwater.
The number of sales coming from non-distressed sellers
The ones who aren’t “distressed” are still pretty unhappy.
Underwater is the only explanation I can come up with too, but that only covers what, 20-25% of the market?
Listings seem to be down significantly more than potential sellers being underwater can explain.
Underwater is the only explanation I can come up with too
Others spring to mind as well:
- fewer people are making job-related jobs, due to fewer people changing jobs
- some fraction of the non-underwater sellers also may be “waiting for prices to improve”–e.g. the bubble set unreasonable expectations in their minds, which they have anchored to.
- some fraction of the non-underwater sellers also may be “waiting for prices to improve”–e.g. the bubble set unreasonable expectations in their minds, which they have anchored to.
——————
This is what I’ve heard from the majority of above-water potential sellers I’ve spoken with. They believe that bubble prices were “normal,” and that the bursting of the bubble was the anomaly. Can’t say that I blame them since the Fed/govt has done everything in their power to prove them right.
“if inventory is low”
If? It’s not. Millions of excess empty houses and growing is plenty of inventory.
Builders build, and current homeowners who want to move are not so afraid of finding their next place to live. My parents would like to sell their paid-for house to downsize, but there are so few houses on the market, they are concerned they won’t find something to buy.
“but there are so few houses on the market”
On what planet?
‘they are concerned they won’t find something to buy.’
Make it a contingency.
They don’t need to sell that badly (really don’t need to sell at all), and don’t want to waste their time given the lack of listings.
^^^^
You go backpedalling liar.
If your parents neither want nor need to move, then why are they considering moving? Why are they even looking at the available inventory? Isn’t that a waste of time?
The home they currently live in is the largest they have ever owned. They travel frequently.
Despite having low utility bills, they find it silly to live in a large house. However, they like their neighbors and community, etc. and so while they would move if they could find a place, there is no NEED to move.
And when they join 70 million others, it will be empty leaving 35 MILLION additional excess empty houses.
The same way it did last time.
It will change in the same manner as last time.
HOUSING SCENE
Are your mortgage modification terms worth continuing payments?
A high percentage of owners who take part in the Home Affordable Modification Program are unable to maintain their loan mods, data show.
By Lew Sichelman
May 10, 2013, 9:29 p.m.
Financially strapped homeowners who are close to foreclosure may want to face the music now rather than continuing to struggle with their monthly payments. There’s a high probability of losing the house anyway, even with the government’s help.
According to a new report, people who take advantage of a key federal program to modify their mortgages in an effort to save their homes are defaulting “at an alarming rate.”
The report from the special inspector general for the Treasury Department’s Troubled Asset Relief Program doesn’t say why an inordinately high percentage of owners who take part in the Home Affordable Modification Program, or HAMP, are unable to maintain their loan modifications. The report says only that the longer owners remain in the program, the more likely they are to default again.
Even with permanently reduced loan payments, the number of owners who are “redefaulting” is rising, the inspector general says.
At the end of the first quarter of 2013, the report found, nearly half the oldest of the HAMP modifications, from the third and fourth quarters of 2009, were going back into default.
Specifically, 46% of the HAMP mods made in the third quarter of 2009 redefaulted and 39% from the fourth quarter flunked out. Even mods from 2010 had failure rates as high as nearly 38%, the report says.
As of March 31, of the 1.28 million owners whose loans were modified under HAMP, more than 312,000 have gone into default again. And when that happens, the consequences are severe.
Owners who cannot sustain their reworked loans and fall out of HAMP are left with the terms of the original mortgage. And as such, they are responsible for making up the difference between the original loan payment and the lower HAMP loan payment.
Not only can the back payment be substantial, the inspector general advises, but already distressed owners can be hit with late fees on both the principal and interest that weren’t paid during the modification period.
In some instances, the report cautions, redefaulting borrowers can end up owing more than they did before their loans were modified.
…
“Bernanke’s plan is to boost house prices to lower unemployment. As far as I know, this concept wasn’t even challenged. So I buy a house.”
Yep, and at these prices, how much would you have left over for furniture, improvements/maintenance, taking a vacation, buying a car or saving for retirement / college funds?
It is indeed a narrow (but powerful) group of folks who benefit - financial services & realtors. And all the FB’s who keep sending in their monthly payments, fingers crossed BB’s fiscal policies make them whole.
I’ve been finding it interesting to contrast the housing market, with the corporate jet market, in that they have many similarities in the way a “bubble” was blown up, vs. the government response (mainly the lack of any) too the bubbles collape
Similarities include:
-Purchases made by companies whose income entirely depended on bubble markets elsewhere (finance, real estate, industries dependent on them).
