Megan McArdle has a novel idea
Don’t buy a house unless you can afford one.
I’m old enough to remember when that wasn’t a novel idea.
She makes the point that low-down-payment loans only work in a rising housing market, and then when there’s an economic downturn they destabilize the market further because of increased foreclosures. That seems obvious, but lots of things weren’t obvious during the boom years, when housing prices rose so steadily and for so long that people forgot basic economic truths.
I don’t think all that many people remember them even now. As McArdle observes, quite a few think that 2008 was an aberration and the boom years for real estate are the rule.
After all, don’t we all deserve houses?
Requiring a 20% down payment would be racist and unfair. (sarc off)
The Great Housing Collapse of ‘08â„¢, was caused (or at least greatly exacerbated) by government policies, and there is no question far too many people take on far too much debt with too little knowledge of what they are doing, but this will always be so. What’s changed between now and the 50s is the discovery by lenders that they can still make a lot of money writing off a certain amount of bad debt if they can keep enough people perpetually on an interest payment only schedule of payments. People in the 30s, 40s and 50s didn’t get into trouble with debt because lenders weren’t willing to issue unsecured loans. If today’s credit options were available then the same problems would have eventually occurred.
“The man in the suit has just bought a new car with the profit he made on your dreams.” – Traffic
Actually, I remember a lot of folks (and I mean a LOT) who should have known better making the claim that real estate prices will only rise, not fall, because real estate is finite.
There is only so much land, they claimed, and we cannot, unlike some manufactured goods, create more. Therefore, the demand will always be more than the supply.
The fact that so many folks were saying this during the boom years tells us that most folks have no clue about supply and demand – a basic of economics. They seemed to have forgotten that the demand can always change.
They seem to have even less of a basic knowledge of economics if they work in government were their skills are politics, not economics.
Charles,
Depending on which year you use as the start of the Baby Boom, my 8th grade class was either the very last Baby Boom class to matriculate through Grammar school, or the first post-Baby Boom class to do the same.
By the time I had graduated College 4 years later consolidation resulted in the closure of about 1/3 of the schools in the district; there simply weren’t as many kids. In the late ’90s I was thinking about this in relation to all the new housing developments I saw going up everywhere. It seemed they couldn’t build 4 and 5 bedroom homes fast enough! They were sprouting like weeds.
When we purchased our current home in 2002 I told Mrs. Firefly to expect the value to go up a bit more in the next few years, and then to remain fairly constant for a good 15 years. We are entering the beginning of a wave when we’ll have 15 or so years of Baby Boomers looking to downsize, move to condos, move to the ocean of the mountains… and there are not enough young families to buy the 4 and 5 bedroom homes they’ll be selling.
Whups, I graduated College 8 years later. I’m smart, but not that smart!
Don’t know about the rest of the country, but we are certainly working on another “bubble” in SoCal.
Houses that have sold around me have appreciated a verifiable 50-75% over the past 2.5 years. Can anyone believe that is sustainable?
If you are a conventional borrower, you have to pony up your 20% down; but, as always, there are those the government wants to help, and for whom the rules are different. Now I learn of something called the “HARP” to help those who dove underwater on their mortgages re-finance loans that don’t qualify for re-financing.
Of course I speak of SoCal; a different sort of place. The front page of the business section in the local rag often proclaims “Improving Economic Outlook in California!”; page two then reports on yet another company that has packed up and moved, taking xxxx jobs.
Rufus is right about baby boomers looking to downsize. My husband and I are boomers who live on a beautiful lake in northern Wisconsin. We also own 40 acres of forested land next to us. This is lake country, and many of the homes here are second homes owned by people from Minneapolis or Milwaukee, etc. On the day we listed our house and land for sale, our realtors told us that the market here is very slow now. The boomers are ready to sell the second homes they bought during the boom years, and the pool of buyers for these types of properties is shrinking. I suppose the good news is that new home buyers can get some good deals on real estate! Not such good news for us, though. . .
