Housing market obliterated

[bascule]

(Note to non-US people: this thread refers to the US housing market)

 

As a followup to this thread...

 

So, I'm examining the present situation the US housing market is in, and I can't help but feel a tinge of the Savings and Loan Scandal which occurred under Reagan. In that case deregulation of the banking industry gave savings and loan companies many of the same powers as banks. This lead to the subsequent bankruptcy of over 500 savings and loans.

 

The same thing is happening now thanks to deregulation of mortgage brokers. It's largely owed to the combination of mortgage brokers offering subprime loans, people willing to accept them, and the cluster**** which ensued. It's a case of two parties looking for a deal in the other mutually screwing each other and in the process, everyone else.

 

http://news.yahoo.com/s/csm/20070302/ts_csm/asubprime

 

The problem goes like follows: Ignorant consumers shop for the lowest mortgage in town and find a subprime ARM. They don't read the fine print (by which I mean the large faced print on their Good Faith Estimate) and fail to realize that two years down the road their APR would ratchet up to some grossly above-prime value. Great if you intend to flip your house in two years! Guess how many people were thinking that way, versus just not paying attention.

 

Scandalous mortgage brokers laugh all the way to the bank, failing to realize one thing: maybe all these people they duped into overly expensive mortgages won't be able to pay them. While they can foreclose all they want, they're not in the real estate business. They're in the banking business. They don't want to own homes. They want to make money on helping people finance homes.

 

Then it all comes crashing down... very very hard:

 

http://news.yahoo.com/s/nm/20070319/ts_nm/usa_subprime_detroit_dc

 

In motor city houses are now cheaper than cars thanks to record foreclosures.

 

So, how are all those subprime lenders dealing with the situation? Well, at least for New Century Financial, which heralds itself as a "new shade of blue chip", their stock is in the toilet:

 

http://www.ncen.com/

 

OUCH! Just look at that graph. The current news on their front page now reads:

 

"NYSE Suspends Trading New Century Financial Corporation's Securities"

 

Nobody's coming out of this one a winner, except those of us who bought homes when the bubble burst and were able to cash in on low prices.

[gcol]

I do not quite see how your post illustrates its headline, or was that just a tabloid attention grabber?

 

Yes the bubble of upward spiralling house prices has faltered and fallen back in a couple of areas, but obliterated? I think not. Market forces are never obliterated, they sometimes move in unexpected directions outside of some peoples' comfort zones. The profitable trick is to correctly foresee the new direction. Bleating because a wish-fulfilment fantasy has turned into a nightmare is a defeatist welfare-state kneejerk reaction.

 

Treat it for what it is. A predictable downturn correction in an overheated sector.

 

I can be sanguine, having seen the prices of houses in my personal lifestyle sector move from £4,000 to £200,000 inthe last 40 years, and suffered mortgage interest rates approaching 14%.

[ParanoiA]

The problem goes like follows: Ignorant consumers shop for the lowest mortgage in town and find a subprime ARM. They don't read the fine print (by which I mean the large faced print on their Good Faith Estimate) and fail to realize that two years down the road their APR would ratchet up to some grossly above-prime value. Great if you intend to flip your house in two years! Guess how many people were thinking that way, versus just not paying attention.

 

That's not true. They DO read the print - there's nothing fine about it. It's repeated at closing over and over again. The problem is not that people didn't know - it's that they didn't care.

 

Poor people don't think about tomorrow - only today. That's why they're poor. That's why they didn't work for a degree. That's why they don't save money and buy things with cash. They are only concerned about today. I'm not being mean, just honest. I've been there, and I know how they feel but it doesn't change the outcome.

 

Then there's the post-poor. They landed a great job, or maybe they finally got treated right at work and got a promotion, or something similar and now they have just enough money to qualify for stuff but a crappy credit score. They don't know how to manage money - particularly since they've never had any. They're still "poor" in the brain.