-”Fog a Mirror” financing
-Whenever recessions slowed sales, the aviation industries (mostly located in Dark Red Congressional districts) lobbied for “accelerated investment tax credits” and other similar devices to pull demand forward at the barest hint of an order slowdown.
The end result was the same…..a market collapse in 2008. This market however, isn’t getting any backdoor support from the government. The result?
-Flight hours/year down approx 40% from 2007 numbers, with a corresponding collapse in fuel sales, maintenance services required).
-Prices of used aircraft 50-60% (or more, depending on the aircraft)below 2007 values.
-A collapse in sales (and prices) in every category except the “high end” of the market (anything with intercontinental range, so business can fly to China and continue “generating opportunities in the opening Chinese market….”). A lot of decent airplanes are selling at scrap value. This is also killing new aircraft sales, in that there are a lot of low time, fairly new airplanes (with OEM warranties) selling for 40% of what a new one sells for.
-Financing disappearing from the market almost completely.
- Lots of “mark to fantasy” reposessions on the banks and aircraft OEMs books; most of them have their own finance divisions. Some of these are being maintained properly while in storage/hibernation, but a lot of them aren’t. When push comes to shove, a lot of airplanes are scrap waiting to happen, the cost to comply with all of the deferred and upcoming maintenance, plus all of the new/upcoming NextGen equipment mandates, will exceed the retail value of the airplane.
And, as RAL has noted, anyone who purchased with cash in 2009-2010 and thought he was getting a steal at a price 40% below 2007 prices has found that they have caught falling knives; while not “upside down”, definitely took a hit. (The one that I have personal knowledge of paid around $4.5-5.0 million in early 2009. Current value? Around $1.5 million, assuming he can find a buyer.) This airplane was “worth” $8 million in 2007.
So to summarize, all of the funny money buyers disappeared in 2008, and all of the cash buyers in 2009-2010 are knife catchers. Needless to say, people are sitting it out, waiting until the bottom. Or their business is not generating enough sales to justify the purchase of an airplane.
The market seems to have reached a bottom….the guys still in the business of flying airplanes who have survived are flying more, prices are real close to scrap value on a lot of nice airplanes, and the depreciation schedule on 2008-2009 buyers is at a point where some can upgrade without taking too much of a financial hit.
I’m getting requests to review the “maintenance status” of prospective purchases. The local avionics shop is getting lots of RFQs for equipment updates and new installations.
Of course, this will be like the last sales cycle, only worse, since the market has tanked for five years……
There has been very little demand, so maintenance facilities have laid off tons of people, mainly the 35 and under crowd. These guys have moved on to greener pastures, like diesel truck repair……..now we are going to go from no demand, to tons of demand, everybody wanting the work done yesterday. Expect to hear even more whining about “not being able to find qualified people”.
The local FAA offices are furloughing people because of the sequester, so “Letters of Approval” (LOAs) will be slow/hard to get.
(The FAA, in their over-regulatory zeal, holds onto the quaint/old paradigm notion that you need to be qualified to operate a large, high performance jet aircraft, and requires that you document/demonstrate your ability to safely operate and maintain it, before they will let you fly it in certain types of airspace and/or operations)
The FAA will also run into the “can’t find qualified people” problem, in that they will have an even harder time finding “qualified” help.
(Especially when the “idiotic government workers are blood-sucking parasites” mindset will prevent them from offering competitive wages…..which means they end up hiring less than the best/experienced…….which will lead to mistakes/delays….which leads to even more bitching about “idiotic parasites”…..but I digress)
I forgot to mention the upcoming “NextGen” equipment mandates.
The FAA used to set the standards that the rest of the world usually followed
But now, the FAA is chronically underfunded, so EASA has become the defacto lead regulatory agency for aviation operations worldwide, and the FAA falls into line with whatever EASA mandates.
(I would mention that doing most of your business means you have to do your business by someone else’s rules, for better or for worse)
The biggest deal coming up is “NextGen”, for the next generation Air Traffic Control system, coming up in the 2015-17 time frame.
The problem is packing more airplanes into the same airspace. This is a problem in Europe, and in certain areas in the US (Boston-NYC-DC corridor). The current, and still undefined solution, means additional data being transmitted to ATC from the aircraft by new transponders, and a satellite data link to ATC, for transmissions of messages/ATC directions by digital data link, instead of by voice. Along with this comes upgrades/mods to other aircraft systems (like Flight Data Recorders, to store additional flight parameters, plus digital communications between ATC and the aircraft)
As of now, the ultimate ground system has not been defined. Until that happens, the required aircraft equipment can’t be defined either. So here lies the challenge of someone making a long range budget for the operation of an aircraft.