Sorry, but Megan McArdle is not quite correct. It’s not about a rising or falling housing market and it’s not about a low (or no) downpayment. It’s about buying more house than one can afford. It’s all about cash flow and therein lies the problem.
If you can only afford to pay $500/month for a mortgage, buying a house that requires a payment of $1,000 per month will not work. It doesn’t matter if one purchased a $100,000 house with no downpayment or a $1.5 million dollar house with $500,000 down. If you can’t afford the monthly payment to service the loan, it doesn’t matter how much you put down.
If, however, you can afford to service the loan by making that monthly payment, the rising or falling value of your home doesn’t affect the monthly mortgage cost. It may make you want to sell or move sooner or later than you otherwise might but it doesn’t affect your ability to pay the monthly principal and interest on the 30 year loan.
T,
I see that all around my hometown when I visit. There are big fancy houses on big lots, but owners never seemed to plant tree or gardens. You can cover the 5th bedroom with your morgage, but ther’s never enough extra money to make the property look good. And then when the marriage goes down the tubes and the housing market sinks, you see for sale signs.
I have a cousin who grew up dirt poor. The family lived in the country, had a garden, cow, raised chickens and pigs, and had a small orchard. He got a small piece of ground from his mom, built his own modest home, and waited till he finished it before getting married. Can you imagine any of the kids whose mothers hire decorators for their dorm rooms even beginning to understand his values?
T:
I think the assumption is that people who can’t make the monthly payments have trouble in any sort of financial climate. But I think the idea is that some can make the payments despite their lack of a down payment, at least for a while. In a rising market they sell, pocket the difference, and go on to another house, using that money to help make the payments for that house. But in a falling market that won’t happen, and they’ll be underwater. At least, I think that’s the assumption.
McArdle: …most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years.
That mind-set is going to be hard to shake. And I think largely because, as she says, that was the experience of a whole lot of people, not just a few.
Expat,
“Can you imagine any of the kids whose mothers hire decorators for their dorm rooms even beginning to understand his values?”
No, I can not.
Neo,
I don’t think that your response (@3:06)is a false assumption. My point is that the problem goes deeper than a down payment or lack thereof (which is the scapegoat for most critics). The problem lies with people being misdirected. Instead of tweaking the system to make a house affordable, they tweak it to purchase a house at the upper limit of their cash flow means. (E.g., “rates are down lets buy a house with a payment that doesn’t eat up 30% of our monthly income”, rather than what most people do which is “rates are down, we can but a more expensive house”). When one is maxed out and then all Hell breaks loose, there’s no where to go. Of course realtors are much to blame here because they lead buyers in this direction; the more expensive the house, the greater the realtor’s commission.
Aside from lower economic classes doing this through a down-payment free mtg, people who were economically well of did precisely the same thing, especially with variable rate mtgs. The bought at the upper level of their income scale, using the remarkably low variable rates to squeeze housing blood out of the cash flow stone, and then as interest rates increase and their monthly payments increase well in advance of their income, they have no recourse but to abandon the property.
Again, the problem is not with the down payment, but with abusing the cash flow. One further thought. People who do this are screwed twice over; first because many of them eventually can’t make the payments and second even for those who can, there is no money to keep the property in good repair. Many people forget that buying a house is more than just paying the mortgage (as expat notes above).
Neo,
and one additional thought:
True. And when one is inured to buying the most expensive house one can afford, then even in a rising market one moves from one “most expensive home” to the next “most expensive home”. All that does is kick the cash flow can down the road.
The people who really made out over the past two decades were people like ex-Californians who saw their real estate value increase exponentially, then sold and moved to other communities where real estate was less expensive. Note that many of them would have also made the basic mistake I discuss here except that in their new communities there wasn’t anything expensive enough to gobble up all of their California equity so they were left with a stack of cash along with a nice house (although the purchase and sale are not simultaneous, it’s still basically arbitrage; i.e., selling in an expensive market and buying in a cheaper one).
