patrick.net

corntrollio says

tatupu70 says

No offense, but you really don’t understand what Troy is saying at all.

Unfortunately, I do understand what Troy is saying, and his idea is basically if we throw massive amounts of central planning and massive government subsidies into housing, we could have a 100% homeownership rate where everyone puts 0% down. This might be some sort of weird utopia for Troy, but it makes no financial sense and it’s not practical.

It may or may not be practical, but it does make financial sense...

tatupu70 says

It may or may not be practical, but it does make financial sense…

Only if you assume that spending that much taxpayer money to provide massive loan subsidies is cost-effective. So far, it doesn't seem to be benefiting our economy that much and doesn't seem to be cost-effective, and mostly seems to blow more bubbles, make banksters more rich, and encourage moral hazard...

corntrollio says

Only if you assume that spending that much taxpayer money to provide massive loan subsidies is cost-effective. So far, it doesn’t seem to be benefiting our economy that much and doesn’t seem to be cost-effective, and mostly seems to blow more bubbles, make banksters more rich, and encourage moral hazard…

So far? To what massive loan subsidies do you refer? Hopefully you aren't implying that the housing bubble was caused by government subsidies?

In any event, I was refering to your statement about government planning of housing.

tatupu70 says

Hopefully you aren’t implying that the housing bubble was caused by government subsidies?

The housing bubble itself was largely not created by government subsidies. This can be shown by statistics, even though ideologues want to blame the CRE or cite similar nonsense.

However, the way Fannie, Freddie, and FHA are being managed right now is basically Bubble Part 2. It's extend and pretend, with the hope that it can slow down the deleveraging that is necessary for things to get better. Subsidizing $729K loans in any city is stupid.

In order to achieve Troy's utopia, you'd have to spend quite a bit more in order to provide all the subsidies necessary.

FunTime says

Troy says
Nope. Non-recourse makes “skin in the game” a sunk cost.

Agreed, and I think it’s insane that non-recourse is still a provision of mortgages today.

I think I understand the two concepts separately...but I'm having a hard time understanding how non-recourse makes the "skin in the game" (I presume you are talking about down payment) a sunk cost. Do you mean only when the house value declines by more than the down payment? What am I missing?

corntrollio says

and his idea is basically if we throw massive amounts of central planning and massive government subsidies into housing, we could have a 100% homeownership rate where everyone puts 0% down. This might be some sort of weird utopia for Troy, but it makes no financial sense and it’s not practical.

My general point here is that housing values aren't supposed to go down enough to ruin people financially after they've bought.

http://research.stlouisfed.org/fred2/graph/?g=Cn

(this chart is annual change in real estate asset value / GDP)

This only happens in the downstroke of a speculative bubble, and these cyclical bubbles have been coming like clockwork since before the Louisiana Purchase.

The financier of the revolution himself -- Robert Morris -- once the richest man in the colonies, found himself in debtors prison after his NY land deal went bust in the aftermath of some Napoleonic war BS.

Every Panic of 18XX had a land speculation component:

"The American people with one consent gave themselves to an amazing extravagance of land speculation. "

http://en.wikipedia.org/wiki/Panic_of_1837

The Florida land boom of the 1920s precipitated the GD. The baby boom bubble of the late 1980s was also a land boom/bust cycle that led to the 1990s recession. And of course the last cycle, perhaps the mother of all bubbles.

http://research.stlouisfed.org/fred2/series/OEHRENWBSHNO

Land is a very sensitive component of our economy. Even though there is 8 acres of land per person here, the reality of modern life is that there's several orders of magnitude of suppressed land demand vs. the supply. We'd all like a half acre in the city, a house on 40 acres on the lake, etc etc.

Georgists say the best way to allocate land in the face of this supply crunch is let the rents flow by generally letting the highest bidder for land lease the land from the state.

The total land value of this nation is simply immense, and the rents the landowners are taking are also immense. And economically, these rents are also economic rents in the sense that land is not produced by its owner, it was a product of the Great Creator millions of years ago. Same thing with existing housing stock, the cost of production of housing stock is drastically lower than its market value, given the scarcity rents and the fact that housing is a very durable good.

There are a lot of serious economic problems this country faces, and the land economy is pretty high on the list.

I don't think subsidies are the answer, I think we need to purge the idea that land and housing in general is a profitable sector to invest from our economic structure, since, as Churchill said over 100 years ago, land is "a perpetual monopoly, and it is the mother of all other forms of monopoly", and the "unearned increment" that landlords collect from the working class is a very large reason why 30-40% of this society are fucked economically and find themselves on foodstamps or worse.