What we do know…….
Resale prices are already being affected. Any airplane flying with analog systems (and there are a bunch of them, mainly in the low end of the market) will be scrap value only on the day the system is implemented. If you operate a large, intercontinental range aircraft, without a complete avionics upgrade, you may be shut out of Europe as soon as 2017.
Digital Systems started coming online in the mid-late eighties. These aircraft may be upgradeable without scrapping the entire existing system, depending on how much bandwidth is available on the internal busses. The problem you have is putting a patch on 20-30 year old equipment. My rumor mill is telling me that these systems are getting harder to support, because nobody makes parts for them anymore (example…..CRT displays)
Airplanes built in the 1995-2003 timeframe are upgradeable, but may run into issues similar to the early digital airplanes by 2017-18
The 2003-2005 and later airplanes (especially the bigger ones, like the G550 and Falcon 7X) will be relatively easy to upgrade.
All of this is complicated by the drop in aircraft prices. It was a no brainer to do a $1.2 million (or more, probably a lot more) upgrade on an airplane that sold for $25 million in 2007. Now, that same airplane is worth maybe $9 million.
Hence, my dilemma, and the dilemma of the company CFO. Just about anything you buy right now is going to need some kind of modification, and sooner rather than later, if you fly to Europe like we do. Modify the current airplane, buy a newer one (hopefully before prices start to appreciate on them, once people start to figure this out), or order a new one ($40 million, give or take). The CFO is the guy in the know when it comes to the taxes and finances.
And of course, the owner gets a vote.
Hence, my dilemma, and the dilemma of the company CFO. Just about anything you buy right now is going to need some kind of modification, and sooner rather than later, if you fly to Europe like we do.
One of several reasons (like fuel costs) why I think there will be alot less flying around than there used to be.
Perhaps when the # of flights falls sufficiently, the reason for high-priced upgrades will evaporate also.
Fuel costs are not as much a driver as you might think, when you only go over there 2-3 times a year. I’d expect the airlines to cut back before corporate.
Remember, all they have to do to pay for the fuel, is to cut your/their employees paychecks……. Because, you $12/hour Lucky Duck, you were getting paid to much to begin with.
Question of the day:
How do Americans feel about federal policy to enrich all-cash foreign real estate investors in an effort to turn them into absentee landlords?
And how will Americans feel a few years down the road, when these absentee foreign landlords turn out to be slumlords?
I grew up near neighborhoods with a percentage of slumlord owners, and the results aren’t pretty (high crime, high number of vacant housing units, houses falling apart due to disrepair, high level of poverty, lack of legitimate employment opportunities, community instability, etc etc etc).
I grew up near neighborhoods with a percentage of slumlord owners, and the results aren’t pretty (high crime, high number of vacant housing units, houses falling apart due to disrepair, high level of poverty, lack of legitimate employment opportunities, community instability, etc etc etc).
The core of the problems you describe is poverty / lack of decent employment / instability. Slums and slumlords are just a result. Having a source of decent employment & a real way out of poverty will cause slums to shrink, although it may take a few years. It’s not happening now.
It’s amazing how much trouble people can stay out of, when they have a full time job, and go to bed early.
And live within their means…
Won’t they be bag holders if they’re buying at today’s prices. Better them than another American who’ll jump on the any government support to get them through the tough times.
And the magic phrase of the entire article???
“The owners of six damaged homes said they need help from the government.”
————-
One by one, homes in Calif. subdivision sinking
Associated Press | May 11, 2013 12:52 PM EDT | Tracie Cone
Scott and Robin Spivey had a sinking feeling that something was wrong with their home when cracks began snaking across their walls in March. The cracks soon turned into gaping fractures, and within two weeks their 600-square-foot garage broke from the house and the entire property—manicured lawn and all—dropped 10 feet below the street.
It wasn’t long before the houses on both sides collapsed as the ground gave way in the Spivey’s neighborhood in Lake County, about 100 miles north of San Francisco. …
Unlike sinkholes of Florida that can gobble homes in an instant, this collapse in hilly volcanic country can move many feet on one day and just a fraction of an inch the next. Officials believe water that has bubbled to the surface is playing a role in the destruction. But nobody can explain why suddenly there is plentiful water atop the hill in a county with groundwater shortages. …
“Man builds house on slope of active volcano……swept away by molten lava”
“Nobody saw it coming.”