T:
That’s true—the cash flow is much more important. But don’t the two (not enough cash flow and lack of down payment) have a tendency to go together? Not always, of course.
Neo,
“. . . don’t the two (not enough cash flow and lack of down payment) have a tendency to go together?”
Absolutely. Of course you have just described people who shouldn’t be buying that house to begin with.
There are reasons. For me to rent what I desire I would spend more, much more, on rent. Further, I would not be able to alter things to my taste without great risk of loss, I would not have control of the land, nor would I have surety that even partial possession offers. Rentals can be vacated for good, bad, or no reason.
I simply did not have the money to buy. I honestly didn’t believe I would still be alive, and for good reason. At this point, it seems long longevity beyond reasonable expectation runs in my blood, or is genetic. I can’t change the past, but I do need to plan for the future. So… I have.
Oh, as well, to store goods for hard times, a rental is a very bad option. Just grains for a year of living, let alone water and gear, is a massive mass to move should the contract be nullified. You can’t seriously prep in a rental. Yeah, I prep, as hard and solidly as I may. So buying in low was the only real choice, given all the givens.
Plenty of misconceptions posted here.
Starting with:
Rufus T. Firefly Says:
October 25th, 2014 at 10:32 am
1) Banks no longer make residential real estate loans — not even Savings & Loan Associations. They merely fill out the paperwork — for a fee — said paperwork is to Federal standards — and your true lender is the US Federal Government — via its institutions.
You may take a gander at any bank’s balance sheet/ annual report to see this is true. It’s also why you see ads for Internet sourced real estate loans — from non-banks. They’re strictly processing Uncle Banks loan applications. (Yes, yes, multiple front organizations are used. Uncle Bank is 95% of the market. The 5% consists of non-conforming loans. (ie really wealthy people financing mansions.) Uncle Bank has 100% of the bread and butter loan market.
eve Says:
October 25th, 2014 at 12:18 pm
“Rufus is right about baby boomers looking to downsize.”
As a general rule this premise is TOTALLY false. The ‘trading down’ idea must have been crafted by some real estate brokers.
The elderly, with their paid off homes, sit pat until dementia or death overtakes them. Their sons and daughters are forced — by the million — to move back in — and take care of them. The parents can’t afford or stand professional nursing home treatment.
Their kids have lost their shirt trading up during the property boom. The last reversal eliminated all their equity in mere months — and their jobs were zeroed out to boot. Simply millions upon millions of American jobs were linked to construction — even when thought otherwise.
1) White goods — sold into new residential space.
2) Commodity materials — used to fabricate housing goods.
3) Advertisers and the media that depended upon such.
4) Retail finance and insurance, each new home means purchases of both. Massive down-sizing is the after-effect.
The average citizen is simply not aware of how many consumer goods are practically once-in-a-lifetime purchases consequent to a home purchase. The replacement market for such items is merely the ‘tail of that dog.’
This cataclysm has terminated life long careers for boomers, too. While their house might be paid off, they are in no position to eat the transaction costs of downsizing.
Further, the typical homeowner is ever more likely to sign a reverse mortgage. They’re not going anywhere.
You’ll note that no-one is building out huge retirement communities in Arizona any more. The construction industry got completely ahead of the market. Those houses exist — at prices few can afford.
BTW, professional (Wall Street) money snapped up Phoenix in a major way over the last three-years. That snapping has stopped cold. The bright boys were chasing their own, self-created, asset bubble. They now have massive positions that are in dire need of tenants.
So these fellows have moved off to buy up distressed Spain. Their logic is identical to their Phoenix play. Their problem is the same: no-one can pay the rents required to make these bets pay off. A trickle of wealthy souls is nowhere near enough.
Ann Says:
October 25th, 2014 at 3:33 pm
“”McArdle: …most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years.””
