Yes, I know that the evil, stupid greedy banks blah blah blah. I’d like to examine some positive consequences of their evil stupid greedy blah blah blah actions.
For the duration of the boom, there were high wages and low unemployment in the construction and associated industries.
More housing stock was created, which means that the needs of an expanding population will be better met—and the price of houses is now/will be lower than if the building boom hadn’t happened.
Many people who had had absolutely no prayer of qualifying for a home loan were able to get one. And most of those people are still in those houses they bought. Certainly, they wouldn’t be able to get a loan now, so they took advantage of a narrow time window.
Even if a given person did eventually default, he enjoyed the benefits of home ownership up until then.
Many mortgage banks made a lot of money. This resulted in more tax revenue for the federal and state governments.
Now, I know there are qualifications and counter-arguments for every point I listed above. I merely wish to point out that the housing boom, bubble and collapse weren’t, collectively, an unequivocally negative event.
Since it was also one of the reasons for the biggest recession in memory and the most sluggish recovery, I still have to see that collective positive.
One important reason for the sluggish recovery IMO is that many can not seek jobs elsewhere as they could do in previous recessions because they are stuck in the usually underwater and hard to sell homes that they have now.
Um, what exactly are the “benefits of home ownership” to you?
Sure, there’s some intangibles like you can paint rooms whatever color you want, but the main benefit to home ownership versus renting is that you can build some equity with the money you pay for housing. The people who got bamboozled into sub-prime mortgages they couldn’t afford are not only not building equity, but they lost whatever savings they might have had and are financially ruined for at least a decade. Even if they’ve cut deals with the banks not to get kicked out, they’ve lost huge amounts of money compared to where they would be had they stayed renters, which defeats the whole purpose of home ownership.
Getting people into houses they “owned” at ruinous expense because of some ridiculous ideal of home ownership when they would have been done just fine as renters is absolutely not a positive.
It was not even close to the only reason. The recession would, in fact, most likely have happened with or without the housing collapse.
I didn’t say it was a net positive; I said that it wasn’t an unequivocal negative, and that there were some benefits.
Even in previous recessions, people generally didn’t migrate to look for work; most stayed where they were. And during the current recession, a lot of people who wanted to migrate did so regardless of the fact that they owned an “underwater” home–they just walked away from it (especially since their credit ratings were already toast from missing multiple payments). So I don’t see that there are that many people who actually want to migrate and are prevented from doing so by their being shackled to an underwater house.
Even if you don’t default, simply making a mortgage payment doesn’t mean you’re building equity. Even in the best of conditions, most of the sub-prime mortgages were set up in such a way that your monthly payment was basically paying the interest. This is not building equity in any meaningful way. Of course it definitely isn’t building equity when the value of the property tanks (or was overpriced to begin with) and you’re massively underwater. Maybe a few people in housing markets that weren’t hit so bad will be able to salvage something when the market recovers, but the vast majority of sub-prime loan recipients ended up losing huge amounts of money.
Being able to paint the walls whatever color you want and the other intangibles are very nice, but I don’t think most people would have agreed to trade a decade or more of their financial lives for the pleasure.
I suppose another “positive” is that some renters got some free rent. I knew some people who’s landlord skipped town on their investment property and the bank let them live there for about 6-months rent free.
As with any bad thing that happens in life, the silver lining is what you learn from it.
If Americans now realize that what cannot be sustained won’t be sustained, that will be very helpful for domestic policy going forward. There are a few issues like that, such as education costs and health care costs where we have similar problems, and the economic dislocations caused by the inevitable popping of those bubbles is going to be just as severe. Unless people use some sense and don’t jump on the bandwagon as investors.
You’re succumbing to the urge to use hyperbole. Not all mortgages written during the boom period went into default–most, in fact, didn’t.
Even subprime mortgage payments include a payment towards principal. In fact, these are almost always the same as in “regular” mortgages–for a 30-year mortgage, for example, 1/360 of the principal. So two people holding, respectively, a “regular” and a “subprime” mortgage on two houses purchased for the same amount would each have contributed the same amounts to principal after a given period. The latter would have paid more interest, of course. But the two would be equally “underwater” at this point in time, so it’s fallacious to say that the writing of subprime mortgages led directly to “underwater” homeowners.