And now the government should pay me…
If you bought a house after 1998 you are a “looser!”
Beating Greenspan and Bernanke in the last 13 years was all about being mobile, investing in TIPS, Series I bonds, and gold at the beginning, and investing in stock index funds while playing their game. Most people are still in denial that a MID is debt bait.
I still think being mostly in stock mutual funds the next few years will be the best approach, but one must always be looking at balancing the portfolio. I am low on money (precious metals) for now, and think two years of buying silver, platinum, and gold bullion will be rewarding in preparation for the social security crisis at the end of this decade. Prices of stocks just are not attractive, but I know I am buying fewer shares at these nose bleed prices.
The manager at work is extending my contract thru the end of December. My friend, a CEO at a software company in the OC is trying to woo me to work for his company, same deal, embedded software. Had lunch plans for this week but postponed.
should I buy some more facebook stock?
If you wish to be a “looser,” be my guest! I’d prefer Exxon/Mobile.
“Most people are still in denial that a MID is debt bait.”
Love it. Thank you.
Bait dumb money with debt and create debt-junkies.
“Most people are still in denial that a MID is debt bait.”
+1.
And unlike many fish caught with bait, debt-junkies don’t even get to swallow the bait. Many of them don’t even realize how little the difference is between their oh-so-valued MID and the standard deduction they would have gotten anyway.
but I know I am buying fewer shares at these nose bleed prices.
If you truly believe the prices are at “nose bleed” levels, why buy any shares at all?
But I’m not as smart as you since I do not know how to time the market. But all you HBBers perfectly time the market. At least you are implying it.
Comment by In Colorado
2013-05-11 14:37:13
But what I see is the bankers wanting every dollar they can get and more.
Which is why I don’t believe there will be “cramdowns”
You have it backwards.
In the old days, a generation ago say, cramdowns hurt the banks; this was because banks actually held the loans, so reductions of principal were directly losses on their bottom line.
Nowadays, banksters offload the risk as quickly as possible. So cramdowns would actually _help_ the banksters. Cramdowns would lower the amount owed, which would mean underwater owners could suddenly sell, and buy a different house; purchases are transactions, and banksters today make money on every transaction via fees.
Since cramdowns help the banksters today, I suspect that they might well happen, even in the face of massive public outcry.
How would a cramdown hurt a bank if the principle on a mortgage loan is federally guaranteed against default?
I’m missing it.
How would a cramdown hurt a bank if the principle on a mortgage loan is federally guaranteed against default?
In the “old days”, not everything was federally guaranteed.
And even in the current era, banks held lots of second mortgages.
MOVING TARGETS
May 10, 2013, 9:00 p.m. ET
America, Rescue Your Cupcakes!
By JOE QUEENAN
Alarming news has drifted in: The cupcake craze may be coming to an end. Sales have slowed dramatically at many gourmet cupcake emporiums across the country, and Wall Street has pummeled the stock of the premier publicly traded cupcake chain. Shares of Crumbs Bake Shop, CRMB -2.25% now with 67 locations, traded two summers ago on the Nasdaq exchange at $13. They closed Friday at $1.35.
The lines of ravenous cupcake devotees that once wrapped around the block in the nation’s trendiest neighborhoods, the spread of cupcake mania to foreign climes, the national fascination with the rise of the cupcakeistas—it all now seems to be ebbing. The days when viewers sat glued to cable TV programs chronicling the improbable exploits of gourmet cupcake entrepreneurs may also be approaching the last roundup.
I myself always felt that the cupcake craze—like similar fads involving Tofutti, water beds and lingerie football—would eventually fade. The public would come to its senses and realize that no cupcake known to man was worth $4.50 a pop, even if it was featured on “Sex and the City,” “Cupcake Wars” or “Ice Trucker Cupcakes.” I was particularly incensed when cupcakes began replacing traditional wedding cakes, introducing a level of pre-emptive frivolity into an institution that desperately needs to be taken seriously. A marriage that begins with a tray filled with cupcakes can only end with a cabinet full of liquor.
Be that as it may, the demise of the American cupcake is no unalloyed joy. Cupcakes are like premium ice cream, tickets to 3-D movies and certain brands of schnapps: an affordable extravagance that helped Americans get through a brutal recession when less affordable extravagances (Maseratis, liberal arts education) were out of reach. Cupcakes raised the national spirit. Without the emotional lift that cupcakes provided in the past five years, this entire society could have gone down for the count.