 

They don't really believe the interest rate will go that high. Why? Because they have no freaking idea - they've never paid attention to such things and aren't entirely sure what the word "interest" even means, much less how it will tear them apart in a couple of years. So, like everything else that results in a new expensive toy for a poor person - they ignore it.

 

If they don't ignore it, they don't get this house. If they don't blissfully, willfully remain ignorant, then they won't enjoy the two years before the interest destroys their life.

 

Just my take on it. I don't think anyone is ripping anybody off or pulling the wool over anyone else's eyes - rather the home buyers just want to hear the word "yes". My wife, a real estate agent, actually advised a client not to do one of these several months ago and the client never came back. I don't know if they went to somebody else, or if they truly changed their mind, but she suspects the former since they didn't like her reality check.

[bascule]

I do not quite see how your post illustrates its headline, or was that just a tabloid attention grabber?

 

Perhaps you missed the part where houses are selling cheaper than cars.

 

"The lumber in the house is worth more than that!" cry the salesmen!

 

I don't know about you, but I bought my home for an order of magnitude more than my car. When the former is cheaper than the latter, something is very, very wrong.

 

Yes the bubble of upward spiralling house prices has faltered and fallen back in a couple of areas, but obliterated? I think not. Market forces are never obliterated, they sometimes move in unexpected directions outside of some peoples' comfort zones.

 

I don't think the housing market is irrevocably obliterated. I'm using "obliterated" to indicate a period of record foreclosures combined with record bankruptcies in mortgage brokers, the biggest drop in the housing market in 30 years. Oh, and in some markets, houses selling cheaper than cars.

 

The profitable trick is to correctly foresee the new direction. Bleating because a wish-fulfilment fantasy has turned into a nightmare is a defeatist welfare-state kneejerk reaction.

 

I profited off this situation. I bought a home for under half the offering price of units in the same complex 6 months before my purchase.

 

So why am I complaining? Because the situation is indicative of why Laissez-Faire capitalism doesn't work. Two people, engaging into a deal which they both believe will bring them value, end up losing tremendous value, and the collective action of millions of people engaging in such an activity is enough to negatively impact the economy as a whole.

 

This is a clear case where deregulation has failed. There's several other places where it's failed, but this is one which has the potential for widespread impact upon the economy as a whole.

 

Treat it for what it is. A predictable downturn correction in an overheated sector.

 

I'm treating it for what it is: deregulation failing

[bascule]

Just my take on it. I don't think anyone is ripping anybody off or pulling the wool over anyone else's eyes - rather the home buyers just want to hear the word "yes". My wife, a real estate agent, actually advised a client not to do one of these several months ago and the client never came back. I don't know if they went to somebody else, or if they truly changed their mind, but she suspects the former since they didn't like her reality check.

 

My belief is the subprime lenders attempted to rip off any customers they could dupe into purchasing a home with an ARM. What they didn't realize was collectively they would destroy the entire housing market.

 

Like the homebuyers, the subprime lenders wanted to hear the word "yes". And they did. New Century's stock skyrocketed between 2001 to 2005, to the point they declared themselves "a new shade of blue chip." Their actions, along with the actions of multiple other subprime lenders, destroyed their source of revenue. Like the subprime borrowers, they lacked the foresight to realize the impact their actions would have on the market. Their stock is indicative of the situation as a whole:

 

[bascule]

Treat it for what it is. A predictable downturn correction in an overheated sector.

 

The question is when it became predictable. Look at the above stock chart and tell me when the stockholders came to the realization that the market was collapsing.

 

Looks to me like it wasn't until early 2007.

[GutZ]

Could someone give a crash course in this matter, I am probably one of those "poor" people you described and being a student, probably will help to know this in the future. I know it americian based but just a rough over view of the economical processes.

[jackson33]

think i saw this same argument about 7 years ago, and the charts and dollars resembled national economies, not one company. the tech bubble which eliminated hundreds of wanna bees and kept the legitimate ones which have gone on to lead the industry. i might add the doom and gloom of this era was what was going to happen, when our entire economic system went off line because we entered a new millennium. well, nothing happen and many in the industry looked like what they were...fools.

