patrick.net

The way to fix the problem IMHO is to reverse the massive transfer of wealth from the general population of this country to the rich.

My general impression is that if the banks totally unloaded all houses and put them on the market that the values would drop. Hence why they do not want to do that! I think this drop could actually make them drop to the point where people might not really need banks for outside of checking accounts (savings yields no interest rate)

BUT...

This is more of a game theory aspect with quite a number of players.If just one bank decides it has to recapitalize and starts to sell off its inventory the price drop might be enough to force other banks to do the same as their values would start to drop as well (think scorched earth policy).

If the government wants banks to lend and they cannot raise fees, have already cut jobs (no one wants to cut their own salary), closed locations then doing this might be the only option left.

I agree with patrick. Besides a big sharp plunge would be better than this yearly decline that seems to never end.

"House prices are falling because millions of homeowners are defaulting on their mortgages, and the sale of their foreclosed properties is driving down the prices of all homes."

Maybe half right..they are going down because we made millions of extra homes.

The last time millions of extra product were created in excess that I can think of was during the 1980's
http://en.wikipedia.org/wiki/Atari_video_game_burial

alpo says

The way to fix the problem IMHO is to reverse the massive transfer of wealth from the general population of this country to the rich.

We agree. Mortgage debt is a primary mechanism to do that massive transfer from the general population to the rich. But making the rest of us liable for that debt to the rich is even worse than the usual transfer. At least mortgages are voluntary. Taxes to bail out the rich are not.

mdovell says

My general impression is that if the banks totally unloaded all houses and put them on the market that the values would drop. Hence why they do not want to do that! I think this drop could actually make them drop to the point where people might not really need banks for outside of checking accounts

Sounds lovely to me!

....the wealth of American homeowners has fallen by some $9 trillion. Well,considering phantom money as a wealth was NOT a good idea after all.

bubblesitter says

considering phantom money as a wealth was NOT a good idea after all.

Yes, it was all counted as money, but it wasn't money.

If I declare there are a billion shares of Patrick.net and then I sell one share for $1, does that make me a billionaire?

Amazingly, Martin Feldstein of Harvard would say yes.

We agree. Mortgage debt is a primary mechanism to do that massive transfer from the general population to the rich.

The amount of debt was fixed to purchase price by the buyer who overbid stupidly based on all the wrong reasons. The buyers were wrong in believing in the long term home prices can outstip both incomes and inflation. Its crazy, but you still have people believing that home prices at or near peak was viable when it wasnt.

The real issue is home PRICES. This nation since mid-late 90s has gone bubble crazy and its still true today regardless of all the real income drivers. Stick a "Green" patch on something and somehow its HOLY Sh*t. Only the sober one see its still Sh*t at the end of the day.

bubblesitter says

....the wealth of American homeowners has fallen by some $9 trillion. Well,considering phantom money as a wealth was NOT a good idea after all.

Cant lose what you never had to begin with...

If I declare there are a billion shares of Patrick.net and then I sell one share for $1, does that make me a billionaire?

If you have 100M shares like maybe Facebook and sell 5% for $450M like FB did to Microsoft then Yes, the other shares you hold makes you worth a billion regardless of what your AD revenue makes. Crazy but true.. irrational exhuberance!

If there were no mortgage debt to compete against, your savings could buy a nice house.

I disagree with that statement. If there were no mortgage debt to help you buy a home, there are always people richer than you buying multiple properties and preying on the poor would be even a bigger problem (renting).

I believe home prices should be at a level where richer folks can buy in cash, requiring regular folks to take on a mortgage.

We should not get upset that richer folks can afford to pay $500k cash for an entry level home.

