How to Stop the Drop in Home Values?

[Gerald]

HOMES are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs. But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters don’t want to provide any more help to the banks that made loans that have gone sour. But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.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. Nearly 15 million homeowners owe more than their homes are worth; in this group, about half the mortgages exceed the home value by more than 30 percent. Most residential mortgages are effectively nonrecourse loans, meaning creditors can eventually take the house if the homeowner defaults, but cannot take other assets or earnings. Individuals with substantial excess mortgage debt therefore have a strong incentive to stop paying; they can often stay in their homes for a year or more before the property is foreclosed and they are forced to move.

http://www.nytimes.com/2011/10/13/opinion/how-to-stop-the-drop-in-home-values.html?src=recg


Note: October 12, 2011

[Armistead]

Didn't we already try this by giving Banks large bailouts so they could rework loans, even though most did nothing but invest it as they pleased since there were no regulations or guidelines to how they used the money.

Banks are sitting on trillions in unused homes, if Chase bank alone flooded the markets with all the foreclosed homes they have at once it would drive prices down even more. The banks don't really care, the taxpayer already paid the cost of the home for them, it's just a double dip when they can sell them.

[Jimbuna]

Didn't we already try this by giving Banks large bailouts so they could rework loans, even though most did nothing but invest it as they pleased since there were no regulations or guidelines to how they used the money.

Banks are sitting on trillions in unused homes, if Chase bank alone flooded the markets with all the foreclosed homes they have at once it would drive prices down even more. The banks don't really care, the taxpayer already paid the cost of the home for them, it's just a double dip when they can sell them.

Yes, agreed...but I speak as a homeowner without a mortgage (if I'm to be honest).

[magicstix]

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

[Tribesman]

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...
Exactly.
Anyone who bought here in the last 10-12 years paid well over the odds(unless in was a special sale)
The homes here will stop dropping in value once they have dropped by about 70% and are once again at real values.

[MothBalls]

the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent.Horsehockey. It never existed in the first place.

The cost of land, labor and materials should determine the value of a home, nothing else.

Same thing for the price of gold. How much it costs to get it out of the ground and process the ore should be the determining value. People think gold is a safe investment, more horsehockey.

Same with the price of oil and gas, the cost of a vehicle, and the cost of food. Once we end speculation, futures and derivatives from the markets we will see prices correct themselves and stabilize. Won't happen though, it would totally screw over the 1% who make the most from it.

[em2nought]

The cost of land, labor and materials should determine the value of a home, nothing else.

The price of materials hasn't dropped at all. You can't build to current codes for the price of a foreclosure.

[August]

Other things have an effect on the value of a house as well. Location, history and architectural style for example.

[tater]

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

This.


It's important to realize that the US housing market is very different than most of the world, too. It is my understanding that in Europe loans are "consequence" loans. Meaning that walking away is not an option—if you do, you'll be out a house, AND have garnished wages, etc. The US system allows people to brush themselves off and start over, but also encourages speculation (particularly combined with pressure to loan to deadbeats, etc).

Best solution is to stop underwriting loans (by the government), so that banks have real risk so housing prices can come into line with reality.

[mookiemookie]

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

Winner, winner, chicken dinner.

Trying to muck with the market correcting itself only draws out the whole painful process longer. I agree with what he says about the wealth effect and whatnot, that's all true, but sooner or later we need to take our medicine and let the market find it's natural equilibrium.

Now if you want to talk about bulldozing excess supply, that's another intriguing story...



The cost of land, labor and materials should determine the value of a home, nothing else.



That's not the way economics works. The value of a good is determined not only by the factors you mentioned, but by its usefulness, it's scarcity, and the demand for it.

[August]

...but sooner or later we need to take our medicine and let the market find it's natural equilibrium.

Besides I seem to recall a lot of complaining just a few years ago about the lack of affordable housing. Surely this drop in house values will do a lot to address this...

