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Negative Amortization Anal Voodoo Loan Product

Where is surfer-X?

I love how the FED is "politically independant" but has to be influenced by the government department that calculates inflation. Still have the hands on the levers really.

8-9% prime lending rate sounds about right. It may be politically infeasible to implement though.

(sorry about typo, I did mean inflation at 6% in previous post)

The politicians can actually stand back and say that it is actually driven by inflation.

AntiTroll, you're talkin' my language here.

(from thread intro):
5. Force the BLS (Bureau of Labor Statistics, a.k.a., “BuLlShit”) to start accurately reporting the true rate of inflation in the CPI (put energy, food, healthcare & education costs back in; eliminate statistical gimmickry like “hedonics” & substitution). This should help restore the missing “risk premium” in the bond and mortgage markets, and make recent buyers feel a little less “house rich” at the same time.

Only problem is, I'm not sure how to accomplish this. The political resistance to reflecting the true rate of inflation in the CPI would be enormous.

In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing, unfortunately.

I want to add that this is a natural tendency. This tendency is not going to change in the existing system.

Do the piggy back loans have equal standing to the 80% loan? Or in the event of a foreclosure, are they only paid IF there is money left over after the 80% loan is paid off?

Scott, not being a homeowner myself, nor a Realtor/broker, I can't answer all of these questions (any experts or spouses of experts out there? --SactoQt, Zephyr?). Nonetheless, I'm reasonably sure that piggyback loans also have to be repaid in the event of foreclosure. HELOCs are considered to be a revolving line of credit backed by the home's equity, but I'm not sure how these are treated in foreclosure.

If the sale of the home does not cover all of them 100%, then I'd assume the buyer is on the hook for the difference. Of course, the buyer can always file for BK (assuming they still qualify after the new "Bankruptcy Reform" law goes into effect this October ;-) ). Then the lender or MBS-holder gets stuck with the loss. If this starts happening in large numbers and the losses get very large, then it starts to get very "interesting" politically.

I agree with Face Reality, at least insofar as real inflation is already out of control, and the middle class is taking the hit.

Jack, now you are the doomsayer.

IMO, the middle class run themselves into this current situation through extreme collective individualism. (Collectively, the entire middle class is highly individualistic with short-term and materialistic goals)

I don't know which is more gloom and doom: hyperinflation or asset deflation?

Education? Out of reach. Health care? Out of reach. House prices? Out of reach. I saw 3 dollar a gallon gasoline signs today too. Forget arguing about a basket of groceries… the inflation ship has left the shore!

Waiting for wage inflation though.

Jack, there are many exciting ways to "profit" from inflation.

Jack, I do not really feel inflation in any major way yet. Perhaps because my "kids" do not need education, health case is mostly covered by company plan, and I rent.

Jack-
Maybe there will be a generational change in the middle class, and a new middle class will emerge.
I'm guessing it will professionals, no children , possibly imigrants, that have a different set of values to current middle class.

They will probably work hard, not speculate, build there own wealth through their own business's, not waste money on toys, or devaluing assets (SUV's etc).

I often wonder how middle class people can afford to have kids these days.

I wonder about the same thing. But the answer for much of the middle class is "unburied" debt.

I don’t know if calling it inflation is really the right thing. It doesn’t seem to be causing the vicious circle of increasing incomes and increasing prices. It’s just increasing costs without increasing incomes.

Actually, wage inflation is alive a kicking.
Factory wages have increased a fair bit in China.

Again, under globlaization we will see real wage inflation in the developing world and real wage deflation in the developed world.

One thing that’s clear is that housing has become less affordable in many places, in particular on the coasts. Other things have become less affordable as well, such as higher education and health care. In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing, unfortunately. Jobs and entire careers are becoming much more short-lived, pensions are eliminated, health insurance is scaled back, housing, education and health care costs are rising disproportionately to incomes, two incomes are becoming more and more of a necessity, etc. etc. I wouldn’t bet on any of these things going back to what they used to be as much as I would like to see things getting easier for people rather than more difficult.

The fact is people can only afford what they can pay for. This whole mess is a result of a credit bubble that is going to burst or slowly deflate as interest rates go up. You might be able to use the in-home ATM for awhile but at some point all this stuff is going to have to be paid for. Health care and education are really necessities and people are going to have to find a way to pay for them. Escalades and second homes are not necessities (to rational folk anyway) and can be sold off. I guess my point is the middle class is not going to be able to keep fueling this buying frenzy especially if jobs are harder to come by and costs are rising. There has to be a break even or just plain breaking point, and it seems to be getting closer and closer. My husband tells me that it takes the economy a year or so to show the effects of an interest hike. But the fed only waits a month or so to see what's happening and if there aren't drastic enough results they continue to raise rates. Since the fed has been on a year-long tightening schedule, we should only now or in the near future begin to see the effects. Since the fed has raised rates so many times, the effect may be way more drastic than folks are prepared for. Should be interesting at any rate.

It may make sense to discuss “bubble reform” if there’s some serious collapse, but that hasn’t happened, and all these predictions about massive price drops and foreclosures are just speculation at this point. There’s a tendency here to think that this already happened, is happening, or will inevitably happen....

One thing that’s clear is that housing has become less affordable in many places, in particular on the coasts. Other things have become less affordable as well, such as higher education and health care. In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing...