"We should not get upset that richer folks can afford to pay $500k cash for an entry level home."
I disagree, unless the building of that home is paying the community back in some way (an estate that allows people to visit for some reason (education, recreation, etc.). The money people tie up in accumulating wealth represents resources that should be utilized to rebuild the soil, the air, the water, political stability, community skills, etc. The idea that it is OK to compete against our own future (storing wealth beyond our physical security needs) needs to be reevaluated in the context of diminishing fossil resources and increasing populations. We no longer have the luxury of waiting for the lazy Invisible Hand Job to decide for us who is 'good' and 'bad' when it comes to being part of the real world instead of the perpetual fantasy of capitalism.
People don't create wealth by themselves. It takes a relationship with other people to create that wealth, and when someone takes that wealth and ties it up in a ludicrous house or in nonlocal 'investment', then they break the social contract with those who helped them get rich. Granted, many of the masses aren't doing much to deserve a share of wealth (not taking care of their health, or their own property and relationships; not building their own skills, etc), but those who are claiming they deserve to be rich because they are more skilled or more intelligent still have some responsibility to those people they can take advantage of, if only for the sake of their own children to be leaders in a better world.

Auntiegrav,

From what you are suggesting, your idea of a perfect world is where it does not matter what profession you choose; the pay will be the same; 1 piece of bread per member of your household. There is nothing wrong with some one accumulating wealth by reasonable means to extrude themselves from the rest of the population by having better homes, cars, food, etc.

Properties are taxed which provides back to the community already. However, prop 13 seems to be blocking the purpose of it for many people.

We agree. Mortgage debt is a primary mechanism to do that massive transfer from the general population to the rich. But making the rest of us liable for that debt to the rich is even worse than the usual transfer. At least mortgages are voluntary. Taxes to bail out the rich are not.

Thanks for the info Patrick. Sounds like NYTimes is playing verbal acrobatics to try to justify the ballooned housing prices and defend the big banks yet again.

The only way to accelerate the drop in housing prices is to basically change societal beliefs and expectations around housing in general. The only reason starter homes in decent parts of the Bay Area are still at 500k price levels is because people are still paying those prices. Its all about rational people making often irrational decisions. The reasons you hear are often similar but boils down to one simple belief that buying a house brings some sort of stability. The usual reasons involves marriage and kids. I've more or less given up on even trying because places like the Bay Area seems to foster irrational behavior even from fairly smart people.

bgamall4 says

And even if prices decline, it is difficult for any except cash investors to take advantage of the bottom.

This is exactly how I feel about removing mortgages also.

And if mortgages never existed from day 1, most of us would not be ahead of the game in the rat race to save to purchase. The top few rats would have bought much more.

If anything, it should be the rich that should hate mortgages because it puts the 99% in the game. If there were no mortgages, building homes would not be viewed as profitable so the supply side of this would not have been this high in the first place.

It's easy to say we should remove mortgages after you've gone thru the system which enabled you to save enough money. Think about how we came to where we are today. It wouldn't have happened without mortgages.

Please write Obama and your Congressmen and ask for a complete end to mortgage debt subsidies, so we can accelerate the drop in housing prices.

Neither Obama nor my congressional repesentatives care for my opinion on anything. They have already made up their mind on everything.

bighorse says

And if mortgages never existed from day 1, most of us would not be ahead of the game in the rat race to save to purchase. The top few rats would have bought much more.

Isn't it this way in a lot of foreign countries, even today? As well as in the US at some point in the past.

bubblesitter says

considering phantom money as a wealth was NOT a good idea after all.

Yes, it was all counted as money, but it wasn't money.

Actually - given the system we have - it was money: just not yours, or the people spending it.

If I declare there are a billion shares of Patrick.net and then I sell one share for $1, does that make me a billionaire?

Amazingly, Martin Feldstein of Harvard would say yes.

Not sure what point you're driving here, according to Wall Street and most people who own stocks the answer is also yes. Are you just saying that people are naïve? I'd like to think most people on this forum already know that...

But to answer your question, I'm not sure how to force prices down. It seems that in many places prices are once again reasonable, but given the slight deflationary environment they can fall further still.

I can see two possibilities - one would be to start buying houses with considerable low-ball offers. This eventually drives all prices down, while bankrupting your local city (assuming it's been as stupid as most local cities).