There’s more to being in ownership of your dwelling than “being able to paint the walls whatever color you want.” And exactly what is “trading a decade or more of your financial life (sic)”? Making a deal with the devil that makes you flat broke fifteen years before you die?
Another of the things you’re overlooking is that the primary utility of a house is that it’s a place to live. If you don’t sell it, then it doesn’t matter if it’s underwater or not–you continue to live in it and derive benefit thereby. This is a real and tangible benefit. Those who are stuck with houses that won’t sell still have a place to live, and they still own those houses.
Oh, I agree. We have learned anew that banks need to be tightly regulated, and why that is so, to our very great financial pain. We have learned that CDOs are a dangerous toy and should probably be regulated out of existence. WE have learned that banks that take deposits should not be part of the Wall Street gambling den.
Unfortunately, we can’t do a thing about it because the wealthy have kinda bought both parties. I guess we will soon learn why plutocracy is a bad idea.
It’s not just banks. Individuals have to steer away from investment markets that get too hot, and more importantly, government has to stop pouring taxpayer money into bubbles. Right now the government is doing a lot to fuel the student loan bubble. Actually, the government is solely responsible for that one.
The difference is that the interest is a much larger portion on a sub-prime note. If you’re talking about two houses of the same cost and term, the payment on the sub-prime one would have been a helluva lot more, especially after the rate adjusted. In most cases, the interest portion of the payment ALONE would have been more than you would pay for a comparable rental. In other words, even though you’re theoretically building some equity, you’re paying more than it’s worth for the privilege. Of course, you’re also not building equity if you can’t keep up with the payments and the bank forecloses.
Suffice it to say that I believe that beyond building equity, the advantages of home ownership are much exaggerated. I doubt most people would buy a house knowing they’re actually going to lose money versus renting, which is exactly what happened with most of the sub-prime mortgage folks.
As for “trading a decade”, a lot of people are going to spend a decade or more of their lives (with or without a bankruptcy and foreclosures) trying to get back to where they were before someone talked them into a sub-prime mortgage, no doubt by talking about “building equity” the many intangible benefits of home ownership. Whereas if they hadn’t listened they could have spent that decade building up their savings and credit while renting and might have actually been able to buy a house at a point in their lives when it would be financially prudent to do so and under terms that would actually make it a winning proposition.
You can live in a rental house too, for a helluva lot cheaper than a house with a ridiculously high-interest sub-prime mortgage on it, especially one that’s underwater.
If you don’t have a cite for this, at least make some argument. Extra credit if your response acknowledges the difference between an ordinary twice-per-decade recession, and the worst recession since the 1930’s.
Payment toward equity is wonderful, because it means that when you sell you get that money - and appreciation. It is not so wonderful if you home is underwater, which 28% are. Cite. In that case your equity payments are totally worthless.
I don’t know what you mean by “directly” but subprimes got more people into the market chasing homes, people who shouldn’t have been in the market. That meant more people were bidding for houses, which drove their price up, so the poor people who bought near the top were the ones most likely to be underwater. So the link is pretty obvious.
Anyhow, you forgot two advantages of the bubble. The first was that the fantasy of increased equity meant that people did equity loans to buy all sorts of crap they didn’t need, which probably improved the economy more than the building industry. It made people who weren’t actually making any more money feel like they could afford more - until the bubble burst.
The second is that all those empty homes became perfect nests for drug addicts and the homeless. Won’t anyone think of the junkies!
You misunderstand how mortgages work. There’s no such thing as a payment toward equity, only a payment of principal on the loan. Equity accumulates independently of such a payment, in that a payment reduces the principal amount but equity may increase or decrease as the market value of the property fluctuates.
You’re making my point for me. The fact that the *global *recession was so severe means that it couldn’t have been caused by the collapse of the US housing market alone. I’ll leave it up to you to do your own research on the multiple causes of the recession. All you have to do is poke around the archives here, where you’ll find much information on those causal factors. (Hint: one such cause was the evil, incompetent, worst President in twenty thousand years GW Bush with his tax cuts for the evil rrrrrich. That’s how it’ll be stated in the threads where you do your search.)