It's very annoying to see us at the national and state level bickering over 300 bps of income tax changes in the face of our $1.5T national deficit and similarly large long-run state deficit (here in Cali) when there's an immense and dare I say "constructive" source of revenue -- the LVT -- sitting only 10-20% tapped.

I don't know if my crazy idea to put the 400,000 unemployed residential construction workers to work building new MFH stock is a workable idea or bollocks. My intent with this wasn't to create a centrally planned economy, but actively intervene in the economy to dramatically increase the supply of quality MFH to drive the scarcity rents out of the sector so wage earners can devote more of their earning power towards other forms of spending other than adding more 0s to their LL's bank account.

Of course, this would be highly disruptive to existing REIC business plans.

I'd like to say tough shit -- they're highly disruptive to a free and just society, but that's impolitic.

As for low down buying, in the absence of a downcycle low down is perfectly safe.

Knowledge of how the economy actually works is not something I see many public intellectuals have the first understanding of.

Krugman, DeLong, Mankiw, the other various opinionators in the press, they're largely silent on the credit cycle and appear ideologically compelled to refuse to understand how the 2007-2008 shutting off of the $1T/yr of free cash that was flowing into the economy 2004-2007 via the housing bubble had any causative connection to the recession of 2007-now.

We're still looking at trillions of dollars of more lost equity coming our way if we can't figure out how to get U-6 back under 10%, or we find ourselves forced to raise taxes to pay for Medicare, Social Security, and/or the $1T/yr defense bill, or the world stops lending us our money back to us at current ZIRP rates, forcing us to raise rates across the board to attract it.

All the policy stuff I propose now is with an eye to preserving what market stability we have or, failing that, what we should do when everything turns into that smoking crater.

I fully admit this is all wankery. I'm just sharing my viewpoints for the helluva it.

corntrollio says

You’re not taking an overall view of risk.

He is only looking at it from a lender's perspective. He has no problem with buyers getting assraped with insurance fees or defaulting, so long as the market is flooded by every living being that can get a loan. Read his posts, that is his bottom line.

klarek says

corntrollio says

You’re not taking an overall view of risk.

He is only looking at it from a lender’s perspective. He has no problem with buyers getting assraped with insurance fees or defaulting, so long as the market is flooded by every living being that can get a loan. Read his posts, that is his bottom line.

Jesus--you really don't get it. The chip on your shoulder is so large that you can't read any post objectively.

tatupu70 says

Jesus–you really don’t get it.

Tell me, what don't I get? It's not in any owner's best interest to be pumping their cashflow into interest and insurance just for the sake of being an "owner". This is the same sort of high-risk, screw-the-customer b.s. that the bubble should have taught us to avoid. Higher DPs = lower chance of default. By offsetting the costs of default with insurance paid by the buyer, it does nothing to economically improve their wealth preservation.

Maybe you don't get it?

Nope--I get it. There are two reasons why homeowners default:
1. They can't make the monthly payments. This was common recently due to the crazy loans given out recently with neg. amort, liar loans, and teaser rates.
2. They decide they don't want to make the payments. Usually, the home value has declined so much that the owners make a financial decision to take the credit hit and move on.

High down payments do nothing in case 1. If you can't make the monthly payments, it doesn't matter how much skin you have in the game, you will lose the house eventually. In case 2, high down payments may prevent strategic foreclosures, this is true. That is why banks used to require 20%. They figure that even if some defaults, the 20% should cover any lost home value plus foreclosure costs.

What the PMI does is take the place of the down payment for the bank by covering any losses due foreclosure. I think you get this, so I'm not sure why you are still arguing.

The buyer has a choice of paying insurance or saving 20% for a downpayment. How is giving someone a choice "assraping" them as you so eloquently put it?

tatupu70 says

High down payments do nothing in case 1. If you can’t make the monthly payments, it doesn’t matter how much skin you have in the game, you will lose the house eventually. In case 2, high down payments may prevent strategic foreclosures, this is true. That is why banks used to require 20%. They figure that even if some defaults, the 20% should cover any lost home value plus foreclosure costs.