Cupcakes may be silly, but they’re not evil. And the fact that so many coarse, hardened Americans—state troopers, repo men, bartenders, Ram Tough guys all—would give their hearts so freely and unequivocally to the pint-size delicacies demonstrated, once again, that Americans have never truly lost their innocence.
What’s troubling here is that no one seems to be coming to the aid of the imperiled little treat, much less to those who bake it, deliver it, market it, blog about it. Where, one asks, is the federal bailout for the cupcake industry? The bridge loans, the seed capital, the bottomless rescue fund?
Why, in a country that always seems to have oodles of bailout money for the solar-power industry, the wind-turbine industry and Amtrak, is there no bailout for the beleaguered upscale-cupcake producers? Why would the Fed bail out insolvent, poorly run banks—that never, ever do anything nice for the average American—but turn a blind eye to cupcakes?
…
“gourmet cupcake emporiums”
I remember when this debt-producing fad started. I was like, “really? Seriously? Cupcakes?”….
Wow…. another failed model marketed to suckers and junkies who don’t know any better much like “bed and breakfast”.
http://www.krispykreme.com/home
Yeah…. donuts. An established retail market with proven demand nationally a’la DunkinDonuts. But cupcakes? Where is the demand? Who has shown profit? Betty Crocker? Duncan Hines?
kkd
10/30/2003 43.35
05/10/2013 13.15
http://www.nasdaq.com/symbol/kkd/historical
Gotcha. I recall KKD IPO getting pimped incessantly just after the tech wreck.
I have never tried one of these so called “gourmet” cupcakes and now it looks I won’t get a chance. Aw shucks!
I like to BAKE cupcakes. Why buy when you can bake?
“Debt is bondage.” ~ Suze Orman, May 11, 2013.
“Debt is bondage.”
+1 My second debt-free anniversary is coming this fall.
My second debt-free anniversary is coming this fall.
That reminds me that I forgot to celebrate my ten-year anniversary this past January.
Rough guess, I’ve spent $90,000 renting throughout the whole of The Housing Bubble.
Currently, I’m in the black. With some savings and no debt.
Without an answer from Obama to answer Ben’s question, am I better off buying commodities such as gold, silver and lead until after The Wall comes down?
If so, does this mean the Money and Metals page will return?
If not, should I scramble to purchase a cheap place which allows me to raise chickens? Or try doing both somehow?
[Insert graph of land prices after The Revolutionary War and The War of Northern Aggression, here x.]
I guess I owe an apology to Neil, even though I’ve gone Primal/Paleo since, grabbing a bowl of popcorn was the correct analogy.
I can’t believe things didn’t go the Icelandic way in the unitedstate after 2008.
I sooo thought things would be going to the upside by now.
Such a shame, how things could have been so much better.
W.F.D.
It could be far worse for you…. You could be on the hook for $600k in borrowed money for an asset that is barely worth $200k.
The Myth of Debt-Free Living
http://www.lewrockwell.com/north/north969.html
That article is flogging buying rental houses as a way to retire.
You mean as a way to get something and not work for it.
This the fundamental, primary lie of this entire housing mess.
The majority of every managerial team at every employer I’ve ever worked for has been getting something without working for it. Not to seem bitter, but it’s no surprise that actual workers would be looking for a way to fill the gap between their pay and their value.
Then don’t be bitter. You won’t get something for nothing.
Do you think I might at least get something in exchange for my capital if I invest it properly? After all, I had to work to earn the capital.
Why would you? You act as though you’re entitled to it. I have a bulletin for you though…. the chances of complete loss are far far higher than whatever pittance you think you might yield.
I hope my comment is just awaiting moderation. Here’s a link-free title, The Myth of Debt-Free Living by Gary North
U.S. Homeownership Rate Falls to Lowest Since 1995
By Prashant Gopal & John Gittelsohn - Apr 30, 2013 8:55 AM PT
The U.S. homeownership rate fell to the lowest in almost 18 years, reflecting rising demand for rentals and investor purchases in the housing market.
The share of Americans who own their homes was 65 percent in the first quarter, down from 65.4 percent a year earlier and the lowest level since the third quarter of 1995, the Census Bureau reported today. The vacancy rate for rented homes dropped to 8.6 percent from 8.8 percent a year earlier, while vacancies for owner-occupied houses fell to 2.1 percent from 2.2 percent.