 

real estate investments in some areas are hurt. some people bought and sold houses like stock or some hot collectible. never saw the homes and let agents perform. todays fools are these people.

 

Sub-prime lenders as well had, miss guided some people into thinking they could afford things they couldn't. people who couldn't afford furniture or know how to change a light bulb, bought and learned the reason they had rented for years. some people are not suited for responsibility and some are not going to be CEO's of corporations.

 

government as well encouraged ownership and encouraged mortgage and banks to finance low income people. the entire concept, although well intended was ill advised and has hurt a FEW, including investors.

 

be careful on no winners; LEND, dropped to 3.00, where i bought and NEW to .80 and also where i bought. both up very good and i am not a loser in this case.

 

all the major home builders will be doing just fine in a year or so. what was the system will be again and people will be forced to live in their means.

those that should rent, or depend on some one else to pay the taxes, interest, repairs and all that goes with ownership are again or soon will be renting. maybe government, even with good intent, will stay out of personal affairs...

[jackson33]

Could someone give a crash course in this matter, I am probably one of those "poor" people you described and being a student, probably will help to know this in the future. I know it americian based but just a rough over view of the economical processes.

 

the general rule for affordable, is to take your total income divided by 4...

what this figure is your sustainable ability to pay off a property, to live in or even rent if you prefer. some do say 33%.

 

40k income, 10k = home and all home expenses. you wont get in trouble and if you save or invest as well, you never will get in trouble...

[Pangloss]

"Deregulation failing" -- in other words people are too stupid for their own good, so the government has to tell them where to live, what they can sign, and ensure that everyone has a new home and a BMW, no matter how high our taxes have to be.

 

I have no problem with extending a helping hand here and there, and if you want to show me an investment opportunity in our future, that's fine as well. But this isn't going to crash the economy (anymore than stagflation or the S&L crisis did -- great example there of something that DIDN'T end up hurting us in the long run, in spite of all the doom and gloom!), the sky is not falling, and people who sign contracts and then can't pay are simply going to have to deal with the consequences.

 

Enough with the "Shiela, a single mother of three, can't afford to make her ballooning house payments!" nonsense.

[gcol]

I tried to point the discussion in this direction in my post #2, but more gently. You point out the truth so cruelly!

 

I reckon there are people out there who think property developers and sub-prime lenders are pure philanthropists with hearts of gold and motives as pure as driven snow. Profit? wash out your mouth.

 

Caveat Emptor. Wishful thinking leads to ruin.

 

"I've been greedy, so what? It's my constitutional right for wellfare and everyone else to bail me out, ain't it".

[padren]

I do think this constitutes much more than a "market correction" when a high demand period starts to subside. This actually has nothing to do with the marketplace demand (more about bad decisions that result in an inevitable flooding of the market with surplus), and better regulation would in all likeihood been able to prevent it.

 

Its worth noting too that the lenders were just as "poor in the brain" as the buyers - they both only thought about what they could get right away, while ignoring the impending consquences.

 

I think there is as much reason to regulate this market as there is to regulate pyramid schemes - which are, dispite our "buyer beware" mentality...illegal. Otherwise, people would either be duped, or see the impending collapse and figure they can make some quick money off it before it just messed up everyone else.

 

There are only two reasons for lenders to invite such a market crash:

1) they don't know any better (and would probably have welcomed regulation in retrospect)

2) they know the damage it will do, but have a quick-buck exit strategy

 

I don't think either reason is very well justified, personally, and as such I would welcome some well balanced regulation in that market.

[bascule]

"Deregulation failing" -- in other words people are too stupid for their own good, so the government has to tell them where to live, what they can sign, and ensure that everyone has a new home and a BMW, no matter how high our taxes have to be.

 

In terms of deregulation, this applies specifically to mortgage lenders. It's something of a repeat of the S&L scandal, in this case corporations attempting an exploitative course of action (offering rip-off loans), preying on people dumb enough to sign (again and again and again), and watching their collective action blow up in their face.

