patrick.net

klarek says

How does that work exactly?

I did the math here already. The 3.5% down payment has a larger principal balance and also the 1.15% PMI cost. This eats up buying power and thus the 3.5% population can't bid as high as the 20% buyers.

The example is the $330,000 property. 20% down is $264,000 principal balance, at 4.3% interest this is a $1300/mo payment. 3.5% buyers would have a $1900/mo payment, which includes the $300/mo PMI and $300 more in P&I -- note the very large difference here -- ceteris paribus 3.5% borrowers can't qualify for as large a loan as 20% borrowers.

Since real estate prices are determined by the monthly payment, for buyers that can only afford a $1300/mo payment the price level will thus be $330,000 in a 20% down regime and $230,000 with 3.5% down ($230,000 with 3.5% down is the same $1300/mo in payments). Requiring a $46,000 down payment increases the price by $100,000!

Now, requiring 20% will tamper the number of buyers temporarily, but this is only a temporary effect as buyers labor those long years sending the rent checks to their landlord, gradually scraping together that 20% down payment.

Which is better for the buyer and the market, 3.5% down on a $230,000 purchase or 20% down on a $330,000 purchase?

It's the same house and same monthly payment.

20% down is just excessive conservatism, and I suspect the ulterior motive here is to keep renters renting.

Yeah, I'm sure it has nothing to do with risk mitigation and everything to do with evil Republicans creating a serfdom society.

The rationale in your argument is truly bizarre, since it negates the severely diminished level of consumer demand at current prices.

Since you aren't considering the aggegate, maybe an example will paint this better for you: A person with substantially high income and a $20,000 DP will go from being able to buy a $571k house to a $100k house.

That will increase prices?

klarek says

A person with substantially high income and a $20,000 DP will go from being able to buy a $571k house to a $100k house.

Substantially high incomes will save the down payment. Your example here is nonsensical.

High down payments are unnecessary as long as housing doesn't fall more than 3% a year. I did the math for you for this too -- PMI is 1.15% and principal paydown starts at 1.6% the first year and increases from there.

After just 2 years a 3.5% borrower has 10% skin in the game, via principal paydown and PMI payments.

since it negates the severely diminished level of consumer demand at current prices.

Demand is demand. It only takes 2 buyers to bid against each other. The 20% regime would knock out demand for a while, but it would come back, and if it doesn't -- eg landlords are forcing their renters to fork over their monthly savings --, then that's another indictment of 20% down.

klarek says

and everything to do with evil Republicans creating a serfdom society.

This has nothing to do with Republicans and everything to do with this serfdom society you speak of.

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

If 3.5% down is risky given future price declines, raise the PMI up from 1.15%. That's also a win-win -- the less we spend on housing the better.

Troy says

Substantially high incomes will save the down payment. Your example here is nonsensical.

Your argument is assuming that the person was making the substantially high income for an eternity. Might be a doctor just out of residency.

Troy says

After just 2 years a 3.5% borrower has 10% skin in the game, via principal paydown and PMI payments.

It takes SIX years to pay down 10% of the principal. Two years puts the owner only a hair above 3% principal paid off. That along with their 3.5% down payment is hardly enough to cover the cost of selling the house, assuming prices are the same.

PMI payments aren't "skin in the game" any more than car insurance is a contributor to my auto loan.

Troy says

Demand is demand. It only takes 2 buyers to bid against each other.

You're seeing the aggregate here. A pool of buyers will effectively be limited in what they can purchase since they don't meet the DP threshold. So it's not going to be the 3.5% versus the 20% on the same house. The 3.5% guy will be making an offer on a much cheaper house. The 20% guy has less competition, and the house he was going to purchase has to lower its price to attract a buyer since so many of those people whose incomes can afford the house are now well below the DP threshold.

This is basic supply and demand. The way you're pegging this is as if you assume everybody has $200k in their bank account, and can pay whatever DP percentage is required. Perhaps you should look at the personal savings rate in this country. It's been hovering around zero for quite some time now.

Troy says

If 3.5% down is risky given future price declines, raise the PMI up from 1.15%. That’s also a win-win — the less we spend on housing the better.

You wouldn't even need PMI were these people to put a significant down payment on the house. It's a complete waste of money to have them plow their earnings into PMI when it could be going into their principal or down payment.