The other would be to nationalize the banks and let the fed/federal government take the losses. Of course, that only works out with increased tax revenue. In the current political environment it risks bankrupting, effectively, the world, but it would drive down prices.

Of course, in that case, the people with money just end up owning everything and we return to a semi-feudal state but that, like all human conditions, is also temporary.

"People don't create wealth by themselves. It takes a relationship with other people to create that wealth, and when someone takes that wealth and ties it up in a ludicrous house or in nonlocal 'investment', then they break the social contract with those who helped them get rich."

Just because a person doesn't create ALL of the wealth by himself, that doesn't mean that his CONTRIBUTION to the overall wealth creation cannot be accurately measured and properly rewarded.

For example, let's say that you and I for some insane reason form a business. Should we take equal shares of the profits if I work 80 hours a week and you work 8 (assuming we produce the same quantity and quality of work per hour)? No, that would be unfair to me. Does it become more fair to me if you have a great need for the income, like five children to feed? No, this just confiscates the value of my labor to feed your children. How is this any different than slavery?

A philosophy of: "To each according to his effort, and from each according to his need" squares a lot better with principles of Yankee ingenuity, thrift, and work ethic than the socialist philosophy of "To each according to his need, and from each according to their ability."

bgamall4 says

I would like to agree with you, except that the 30 year fixed is the foundation of a strong middle class. The easy money mortgages of the last few years destroyed the stability of the 30 year fixed, crashed house prices, and pushed more money up to the top 1 percent.

Yeah the system does have some serious issues but I don't think removing the mortgage system is the way to go. These bail-outs assisted so much of the transfer in wealth. I can see why so many people are occupying Wall Street at the moment. The White House probably supports this as they are glad they are not occupying Capitol Hill :)

Patrick I have a question for you (and other democrats).

How can you support the democrats when one of your 'big issues' is you are against the artificial price supports/debt traps the gov provides to jack up house prices and make people debt slaves?
The R and the D are identical on this issue, no?

I am like Ralph Nader (an unreasonable man) - hes says both parties are same two headed corporate monster.

partial list of abominations:
(3% or less DP FHA, 400,000 federally subsidized loan mods and counting, foreclosure moratorium, bank bailouts, endless money printing to paper over bad loans so they dont have to foreclorse, etc, etc,etc S-8 vouchers used to buy a home, etc.)

let interest rates rise ...

End the blacklist periods for strategic defaulters, foreclosees, and short sellers, for a start.

Wrote a whole piece on it...
http://bayarearealestatetrends.com/2011/10/13/reconsidering-the-housing-crisis/

To those of us renting, patiently waiting for prices to drop enough, its very frustrating to see everyone working so hard and spending so much to prop up prices.

But then it's easy to understand. Most of the power is in the hands of people who own real estate and want to see the prices propped up. I don't see his plan as a solution, or as being fair. It would probably cause an extra decade of anemic growth. But who knows, maybe that is the best we can hope for ?

Certainly the financial institutions are in trouble if prices drop another 20%. And meanwhile money and interest rates are increasingly fraudulent compared to what we would have in a properly functioning economy.

The process of prices droppping is far from over:

http://www.sfexaminer.com/local/peninsula/2011/10/foreclosure-crisis-lingering-san-mateo-county-housing-market

The article refers to the growing load of reposessed properties in San Mateo County, one of the most resistant places to price drops.

And where is the prosecution of the fraud perpetrated on many ignorant home buyers by agents, banks,etc., who passed the crap loans up the chain without responsibility? I see plenty of blaming of starry-eyed would-be homeowners, but where's the responsibility of the carnival tent proprietors? They are the ones who made money from this process.

monkframe says

http://www.sfexaminer.com/local/peninsula/2011/10/foreclosure-crisis-lingering-san-mateo-county-housing-market

I see the news always talk about how banks are holding on to properties in Bay Area. But throughout the years, I can only spot a few. I'd like to see a list of properties by address that the banks are actually holding on to without a squatter inside preventing them from selling.