“That mind-set is going to be hard to shake. And I think largely because, as she says, that was the experience of a whole lot of people, not just a few.”
I never cease to be amazed a the number of highly educated Americans who don’t understand the source of real estate wealth… For the winnings of the last seventy-years have been — for the vast majority — solely due to their short position against the US dollar.
EVERYONE who owes a mortgage on American real estate has established a SHORT POSITION against the US dollar. This is true whether they intend it or even comprehend what they’ve done.
The PROFIT ON THIS SHORT shows up as “real estate appreciation.” But the real estate scarcely appreciated. It was the US dollar that was debased. Everything else in the dollar universe was repriced, too. The ONLY players winning were those owing big debt. And no bigger debt is to hand more than real estate secured borrowing.
Further, it’s these very real estate borrowings that are the true source of most American money. This, again, is lost on most Americans, who don’t hold MBAs in banking. Modern money starts life as a real estate loan — straight out of thin air. The government does not create it — the American citizenry does — when they take out a debt. Since mortgages are anyone’s largest debts — they dominate (modern) money creation.
[ Earlier forms of money, best known, were gold and silver specie. America stopped using specie as the dominant form of money early in the 19th Century.
Mortgage lending took over — yet the currency was still linked to specie. When Jackson zeroed out The Bank of the United States by selling off government land — en masse — he totally cratered the national money supply — and triggered the greatest depression this nation ever endured. The 1830s were fantastically tighter than the 1930s. It’s just that most Americans were (still) subsistence farmers. Many farmers never saw a gold dollar, in that period, for years on end. The California gold strike had yet to come — and Americans were still using foreign specie, everywhere. That practice was only banned in 1853 after enough domestic gold and silver were mined to coin enough to meet needs.]
Of late, the Fedsury has been hyper-inflating the money supply: absolute money printing out of thin air — by the central government via various ruses and complexities. ( To fool the rubes… and it’s working.)
Since hyper-inflated money creation enters the economy via a SPIGOT — in one massive stream — the Primary Dealers — you have a torqued economy — with the Wall Street crowd getting fat while everyone else is sucking on hind teat.
This phenomena explains why New York City incomes are busting out — like no-one else. (okay, Washington DC)
Any sane economic policy MUST cause immense contractions in the Democrat party economy. Hence, Barry Soetoro is Detroiting the nation.
The end game is to be identical to Greece: all at once.
The same thing happened to Louis XVI.
And it’s the story of most Chinese dynasties. This is how and why the Ming dynasty blew up.
BTW, no government in history so resembles modern America — in its broader (military-cultural-economic-technological) strokes — than the Ming Dynasty. It’s uncanny.
BTW, since interest rates on mortgages CAN’T go down, there is a very real prospect that the US dollar short game might be reversed.
Certainly, real estate — all of it — is no longer a one-way bet.
America is headed back to post Civil War economics — without a Wild West/ gold strike boom.
Between 1865 and 1913 everyone did everything in their power to get out of debt — even real estate debt.
The only players borrowing large were the railroads. And they kept going bankrupt. The Northern Pacific went belly up THREE times — and it hadn’t even been completed yet. During the 19th Century, most railroads were ‘re-organized’ at least once. Obviously, only the winners were left by 1915.
Which is to say that for the rest of your lives you should expect to read of the Zells and Trumps going bankrupt, time and again.
What’s happening to them will be a common story all across the nation.
Current policy is designed to stop this healthy correction.
As the Ming could tell you: it blows up, entirely, by the end.
blert, yes, banks just move paper and the Federal government has taken complete control of the system, but that has nothing to do with the point I was making. It doesn’t have to be that way, and it wasn’t in the 50s, which was the basis of my comparison. My point was, human nature is human nature and there will always be people taking on too much risk, or simply not bothering to educate themselves sufficiently.
