patrick.net

@Ad

How do you figure? They were already taking out loans that they had no business getting. Why would a slightly higher interest rate make any difference?

tatupu70 says

hy would a slightly higher interest rate make any difference?

$1500/mo buys:

$200,000 @ 7%
$215,000 @ 6%
$230,000 @ 5%
$245,000 @ 4%
$260,000 @ 3%

30% appreciation going from 2000-2001 interest rates to 2003's teaser rates.

Go IO @ 5% and you can "afford", temporarily at least, $350,000.

Go SI/SA and you can stretch to $400,000 or more.

This isn't rocket science, but it also is somewhat non-obvious. I didn't see it coming in 2000-2001, that's for sure, but only figured out in retrospect upon learning about Casey Serin's serial frauds.

The funny thing is now I also believe the 2001-2003 tax cuts also served to mainly accelerate home price appreciation. Back then I wasn't into Georgism, but now I pretty much believe:

gross income - taxes - bare necessities (food, fuel) - housing costs = constant.

Raise/lower any non-constant term and the others housing adjusts accordingly; wages go up, houses go up. Taxes go up/down, housing goes down/up in response.

So the history of 2001-2005 was as if the Fed and PTB were intent on blowing the mother of all housing bubbles. Whether it was accidental or intentional, it certainly does not reflect well on their competence.

@troy--

I understand that lower rates allow lower payments. My point is that most of the trouble is with sub-prime and liar loans. These aren't really very sensitive to interest rates, at least IMO.

tatupu70 says

I understand that lower rates allow lower payments

actually they "allow" higher asset prices, giving people artificial equity to draw against via home equity loans.

Oh, the changing of the rules to allow home equity loans to go for non-home related expenses is another brick in the wall or nail in our collective coffin.

Troy, right on. There were certainly a plethora of compounding factors, but the FED created a bubble with easy money.

Troy says

actually they “allow” higher asset prices, giving people artificial equity to draw against via home equity loans

I'm confused. How does a home equity loan raise a home's price?

tatupu70 says

Troy says

actually they “allow” higher asset prices, giving people artificial equity to draw against via home equity loans

I’m confused. How does a home equity loan raise a home’s price?

I believe patrick has mentioned that when interest rates are low, nominal prices (asset prices) of real estate rise. Is it still on the page one comments on why now is not a good time to buy?

AdHominem says

I believe patrick has mentioned that when interest rates are low, nominal prices (asset prices) of real estate rise. Is it still on the page one comments on why now is not a good time to buy

@Ad--

Yes, as I mentioned, I understand the reasoning although history has proven otherwise. But, my point was that for subprime or liar loans (the ones that caused the bubble), I don't see how low rates would have had much of an effect. The lowering of standards was the problem--not the interest rates. Banks could just as easily have lowered standards at 5% or 6%...

tatupu70 says

I’m confused. How does a home equity loan raise a home’s price?

A rising market attracts speculative bubbles. It's a self-feeding process until the music stops. We're all just monkeys with monkey-brains, and seeing neighbors and friends getting stuff for free via the housing ATM 2003-2007 was a powerful narcotic that reduced sober appreciation of the risks.

http://seekingalpha.com/article/33336-home-equity-extraction-the-real-cost-of-free-cash

shows that $500Byr of home equity was being rotated into back into RE in 2005. At $40K a pop that's 12.5M transactions!

But, my point was that for subprime or liar loans (the ones that caused the bubble), I don’t see how low rates would have had much of an effect

Going from 7% to 5% raises the price of housing 30%, assuming people bid up the price of housing based on the "how-much-a-month". Is that "much of an effect"?

Around a year or so ago I saw an awesome chart of the progress of the market, 2000-2006 that illustrated the various factors as individual arrows on the home valuation graph.

If I were to make my own:

1) Tight labor market / rising productivity/ rising wages in the 90s
2) 2001-2003 tax cuts
3) Interest rates pushed to the firewall post 9/11
4) More and more buyers are allowed to go IO / negative-am
5) More and more buyers are allowed to go SI/SA or even NINJA
6) Unregulated & unsupervised loan industry results in general lawless and borrower fraud on a massive scale
7) Credit aggressively extended to subprime borrowers, reducing supply on the lower end
å…«) "Flip this House" etc popularizing the idea of getting rich in real estate by taking risks

It's my thesis that the train got rolling with the first 3, and was accelerated with the rest.

tatupu70 says

although history has proven otherwise.

