Disagree. The European crisis, also caused in part by lending frenzy, and American crisis are largely unrelated, but did feed on each other to some extent. But note that U.S. unemployment soared from 4.5% to 10% in 2007-2008 before the Euro crisis hit hard. Unemployment in Europe was more contained until recently.
You were doing so well the last few days, I was almost ready to compliment you. What happened?
I just have a realistic view of it. Home ownership and all the intrinsics and intangibles that go along with it is great when you can do it on reasonable terms, but that was not the case with the usurious sub-prime mortgages.
You, along with many others in this country, seem to think that home ownership is some sort of quasai-magical state of grace. The whole thrust of your OP is that it’s better for people to have owned and lost than to have never owned at all, even though most of those people suffered possibly irreparable financial damage as a result of their brief time as home owners.
I do not agree that there is any intrinsic benefit to home ownership that justified entering into it in such a financially irresponsible manner. Therefore, I do not consider this a “benefit” of the housing bubble.
I damn near tripled my money on my investment, which helped me and my family move into a bigger, nicer house with only a slight increase in mortgage payment, and since the equity is “still there”, we’re waaaay above water. So, thanks, crooks and idiots, for building my nest egg for me! [/Marie Antoinette]
Good point, there were some winners. I actually got out of the tech bubble right on time, preserved all of my gains by getting out of tech stocks in 1999.
I think the American bubble was in large part caused by Americans borrowing money on property and then spending that money on toys. This kept the economy going for several years until the bubble burst. No real tangible item was driving the economy for the past 10 or so years, or since the dotcom bubble burst. The affordability index is the best indicator of real property values, when the index says we are upside down and know one is paying attention a serious problem is looming. I see no benefits to the collapse besides the needed adjustment that resulted.
Well, I’ve never heard anyone say that their own view of something is unrealistic…
Your argument, that the benefits of home ownership (to the extent that you acknowledge that there are any benefits) vary according to how much interest you pay is exactly backwards. The benefits are constant; the cost is what varies with the interest rate.
Obviously, those who purchased homes during the period–as in any other period–believed that the benefit outweighed the cost. For some, when you removed part of that benefit–the appreciation of the property–the (ongoing) transaction became no longer cost-effective. For others, it didn’t matter since they hadn’t intended to resell their houses anyway.
You are totally discounting the fact that many people were able to buy homes during the boom, people who had not had a prayer of being able to do so. Who are you (or I) to say how valuable that was or wasn’t?
I don’t know. How would I know what’s been going on in your mind the last few days? I haven’t been monitoring you.
I would caution you against complimenting me, though–you’re likely to get virtual letter bombs in your inbox. I criticize Democrats, which is right up there with beating puppies to death. (I also criticize Republicans, but only rarely as so much of that is already done here, it would be redundant.)
Since you decided to bold this for some reason I thought I’d point out that this is not how any mortgage works, sub-prime or otherwise.
Where do you think mortgage payments go, and how do you think they are allocated, then? I’m curious. I always thought that mortgage payments went to pay off the mortgage, thus the term, “mortgage payments.” It might be different where you live, though.
The banks CONTROL the government, that’s the whole problem. Money in politics has gotten completely out of hand.
Each month your payment first goes to pay interest you accrued on the outstanding balance that you owe the bank. Any money left over is applied to the principal balance.
The bank determines what your payment will be based on the goal of having it paid off entirely at a certain length of time.
For instance, say I loan you $100,000 on which you pay 12% interest on an annual basis. After the first month you owe me $1000 in interest (12% per year / 12 months). I’m getting that interest immediately because I’m a bank and that is how we work.
However, because I have basic knowledge of finance I decided you will pay me $1028.61 every month for 30 years.
That means I take your $1028.61 and keep $1000 as the interest you owe me. I apply the other $28.61 against the principal balance. That means your first payment is a mere 0.028% of the principal, not 1/360th as you said.
Of course, on the 2nd month you only owe me $99,971.39, so you only owe me $999.71 in interest and I apply a whole $28.90 to your principal balance. Still a far cry from 1/360th.
In the first month of the 19th year of your mortgage I apply approximately 1/360th of the original principal balance against the mortgage, and every month thereafter I apply MORE than 1/360th. By the end, you owe me very little money so the vast majority of your payment is going to pay off the principal, much more than 1/360th.
And it’s not just how I think mortgages work, it’s how they work.
Given a stable price, principal payments are payments toward equity. Even when they do fluctuate, principal payments still contribute to equity versus no principal payments. I’ve owned plenty of houses, child, and have plenty of equity too.
Do you remember the credit freeze, caused by the banks no longer able to value their assets because of the housing crash? Do you remember consumer spending dropping because people no longer had equity in their homes?
There were, in fact there were too many jobs. This caused the industry to crash, which has more than offset the gains during the bubble
This is also more than offset by the losses of people who already had homes or bought during the bubble. Also, it’s not exactly how the market works. Lower prices also means credit tightens (which should mean rates go up and monthly payments go up…but we’re keeping interest rates artificially low to goose equity). It also means it’s more favorable to rent than take out a 30 year mortgage. And default continue at a higher rate, continuing the downward or sideways trend of pricing.