You're missing the obvious caveat to defaulting and foreclosure which is that if you are above water, you can sell the house and the whole problem is averted. DP can resolve this issue no matter what the problem is (resetting ARM, loss of job, etc).

tatupu70 says

What the PMI does is take the place of the down payment for the bank by covering any losses due foreclosure. I think you get this, so I’m not sure why you are still arguing.

Yes I know this, but why can't you see how this works against the borrowers' interests and doesn't mitigate the possibility of default? It mitigates the problem of systemic risk from the investor's position, but at the expense of the borrower. Why would anybody prefer a system which keeps the lending risk neutralized, decreases the capital investment from the borrower, and drastically increases the probability of default? How is that preferrable to making the buyer wait until he or she has a good down payment, if in the end the down payment actually goes into their purchase rather than someone else's insurance pool?

tatupu70 says

The buyer has a choice of paying insurance or saving 20% for a downpayment. How is giving someone a choice “assraping” them as you so eloquently put it?

Trace back up the conversation. Troy is saying that a low DP is no problem. I've argued that it adds risk, and it's better that people have at least something put down on the principal both for their own sake as well as the lender's. His position is that as many buyers should get into the game as possible because landlords ought to be driven off the face of the Earth. This can be done by eliminating the barrier to entry (down payment) as much as possible, then covering the risk on the lending side by making the borrowers pay a lot of insurance which doesn't go into the principal.

This isn't an argument about what's wrong with giving them a choice, this is about whether this is a good idea at all. People are often stupid, so choice is not even an issue to be debated here. It's about the merit of the idea. I say that it's dumb to use people as pawns like this, just like it was dumb during the bubble. By lowering the barrier to entry and having them with less skin in the game, it's not exactly fair to the borrower to then be paying an equivalent amount to make up for the missing principal in paying for expensive insurance.

It's a shell game and it's dumb. Higher down payments negate the need for any of this crap.

klarek says

This isn’t an argument about what’s wrong with giving them a choice, this is about whether this is a good idea at all. People are often stupid, so choice is not even an issue to be debated here. It’s about the merit of the idea. I say that it’s dumb to use people as pawns like this, just like it was dumb during the bubble. By lowering the barrier to entry and having them with less skin in the game, it’s not exactly fair to the borrower to then be paying an equivalent amount to make up for the missing principal in paying for expensive insurance.

I guess I just don't get how it's not fair to the borrower. There's more risk for the lender, so it's compensated by higher fees. There's nothing predatory about it--the fee isn't outrageous IMO.

klarek says

Why would anybody prefer a system which keeps the lending risk neutralized, decreases the capital investment from the borrower, and drastically increases the probability of default?

I would argue that it doesn't drastically increase the probability of default. The last 10 years are a huge anomaly.

Whatever eventually works, hopefully irresponsibilty is not being encouraged. I do like the LVT as far as I understand it.

Whatever eventually works, hopefully financial irresponsibilty would not be encouraged. I do like the LVT as far as I understand it.

tatupu70 says

I guess I just don’t get how it’s not fair to the borrower. There’s more risk for the lender, so it’s compensated by higher fees. There’s nothing predatory about it–the fee isn’t outrageous IMO.

It's not "fair" because the borrower is plowing their money into something other than their investment. It's the same concept as getting an absurdly-high interest credit card to make a series of purchases. People spend months or years trying to chase down their principal, but because they're stifled with interest, they're stuck in a debt trap. "But it's their option" is true, but financially it's really hurting them a lot.

So back to the home buyer, whose money which would have gone into the principal or DP later on, they're now paying hundreds per month in insurance while never really tackling their principal. Systemically, the risk is covered (assuming this is all a wash from the lender's perspective), but the buyer has a greater risk of default since their revolving cashflow is limited and they're more likely to be underwater without options.

So my contention with Troy above is "what's the point in doing all of this?" He believes that the ends (flooding the market with premature buyers) are worth the means (in this case, making those borrowers pawns, conduits for money in an insurance game). In the end though it doesn't benefit them at all. Sure, the lenders are covered, but do we want the system to be engineered for large defaults (which, again, are covered from the lender's position) at the expense of these buyers' financial viability? Is sacking "poor" people with mountains of debt really going to "stick it to the man", in this case, the landlord? Is it worth it?

tatupu70 says

I would argue that it doesn’t drastically increase the probability of default. The last 10 years are a huge anomaly.

Fair enough. But in the case where default occurs, it does drastically increase the chance that it will end in foreclosure. Above-water borrowers who default have options. Those who are on the edge or underwater do not.