This really bugs the crap out of me, btw. You can't compare the 1970s to the 2010s.

Troy says

tatupu70 says
although history has proven otherwise.
This really bugs the crap out of me, btw. You can’t compare the 1970s to the 2010s.

OK--look at the 80s then. Or 60s. Find me a decade when it did hold true.

Troy says

Going from 7% to 5% raises the price of housing 30%, assuming people bid up the price of housing based on the “how-much-a-month”. Is that “much of an effect”?

Obviously that's not how it works though. I think we can all agree on that. That's my point.

tatupu70 says

Obviously that’s not how it works though. I think we can all agree on that. That’s my point.

? It's not obvious to me. When I make a bid on a house, the housing payment has to fit within my budget (and, secondarily, make some amount of sense compared to the trend of area rents).

Lower interest rates raise not only my buying power, but the people I'm bidding against for the house. Result: a higher winning bid on the house. This is so basic I don't see your problem with this effect of increasing purchasing power chasing a VERY limited good. G-d stopped making land a LONG time ago.

tatupu70 says

Find me a decade when it did hold true.

I don't care about ANY previous decade since it's my thesis that housing directly responds to after-tax household incomes -- I think this is the basic drivespring of the market, modulated by interest rates, new construction, credit availability, etc.

What is different now than previous decades is that we've largely offshored our manufacturing base, and there's 2.5 billion workers a Vonage call away from our labor market now.

I have no idea how the 2010s are going to turn out, but I do think wages are going to remain under pressure. All things being equal (ie static), no wage growth, no housing inflation IMO.

Whether or not the "all things" will remain static is unknown. Perhaps the housing credit will go to $10,000. Perhaps they will change the mortgage interest deduction to a straight credit (that would put a rocketship up the market's ass). Perhaps the Chinese will move in bigtime and buy up everything at stoopid prices like the Japanese did in the 80s. Perhaps we'll just see a similar souffle that Japan had in their 1990s post-bubble aftermath. Perhaps . . .

Troy says

I don’t care about ANY previous decade since it’s my thesis that housing directly responds to after-tax household incomes

We agree then. Wage inflation correlates fairly well with housing prices. The inverse of interest rates doesn't. Which is why I don;t think low rates had much to do with the bubble

Troy says

What is different now than previous decades is that we’ve largely offshored our manufacturing base, and there’s 2.5 billion workers a Vonage call away from our labor market now.

Nothing new there. That's been happening since the 70s

tatupu70 says

The inverse of interest rates doesn’t.

This is getting perverse. If you agree that wage inflation correlates with housing prices then you should agree that lower interest rates will also boost housing prices, since these two work in tandem to determine household purchasing power and thus home valuations. I expect the data of the 1930s, 1970s, and any other decade will actually support this thesis since it is so basic.

What I object to in looking to the 1940s or 1970s is the expectation of a similar inflation in land values since this is silently assuming that any inflation coming down the road will include wage inflation.

Compared to the rather advanced integration of China and India (plus NAFTA, for whatever that's worth) with our present economy, the 1940s featured an isolated nation deprived of consumption for over a decade, its major competitors ground into powder, and a nation with a bright prospect of getting back on its feet and kicking ass economically.

The 1970s featured baby boomers entering their household formation years, the rise of two-income households, and much infill and suburban development to meet the rising housing demand.

shows that mortgage rates went from 8% to 5% from 2000 to 2003. To argue that that did not materially contribute to the hyperbolic blowoff:

http://static.businessinsider.com/~~/f?id=49a02ccc796c7afa009b4708&maxX=620&maxY=474

of the period takes some real chutzpah.

Nothing new there. That’s been happening since the 70s

One difference is that we went from a net exporter to a net importer from the 1970s. Back in the 1980s RCA actually retooled their Indianopolis plant to make their CED players, and Apple made their Macs at their Fremont factory. The very idea of this type of wealth-creation happening here is now ludicrous given that the Chinese can do it better for pennies per hour in labor costs.