It's just a way of ushering people into the market earlier than they should jump in. They're pawns, really naive pawns whose willingness to purchase is exploited by abysmally low DP requirements while raping them with insurance fees for years which would have been much better put into savings and hence into the principal of the house, thus limiting their risk factor.

klarek says

Your argument is assuming that the person was making the substantially high income for an eternity. Might be a doctor just out of residency.

Um, yes, I assume stable household incomes. So do lenders, obviously.

It takes SIX years to pay down 10% of the principal.

Right, and in these SIX years they will have also paid 7.9% in PMI. Added to the 2.5% down at purchase, that's 19.4% "skin in the game" in just 6 years. Almost there to that magical 20% zone of safety!

PMI payments aren’t “skin in the game” any more than car insurance is a contributor to my auto loan.

Sure they are. PMI perfectly offsets any losses the lender will take on the property. Hell, maybe we ought to make PMI a set-aside account and just apply it to the principal if & when there's enough equity to hit 80% LTV.

The 20% guy has less competition

You are overly attached to this demand destruction of high down-payments.

I argue this would be a temporary thing and establishing a 20% regime would not result in long-term demand destruction, it would just delay entry, forcing millions of families to pay their LL's mortgage payments for years, all unnecessarily, while also raising the price level since "affordability" rises more than linearly with every dollar of down payment.

It’s a complete waste of money to have them plow their earnings into PMI when it could be going into their principal or down payment.

Better to 1.15% PMI than to being a rent-slave to their landlord.

This is obvious, no?

would have been much better put into savings and hence into the principal of the house

LOL. Putting savings into principal? Talk about risk! Look, either the market is tanking from here or it isn't.

If it is, then buying with 3.5% or 20% is a total waste of money.

If it isn't, then 3.5% is perfectly safe. The numbers say borrowers will have 19.4% principal paydown + PMI payments in just 6 years.

Troy says

Um, yes, I assume stable household incomes. So do lenders, obviously.

Stable in their terms is what, like six months? A year? Don't know anybody that makes enough money to save up $100k in that time period.

Troy says

Right, and in these SIX years they will have also paid 7.9% in PMI. Added to the 2.5% down at purchase, that’s 19.4% “skin in the game” in just 6 years. Almost there to that magical 20% zone of safety!

What in the world makes you think that all the PMI is going into the principal?

Troy says

You are overly attached to this demand destruction of high down-payments.

No, I am just overly stating an economic must-know fundamental: supply and demand. You're completely dismissing this in your theory, which is why it's b.s.

Troy says

I argue this would be a temporary thing and establishing a 20% regime would not result in long-term demand destruction, it would just delay entry, forcing millions of families to pay their LL’s mortgage payments for years, all unnecessarily, while also raising the price level since “affordability” rises more than linearly with every dollar of down payment.

No offense, but that's really dumb. Do you think that if we lived in a world of 20% down, then the next morning it went to 3.5% down, people would be going out and buying cheaper houses? That prices will fall?

Troy says

Better to 1.15% PMI than to being a rent-slave to their landlord.

This is obvious, no?

No, it's not. It's part of the bullshit "renting is throwing money away" crap I and others have heard ad nauseum for years. If you're going to use this as a basis for your argument, then this discussion is effectively over.

People nowadays have to be so mobile due to job insecurity that owning is a liability. Prices are still too high, especially if people have to have a decent sized down payment. I hate it when the industry lobbies for self serving stuff then promotes it as being "good for the economy," or "good for you." Any benefit of their lobbying is incidental, but usually the result of industry lobbying is the public getting shafted.

klarek says

corntrollio says

Providing a path to documentation would be a net economic benefit to every single state, and these studies never include the net economic benefit that already currently exists.

It will encourage an even larger number of people to come here illegally. That’s an ass-backwards way to deal with it, and history has proven that it backfires in the end. It sure makes for a sweet-sounding platitude though, right?

Only if you don't understand economics.

Even the Cato Institute says that legalization would add $180B to GDP over 10 years:
http://washingtonindependent.com/55152/cato-institute-finds-180-billion-benefit-to-legalizing-illegal-immigrants

Other studies have found an even greater benefit by an order of magnitude, making Cato's estimate a lowball:

http://www.americanprogress.org/issues/2010/01/raising_the_floor.html

According to this study, a path to legalization would raise GDP by $1.5 TRILLION over 10 years. A guest worker program would raise GDP by $792 billion over 10 years.

