Even the NYT was also very late to the reality party.
It didn’t take a lot of fancy graphs and risk-modeling to figure out that the annual 10-40% in house prices could not last; nor that 2/28 or 3/27 ARMs, piggyback 80/20 or option ARMs were being taken out by borrowers who could NOT afford to make a payment that would cover the principal plus prime interest; nor that remortgaging the house to add a $40,000 kitchen to a $140,000 house (NYT story) was NOT ‘getting your equity out’ but running up a bill that would have to be paid back plus more in the form of interest. Buying a house with a 0 down, 2/28 ARM with a below market teaser interest rate and gambling that the house will gain enough in value in 2 years so they could refi into a fixed with a market rate interest will not, did not and can not solve the problem that the purchaser has to pay back the amount borrowed no matter how much ‘equity’ they have and, sooner or later, do so at an interest rate that yields at least market interest over the life of the loan.
And doing such things when median incomes were dropping or staying basically flat was beyond insane.
We retired early and sold the house in 2000-01, and then proceeded to travel full-time for around 3 years with the RV. When we decided to stop traveling, I looked at the prices, looked at the household incomes in the area where we had decided to stay (US census data is so much fun) - and laughed. There was no way that the incomes could support the prices over the long term. I have always preferred working with micro-economics and the demand/pricing of goods and services rather than the macro but I didn’t need to do much to see that the supply prices far exceeded the prices which the buyers could reasonably pay - ergo, sooner or later prices had to fall.
The local realtor showed me one house - and I quickly did the math in my head and ask how in the world they could justify the sq ft price? She had no answer except “the prices are going up and it is a good time to buy.†I told her that, on a good day, it wasn’t worth more than 40-42% of the price as such a place wouldn’t rent for enough to make the mortgage payment at that asking price, and forget taxes, insurance and maintenance. It did sell to a sucker who is has been trying to sell it for over 2 years in a market that has just lost 31% in price - so far.
We committed to a long term lease on a 3 bedroom house with a 1/2 acre yard and garage which is only 3 blocks off the beach on the shore of Lake Michigan (prime tourist area.) When ask why we were not buying something, I simply responded that I was not stupid enough to pay 58% more a month in taxes, mortgage and insurance to buy such a house when I could rent it - and in addition to the 58%, I would also have to foot the bill for the repairs and maintenance (and that is not cheap as anyone who has owned a house can testify.)
The rental value of a house is ‘the’ major indicator of its true value. What people can pay in rent is dictated by their income.
In the past 4 months, this county has taken a 31% drop in prices as shown by the actual sales. The foreclosure rate is 1::92, and the 2nd homeowner foreclosure rate is 1::58 (and 2nd homes are 40% of the housing stock.) In my village alone, it has been 1::60 with all the foreclosures being 2nd homes. The foreclosures are 95%+ 2nd homes with such foreclosures ranging from amounts in default of $150,000 up to $1,700,000 with the average being $389,000. 98% of the loans in default were made from 2003 to 2007, and the lenders are the big nationals like Countrywide, WaMu and others who engaged in risky lending practices. About 90% of these loans are clearly 2/28 or 3/27s ARMS or option ARMS - used to buy something they couldn’t afford otherwise because they ‘just had to have it’ and be good little gluttonous greedy consumers.
Should these 2nd homeowners be ‘rescued’ as the NYT is fond of advocating when it bewails people losing their homes without specifying the difference between the illiterate old lady and the 40% of houses sold in 2005-2007 to speculators and 2nd homebuyers? My response is ‘not until hell freezes over’ so far as the speculators and 2nd homes (and the same applies to those who refied to pay off credit card bills incurred by overspending on ’stuff’, to buy the SUV or to add a kitchen costing 30% of the value of the whole house.) All of this talk about re-dos on the mortgages with changes in interest rates and, astoundingly, reduction in the amount owed, sounds very much like the idea of a general cancellation of debts - a concept that was floated several times during the Roman Republic by proponents such as the Gracchi brothers Tiberius and Gauis and then by Cataline. It didn’t get anywhere then either.
So why couldn’t Greenspan and the rest see it coming it if I could? The short answer is that they didn’t want to see it. Selective blindness and deliberate ignorance were too comforting and they went flying along literally on a wing and prayer with their eyes closed until they hit a wall. To do anything else would upset those who were making money off lending wildly or speculating on the idea of making easy money in real estate.
Further they were focused solely on the theoretical world of macroeconomics and ignored the very real and practical world of the daily microeconomics. It sounds very grand to talk about liquidity, the credit markets, leveraging and risk analysis but the bottom line is that if the majority of the Uncle Jakes and Aunt Tillys out there in the US do not have the income to pay the price ask for something, be it a house or a car or a TV, sooner or later the prices will fall. One should never overlook the Uncle Jakes and Aunt Tillys if they are a major factor when trying to predict what will happen with respect to anything. All the macro theories are for naught if the reality of the micro is that the buyers do NOT have the money and, sooner or later, will run out of credit and how much debt they can repay. Policymakers and Wall Street may have been playing with Monopoly money but Aunt Tilly was not.