Investors are buying single-family homes and renting them out to capitalize on demand among families unable to qualify for a mortgage. Their purchases, many made with cash, are helping to support the housing recovery and pushing up prices. Home values in 20 cities increased 9.3 percent in February from a year earlier, the most since May 2006, according to the S&P/Case- Shiller (SPCS20Y%) index released today.
…
Here are some really dumb questions which will reveal just how ignorant I am on the subject of central bank intervention in housing markets:
1. Has the Fed ever intervened to prop up home prices after previous housing market corrections, or is this time different?
2. Given the Fed’s apparent ability to prop up housing prices, how come they didn’t step in way back in 2006, before so many American households lost a fortune?
3. Isn’t there a good chance that artificially propping up home prices above fundamental market value will create further incentives for current overbuilding and future price collapse?
4. At what point did housing price support policy enter the Fed’s mandate, or has it always been there, unbeknownst to almost everybody?
Where is DopeyMacDoc when you need answers to tough questions?
I think their mandate is just to maximize banking profits around the globe.
Agustino Fontevecchia, Forbes Staff
Bringing You The Bull And Bear Case From The Markets Desk
4/30/2013 @ 11:45AM
Home Prices Growing At Pre-Bubble Rates On Bernanke Boost, But Big Shadow Inventory Lurks
Rising home prices help the economy, but homes stuck in the foreclosure pipeline threaten to slow the recovery - Image credit: Getty Images via @daylife
Boosted by Ben Bernanke and turbocharged by tight inventories and strong recoveries in the worst hit cities, home prices continue to grow strongly. The widely followed Case-Shiller indexes showed the price of single-family homes across 20 of the most important U.S. cities grew 9.3% in February, its fastest rate since May of 2006 before the collapse of the housing bubble and subsequent financial crisis. The housing recovery is already having a positive impact on growth, pushing GDP up as residential investment accelerates, but with more than 1.1 million homes in some state of foreclosure and a shadow inventory that tops 2 million units, it will take some time for the market to truly heal, while the risk of slowdown and a reversal remains a possibility.
It comes as no surprise that the housing market is firing on all cylinders, but the February data, released on Wednesday, was quite encouraging. The 10- and 20-city composites gained 8.6% and 9.3% on a year-over-year basis, with every metropolitan area clocking in a second consecutive month of positive growth for the first time since early 2005. Phoenix was the strongest performer, growing at an impressive 23% and joining the likes of Las Vegas, Atlanta, and San Francisco, some of the worst-hit cities in the crisis, in their rapid pace.
Prices have now climbed back to their autumn 2003 levels, prompting index chairman David Blitzer to say “despite some recent mixed economic reports for March, housing continues to be one of the brighter spots in the economy.” Housing has been additive to growth for some time now, as Blitzer explained, “the 2013 first quarter GDP report shows that residential investment accelerated from the 2012 fourth quarter and made a positive contribution to growth.”
Few would venture to say that housing isn’t on the mend right now. Over the past several months prices have increased on the back of incredible support by the Federal Reserve, which has taken its balance sheet north of $3.3 trillion, buying more than $1 trillion in mortgage-backed securities. Investor demand for housing assets has skyrocketed, taking homebuilders’ stocks to multi-year highs. KB Home, Lennar LEN (+0.66%), and Toll Brothers (TOL +0.17%), for example, are sitting close to their 52-week highs. Hedge funds have jumped in the game as well, with the best performers of 2012, including Deepak Narula’s Metacapital and Steve Kuhn’s Pine River, which made bank trading mortgage-backed securities.
Yet residential real estate markets remain deeply depressed, and those opportunities are a reflection of that. Home prices are still 29% to 30% off their mid-2006 peaks, Case-Shiller shows, while CoreLogic data shows the number of foreclosed homes and the size of the shadow inventory is massive.
…
“while CoreLogic data shows the number of foreclosed homes and the size of the shadow inventory is massive.”
And CoreLogic understates the massive shadow inventory.
Yeah, it’s so depressing to think of all those millions of Americans who might actually be able to afford a home. It won’t be bright until the entire middle-class is priced out, and has to take a suicide loan to get in on the action, but then ends up foreclosed because they did not get that 100% raise that was supposed to make them able to pay the loan.
Those suicide loans didn’t work out so well for Spanish home buyers. Maybe they would work better here in America, since it is different here?
In Spain, Not Even Death Will Save You from Your Mortgage
By S. E. Smith
April 25, 2013
4:00 pm
On February 15, a retired married couple in Mallorca, Spain committed suicide together, leaving a note behind stating that they were going to lose their home. This extreme response to financial ruin sadly isn’t unique in Spain, where several such suicides have made the news recently, including that of a 46-year-old man in Alicante and a woman who jumped out a window. What is driving the Spanish people to such desperation, and why isn’t anything being done about it?