Troy says

I fully admit this is all wankery. I’m just sharing my viewpoints for the helluva it.

Hence why I'm not really taking it seriously any more. Basically, you're trying to solve a few simple things by making massive and sweeping changes that will cost a lot and probably won't achieve the end goals.

corntrollio says

you’re trying to solve a few simple things

Housing being a $10T rathole

http://research.stlouisfed.org/fred2/series/HHMSDODNS

is pretty far from an inconsequential thing.

and sweeping changes that will cost a lot and probably won’t achieve the end goals.

These sweeping changes don't cost anything. The private capture of ground rent is an immense, systemic flaw in the system and is what is costing the actual productive element of this economy a trillion or more in losses to successful rent-seekers.

The sweeping changes essentially eliminate the foundational corruption of our current economy -- a very sizable number of people pocketing a significant chunk of the nation's GDP in return for providing nothing that did not already exist without their intermediary presence.

Eliminating this long-standing and continuously ongoing and even increasing theft of the commons could arguably solve "everything", and I have some very powerful minds in agreement with this, ranging from Adam Smith himself through Jefferson, Paine, JS Mill, Samuel Clemens and to the modern day:

"Social collection of the rent of land and natural resources serves three purposes. First, it guarantees that no one dispossesses fellow citizens by obtaining a disproportionate share of what nature provides for humanity. Second, it provides revenue with which governments can pay for socially valuable activities without discouraging capital formation or work effort, or interfering in other ways with the efficient allocation of resources. Third, the resulting revenue permits utility and other services that have marked economies of scale or density to be priced at levels conducive to their efficient use."

http://en.wikisource.org/wiki/Open_letter_to_Mikhail_Gorbachev

The critics are generally full of shit in their complaints:

http://www.cooperativeindividualism.org/pollard_response_to_rothbard.html

I don't argue that the LVT is flawless, but it has historically worked well where it has been tried. And I do like encouraging people to think about how the present world is arranged and how much these old 19th century ideas still make sense.

Discovering Georgism back in 2002 was simply the most mind-altering thing I'd been exposed to up to then.

Before then, I did not understand what capital, wealth, money, etc really was. With the classical division of the neo-classical concept of capital into natural capital (land) and physical capital (manufactured goods), how the world works became a whole lot clearer.

It's almost as if the neo-classical school was intentionaly muddying the picture.

http://homepage.ntlworld.com/janusg/coe/cofe00.htm

Troy says

These sweeping changes don’t cost anything.

Riiiiight.

Troy says

Housing being a $10T rathole

http://research.stlouisfed.org/fred2/series/HHMSDODNS

is pretty far from an inconsequential thing.

Don't change my words. I said simple things about housing finance or policy could be changed quite easily, and you are now saying housing is not inconsequential.

corntrollio says

I said simple things about housing finance or policy could be changed quite easily

Just bandaids on a broken system. We're spending $30B in section 8, $80B on food stamps, $120B per year on the MID (which reminds me, we should really kill that for non owner-occupied) etc etc.

Without purging the rent-seeking, all attempts at helping people end up in the LL's pocket at the end of month.

Even the minimum wage.

So there is no simple fix to all this. The system is corrupted to the core, because the land economy is the base of all human activity.

That's why Churchill called it the mother of all monopolies. Trying existing without land. Even on a boat it's difficult. If you try to live like a native American you will be arrested eventually. The only solution that would work would be investing in some sort of zeppelin or something, and living and working up in the sky.

Troy says

Just bandaids on a broken system. We’re spending $30B in section 8, $80B on food stamps, $120B per year on the MID (which reminds me, we should really kill that for non owner-occupied) etc etc.

Why not kill the MID period?

klarek says

Why not kill the MID period?

It should be phased out over 10 years, yes.

It was when housing boosters objected that this would give an asymmetric/unfair advantage to investors that it occurred to that we should just kill it for non-owner occupied SFH/condo too.

problem solved, as it were.

"Why not kill the MID period?"

Why should we get rid of it when corporations are getting massive subsidies? Does that sound fair?

HousingWatcher says

“Why not kill the MID period?”
Why should we get rid of it when corporations are getting massive subsidies? Does that sound fair?

Only if you believe one evil justifies another. Maybe you should look into where the hundreds of billions in MID are going. It's disproportionally helping the wealthy people which statists like you want to draw-and-quarter.

klarek says

It’s disproportionally helping the wealthy people

actually, it's not even doing that. Giving a subsidy to absolutely everyone for a good with inelastic supply just shifts the cost of that good over by the subsidy.