It didn’t take a lot of fancy graphs and risk-modeling to figure out that the annual 10-40% in house prices could not last; nor that 2/28 or 3/27 ARMs, piggyback 80/20 or option ARMs were being taken out by borrowers who could NOT afford to make a payment that would cover the principal plus prime interest; nor that remortgaging the house to add a $40,000 kitchen to a $140,000 house (NYT story) was NOT ‘getting your equity out’ but running up a bill that would have to be paid back plus more in the form of interest. Buying a house with a 0 down, 2/28 ARM with a below market teaser interest rate and gambling that the house will gain enough in value in 2 years so they could refi into a fixed with a market rate interest will not, did not and can not solve the problem that the purchaser has to pay back the amount borrowed no matter how much ‘equity’ they have and, sooner or later, do so at an interest rate that yields at least market interest over the life of the loan.
And doing such things when median incomes were dropping or staying basically flat was beyond insane.
We retired early and sold the house in 2000-01, and then proceeded to travel full-time for around 3 years with the RV. When we decided to stop traveling, I looked at the prices, looked at the household incomes in the area where we had decided to stay (US census data is so much fun) - and laughed. There was no way that the incomes could support the prices over the long term. I have always preferred working with micro-economics and the demand/pricing of goods and services rather than the macro but I didn’t need to do much to see that the supply prices far exceeded the prices which the buyers could reasonably pay - ergo, sooner or later prices had to fall.
The local realtor showed me one house - and I quickly did the math in my head and ask how in the world they could justify the sq ft price? She had no answer except “the prices are going up and it is a good time to buy.†I told her that, on a good day, it wasn’t worth more than 40-42% of the price as such a place wouldn’t rent for enough to make the mortgage payment at that asking price, and forget taxes, insurance and maintenance. It did sell to a sucker who is has been trying to sell it for over 2 years in a market that has just lost 31% in price - so far.
We committed to a long term lease on a 3 bedroom house with a 1/2 acre yard and garage which is only 3 blocks off the beach on the shore of Lake Michigan (prime tourist area.) When ask why we were not buying something, I simply responded that I was not stupid enough to pay 58% more a month in taxes, mortgage and insurance to buy such a house when I could rent it - and in addition to the 58%, I would also have to foot the bill for the repairs and maintenance (and that is not cheap as anyone who has owned a house can testify.)
The rental value of a house is ‘the’ major indicator of its true value. What people can pay in rent is dictated by their income.
In the past 4 months, this county has taken a 31% drop in prices as shown by the actual sales. The foreclosure rate is 1::92, and the 2nd homeowner foreclosure rate is 1::58 (and 2nd homes are 40% of the housing stock.) In my village alone, it has been 1::60 with all the foreclosures being 2nd homes. The foreclosures are 95%+ 2nd homes with such foreclosures ranging from amounts in default of $150,000 up to $1,700,000 with the average being $389,000. 98% of the loans in default were made from 2003 to 2007, and the lenders are the big nationals like Countrywide, WaMu and others who engaged in risky lending practices. About 90% of these loans are clearly 2/28 or 3/27s ARMS or option ARMS - used to buy something they couldn’t afford otherwise because they ‘just had to have it’ and be good little gluttonous greedy consumers.
Should these 2nd homeowners be ‘rescued’ as the NYT is fond of advocating when it bewails people losing their homes without specifying the difference between the illiterate old lady and the 40% of houses sold in 2005-2007 to speculators and 2nd homebuyers? My response is ‘not until hell freezes over’ so far as the speculators and 2nd homes (and the same applies to those who refied to pay off credit card bills incurred by overspending on ’stuff’, to buy the SUV or to add a kitchen costing 30% of the value of the whole house.) All of this talk about re-dos on the mortgages with changes in interest rates and, astoundingly, reduction in the amount owed, sounds very much like the idea of a general cancellation of debts - a concept that was floated several times during the Roman Republic by proponents such as the Gracchi brothers Tiberius and Gauis and then by Cataline. It didn’t get anywhere then either.
So why couldn’t Greenspan and the rest see it coming it if I could? The short answer is that they didn’t want to see it. Selective blindness and deliberate ignorance were too comforting and they went flying along literally on a wing and prayer with their eyes closed until they hit a wall. To do anything else would upset those who were making money off lending wildly or speculating on the idea of making easy money in real estate.
Further they were focused solely on the theoretical world of macroeconomics and ignored the very real and practical world of the daily microeconomics. It sounds very grand to talk about liquidity, the credit markets, leveraging and risk analysis but the bottom line is that if the majority of the Uncle Jakes and Aunt Tillys out there in the US do not have the income to pay the price ask for something, be it a house or a car or a TV, sooner or later the prices will fall. One should never overlook the Uncle Jakes and Aunt Tillys if they are a major factor when trying to predict what will happen with respect to anything. All the macro theories are for naught if the reality of the micro is that the buyers do NOT have the money and, sooner or later, will run out of credit and how much debt they can repay. Policymakers and Wall Street may have been playing with Monopoly money but Aunt Tilly was not.