Sure, but again, that’s been offset by how difficult it can be to get a loan despite the historically low interest rates on mortgages. In the future, we’ll have to raise rates, which keeps prices from rising. Keep in mind that the recovery has now lasted longer than the bubble.
As someone that works with foreclosures everyday, I can tell you the stress of being foreclosed overwhelms any enjoyment the person got from homeownership. Plus, most foreclosures take place early into ownership, so it’s not like they get home ownership for long. Plus, the credit hit makes it harder to buy in the future, so they’ll spend more years as renters than they would’ve without a bubble.
This is absolutely overwhelmed by the losses banks have seen. To start with, the government paid 800 billion to bailout banks. And they continue to take huge writeoffs that cause them to not pay taxes on profits. Plus, when people sell their residences, they usually don’t have to pay capital gains on the profits. Everyone also gets a tax deduction for the interest you pay on a mortgage.
You said NET BENEFITS
Indeed. For most people, there were large net benefits.
Yes. Given a stable value (I assume that’s what you really meant). But housing values fluctuate, while the amount paid into principal remains constant. That’s why accepted accounting methods don’t constantly fiddle with the value of a real property asset, but rather, keep that value fixed at the purchase price. It matters little what the market value of an asset is, until you actually sell it.
In fact, your misconception underscores what was dysfunctional about the housing market during that period–people mistook paid-down principal for equity. Then they woke up one day and found out that their principal payments hadn’t been “payments toward equity” (your phrase) at all.
By the way, let’s say you pay down all of your principal balance. You now own your house. Don’t you still have the full intrinsic value of that house? You calculated that intrinsic value when you made an offer to purchase for $X and that offer was accepted. Clearly, you thought the house was worth that much or more to you. Why should the current market price of your home influence its intrinsic value to you?
It is true that none of this matters unless you want to sell your house - or refinance your mortgage.
Here’s my point:
Persons A and B both bought a house for $100K, and financed all of it. (Yes, they’re stupid, but it is easier this way.)
Person A had a normal mortgage and paid $2,000 in principal over the period in question. Person B had an interest only loan during the period and paid no principal.
The market tanks, and the house is now worth $80K. Person A has -$18K equity, person B has -$20K. That they both might walk away has no impact on the equity situation.
The problem had little to do with people paying principal, it had more to do with house values rising which increased equity outside of principal payments. In fact a big problem was that many people reduced their equity (which was less real than they thought) by taking home equity loans.
Hey, I’m all for home ownership. But psychologically home value is important, in that it makes people feel richer and willing to spend more. Ditto for high stock prices, even if the stock is not sold. High prices made homeowners feel rich, and to act on that feeling and buy stuff they got home equity loans. In the Bay Area at least the radio was full of ads basically saying anyone not taking money out of their house was stupid. Not one mention of cash flow, of course, which was why that was stupid even before the crash.
You keep posting mildly condescending things about other people’s conception of how real estate works, which is surprising because almost everything you say is wrong.
Equity, in real estate and every other situation, is the difference between an asset’s market value and any outstanding liabilities owed against it. By definition when you pay down the principal balance on a mortgage there’s a dollar for dollar increase in equity.
Even when you are underwater on a house and owe more than it is worth (i.e. have negative equity in the home). When you pay $100 off the mortgage your equity is $100 less negative.
If the value of you home drops $10,000 in a month, when you pay off $100 of the mortgage you still have $100 more equity than if you didn’t pay it off. (even if it’s $9,900 less than last month, it would have been $10,000 less without the payment).
More importantly, you’re almost completely wrong about marking asset value to purchase price instead of market value, except for convenience on a balance sheet. Try to refinance your condo and tell the bank they’re just going to have to use the price you paid for it instead of the current market value. They’ll laugh in your face and tell you get an appraisal because they only care about its current market value.
Then they’ll subtract your mortgage balance against the market value and determine how much equity you have in the property.
You are overlooking the fact that a house is, for most people, an asset that is used rather than one that is bought and held for the purposes of realizing potential appreciation.
You are confused, and incorrect, when you equate a decrease in the principal balance with an increase in equity–especially “dollar for dollar.” That condition would only be true if the market value of the property is and remains exactly equal to the purchase price. Obviously, that is almost never the case.
You could, in fact, see an increase in equity of zero (if the market value of the property dropped in an amount equal to your payments on principal), less than the amount paid to principal (if the market value dropped, but less than in the previous instance), equal to the amount paid into principal (if the value of the house remained constant), or more than the amount paid into principal (if the house appreciated in value.
None of these changes in equity would affect the utility of the house, which is, as I said, its primary value to the homeowner, in most cases.
Now, banks (correctly or incorrectly, given the information available at the time) made subprime loans in a market where housing stock was rapidly appreciating on the premise that even if they had to foreclose, the increased value of the properties would provide a cushion against the expenses of foreclosure. Mortgage lenders try, if at all possible, to create a situation where they don’t lose anything if they have to foreclose. The rapidly appreciating values of real property seemed to create that situation, even in the case of subprime borrowers. It wasn’t, as populist thinking and late-night pundits constantly bleat, an unsound or unreasonable approach to take.