Government could offer everyone $1/gallon vouchers, and we'd soon seen $5 gas here.

which statists like you want to draw-and-quarter.

Actually, it was Georgism that made me understand the difference between the good wealthy people and the wealthy people that are ungood.

It all comes down to what wealth *creation* they themselves contribute to society -- "wealth creation" here being the provision of new goods and services into the economy.

The Nordic countries, and mixed economies in general, do not punish entrepreneurial effort, though if they listened to me they'd tax wage income less and actual rentier income more.

Troy says

actually, it’s not even doing that. Giving a subsidy to absolutely everyone for a good with inelastic supply just shifts the cost of that good over by the subsidy.

Agreed, they're largely paying for it in the bloated price they're bidding up on their purchase. But the MID is giving more breaks to the wealthy, dollar-wise.

Troy says

The system is corrupted to the core, because the land economy is the base of all human activity.

I agree. The system is designed to use the government to redistribute wealth -- UPWARD. Wealth gets redistributed from the middle class and the poor to the rich by force of law. It's socialism, but because it's socialism for the rich, it is somehow "good", so there are no complaints from the Fox News crowd.

Question: What's the difference between the people who do no useful work but get welfare checks and the people who do no useful work but get to use the police to collect rents and interest?

Answer: A few trillion dollars.

Forgive me for not reading all of your posts, but I read as many as was comfortable. Everyone is talking about the housing bust as if it were over, and all the damage has been done. We're only in the third inning of this ball game. Thank you patrick for warning me in time, we were going to buy in Florida at the top of the market, and as fate would happen we didn't and ended up inherriting 100% free small house in Pgh pa, where there was no bubble. Now the houses we looked at are exactly 1/2 of the price we were going to pay. Every house in the plan is underwater by 1/2 a million dollars, and the developer has gone bankrupt. The systematic corruption of all of the entities will haunt us for decades. The banks have written down only some of the losses, and the fed is allowing them to lie to us and their stockholders. We have at most 8-12 years before the national debt is so large we will have to default. We are living with no credit cards, own our house, own a 10 year old car, shop with coupons, stockpiled and have weatherized our house. You can't change people, and yelling at them does no good, you can only save yourself and possibly your family, if they haven't taken out 70k in student loans. Cradle to Grave politics have given us cradle to grave debt. Glad I didn't have kids I feel sorry for the 20 somethings. Oh, and you don't really think cash and gold are going to save you do you? Futures of gold have been sold to 100x or more of the quantity of gold in the world, and well you know what is going to happen to the dollar. So go in and kiss your spouce and or kids, and appreciate the sunrise/sunset, and other free things. The gig is up.

With all this pent up demand, there has never been a better time to buy!

Most of the shrinking inventory is being sold over listing price with multiple offers

APOCALYPSEFUCK isFrank Sinatra says

When will Patrick.Net advocate 50% downpayments? Anything less is just asking for speculators to fuck up the market.

Hey,what happened to your cash only slogan?

What if the house doesn't have tillable land or a water supply?

APOCALYPSEFUCK isFrank Sinatra says

I can be flexible. As long as the housing is priced rationally - like a fair valuation from 1973, maybe all the way out to 1974.

First time I have seen your milder side. Hehe.

It's just better to ask Congress to stop the housing sector subsidies. We are running this nation bankrupt trying to subsidize every single bank and wall street gambling casino out there.

Tell your Realtard buddy that In-N-Out Burger is always hiring if this RE thing doesn't work out.

OK how about 25% downpayments then...

This, and a lot of other legislation, could be read, "We do not believe in free markets. Please pass, or don't pass, a law to sway things back to favoring the people with most of the money."

Ruki says

TODAYS RIDICULOUSLY DEBT-FUELED HOUSING PRICE VALUATIONS

Exactly! And I'd add 'TODAY'S RIDICULOUSLY, FRAUDULENTLY, PEOPLE BEING GAMED BY WITHOLDING INFORMATION FOR PROFIT BY THOSE IN POWER, DEBT UNDER FALSE PRETENSES -FUELED HOUSING PRICE VALUATIONS..."

Anyone who needs 70 years to pay off a house should not be buying that house

jvolstad says

Tell your Realtard buddy that In-N-Out Burger is always hiring if this RE thing doesn't work out.

Yeah, but why would they want to work much harder for less pay?