In contrast, mass deportations would lower GDP by $2.6 TRILLION.

What you're missing is that the U.S. economy did well when we allowed more immigration. Certainly it would make sense to have more skilled workers here and more people with advanced degrees.

klarek says

corntrollio says

I’m calling BS on that — those costs are never accurate, and almost always assume that undocumented immigrants don’t pay taxes, even though many of them do.

Sales taxes on Doritos and Slurpees don’t amount to a whole lot.

Sure, undocumented immigrants do pay a ton in sales tax, but they often also pay property tax, income tax, and payroll tax. One of my friends who is an immigration lawyer has had multiple clients with tax returns going back more than 10 years -- sometimes you need to add them to your immigration applications. This phenomenon is well documented.

In addition, a path to legal status generally requires paying a big fine and making absolutely sure that all back taxes are paid, which would be a huge boost to our revenues in and of itself.

"Certainly it would make sense to have more skilled workers here and more people with advanced degrees."

Why do we need more peope with advanced degress when there are tens of thousands of people with advanced degrees unemployed or flipping burgers?

In Pennsylvania alone, there are 15,000 unemployed skilled workers:

http://articles.philly.com/2010-09-30/business/24977870_1_unemployed-engineers-college-education-unemployment

And FYI: We already have a system in place that allows workers with advanced degrees to come to the U.S. IT is called the H1-B, which is basically a criminal enterprise that allows companies to fire US workers and replace them with cheap foreign labor.

Troy says

No, loans are still qualified based on debt-to-income limits. Increasing the down payment to 20% will just result in home prices inflating, resulting in the same monthly payment for the same house, but with 20% down instead of 3.5%.

Not true. If anything, raising down payments LOWERS housing prices because fewer people can meet the down payment requirement. It only takes a quick look at the current bust to show this. Basically, the opposite of everything you have said with respect to 3.5% down is true. It's nice to have opinions, but the facts say differently.

Troy says

Right, and in these SIX years they will have also paid 7.9% in PMI. Added to the 2.5% down at purchase, that’s 19.4% “skin in the game” in just 6 years. Almost there to that magical 20% zone of safety!

What is this magical math where you include PMI as "skin in the game"? That makes no sense. You've said this at least twice in this thread, and it's still not true. You don't understand the concept of insurance.

Troy says

Better to 1.15% PMI than to being a rent-slave to their landlord.

Yeah, okay, you don't have anything substantive to say. This is nonsensical, as are your other arguments.

klarek says

What in the world makes you think that all the PMI is going into the principal?

that's not my argument. What I'm saying is PMI is going to offset any losses to the lender due to falling home prices.

After 3 years of payments the lender will have 4.45% of PMI banked. This is equivalent to the loan having 4.45% less LTV when looking at loss scenarios upon borrower default.

This is obvious no? PMI is just another form of "skin in the game" from the buyer that protects lenders from default losses.

You’re completely dismissing this in your theory, which is why it’s b.s.

I'm not dismissing demand, I'm saying demand is already so stupendously immense that temporarily winnowing down the public with high down payment requirements is still going to have more able-buyer demand than supply of houses can fulfill.

There are 140 properties on the market in Milpitas and 68,000 people living there. 60 in 93901 and maybe 60,000 who would like to buy there if they could afford it.

That's a dire undersupply of housing.

All buyers bid against each other, and while 20% down will remove a big chunk of the buying public immediately, over time the able-buyer public will grow to today's level as more people save up for the down payment.

The end result will just be the same demand we have now, but with home prices 50% higher.

The math on this is obvious, which is why you ignore it.

Stable in their terms is what, like six months? A year? Don’t know anybody that makes enough money to save up $100k in that time period.

At this point I'm really lost at WTF you're trying to say here.

Your original:

A person with substantially high income and a $20,000 DP will go from being able to buy a $571k house to a $100k house.

was attempting to argue that down payments are fixed in time, even for people with "substantially high incomes".

I was pointing out that people with high incomes will not have a fixed DP but this will increase to match whatever the pricepoint the market sets for the housing this buying segment wishes to buy.

And as down payments go up, so do home prices. There's a feedback loop there, and it's more than dollar-for-dollar, and the feedback will only end when borrower DTI limits are reached.

Do you think that if we lived in a world of 20% down, then the next morning it went to 3.5% down, people would be going out and buying cheaper houses? That prices will fall?