 

This Modern World (which I'm sure most of you hate) did a good job describing the situation:

 

http://www.workingforchange.com/comic.cfm?itemid=22163

 

I have no problem with extending a helping hand here and there, and if you want to show me an investment opportunity in our future, that's fine as well. But this isn't going to crash the economy (anymore than stagflation or the S&L crisis did -- great example there of something that DIDN'T end up hurting us in the long run, in spite of all the doom and gloom!), the sky is not falling, and people who sign contracts and then can't pay are simply going to have to deal with the consequences.

 

"In the long run is great." In the mean time we have mortgage lenders going from "blue chip" to worthless.

 

We have ordinary, hard working people who bought homes whose value was inflated due to all of this. Now their homes are worth less than what they took out their mortgage for. They did everything right, and rather than gaining equity, they're at a loss for their purchase.

 

Their investors screwed out of their money, and worst of all record foreclosures ensuring that millions are now without homes.

 

Now why exactly is deregulating mortgage lending a good idea?

 

Let me interject something else here: I profited from this clusterf*ck. I bought my home for less than half of was worth. I felt bad for the person I was buying it from. It had been sitting on the market for over a year. In the sale the seller lost considerable money they have to now pay back.

 

Enough with the "Shiela, a single mother of three, can't afford to make her ballooning house payments!" nonsense.

 

You're really failing to see the big picture here. This doesn't just hurt the idiots who got ARMs only to instantly get foreclosed on when they reset. It doesn't just hurt the subprime mortgage lenders who are now bankrupt because they tried to prey on idiots only to realize their business model was bound to crash eventually.

 

It hurts the motherfu*cking American dream. People who had the dream of owning their own home got mortgages at inflated values thanks to other people's idiocy. Idiots drove up the market prices, and other people had to pay market value. Now your average Joe who wanted his slice of the pie is screwed.

 

What about all the people who were planning on selling their homes for at least the purchase price, if not a reasonable gain. How long do they have to wait? The average person owns a home for five years before selling it. How many couples now want to start a family and move out of their two bedroom condo into something bigger. Do they wait, or just eat the loss?

 

I think I've made the point to the contrary abundantly clear at this point. Now please, tell me, what possible advantages were there to deregulating mortgage lending?

 

I can think of about one: I'm a guy who was in the right place at the right time, and watched the market collapse right as I was ready to buy a home. I made out like a bandit!

 

Hooray capitalism!

[bascule]

Let me say something else.

 

In my last post I did a lot of harping on "idiots" who got ARMs but didn't intend on selling their house in two years (about the only reason for anyone to get an ARM)

 

Having been through the process, I can't really call these people idiots. Buying a home is hard! I consider myself a reasonably intelligent person, and I found the entire process incredibly confusing.

 

Perhaps the best part I ever did throughout the process was taking a homebuyer's course. It was horribly early in the morning (for me) and quite a drive, but it was free, and they even had free food!

 

But more than that, they had a professional mortgage lender go through various types of mortgages. At that time I hadn't gotten a mortgage yet, I had just gone under contract and was about to go through the rigmarole of the whole process (however half the people there raised their hands if they were closing in the next week! I was shocked)

 

First she gave her whole sales pitch for an ARM. She painted a sunny picture of a bright future where prime decreases thanks to a booming economy. ARMs work in your favor! Get one today!

 

Then she broke out of that and started doing the math on the board, given just recent history. And it was shocking.

 

Then she wrote the number $100,000,000 on the board and told us that was the total value of property foreclosed upon in our state in the last week alone.

 

Had I not taken that class, I can't say what decisions I would've made. I was completely naive going into the process, and that class made me question many things I hadn't before, including whether I should be buying a home in the first place and could I actually afford one?

 

I think there's a lot of people who wanted to the live the American dream and purchase a home for their family, saw an opportunity to buy one, perhaps with a seedy financial past. They didn't know a reasonable percentage of total income that they should give to a mortgage, and found something of a loophole in the law regarding subprime loans which could eventually end up taking a monsterous chunk out of their total income.