I don’t know what circles you run in, but Boomers downsizing is the norm where I live. Even if not planned, it becomes a necessity at a certain age since most all the 4 and 5 bedroom homes are 2 stories, with the bedrooms on the 2nd floor. Real estate in favorable retirement areas will do well; 2 story family homes will stagnate (except in places experiencing economic growth).
eve,
Wisconsin is a wonderful state! A well kept, national secret. Beautiful, beautiful countryside and not too expensive.
blert,
The mechanics of it all isn’t my ballpark, but I get the gist of the game. I honestly can’t do more than do what I can, I honestly don’t know enough. However, I realized some time back that the long game was a ‘splodey’. So, I stock, have bought into a home with some land, and will… just have to make it as I can.
I wonder how many bright lights blinked off at the thought of the truth of what you just wrote. So many refuse to face the truth. This IS going to hurt, soon or late, if soon is my bet. I’m still hoping for late, to get gear, food, and such, stored. Reminder… all preps are short term… failure discussed is long term. Which means… learn to garden, begin animal husbandry, if you live in a city, get the …. out.
*blink* *blink, blink* *blink^e*
Doom and blert,
When I look at the numbers and facts on the ground an enormous disaster seems inevitable, but there are two significant factors that continue to postpone the seemingly inevitable:
1. Most other countries are in worse shape.
2. The Fed keeps devaluing our dollar. Just as the enormous, post Civil War debt of $5M seems insignificant today (there are several Americans who could write a check to pay that off and still retain more than 80% of their net worth), the money we owe China and other creditors could become less burdensome in future dollars.
However, I still expect our Government to find a way to destroy the Republic.
Too few politicians follow the first rule of holes: When you find yourself in a hole, stop digging.
Whups, that should be a billion with a “B” after the Post Civil War debt, but the rest still stands.
At the risk of sounding simple, it is my view, at least since the 80’s, that it is far too easy to get things. Much easier than it is to keep them. From marriage to divorce, to home or automobile ownership. Money management, basic economics, should be mandatory courses taught in high school, the entire 4 years. But we all know why it is not. Without debt, our economy would collapse. Just like too much debt will cause the same thing.
I don’t owe anyone anything, except for the monthly incidentals – water bill, electric, etc. The things that are pay as you go. I’m not needed.
Amen, br549! (Although it’s hard to believe a guy who sells Used Cars for a living is against loans!)
br549 Says:
October 26th, 2014 at 7:22 am
…”Without debt, our economy would collapse. Just like too much debt will cause the same thing.” …
Preach it, brother.
If there is ONE thing the citizenry has to comprehend, this ^^^ is it.
&&&
Having predicted the 1982 Bull Market flip…
The Russian Revolution — #2 — to the day…
The flow of the Falklands campaign…
The flow of the Gulf War #2…
And much more too vainglorious to list here…
My crystal ball says that because of the interconnectedness of today’s world…
The Fedsury will keep levitating the Fiat World — via SWIFT — and multi-national financial structures — until the entire edifice collapses — like the final pages of a Cat-in-the-Hat saga.
(Dr. Seuss tapped our collective (financial) unconscious.)
[ SWIFT is the hidden Anglo-American magic that keeps both Britain and America at the apex inside the world of trade.
SWIFT is the reason why the US dollar — and to a much lesser extent — the pound sterling are international monies, (ELECTRONIC) reserve currencies.
This last point bears emphasis. Most modern money now exists solely as entries within the Anglo-American ledgers.]
{
Any visit to ZeroHedge will inform you of the Russian rage at this apex dominance.
Putin is now in fiscal gaol. Stepwise, his crew is being repressed like any other narco-mafia clique.
His crew has a LOT of toys in the West. They are now all at hazard.
Slowly, it’s dawning on him that he’s been swapping poverty stricken Crimea (a perpetual money drain, it can NEVER make its way on its own) for all manner of fun assets.
