My google-fu is weak today, but I found this article that looks closer at foreclosure data. Of note: "The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. "
Where positive equity means putting in a downpayment (or having the house value appreciate). “A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.”
To summarize, nearly half of all foreclosures resulted from no-money-down loans.
And what does Bill Gross what the government to do? Encourage more no-money-down loans.
Why do you believe that? Is that just your opinion or is it based on something more?
In my experience, labour costs weigh heavily on small businesses–sort of a truism. If they have the opportunity to cut staff they’ll take it. There is no reason to hire more people as long as they possibly can hold off.
I spent a lot of time in the restaurant and catering industry (all small business that were desperate to keep labour costs to a minimum). The biggest challenge for managers was figuring out how to cut staff during lean times.
I own a business and payroll and the taxes generated from payroll is roughly 65-70% of my expenses…most of the other expenses are fixed amounts (rent, utilities, insurance, etc.)…so yeah…if things go south, then the obvious choice would be payroll since the other expenditures are absolute necessities as opposed to staffing necessities, which can be adjusted as needed. I have reduced hours (slightly), but have not laid off anyone yet although I did fire one for misconduct and didn’t replace her.
And Gonzo…I’m a small business that is incorporated.
I really hope you read to the end of that article, but in case you don’t here is the key point which lines up nicely with what I previously believed:
Understanding the causes of the foreclosure explosion is required if we wish to avoid a replay of recent painful events. The suggestions being put forward by the administration and most media outlets – more stringent regulation of subprime lenders – would not have prevented the mortgage meltdown regardless of their merit otherwise.
Rather, stronger underwriting standards are needed – especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell.
Essentially, if over the 5 years before the bubble burst people had made larger down payments (either by choice or by legislation) the bubble bursting wouldn’t have had as much of an impact, because the subsequent fall in housing prices still would have left the loan with some equity.
For those following at home: a $200,000 house should have a 20% down payment, so the loan is $160,000 and the house has $40,000 in equite. The house can susequenlty lose 20% of it’s value and still cover the loan amount.
What we saw in the lead up to the bubble (and what is being proposed now) were people making 80/20 loans where that $40,000 downpayment came from a secon loan. When the house value falls, suddenly the house can’t be sold to cover the debt–which is when people need to use forecloser.
If there is equity in the house, the owner will take a loss on the transaction, but still be able to cover the loan.
Unfortunately we are seeing that the American economy only works if we all buy a bunch of crap we don’t need. A few years ago everyone was freaking out because we were using too much consumer credit and not saving enough but if we all save what we’re supposed to the economy crashes.
Does anyone else think we’re in an adjustment period where we will eventually buy less, make less, work less and it will become normal. Will there be more one income families because of permanent job losses? Will we move back to kids sharing bedrooms and two bathrooms for a whole family? Could we go back to the day where our lives weren’t totally consumed with having the biggest, newest or bestest whatever? As hard as this adjustment is might we all be better off in the long run? You must admit that Americans, for a long time, have been getting a little ridiculous with their material possessions.
And you are the judge of the collectives ‘need’, are you? Are you one of those ‘do as I say and not as I do’ busybodies who tell people what their need are, or are you one of those ‘I don’t need it so no one else does either’ types? Really it’s one or the other, though in my experience with those who profess to know what everyone else’s needs are or aren’t, there is usually a tinge of both. It’s that mix of hypocrisy and holier than thou attitude that REALLY makes such people so pleasant to be around…
Let me guess, you style yourself an Austrian “economist”? Or you have no even rudimentary formal training in economics (aha! I repeat myself!) and have never heard of the Paradox of Thrift.
I’m not suggesting that people “save more during a recession.” I am suggesting that it’s okay for people to save, that way when a recession hits they have reserves to cover it. Is that wrong to say? Have I offended anyone?
Secondly, the paradox of the thrift is exactly why I personally advocate increased government spending during recessions.
Want to make any other wrong guesses about who I am?
And more to the point, this pit thread is directly aimed at this flawed notion that no money down loans are okay.
The point is not no money down loans. It is whether people can get loans to make large needed purchases like a car or refrigerator. It is also not about buying a bunch of unneeded crap either. If your refrigerator goes out, you need a replacement. If your car dies or gets stolen, you may well need another one.
Those kind of purchases stimulate the economy since salesmen, delivery men, preparers, secretaries, and many others are part of the process. They do help the overall economy.
This is not true. I am in lending for a large institution that is financially very solid. It is notoriously difficult to get any loans complete at this time. Even well qualified applicants are harrassed about small details of their credit until many throw their arms up in disgust.
One recent challenge I had is a customer with 800+ credit, 50% loan to value on his house, and 38% debt to income ratio, and underwriting still pushed back.
The credit reigns are pulled in tight. Money is NOT being lent to the average consumer. This is the experience of my friends who work for other institutions as well.
If you had put 20 percent down on your house a few years ago, you would still be underwater now. Home values have dropped a lot more than that. I was sitting on 80 k in equity and it is gone. What did I do except pay my mortgage faithfully for years.
Who are you talking too? Is this supposed to be a general statement, or a specific anecdotal statement wrt your own area? If you had put 20% down in my area ‘a few years ago’, then you most certainly wouldn’t be underwater. I put 20% down on my house 5 years ago, and I’m not underwater.
If you had foolishly bought a house a a year or so before the bubble burst for an inflated price in, say, Phoenix, then to be sure you’d be underwater now. Sort of similar to if you had bought inflated stock for the IPO of Pets.Com just before the bubble burst you’d be ‘underwater’ wrt the value of the stocks vs what you paid for them. That’s what a bubble busting does, after all.
Are you one of those ‘do as I say and not as I do’ busybodies who tell people what their need are, or are you one of those ‘I don’t need it so no one else does either’ types? Really it’s one or the other, though in my experience with those who profess to know what everyone else’s needs are or aren’t, there is usually a tinge of both. It’s that mix of hypocrisy and holier than thou attitude that REALLY makes such people so pleasant to be around…