 

They were very likely lost in the whole process. It's incredibly confusing, especially your first time. You have no idea what to expect. The mortgage seems like a trifle after dealing with the massive process that is closing. Then it sits in the back of your mind for two years, until it resets. Then what?

[ParanoiA]

They were very likely lost in the whole process. It's incredibly confusing, especially your first time. You have no idea what to expect. The mortgage seems like a trifle after dealing with the massive process that is closing. Then it sits in the back of your mind for two years, until it resets. Then what?

 

Then you refinance to a fixed rate, take another equity hit (if it will even appraise high enough) and you learn. A lesson learned in life. The whole ARM thing is stupid for any "typical" homebuyer.

 

They are told, via the truth in lending statement and the payment schedule what the terms of the loan are. This is not hidden in lawyer verbage or "the greedy capitalists" shrinking the print so they don't know - it is actually said "out loud" in plain freaking english that in two years your payments will be subject to a NEW interest rate. It will fluctuate up or down.

 

How many in here really think it will go down? That's right...because we're not stupid. We don't live in denial and self chosen ignorance.

 

Let me ask you this bascule...what kind of idiot spends thousands and thousands of dollars - makes the biggest purchase of their entire life, and doesn't even understand the ARM?

 

Hey, I agree, the lenders are greedy capitalists just like you - taking advantage of the stupid. But, I have a hard time giving them an out because our culture is dumbed down with "pop" culture focus that spends hours watching American Idol and 5 minutes on home mortgages...

[Saryctos]

Don't forget the people buying interest only loans! Their stupidity deserves some credit too!

[geoguy]

Good post ParanoiA.

 

The overwhelming majority of people do NOT have trouble making mortgage payments and do NOT lose their home. Are they all lucky? No, they aren't stupid.

 

Anyone with half a brain wouldn't buy a vehicle, take a vacation, rent a CD, spend 50cents on a pop BEFORE they put together a rainy day fund to meet unexpected changes in circumstances. On CNN last week there was a 'sob' story on a couple who were about to lose their 270 thousand dollar home because they couldn't meet the payments. In the backyard was a boat for heavens sakes. 10 to 1 inside the house there was a color TV that cost more than the $75 you can buy one for at Walmart.

 

I know lots of people with houses and they aren't losing them. They aren't stupid.

[bascule]

The overwhelming majority of people do NOT have trouble making mortgage payments and do NOT lose their home. Are they all lucky? No, they aren't stupid.

 

I guess everyone missed the point of my post.

 

Regardless of if people and corporations do stupid things and mutually screw each other, they're participating in a market, and in doing so affect other people in the market.

 

Normal people who wanted to live the American dream are now getting screwed. Their "investment" in a home ended up costing them money through no action of their own. An elimination of regulation let stupid people do stupid things, and in the process vicariously screwed others.

 

I bought a two bedroom condo from a family raising a child who wanted something bigger. I got it for less than half of what they bought it for. You can see that as doing them a favor, as their home had been on the market for a year. But in the end the market screwed them. They lost nearly a hundred thousand dollars from buying their home during a time when the powers that be decided to experiment with deregulation.

 

So to repeat myself, again, what possible advantages were there to deregulating mortgage lending, beyond people like me being able to buy a home for half of what the person I bought it from got it for?

[geoguy]

I guess everyone missed the point of my post.

 

Normal people who wanted to live the American dream are now getting screwed. Their "investment" in a home ended up costing them money through no action of their own.

 

Baloney. The part you leave out of the American Dream is hard working people who have brains and make their own fate. When they fall flat, they pull themselves up and keep on chugging. It's not 'give me, give me, I want, I want': boo hoo'

 

It's amazing that 99% of people don't have their houses foreclosed upon in such an evil system .

 

Sure there's 1% of stupid people. Go and wallow among them. Remember 'No payments until 2008! buy it NOW!'

[bascule]

Baloney. The part you leave out of the American Dream is hard working people who have brains and make their own fate.

 

The point is they don't. They're also subject to market forces, which are monstrously bigger than any individual.