It’s been noted that the Kremlin is as much a prison as a fortress. Moscow or St. Petersburg — the weather is rotten nine months out of the year. No Gulf Stream for you!
}
While the media represses the truth: Putin has embraced neo-Stalinism, Ivan the Terrible, style. He’s cuckolded his boyars, already. (Got to love income tax as a political weapon.)
He’s openly invading Ukraine — and violating existing Russian national law in grand style to do so.
In both instances Barry and Putin emulate each other.
I think both tyrants have jumped the shark.
I suspect that Putin will keep attacking the West until he gets Barry’s ‘respect.’ In this way, he’s travelling the same story arc as the Kim family enterprise.
The recent cratering of the Brent crude benchmark is most curious. Russian crude is sold into that hub. Yet, actual Brent production is cratering. (British taxation has destroyed the economics of further recoveries. Think of the Greens, again.)
What’s happening is that refined American imports are CRUSHING European refineries. Most have been reduced to mere tank farms. Once you pull the plug on a refinery — due to the crack spread — then it’s out of the Brent market — entirely.
This is magnified by the KSA Yanbu refineries. They’re totally oriented towards middle distillates. 400,000 bbls/day is coming on line this Winter — if not sooner.
The Saudis have been, doubtless, flogging this REFINED product stream all over Europe. It’s large enough to largely replace Russian gas imports. (Europeans switched TO Russian gas from middle distillates. Those fuel tanks and burners are still in place.)
To make matters worse, Russian gas is often priced relative to Brent. So the price move in Brent is a disaster for Putin… pretty much a financial Stalingrad.
All of this is a predicate for further revanchist war.
His balloon will be popped the moment the balloon goes up.
I mostly never wanted to own a house. Various reasons: the then current relationship wasn’t steady enough (the younger me was spectacularly good at failed relationships). My then current job wasn’t steady (or didn’t pay) enough. I was too poor (the story of my life lol).
But as much as anything, because I was a gypsy. And irresponsible. And I knew it.
Until …Deb.
We’ve been married 20 years. My 2nd, her first. Best thing that ever happened to me.
But …we rented. Even when we finally settled into careers/jobs.
Buying a house wasn’t a real priority.
And, realistically, we couldn’t afford anything like 20% down, in any place we would have ac
…actually afforded to make the payments on.
Until we left California, especially.
Oh, we looked. Occasionally.
Then we moved to Spokane.
And realized that we were – and had been for most of our married life – paying more for rent than purchasing would take out of our monthly budget.
We’re the kind of renters every landlord wishes for btw (they’ve all told us that). We take extremely good care of the house (or apartment) we choose to live in. We fix things when they break. We cooperate and suggest property improvements. We pay on time.
Nice houses in great neighborhoods are a lot less money in eastern Washington than in California lol.
But 20%?
Wasn’t gonna happen. We had no debt, we had some money …but hell, that’s real money. We didn’t have it, and weren’t likely to.
Which brings me, finally, to the point.
If you’ve been paying more in a rent payments then the house payment will cost, and for years, it’s time for you to buy.
So. Don’t listen to Meghan McCardle.
You’re a good risk, and the banks will listen to you. And an FHA loan can [still] make that happen.
The 20% down is less an accurate predictor of loan performance than a realistic budget based upon your rental history is. IMHO. And our mortgage broker’s!
You have to live somewhere lol.
And moving sucks (trust me on this: I have a LOT of experience moving). And with renting, you can never be sure about your residence.
Better to own.
And that’s T’s point, really, isn’t it?
Just live within your means. Don’t be an idiot, and go beyond what you know is affordable for you. But that don’t necessarily include a 20% down,
“Ya gotta live somewhere.”
Sorry about the break in the comment. I’m writing using the Surface onscreen KB, and I must have geed when I should have hawed.
Or something lol.
davisbr…
I think that a reduced down payment is not the end of the world…
The systemic problem is the 30-year mortgage.