This is my thesis why household wages may not respond to the overall inflationary trend. Even if they do, I also strongly suspect that the housing good will have to compete with other necessities like energy, education, health insurance, and increased local & federal taxes. There's no law that says the median price of a house has to be $300,000. Double taxes, health insurance, gas prices, and even if you (somehow...) double wages we may see housing prices fall in nominal terms, because rents (and housing valuations) come from surplus income after higher priority expenses are covered.

Troy says

This is getting perverse. If you agree that wage inflation correlates with housing prices then you should agree that lower interest rates will also boost housing prices, since these two work in tandem to determine household purchasing power and thus home valuations

The problem is that interest rates are directly related to wage inflation. When wage inflation is high, interest rates are also high (in general). And like you said, wage inflation is the primary influence on housing prices. So it drowns out any effect of the interest rates. That's why you won't find any time period where housing prices have gone up because rates have gone down.

tatupu70 says

When wage inflation is high, interest rates are also high (in general).

Yes, this was evident in the 1999-2000 period when Greenspan was trying to put the brakes on the economy.

That’s why you won’t find any time period where housing prices have gone up because rates have gone down.

Wages have been flat 2000-now. Rates went from 8% to 5% 2001-2004. Home prices doubled. I think I've found a time period that qualifies.

Attempting to dodge the correlation as not a causative link is bizarre, IMO since it would take major secondary effects to PREVENT prices rises due to lowered cost of money. Secondary effects like mass unemployment of the 1930s, Japan's liquidity trap of the 1990s.

In the late-80s rates were eased from 12% to 9%, matching the 1980s RE bubble precisely. Gee, another time period that supports this causative thesis.

But I shouldn't have to point to previous history. The link between the lower cost of borrowing and higher real estate valuations should be prima facie obvious and unsurprising when looking at what blew up the bubble this decade.

Perhaps part of the problem is worldview impedence. My economics education sucked until not too long ago, when it finally became clear to me that housing was not a commodity like gold, oil, or consumer good like toothpaste, but rather the f---ing Fifth Element of the universe.

Real Estate -- Land -- is at the core of our economy. It is the source, and just as importantly, SINK, of all our wealth. Because it is the economic sector rife with rentiers, it is the reason why the majority of people in the developed world are kept on the treadmill.

We've fully occupied the entirety of the country for over 100 years, yet over 60% of the population still have mortgages. Worse, we even owe more on our real estate than ever:

How did this happen?

Troy says

Perhaps part of the problem is worldview impedence. My economics education sucked until not too long ago, when it finally became clear to me that housing was not a commodity like gold, oil, or consumer good like toothpaste, but rather the f—ing Fifth Element of the universe.
Real Estate — Land — is at the core of our economy. It is the source, and just as importantly, SINK, of all our wealth. Because it is the economic sector rife with rentiers, it is the reason why the majority of people in the developed world are kept on the treadmill.
We’ve fully occupied the entirety of the country for over 100 years, yet over 60% of the population still have mortgages. Worse, we even owe more on our real estate than ever:

How did this happen?

inflation (aka expansion of the money supply, not to be confused with the EFFECTS of inflation -rising prices)

In as many words? Always a greater fool. Always.

AdHominem says

inflation (aka expansion of the money supply, not to be confused with the EFFECTS of inflation -rising prices)

No, inflation would result in higher equity values, not lower. Per the chart, equity went UP from 1966 to 1982. Too many new households, not enough homesteads. The last free homestead was given out in the late 70s, up in Alaska.

Look at the price of gold over that time. Evidence of the effects of inflation. I was NOT saying equity went down or up, only that the reason debt is greater today is because it is very difficult if not impossible for the average person to preserve wealth due to the FED's policies.

Interestingly enough as interest rates go down, the return on investment in gold becomes real. When interest rates are high, the return on investment in gold is zero or negative. Go figure.

When interest rates are high (as they probably would be in a free market without FED interference) then gold would lose its luster and people would put their money out for loans where they can earn a return. But when interest rates are low, you actually have a negative rate of return on savings (factoring in inflation). This encourages speculation and bubble formation.