 

When they fall flat, they pull themselves up and keep on chugging. It's not 'give me, give me, I want, I want': boo hoo'

 

Well, in this case, it's a "A bunch of idiots mean my home is worth half of what I bought it for, even though I did nothing wrong except being in the wrong place at the wrong time"

 

So to repeat myself, YET AGAIN, what possible advantages were there to deregulating mortgage lending, beyond people like me being able to buy a home for half of what the person I bought it from got it for after the whole experiment blows up in everyone's face?

 

Nobody can answer this question. I hear a lot of defense of the concept of deregulation but no defense of why it was applicable in this instance.

 

I'm going to go ahead and say "This is why Laissez-Faire Capitalism doesn't work"

[Saryctos]

Could it be that the market value of the house isn't actually worth anything near what people thought it was, and that the loss is what happens over the years? maybe noone wants those homes anymore. If that's the case then of course the value is going to plummet. This is especially true in michigan, where there are neighborhoods popping up everywhere, and jobs leaving just as fast as homes get built.

 

Regulating the prices will only FORCE a seemingly arbitrary price on a piece of property reguardless of actual worth based on the market.

[Pangloss]

You're really failing to see the big picture here. This doesn't just hurt the idiots who got ARMs only to instantly get foreclosed on when they reset. It doesn't just hurt the subprime mortgage lenders who are now bankrupt because they tried to prey on idiots only to realize their business model was bound to crash eventually.

 

(shrug) Ok, I'll go along with that. I'm not a deregulationist, I'm a "careful and throughtful reglationist" (if there is such a thing). If there's one thing I would hope we've learned in our country is that regulation is a necessary evil. Removing too much of it is just as dangerous as having too much of it. If you want to make your case on that basis, you'll not get an argument out of me.

 

The drama and "hurts the American dream" stuff, not so much. I'm not interested in what Suzy Q, single mother of three, is struggling with. She has a million ways out of her predicament, whatever it is, and it's not my fault that she's in it.

[bascule]

Regulating the prices will only FORCE a seemingly arbitrary price on a piece of property reguardless of actual worth based on the market.

 

Again, this has nothing to do with regulating the prices of homes homes. It has to do with regulating mortgage lenders. Deregulating mortgage lenders (allowing subprime mortgages to be issued by corporations) resulted in:

 

• Hundreds of thousands of people losing their homes because they got subprime mortgages they couldn't afford
  
• Subprime mortgage lenders going bankrupt because their clients couldn't afford the exploitative loans they issued
  
• Your average citizen's home value decreasing because the stupidity of the people above
  

[bascule]

Removing too much of it is just as dangerous as having too much of it.

 

Thank you

 

I'm not interested in what Suzy Q, single mother of three, is struggling with. She has a million ways out of her predicament, whatever it is, and it's not my fault that she's in it.

 

In my case, I got a home for $120,000 less than what the seller bought it for. They're still paying an extra $120,000 for a mortgage on a home they no longer own because they bought a home for $120,000 more than they sold it for.

 

In 15-20 years, sure, they'll have it paid off. No skin off your nose, no doubt. But for them, I can't imagine the situation is anything more than devastating.

 

Their mortgage is as large as mine, but I got a home out of the deal, and they didn't. They owe $120,000 due to changes in the market caused entirely by external factors, in this case poorly thought out policy changes.

[Pangloss]

No skin off your nose, no doubt. But for them, I can't imagine the situation is anything more than devastating.

 

Ok we're on the same page, but this is just the wrong reason to buy the book, IMO. How is that any different from blowing the family's savings at a craps table in Vegas?

 

If we assume for the sake of argument that they weren't treated fraudulently by their realtor (which would be a matter for legal action, I would agree), didn't they go into it with their eyes open?

 

We can close loopholes that are bad for society. But is this going to be a free country, with people freely able to choose their fates, or is it not? That's a *real simple* question in my mind. If the answer that question is "yes", then motivations like the above should never come into play when deciding policy. Not ever.