Investors HATE 30-year paper. Consequently, it has always taken the US government to goose the market — all the way back to FDR.
FYI, it was the FDR administration that invented the 30-year mortgage for bread and butter properties.
&&&
If the market had been shaved back to 15 or 20-year paper…
Then married couples would be out of mortgage debt when their kids were ready for college. (more or less)
Excess mortgage credit merely causes over indulgence in home construction. It also causes unwarranted appreciation in raw land — in the path of development.
Excessive, free-riding, profits on land are a bane of modern society. Naturally, they get no ink.
They are THE NUMBER ONE source of local government corruption.
( You wouldn’t BELIEVE how severe this can get. It’s the primary engine of (local) Democrat party corruption/ politicking. )
When I witnessed this up close — I noticed that the local TV crews — all of them — were in on the corruption. This took the form of kissing ass — and burying the in-your-face-obvious indications of corruption.
blert,
I don’t understand why 30 -year paper is a problem for investors. With all the bundling and transferring that goes on today that should not be a deterrent. For the most part, investors like to have guaranteed interest payments coming in as long as possible, especially on a secured loan. It’s steady, monthly income on an asset you don’t have to pay taxes on, or insure, and if the borrower defaults you have an asset that’s almost always worth more than the outstanding principal on the loan.
With the modern borrower’s mindset, even if loans were capped at 15 or 20 years folks would simply do home equity loans, or re-mortgage to fund fancy, private colleges for their progeny and take exotic vacations, etc. Look at the recent boon of reverse mortgages.
Look at how popular auto leasing is. Folks would rather lose money to have the status of possessing something, even if that possession is ephemeral.
blert,
Look at the credit card industry, or student loans. In both cases minimum payment amounts are structured to keep interest payments coming in as long as possible. Creditors don’t want borrowers buying down principal. It’s more work to find new borrowers than to keep the “customers” you already have on the hook, in perpetuity.
blert,
And auto loans are doing the same thing as mortgages; offering longer terms, rather than shorter. This is voluntary, by the lenders. It used to be 5 year auto loans were absurd. Now you can get 10 year loans. On an automobile! The goal of a lender is to find the precise, maximum monthly payment you can make without defaulting, and keep you making that payment as long as possible.
Some of the commenters on this topic rightfully called the Federal Government to task for its role in creating the Housing Bubble and subsequent collapse, however, we too often fail to criticize the lenders who knew they were passing bad paper and gladly took tax dollars and other government assistance.
For years many investment firms gave huge bonuses to their employees for signing up all these new mortgagees and for bundling and selling off loans. They knew what they were doing. They knew many of the borrowers would default. They knew the paper they were passing on would be rendered worthless in a massive default.
Then, when the collapse happened they kept those bonuses and we tax payers bailed their companies out and “ate” the bad mortgages. I’ve never defaulted on a mortgage, and I never got a huge bonus for signing folks up to a bad mortgage, but I was stuck with the tab when the bill came due.
The real problem with a less than 20% down isn’t the 30 year loan duration blert. The duration is just to stay in budget.
The problem is that less-than-20%-down buyers have to pay exorbitant PMI.
Which – in our case – means more than a 30% increase in our monthly payment. For the life of the loan (apparently this has changed from previous).
Now that’s still less than we’ve paid for rent …and in a nicer (and yes, larger) house.
And. Once we have a 20% equity stake, we’ll re-fi. (Our monthly will drop by over $400 per at that point …and be significantly less than we’ve ever paid for rent.)
So. What would be the effect on the real estate market if PMI was something reasonable?
And on buyers’ ability to do 15 or 20 year paper? And on freeing that money to turn back into the local economy? Or even into savings?
On a national scale, I bet that’s “real money” too lol.
A house isn’t an “investment” in my world.
“Ya gotta live somewhere.”
The last I heard, the PMI was automatically waived once the mortgage was paid down X percent.
Since I never used it, I can’t speak from experience.