Loans and thus the price level is determined by borrower DTI ratio. There would be more able-buyers with the change to lower DP requirements, but over time prices will lock to match what borrowers can afford to borrow.

The housing market is of course highly path-dependent and the bumrush of buyers with 5-20% DP saved up would result in the market moving up to accommodate these buyers, but after they're gone the market would have to adjust to the new reality of PMI and higher P&I, which reduce buying power and thus the general price level.

Of course, we don't live in a 20% DP world now so this is just a theoretical discussion. However, something similar to this did happen in the 1990-2005 period, as the rise of 80/15 and 80/20 lending occurred.

It’s part of the bullshit “renting is throwing money away” crap I and others have heard ad nauseum for years.

ah, I touched a nerve and hurt your fee-fees.

The bottom line is that landlords -- especially those who own SFHs -- are in fact parasitical scum leechfucks latched onto the productive members of our society.

Surely you cannot disagree with this?

The math on this is also impossible to deny. In the other thread we've got new LLs declaiming their financial genius by roping renters paying $1650/mo into their $200,000 properties with $1100 PITIs they've just bought.

THAT is the ugly reality that this horrendous, economy-destroying 1.15% pa PMI fee is competing with.

Like I said, an able buyer should have been able to pick up that $200,000 property with a $5000 DP, $2000 PMI pre-payment, and $200/mo in PMI, not some rich specuvestor latched onto the earnings of somebody else now.

corntrollio says

raising down payments LOWERS housing prices because fewer people can meet the down payment requirement. It only takes a quick look at the current bust to show this.

The current bust was entirely caused by NINJA/SISA negative-am / pay-option / teaser-rate interest-only loans boosting affordability by roping borrowers who couldn't repay the fully amortization without continued home value appreciation.

These were the things the industry did 2000-2006 to make the new 80/20 regime more affordable to people. Temporarily.

corntrollio says

You’ve said this at least twice in this thread, and it’s still not true. You don’t understand the concept of insurance.

And you don't seem to understand the lender will receive these PMI payments to apply against default loss. They are perfectly equivalent to a DP from the lender's perspective, assuming their underwriting risk model is accurate.

Troy says

And you don’t seem to understand the lender will receive these PMI payments to apply against default loss. They are perfectly equivalent to a DP from the lender’s perspective, assuming their underwriting risk model is accurate.

No, they aren't equivalent. When you sell the property, you don't get anything back for paying PMI.

You're confusing several different concepts and trying to turn it into a coherent argument, but it's not quite working. We get it, you hate landlords; but your ideas on increasing homeownership make no sense and require government subsidies to sustain.

corntrollio says

When you sell the property, you don’t get anything back for paying PMI.

PMI protects the lender should he find himself having to sell the property at a loss, so the lender does in fact get something back for the borrower having paid PMI.

If the risk is modelled correctly then the 1.15% pa PMI rate corresponds to the estimated risk of loss over the length of the loan (ignoring vested returns on unallocated premiums for the moment).

but your ideas on increasing homeownership make no sense and require government subsidies to sustain.

3.5% makes perfect sense to make housing more accessible to more people. I wonder how you can find yourself arguing against this.

The real question is risk to the GSEs -- and thus the taxpayer -- should the borrowers default.

I demonstrated that after 6 years the lender --and thus the taxpayer is protected by 19.4% principal paydown and accumulated PMI premium contribution from the buyer. This is substantial.

Plus the 1.15% PMI has the salutary effect of actually making home prices more affordable by limiting how much people can borrow due to 1.15% counting against DTI limits.

We get it, you hate landlords;

Doesn't everyone?

Troy says

3.5% makes perfect sense to make housing more accessible to more people. I wonder how you can find yourself arguing against this.

Not everyone is an ideal candidate to buy housing. I mentioned at least 7 types of people in another thread, and there are others I didn't list. In addition, not everyone is a good risk for the bank or is in the financial situation to buy. In some municipalities, renting is cheaper than buying. Also, some people are better at saving their money, than having a mortgage to function as forced savings.

I actually don't think we should make housing more accessible. We haven't seen any great societal benefits from it here in the U.S. from Bush's so-called "Ownership Society." Other countries have varying degrees of homeownership, and it's not like there is one ideal rate.

corntrollio says

Other countries have varying degrees of homeownership, and it’s not like there is one ideal rate.

