I’m not suggesting or advocating anything, not in this thread anyway. I just gave some examples of ill effects of deflation. I gave some reasons why trivial “supply and demand” arguments are not going to lead to a fairer housing market, not here, anyway. And I mentioned what is seen to be a problem with high prices - the lack of affordable housing for anyone not in the top of the high tech industry.
Luckily, not much of this affects me personally. I bought at the bottom, and never tapped into my equity. I live in a place with relatively few foreclosures. My kids have no desire to live down the street from their parents. I was just answering the OP.
What is your idea of a “fairer” housing market? And why are high prices (or low prices) a problem? As I said, “price” is simply an measure of how desirable your particular commodity is. You seem to be suggesting that there is some kind of “fair” price independent to the forces of supply and demand, which, in a free market, is simply not the case.
Unless you have a lot more benefits than you did in 1980, it means that you have taken a significant pay cut over the past 28 years. Your hourly wage should have increased by around 2.5 times in order to keep up with inflation.
How much worse than this you are doing depends on what percentage of your wage $1.50 is. If you were making exactly the same now as then, you’ve effectively taken a 65% pay cut in the intervening years. As far as wages go, if you had kept up with the national average over the past 28 years, you should be earning $2.77 now for every dollar you earned in 1980. Time to ask for a raise.
That link is depressing. I just found out I’m making less now than when I got my first “good” job in 1995 (having worked within a dollar or so of minimum wage until then).
I figured that there are always winners and losers. E.g. the housing market has taken a beating, but if you have some bucks, maybe you can buy a $500K house for $300K. If you ride out the storm, you could make a nice profit when salaries and prices rebound.
So looking at it from a “survival of the fittest” POV, somebody must be making out like bandits.
@Voyager: I wonder how many of the Dutch bet the house (literally) that tulip value would increase.
I saw you make this suggestion before and thought it deserved an answer. The reason this will not work is that currently no one really knows who owns their mortgage. The bank that sends you a statement every month is just the servicer, they may own the note, but more likely the sold it. If it was just sold out right and held by a different bank, you plan would still work, but it more likely it was bought by an investment bank that bought hundreds or thousands of loans and bundled them up, then split them into slices, and sold them as bonds.
It works like this: Take 1000 $100k loans at 6% interest. Bundle them into a bond group that has 50 slices of 2000 bonds each. Each bond would have be for 1000 dollors of debt with an average of 6%, but varing by slice between 9% and 3%. If any one defaults on their loan, the higher interest rates slices lose first. The lowest rated bonds would pay out unless 98 out of 100 loans went bad while the ones with highest would not pay out if 2 out 100 default.
This kind of scheme is how you can take the riskiest loan and still make it into AAA bonds. But they didn’t stop there. It was difficult to sell the riskiest bonds, so they took the lower slices of a bunch of these packages and bundled them together and did the same thing all over agian. Then the did it agian.
The immidiate issue in this crisis is the banks and funds have been bundling and selling these things back and forth to each for so long and have made them so complicate that it is almost impossible to tell who owes who what. Bonds are only valuable if people believe they will get paid off. So once the housing market started going south, no one really understands what any of these pieces of paper are worth. So the banks can’t sell them for what they bought them for and need the government to buy them so they have the capital to make more loans.
I know that in the 18 years we have been paying a mortgage on this house we have had the mortgage sold 5 or 6 times … to be honest I 8think* we have been with Midland Mortgage for about 5 years.
We bought the last time Ct had a housing bust, the guy bought 3 properties, then the economy took a downswing and he sold to the first bidders he could get. We got what was at that time a 110K property for 91K. They have kept reappraising us over the years for one reason and another and last I heard it was theoretically worth 140K.
Since we specifically bought a fixed rate mortgage, for what we could afford on a single navy income we are considerably better off than most people, I guess. We have occasionally as cash permitted made extra payments on the princepal, and plan to pay the farm off and have a place to live that we OWN. We have never intended to play the market to make money, we wanted a plot of land that was entirely ours.
If more people did it this way, we would be in a hell of a lot better shape nationwide. Why should mrAru and I be penalized by all the other jerks out there who are now whinging about their finances?
Because if the economy goes into another Great Depression you’ll be “penalized” anyway, and probably worse ? The thing about being in the same society as everyone else, is letting millions of other people suffer tends to boomerang and hurt you as well. If we let huge numbers of people be economically ruined, the effects of that will impact the entire economy, including the parts you happen to depend on.
History shows that the banks and investment houses that dreaned up these rotten instruments should be allowed to fail. Credit (resposbily applied) is a good thing-but bombarding people like myself, with credit is stupid-I get 2-5 credit card applications per week. Plus, by encouraging people tp borrow beyond their means, we are setting us all up for disaster. Maybe deflation is the right thing.
And one of the biggest hammers won’t fall for about 15-20 years. So many people have been paying 50-70% of their income into a mortgage for 10 or 5 years and having nothing left to put into a (401)k for the future. And even though the market hasn’t had a good 10 year span, it hasn’t gone down really either, so the deposited principal would still be there. If we assume the Economy does get strightened out and get back to growth over the next 15-20 years, that principal would be growing it’s way to real money.
But with nothing put in, there is nothing to grow, and the next retiring generation could be in serious trouble as a group. I guess they all thought that housing prices were going to go up 15% a year forever and they would sell their dinky cottage for 2.4 million at retirement age or something.
I know that it is difficult to imagine, but despite the media’s attempts to paint it otherwise, the US real estate market across the board is not failing. Vast areas of the country never experienced the lead up to the bubble nor the burst bubble. I fail to see how this “crisis” experienced especially in the west and NE coasts is going to affect an entire generation of homeowners int he way that you state.