Of course, the reason for the killer PMI rate has been the default experience due to CRA Policy.
&&&
In my youthful Hawaiian days, the universal drill for the locals was to have mom and dad advance the down payment — under the table if required. (typ.)
Then the kids would qualify for conventional finance.
(The inflation of the 1970s caused Hawaiian real estate to get even crazier than it already was.)
As their ‘rent’ (mortgage nut) was fixed, the locals soon had enough cash flow to pay off mom and dad — if this was necessary. This money was turned around and used to set up child #2.
&&&
The problem today is that for the next two generations, real estate is going to be a dead asset.
It will no longer be possible to profit by shorting the dollar via a traditional mortgage, at least not easily.
What’s going to trip home owners / owers is loss of cash flow/ their job. This will happen at previously unheard of tempos.
One should expect even municipal civil service jobs to be on the bubble. (Vallejo blues… Chapter Nine all over the place.)
Payroll is such a huge part of all government budgets that when the crunch comes, layoffs are always epic.
I give you Russia, circa 1998. Not only did Moscow stiff retirees, it laid off staff, soldiers, generals, defense contractors… the works. ALL of these souls had been protected — as best possible — until that moment.
The end game is ALWAYS out of the blue — and abrupt.
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Residential real estate is CERTAIN to be hammered because:
1) 0-care flat-lines the First Time Home-buyer. The bottom rungs to the property ladder have been blown away.
a) To even be a FTH your income has to be above 0-care subsidy levels.
b) Everybody above that level has an embedded TAX built into their 0-care outlays. It’s the steepest for young healthy adults with children. The VERY citizens that buy their first home.
c) Even if the “employer pays” the above impact still holds.
i) Employers never pay for employee benefits, they must be earned; otherwise you’re fired/ laid off/ demoted.
ii) The 0-care tab will result in said employer rolling back nominal (W-2) wages or cancelling any inflation adjustments and any performance raises.
Out my way, CraigsList blue collar ads show that $5-$7 per hour has been rolled back — across the board — for new hires. The old hands are being laid off, mostly. If they are held on it’s because they’ve earned a wage bump — and 0-care is that bump.
2) Property tax authorities ALWAYS go crazy taxing away when the end times come. In ancient times, this impulse ended in revolution or social collapse. (Rome, China, India)
a) Unlike all other forms of wealth, land and structures are easy to spot and slow to move. Consequently, such asset tax revenues are easy to trap.
b) The need for civil service payoffs/ wages never abates. It just keeps ramping away. But since the sector is large, and efficiencies impossible, the end game is fast upon.
3) The general hammering in discretionary real estate (McMansions) shuts down fat tax revenues.
a) Sales taxes…
b) Income taxes…
c) Property development fees…
Run away spending and taxation cripple economic output… which at some point takes out the entire government.
We call that a revolution.
PMI is now for the life of the loan. Times change. The only way out is re-fi when your equity value is sufficient.
…which could probably be construed as a tax of sorts conforming to your “…game over, man. Game over” hypothesis lol.
…regardless, even when you’re coterminous with the fall of a civilization, you gotta live somewhere lol.
blert,
We agree that residential home sales in most areas will be anemic, but we disagree on the reason. Demographics are the biggest, single determinant in residential real estate; look at what all the Levittowns sprouting up in the 50s and 60s did to our nation and its economy. I don’t understand why you insist on ignoring demographics? The Baby Boomers will continue to drive our economy. The next 25 years will be all about retirement housing, medical costs, elderly care, assisted living expenses and facilities… It will be a buyer’s market for young couples looking to start a family. (Unless we import millions of young foreigners.)
We agree on the time bomb of municipal debt. It’s already started blowing up in the most profligate communities. There are going to be A LOT of unhappy cops, firemen, teachers and sanitation workers and you are right, property taxes in large urban areas will likely skyrocket before the whole pension ponzi scheme collapses.
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