Frankly, I don't care about the ownership rate, I care about LLs profiting from their monopoly ownership in land.

This is a VERY zero-sum relationship and wealth transfer from the poor to the rich.

Here, let me repeat myself from a week ago:

"i’d be all for max 80% LTV if, and ONLY if, non-owner-occupied SFH and condos had a confiscatory rent tax.

"Anything less just pushes supply away from families and to the parasitical specuvestors that are already nearly monopolizing the market in many segments and areas."

Troy says

Anything less just pushes supply away from families and to the parasitical specuvestors that are already nearly monopolizing the market in many segments and areas.

We should probably agree to disagree at this point, but as I stated before, there are several categories for which landlords create a market. That's a good thing.

I'm not sure how true landlords, as opposed to specuvestors (which only really exist in a bubble scenario), are parasitic. They provide a necessary service in many cases. The rental market and the buying market are two sides of the same coin in many markets, although that may not be true in the Bay Area where the rent vs. buy calculation is out of whack.

What I find parasitic is realtors and mortgage brokers and other rent-seekers that accompany home buying process.

corntrollio says

What I find parasitic is realtors and mortgage brokers and other rent-seekers that accompany home buying process.

parasites everywhere, yes.

landlording start parasitic in the way renters pay the LL's mortgage, and this relationship becomes more parasitic as wages inflate rents past the fixed cost of ownership the LL enjoys, as historically has been the case.

If the LL only charged for the tenant's wear & tear and various capital costs on the property, there would be no parasitical relationship here.

Removing Prop 13 protections on rental property would go some way to fixing things, but the bottom line is that there's a lot of downside for the alleged sunny benefits that landlording brings to the housing market.

The LL's alleged "necessary service" is fulfilling a need largely of their own creation, the reduced supply of housing and the tightly-bound pricing relationship between area home prices and the capitalized value of area rents.

Without abnormal bubble inflation, the specuvestor nature of LLing takes longer to achieve, but historically rents & land values have doubled every 15 years so chances are new investors today will be enjoying wonderfully rapacious profit margins not too much farther down the road.

This is how the richer have gotten richer and the poorer have gotten nowhere. To try to blow sunshine about this very wealth transfer dynamic is disgusting.

But very much par for the course on online discussions about the economic imbalances we face today.

Troy says

PMI protects the lender should he find himself having to sell the property at a loss, so the lender does in fact get something back for the borrower having paid PMI.

If the risk is modelled correctly then the 1.15% pa PMI rate corresponds to the estimated risk of loss over the length of the loan (ignoring vested returns on unallocated premiums for the moment).

I have an even better idea. How about that borrower not go into default AT ALL? As in, their money goes into their principal balance BEFORE they start making payments, thus there will be no need for PMI, they won't lose their house, there won't be losses to mitigate, etc.

That's a lot better for everybody.

Troy says

Frankly, I don’t care about the ownership rate, I care about LLs profiting from their monopoly ownership in land.

Home ownership rate is somewhere around 66% in this country. That's not a monopoly, dumbass, and it's a much higher rate than other western countries which have less disparity between their rich and poor.

Troy says

If the LL only charged for the tenant’s wear & tear and various capital costs on the property, there would be no parasitical relationship here.

That's stupid. You're basically saying that the LL should take all the risk, eat all the losses, and never make up for them with profits. You don't understand how investment works. Somebody puts money and time into [something] expecting a return. And it's a long-term investment, not some scumbag hedge fund shorting type of operation.

Also, typical of your complete ignorance of economics, rents tied to the minimum ownership costs would create a price ceiling on rents. You know what happens when you artificially keep prices down? There demand outweighs the supply and there's a massive shortage. It's what happened when we tried capping gas prices, and it's 100% destructive.

klarek says

now you’re trying to convince us that higher DP requirements will drive prices up. This is truly comical.

The implication comes from the observation that the price is level is set by the how much lenders will lend to borrowers.

The math is simple on this, ever dollar of required downpayment increases the borrower's borrowing power by more than a dollar, thus the price level will not be lowered by high down payments, but driven higher.

I gave you the math above and you ignore it.

You assert that there will be permanent demand destruction that shifts the cost-curve over, and I assert that real estate economics doesn't work that way since supply is fixed, demand overwhelms what supply is on the market, and the transaction price is determined more by market sentiment and the second-highest bid more than anything, plus people over time will assemble whatever downpayment is required, and any demand destruction will be reduced over this process.