Whoever holds the note should have to pay taxes on real estate. This includes banks. If the banks had to pay all the taxes on foreclosed houses, then they wouldn't be able to just hold on them w/o bleeding money. Then the houses would be price to sell and local communities wouldn't have tax shortfalls.

Amazingly, Martin Feldstein of Harvard would say yes.

George W. Bush graduated from Harvard, and it wasn't even an undergraduate degree. A Harvard degree means nothing to me. If anything, I'd question someone's ability if they graduated from Harvard, Yale, or the University of Phoenix. They're all the same.

Now, an MIT or Cal Tech degree, I can see meaning something.

We let OBAMA know the bailouts backfired, (he does not seem to know)
We demand OUR money back !!!
We elect a president to protect PEOPLE, NOT fat cat banks !!!

J.K. You NEVER get anything back from any gubmint.

Auntiegrav says

I disagree, unless the building of that home is paying the community back in some way (an estate that allows people to visit for some reason (education, recreation, etc.). The money people tie up in accumulating wealth represents resources that should be utilized to rebuild the soil, the air, the water, political stability, community skills, etc. The idea that it is OK to compete against our own future (storing wealth beyond our physical security needs) needs to be reevaluated in the context of diminishing fossil resources

This really resonated with me. I'm not saying that I agree with all (or any) of it, because deciding what I think about this subject is difficult...but it speaks to how I feel about the topic, and it was presented better than I could say it myself. Well said, thanks for that.

-S

Market should have been left alone.

There is a difference between abolishing the entire mortgage model, and getting rid of the mortgage tax deduction.

Who here thinks the latter is still a good idea? All it does is encourage people with money to buy more house than they would have otherwise, and by people with money, I mean upper-middle income coastal dwellers from expensive places. Like, say, Silicon Valley.

Folks from places where homes cost less don't pay enough in interest to bother itemizing tax deductions.

Don't get me started on Prop 13.

We're already past the inflection point of the deflation so acceleration is negative.

"I see the news always talk about how banks are holding on to properties in Bay Area. But throughout the years, I can only spot a few."
Gotta look deeper for the shadow inventory.
If banks were fully exposed and revealed for their possessions, tbey would be revealed as insolvent.
Which some of them are.

Oh, and thank whomever for the Patrick point, I know it cost you a dollar, and I'm glad you're supporting the site.

monkframe says

And where is the prosecution of the fraud perpetrated on many ignorant home buyers by agents, banks,etc., who passed the crap loans up the chain without responsibility? I see plenty of blaming of starry-eyed would-be homeowners, but where's the responsibility of the carnival tent proprietors? They are the ones who made money from this process.

If the prices were not so inflated, but were around 1996-97 prices plus inflation and income growth, most likely half as much... no matter what loan the buyer had (Crap or otherwise) foreclosures would have NOT occured. Its not the loans at fault .. it the irrational buying by consumers who pumped prices beyond any rational reason.

If there were no mortgage debt, there would be no negative equity or foreclosures.
If there were no mortgage debt, the banks never would have had a mortgage debt crisis.
If there were no mortgage debt to compete against, your savings could buy a nice house

Buying with cash, or no mortgage debt, does not protect you from price drops. Its about having some common sense and money smart.

Those who stupidly overpaid, reap their own rewards of losing money.

Steven Spielberg Sells Malibu Home at a Loss (1998)

Not everyone is making money in the California real estate boom. Director Steven Spielberg just sold his oceanfront Malibu home, not his primary residence, for approximately $4.5 million or $1.5 million less than he paid for the property when he purchased it in 1992. His loss is his lucky buyer's gain.

http://realtytimes.com/rtpages/19980819_celebrity.htm

"it the irrational buying by consumers who pumped prices beyond any rational reason...."

That's true, but the consumer was aided and abetted by all the real estate agents, mortgage brokers, banks, securitizers, ad nauseum, who all made piles of money from crap loans that they knew many people would become trapped by.

bgamall4 says

thomas.wong1986 says

Those who stupidly overpaid, reap their own rewards of losing money.