Strassia, at this point trying to figure out who owns what is the least of the worries–which is one reason why I hate the bailout plan, because they’re holding on to securities that are essentially worthless unless we can regularize the value of the original security for the original loan, which is the property. If we stabilize the mortgages to prevent foreclosures we’re still doing more to fix the market because we’re stabilizing the foundation. The bailout is like trying to keep a skyscraper from collapsing by redecorating the fucking penthouse. We need to shore up the actual real property market FIRST, which will then give us a baseline to value the credit derivatives fairly. We can say to the guy holding the dogshit bag “Dude, that house has now been stable valued and refi’d at X value and that’s what we’re gonna base your valuation on.” None of this “but I paid a billion bucks for it!” crap–it’s WORTH what the original security is worth and they can just deal with it. We can call it the Stupidity and Greed Assessment.
There’s something very sick about an economy where the greatest volume of income derives from debt–we’re being rewarded for irresponsibility and bad management. We need to get a healthier economy, and if that means we need to amputate a couple limbs, we do it. We just go ahead and foot the bill for good surgeons and good followup care to make sure the patient survives. There is going to be fallout from all of this no matter how much money we shovel into the gaping maw of Wall Street, I think we ought to have a lot of control over how it happens. I also think Wall Street should be on the hook to repay us, either with interest or with shares of their companies that will repay our money. Fuck this handout shit–we make welfare recipients work for their check, so can Wall Street.
http://www.realquest.com/rq/default.aspx# Just type a zip code in and you will go to the zip. Then get a little closer and then flags will appear on the map indicating foreclosures. They are in the best of neighborhoods. They are in the least of neighborhoods.
I think you’re forgetting the fact that the US (as well as other nations) were on the gold standard; people in general loss faith in the banking system and making runs on banks; the previous inflationary boom due to an influx of gold from Britain as it monkey around with its currency (causing price distortion); protectionist polices enacted after Black Monday (i.e. increased tariffs) preventing US produced goods from entering other markets, and a lack of liquidity caused by too tight regulations of basing money supply on gold available.
To the OP: Deflation is a bad thing in general, but it might be necessary to correct the markets and clear up distortions, particularly in price. The idea should be to speed up the correction as fast as possible. The best way should be to let the markets clear naturally with little intervention. I suspect we may have an oversupply of houses, so that market would be down for a long time as houses stick around for a long time – which is ok, as long as other market fundamentals remain free and in place.
SmartAleq, I agree with you in principle, but the logistics and time fram do not allow that kind of solution. The situation as it exists has the potiental to knock down a huge chunk of the financial system. Because fo the way these fincial instruments are configured, it becomes extremely difficult to say who is going to be affected by what.
Remember these are bonds, meaning that if they pay out it will be in about 10-30 years. Until that date the value is only what people will pay for them. The banks have too much capitol tied up in these securities and now they can’t sell them. To go house by house and fix it from that end would take months, and then more months to sort through the bonds and give an actual realistic rating on each one. For good or ill, Congress cannot react to any crisis with a plan that will not have results for another six months.
So our economy is so fragile that it needs an immediate trillion dollar infusion to avoid a spiraling collapse? If that is the case why wouldn’t it be better to let it collapse and begin the process of building something more robust?
Doesn’t this perpetuate an economic system that makes us quite vulnerable?
Personally, I find it a little irritating that anyone views a house as some kind of investment. It is a place to live where you get to do what you want. I wish I had a house to “lose” so much money. Instead I pay my landlord what could be my mortgage payment. A house may happen to appreciate while you are living in it, which is a perk. If it depreciates, so what? Forget the silly people who put themselves in debt situations they should not have for a moment. So what if your house loses value? You have no equity? I’m really crying. How much equity would you have if you had rented? Zero, of course. So what you’re saying is that it is a sad situation to have been in a place under your complete control where you pay money out but see no “return”… compared to the alternative, which would be living in a place where you have little control and see no return. This is the real alternative. It has always been available. That it wasn’t chosen when one could afford a house is evidence to me that it doesn’t really matter what the market value of the house is if you plan to live in it. Does it suit you, and can you afford it? Then there you have it. What happens after that is kind of irrelevant.
My friend “lost” twenty thousand dollars when he sold his house. Except of course that it is less than he would have paid if he’d been renting during the time he lived there. He said he was ahead. I agree with him. But then, everyone I know who is right agrees with me.
Ask yourself how much you would have paid in rent to have something close to your house, except the control, and see how much your house would have to “lose”. My grandmother has lived in her house for 30 years. If her house cost her $30,000 to sell she’d still be ahead.
I made an emotional post and while I don’t wish to retract it, it is not particularly appropriate for this thread. Neverthelss, here are some numbers.
For a $450,000 house in the tax-wise worst place in Taxachusetts you’re paying $7042.50 in property taxes a year, or about $600 a month. At 20% down on that house you’re looking at approximately $3000 a month, mortgage + taxes. $3000 a month just happens to get you a luxury three bedroom up the street from me (though I don’t live in the tax-wise worst area). Which means that in your eleventh year of paying your mortgage, if your house was only worth $308,000 on the open market, a >30% loss compared to its purchase price, you are just marginally ahead if you sell right then and there “at a loss,” completely ignoring inflation (better for borrowers, though in principle the lender has taken it into account), and all the non-monetary benefits of owning a house. Assuming that you flipped a coin to decide whether to buy that house or rent that roughly equivalent apartment (which almost surely doesn’t exist in reality), it was a matter of indifference, that’s what it would take to break even.