Instead of challenging the logical bases of this implication, you just call me names and go ad hom on my dislike for the top 10% of this country who massively profit from their collective ownership of 75% of the commercial land, turning a third of this country if not more into dispossessed rent slaves.

klarek says

Were it not for the ability to profit from being a landlord, there would be no way to prevent the market from overcorrecting on a massive scale. They’re filling a void, and taking on the risk.

Housing falling to what people can afford to pay is not "overcorrecting", LLs buying SFH are not filling a void they are inserting themselves into the system as parasites, and risk alone is what a casino is about, not capitalism.

Troy says

To assert that my economics comes from “ignorance”, I can only refute that by citing the very, very long list of highly esteemed economists and intellectuals who have found attraction in the LVT. Adam Smith. Thomas Paine. Thomas Jefferson. JS Mill and Leo Tolstoy. Sun Yat Sen. Admiral Spruance. William F Buckley. Milton Friedman. The signers of the letter to Gorbachev that included Franco Modigliani and a dozen other internationally-known academics.

You have no economic background. Listing the names of other economists does not substitute for knowledge and insight. You lack both, and I doubt you understand any theory from those philosophers and economists since you inherently reject the generally fundamental economic concepts and the required context from which they preached. You sound like a C-student poly sci major who has read a lot of books for the indulgence of your own ego, but learned nothing of substance beyond what others have to sum up and present to you.

Troy says

Investment in human chattel slavery was also a long-term investment. Just because somebody “puts money” into something doesn’t make all income from that investment morally right.

Stop it with the hyperbole. If that's how you really feel about landlords and investors, then tell it directly to other patrick.net posters. Tell Mr. Ribas that it's wrong for him to rent at a lower cost than it is costing him to own the property. See if you can make one sound argument against what he and others are doing.

Your diatribes about class warfare via rentership is annoying and insulting. Like I said above, my landlord assumes all risks in owning the property which I rent, and I don't pay very much at all. To accuse him being the moral equivalent of a bank robber or investing in human chattel slavery is such horseshit.

Troy says

This is entirely so obvious I really wonder why you are arguing it.

Because almost every point you attempt to make is based on a falsehood or an opinion. Your math is inconsistent (and barely present), you don't understand how PMI and amortizations work, you are completely ignorant of supply and demand (and price equilibrium), you don't know the fundamentals of investment or risk/reward, and you're so economically clueless that you think it would be in renters' best interests to cap what their landlords are able to take home. Gee, charge them the same rent, take it away from the person it's going towards... that makes for a really healthy lessee-lessor relationship. Then again you are wholly opposed to people renting at all, despite their inability to purchase a house, that it's no surprise you are operating in a completely batshit universe of your own.

it's worthwhile to point out that citing math as your proof is irrelevant when your math is improperly used (or just plain old sucks).

cearka says

it’s worthwhile to point out that citing math as your proof is irrelevant when your math is improperly used (or just plain old sucks).

He thinks that by putting the word "math" in his posts, it's a substitution for doing math. Much like listing the names of philosophers and economists without knowing what any of them were talking about. It's like that guy in Good Will Hunting that goes to the bar and sprouts off some random shit, assuming that the people around him are dumb enough to believe it or not challenge him.

klarek says

you don’t understand how PMI and amortizations work

utter lie. Good day sir.

It's called "Extend and Pretend"

klarek says

Because almost every point you attempt to make is based on a falsehood or an opinion. Your math is inconsistent (and barely present), you don’t understand how PMI and amortizations work, you are completely ignorant of supply and demand (and price equilibrium), you don’t know the fundamentals of investment or risk/reward, and you’re so economically clueless that you think it would be in renters’ best interests to cap what their landlords are able to take home. Gee, charge them the same rent, take it away from the person it’s going towards… that makes for a really healthy lessee-lessor relationship. Then again you are wholly opposed to people renting at all, despite their inability to purchase a house, that it’s no surprise you are operating in a completely batshit universe of your own.

Klarek--

No offense, but you really don't understand what Troy is saying at all. Calm down, take a step back, and read his posts again.

Personally, I'm not sure it would be so easy for buyers to save up 20%, but his math is right if you assume they can. And his logic on risk/reward is very interesting. I agree with him.

Wow, NAR wants to brew another bubble.

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.

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.