The financial situation in Spain is grim, like that of many of its fellow European Union members. Over 1/4 of the population is unemployed, with the youth rate even higher; about half of young adults in Spain have no jobs. Young people are moving back in with their parents to make ends meet because they cannot survive on their own, while others are leaving the country in the hopes they will be able to find work elsewhere.
Spain was actually chosen as the site for a viral marketing stunt offering 100 Euros (roughly $130) for free to participants who walked up to a cash machine and watched a short video. The catch, other than the video, was the requirement that they share the money, something Spaniards have already been doing in their own communities with the limited resources they have. This is the same nation, after all, where residents protested high taxes on cultural resources (things that should be freely available to all rather than restrictively priced so they’re only available for the wealthy) by paying for theatre tickets with carrots.
The country also experienced a substantial housing bubble along with many other regions of the world in the early 2000s, with property prices inflating very quickly. Many people bought homes on the assumption that their incomes would remain stable in high, or refinanced properties to take advantage of their increased value. When home values dramatically fell, they were left holding the bag.
To compound the financial problems in Spain, the country is also wrestling with archaic financial laws dating back to the early 1900s. Under those laws, the handling of mortgages, repossession, and bankruptcies is quite strict: borrowers who can no longer make payments on a property are still liable, even if they attempt to surrender the house or declare bankruptcy. When a bank seizes a property in foreclosure, it can demand the balance of the loan if it’s unable to recoup the cost from the sale of the property.
Tragically, given how many people are committing suicide as they end up underwater on their homes, not even death erases existing mortgage loans under the law.
…
Can you believe all the Bernanke-haters spreading false rumors of a new housing bubble these days?
Will The New Housing Bubble That Bernanke Is Creating End As Badly As The Last One Did?
By The Economic Collapse Blog
Global Research, April 30, 2013
The Economic Collapse Blog
Federal Reserve Chairman Ben Bernanke has done it. He has succeeded in creating a new housing bubble. By driving mortgage rates down to the lowest level in 100 years and recklessly printing money with wild abandon, Bernanke has been able to get housing prices to rebound a bit. In fact, in some of the more prosperous areas of the country you would be tempted to think that it is 2005 all over again.
If you can believe it, in some areas of the country builders are actually holding lotteries to see who will get the chance to buy their homes. Wow – that sounds great, right? Unfortunately, this “housing recovery” is not based on solid economic fundamentals.
As you will see below, this is a recovery that is being led by investors. They are paying cash for cheap properties that they believe will appreciate rapidly in the coming years. Meanwhile, the homeownership rate in the United States continues to decline. It is now the lowest that it has been since 1995. There are a couple of reasons for this. Number one, there has not been a jobs recovery in the United States. The percentage of working age Americans with a job has not rebounded at all and is still about the exact same place where it was at the end of the last recession. Secondly, crippling levels of student loan debt continue to drive down the percentage of young people that are buying homes. So no, this is not a real housing recovery. It is an investor-led recovery that is mostly limited to the more prosperous areas of the country. For example, the median sale price of a home in Washington D.C. just hit a new all-time record high. But this bubble will not last, and when this new housing bubble does burst, will it end as badly as the last one did?
…
I see the seeds of future mockery opportunities in this arrogant blog post.
Paul Krugman - New York Times Blog
May 9, 2013, 4:30 pm
More on the Roots of Bernanke Hatred
Matthew O’Brien follows up on the hedge-fund-guys-who-hate Bernanke question, and points out that hedge funds have actually done quite badly for a decade, and especially since the crisis began. He also suggests that what the hedgies really hate isn’t Bernanke so much as the IS-LM framework he (and I) basically work in, and hate it all the more because it has worked so well.
This makes a lot of sense. It’s also worth noting that the named Bernanke-haters — Druckenmiller, Singer — are “bond bubble” guys who we can guess, though without knowing for sure, have spent years shorting Treasuries; and what they have found out is that it’s the equivalent of the “widow maker” trade in Japanese bonds. In fact, some of them may have been making the widow maker trade in Japan too.
So these may well be guys who were absolutely sure that their fiscal-doom investments were going to pay off big, and ended up losing money instead. They could respond to this setback by rethinking, considering the possibility that the academic macro types at the Fed and elsewhere actually had a point. Instead, however, they’re yelling that it’s a rigged market, and that the Fed is destroying Western civilization.