Face,

We are agreed that life is getting much harder for the middle class, and that other costs besides housing are rising faster than incomes. No doubt about that, regardless of how you fudge the CPI numbers.

Nonetheless, housing is rising even faster than healthcare & education, and has been for 5 years or more. We've seen nominal price gains of 200-300% in many areas on both coasts, feuled overwhelmingly by those I/Os, neg-ams & no-docs.

I just don't see how this trend can go on forever. In my mind, a correction/crash is inevitable, in order to bring housing back in line with equivalent rents and supporting incomes (the fundamentals). No, I don't think this will play out in 1 or even 2 years. I don't think nominal prices will fall to 1996 lows, either. But 2002 or 2001 levels is a distinct possibility.

IMO this can be considered a foregone conclusion. As always, you are free to disagree :-) .

Re: Inflation

Isn't the whole idea of the fed raising interest rates to prevent inflation? How much control does the fed realistically have?

Do u guys think high inflation helps or hurts housing prices?

Let’s say inflation goes from 2.5% to 7% for example.

Convential inflation (in which inflation bleeds into wage) will help housing prices. "Inflation" without wage increases wil have deflationary effects on housing because "real" wage is lower.

MP, again, I am talking about middle class housing. Prime markets have their own set of behaviors.

How about a 1% NAAVLP?

Don't they already have those??

If inflation is to rise, I would bet on commodity prices if corporations have no pricing power and stocks otherwise.

How about a 1% NAAVLP?

Don’t they already have those??

I saw a 0.95% Option ARM the other day.

Yes. I was just recognizing your (unintentional?) pun!

Ah, very clever. It was unintentional, but when I wrote in the word 'rate' I had a feeling someone would comment...

0.95% option ARM's. Too scary for me.

What?? Goats don't need to be educated??

I think he has cats.

Apparently not very well educated cats.

Maybe there will be a generational change in the middle class, and a new middle class will emerge.
I’m guessing it will professionals, no children , possibly imigrants, that have a different set of values to current middle class.

That's an interesting thought...I might consider that more of an idealogical class than an economic one. It's about time for a change in attitude towards goods and money. Perhaps because I've also lived outside the US , and I have a different perspective, but I simply can't understand the level of excess the "middle class" in the US aspires to--in terms of housing, clothing, cars...etc. There are necessities--and there's fluff. If you ask me, people are addicted to useless fluff, and it's getting them in trouble. In contrast, I save approx 40% of my take-home pay--plus max. contributions to my 401K. Admittedly, I've taken a different approach than most, but for me it's reassuring, and I hope it catches on.

MP
Do u guys think high inflation helps or hurts housing prices?

Chicken and egg stuff.
It would appear that prices have risen before wages.
Question is, will rates hurt people before wages can catch up?

There seems to be a general recognition that the U.S. is again in a greed fueled buying frenzy, which isn't new. And there seems to be yet another generation that wants it all and right now. But this isn't an American thing, it's a human one. A friend of my husband is currently living in Hong Kong, and he says they are really in the middle of a greed/buying frenzy. He says that wherever you go people are driving ferrari's, lamborghini's etc. etc. He just moved from San Francisco btw, so he's used to a certain level of propsperity. He say's that instead of the ubiquitous Escalade, in Hong Kong it's the ferrari.

Apparently not very well educated cats.

Can't afford to send them to school. :(

They will be illiterate cats. Can't even read Old Possum's Book of Practical Cats.

Pet teeth cleaning is a budget-buster these days! More expensive than sending the cats to Yale.

They do have health insurance though.

Keep in mind, that if CPI up and rates up, then exchange rate up, imports cheaper, local manufacturers suffer.

I think CPI would work fine. I believe (to the contrary of many) CPI is a pretty accurate gauge of general prices.

I tend to agree. Rent does accurately reflect housing cost net of the asset portion.

“KURT S: AMERICAN ODDITY”

(It’s catchy, dont you think?)

Does he keep a cat in his closet?

So let me see if I have this straight. Those who don't think there is a bubble believe that wages will increase due to inflation and that the middle class will continue to be able to afford their ridiculously overpriced sh**boxes? Where are the higher wages going to come from? We've discussed how companies are outsourcing at a growing rate to avoid paying existing wages. My husband tells me that a raising inflation environment is bad for business growth so I'm thinking that doesn't translate into more jobs and higher wages. Where are the jobs and wages going to come from? It think we're at a higher risk of seeing companies downsize in the face of rising inflation. That can only mean few availiable jobs at lower wages. Then where is our housing affordability level going to be?

Wow, lots of typos on that last one. Got ahead of myself I guess....

Also, there is a good reason why asset prices are not in the domain of CPI. Asset prices are very sensitive to monetary, as opposed ot macro-economical conditions, and therefore are not innate characteristics of the economical development.

I think this is the basis of the bubble.
BUT, what about the people who have bought these assets at high prices.
As a consumer they have locked in high holding (or consumption) costs.
The builders have also generated profits and therefore this should reflect in economic indicators.

What’s the “fluff” that those people are buying? Are we talking about cars? Ultimately, there’s only so much space in a house which puts a natural limit on the amount of furniture, TVs, etc. that you can have…

I don't know..... people seem to have an amazing ability to accumulate stuff. Clothing and jewelry don't require that much space, and women looooooove that. I bet people are entertaining more, so I'd love to see what liquor and food profits are like nowadays. Just a thought.