I am actually tired of hearing this. If markets are manipulated and people don't know what things are worth, how can overpaying be stupid?

Buying something without knowing its worth can pretty easily be classified "stupid". Buying something just because the price is rapidly increasing is a pretty good metric as well.

Right now, interest rates are at the lowest they've ever been. Are people rushing out to borrow money? No? Well, not for houses anyway. Clearly, easy money alone doesn't cause the problem.

As to thomas.wong's comment, most people didn't "lose money" on the deal. They may have sold for less than they paid, but thanks to ol' Bushie they no longer have to claim the difference as income, as they should, so the losses fall onto the banks and the public.

And as to monframe's comment, let's not forget the people who bought the mortgage bonds ... most likely some of the same people who just made a mint flipping their overpriced house. The sellers certainly knew the house's true worth.

bgamall4 says

cc0 says

Buying something without knowing its worth can pretty easily be classified "stupid". Buying something just because the price is rapidly increasing is a pretty good metric as well.

Monday morning quarterbacks are a dime a dozen, don't you think Thomas?

I have no idea what you're talking about. I've been telling people not to buy houses since 2002.

Now I know better.

bgamall4 says

Do you know how to diagnose your own illnesses to and fix the computer on your car? Not everyone knows what everyone else knows Thomas.

This thread has just gone absurd.

You don't need to be a car mechanic to know that buying something solely because the price is going up is a bad idea.

bgamall4 says

It is not absurd. You diagnosed the prices of houses in a way that most have no clue how to do. Very few people knew in 2002 that houses would peak in 2007 and fall back to as low as 1990 prices at the time of this post.

I'm not claiming any super-powers here. In 2001 I was shopping for a house. I finally found one that I liked that was a little out of my price range. I tried to offer what I thought I could afford and the listing agent said she wasn't even going to entertain it because she expected multiple offers over the listing price. I had no idea what was going on but knew that's not how things work. You list for more than you want, expecting to haggle. But prices kept going up, and I sat on the sidelines.

I didn't know when the peak was. I didn't know anything about real estate. I knew my income as a professional was higher than the majority of the people in this area and I was being priced out. I was scared by Realtors® saying I was being priced out of the market forever, but I had already decided what I would pay and I wasn't going to overpay because some schmuck told me "It's only $X per month".

Maybe I was lucky because in 1996 I went to a car dealer who refused to tell me how much a car cost. "We don't do that here," he said, "We only go by the monthly payment."

Say what? "I don't think so, buddy," says I, and leaves.

Maybe it was 2003 when I started saying not to buy houses, but it was somewhere around there when I heard people say that they were buying second homes and condos and time shares so they could flip them. If I knew what was going to happen, I would have flipped to some of these idiots but I didn't make a dime off this mess.

A few years later some of my younger friends started to say that they were going to buy a first house. This may have been 2005-2006 time frame. At this point it was simply blatantly obvious that things were overpriced. Houses that I'd looked at for $160k were now being listed at $280k. Someone else I knew sold his house just so he could rent. Here I said many times over not to buy. The only people who thought differently were greedy idiots who were buying for the sole reason that they knew that they were expensive. They just expected that to go on forever.

This is just plain stupid. Whether it's houses, stocks, tulips, or cabbage patch kids, buying things because they're expensive is stupid.

There is nothing absurd about criticiziing arrogance. If the financial system had thought people were as smart as you they never would have attempted the housing bubble in the first place.

Methinks you prescribe too much to malice that which can be adequately explained by ignorance. There's a lot of people on Wall Street who are a lot smarter than I am, but I'm pretty sure that the bubble was well underway (say, 2003/4) before anyone really realized what was going on.

What happened after that, though, was criminal. Or would have been hadn't Clinton deregulated it. But there were many forms of malfeasance so it's difficult to ascribe all of it to Clinton's legislation and Bush's being a crony lovin' moron. bah!