But, but.
Weren’t these same people also leveling the exact same criticisms against Greenspan? What happened to the Greenspan bubbles? And doesn’t the average American suffer when risk is underpriced, and they find themselves sucker-punched by all their “sound” investments in their 401ks and their homes? The homes in which they LIVE?
Don’t get me wrong, I don’t blame Bernanke for the problem. He is merely trying to respond to some fundamental problems (i.e., globalism) using tools that are not appropriate. He does this because they are the only tools he has. I wish Bernanke would go on air and tell everyone that the only solution is for Congress to dump the WTO and get back to charging tariffs against countries with economic policies that tend to undermine our own.
The policies in place are ultimately bad for the average American, but Bernanke is not the root cause.
“I wish Bernanke would go on air and tell everyone that the only solution is for Congress to dump the WTO and get back to charging tariffs against countries with economic policies that tend to undermine our own.”
Higher prices for everything is the solution (?)…
“He also suggests that what the hedgies really hate isn’t Bernanke so much as the IS-LM framework he (and I) basically work in, and hate it all the more because it has worked so well.”
Once said to me by a freshwater macroeconomics professor:
‘Anybody who mentions the IS-LM model should be taken outside and shot.’
(I don’t know to this day whether or not he was joking…)
‘the hedge-fund-guys-who-hate Bernanke question’
Strawman, and a pretty lame one at that.
“This makes a lot of sense.”
It sounds like a steaming pile of BS to me, but then I’m not a Nobel prize winner, so what do I know?
I was just wondering if it’s normal to buy a new car for a 6.8% discount off list, with 0% down and 0% interest over 5 years. That’s what happened to me yesterday, but I had to get the gray interior instead of tan.
Hi. Sorry if this is double-post.
I just want to know if it’s normal to buy a new car for a 6.8% discount off list, with 0% down and 0% interest over 5 years. That’s what just happened to me, but I had get the gray interior instead of tan.
Thanks,
Unloved by Federal Reserve in US
Sounds like you figured out how to make ZIRP work for you quite well. Great job!
When you could have gotten a cash discount in lieu of financing?
It sounds like you got ripped off bad.
I bought the exact same make and model brand new in 2002. I believe my interest rate was like 7%. Or was it 4.5%? I can’t remember. Doesn’t really matter because my 2013 price is lower than my 2002 price, and my 2013 interest rate is 0.
What matters is you didn’t get a cash discount in lieu of financing.
What matters is that I paid way less in 2013 than I did in 2002. I paid less for the car, and I am paying no interest. Isn’t 11 years-worth of inflation supposed to make prices go up? I though we were gonna have hyper-inflation and stuff. We have deflation with 0% interest.
You overpaid. You didn’t get a cash discount in lieu of financing.
“11 years of inflation”?
In case you hadn’t noticed, we’ve experienced 30 years of deflation… and it’s accelerating.
HA:
Hmmmm…. Are you SURE I overpaid? I feel like I got a pretty sweet deal.
“The industry average discount among all automakers, according to TrueCar.com, is 5.9 percent.” (http://www (dot) forbes (dot) com/sites/jimgorzelany/2012/08/03/the-easiest-cars-to-bargain-for/2/)
Do you believe we have a bubble in cars now, and the best prices can only be gotten with cash? Why would I pay cash when I can invest my money at a return that is far higher than the interest rate (0%) on the loan? Why would I ask for a cash discount when I can already negotiate the very bestest deal by simply walking out the door, and seeing whether or not I get called back in? No “cash discount” is necessary. The overall deal is what matters.
I realize that the negative interest rates being pushed by the Federal Reserve are not good for our economy in the long run. They don’t solve anything, but merely kick the can down the road. On the other hand, I also realize that I can’t change the rules of this game.
We have deflation at 0% interest.
Are you really that naive to believe the 0% financing is free? Really?
And where are these “returns far higher”? What? WHAT?
Yeah…. you got suckered.
Hasn’t the Fed suggested they might do just about anything under the sun by now to end QE?
May 9, 2013, 10:26 a.m. EDT
Evans: Fed could outright end QE when time right
By Steve Goldstein
WASHINGTON (MarketWatch) — Chicago Fed President Charles Evans said Thursday the Fed could outright end rather than taper asset purchases if the economy improves enough. In an interview on Bloomberg Television, Evans said the asset purchases of $85 billion per month are helping the economy. “The labor market has improved,” he said. Evans is considered one of the more dovish Fed members and is the one who pushed for the policy to link asset purchases to the unemployment rate.