[Herr-Berbunch]

In this country you didn't used to be able to get a mortgage for more than (IIRC) two-and-a-half times your annual salary as a couple, or three times as an individual.

So if I earnt £25k (which I did years ago, but don't now) I could've got a mortgage for £75k on my own.

Then came along self certification (under Labour for those interested!) and if I saw a house for £130k all I had to do was pretend to make £44k. As long as I could afford the initial repayments they offered - I was in a nice new abode worth almost double what I could've got a few years previously.

Then the interest rates would rise, other bills would rise, and hey-ho, I'd expect someone to come and help me out. That'd be you, the taxpayer! Why should my family and I lose out on this lovely home because somebody made me lie on a mortgage application form? Oooh, you've dropped interest rates, how kind, thank you banks. Sorry savers.

The above is all ficticious, I've never owned a house, or had a desire to, but I just think that those that lied should get their comeuppance! :stare:

[mookiemookie]

In this country you didn't used to be able to get a mortgage for more than (IIRC) two-and-a-half times your annual salary as a couple, or three times as an individual.

So if I earnt £25k (which I did years ago, but don't now) I could've got a mortgage for £75k on my own.

Then came along self certification (under Labour for those interested!) and if I saw a house for £130k all I had to do was pretend to make £44k. As long as I could afford the initial repayments they offered - I was in a nice new abode worth almost double what I could've got a few years previously.

Then the interest rates would rise, other bills would rise, and hey-ho, I'd expect someone to come and help me out. That'd be you, the taxpayer! Why should my family and I lose out on this lovely home because somebody made me lie on a mortgage application form? Oooh, you've dropped interest rates, how kind, thank you banks. Sorry savers.

The above is all ficticious, I've never owned a house, or had a desire to, but I just think that those that lied should get their comeuppance! :stare:

It was much the same here. People had the attitude that "hey the lender knows what they're doing, they wouldn't loan me the money if I couldn't repay it." But the lenders never cared about the loans being repaid. They sold them off to the securitizers on Wall Street to be packaged into garbage securities.

I would go so far as to say the number of loans made that don't rely on income verification and take the borrower's word for it should be a number around zero.

[Osmium Steele]

It was much the same here. People had the attitude that "hey the lender knows what they're doing, they wouldn't loan me the money if I couldn't repay it." But the lenders never cared about the loans being repaid. They sold them off to the securitizers on Wall Street to be packaged into garbage securities.

You are on the right track, just keep digging. It does not begin, nor end, with Wall Street. The private securitizers were a symptom, not a cause.

[Jimbuna]

In this country you didn't used to be able to get a mortgage for more than (IIRC) two-and-a-half times your annual salary as a couple, or three times as an individual.

So if I earnt £25k (which I did years ago, but don't now) I could've got a mortgage for £75k on my own.

Then came along self certification (under Labour for those interested!) and if I saw a house for £130k all I had to do was pretend to make £44k. As long as I could afford the initial repayments they offered - I was in a nice new abode worth almost double what I could've got a few years previously.

Then the interest rates would rise, other bills would rise, and hey-ho, I'd expect someone to come and help me out. That'd be you, the taxpayer! Why should my family and I lose out on this lovely home because somebody made me lie on a mortgage application form? Oooh, you've dropped interest rates, how kind, thank you banks. Sorry savers.

The above is all ficticious, I've never owned a house, or had a desire to, but I just think that those that lied should get their comeuppance! :stare:

Good post...iirc about 25 years ago you'd be allowed 2 1/2 time the main/larger wage earner + once times the lower wage earner.

3 x was indeed the max for a sole buyer.

Mind you, in those days you could depend on houses increasing in value on a month by month basis.

[mookiemookie]

You are on the right track, just keep digging. It does not begin, nor end, with Wall Street. The private securitizers were a symptom, not a cause.

Of course they were a cause. A huge one. Lack of oversight from regulators like the SEC and the Fed enabled garbage like Alt-A's, Low doc/no doc/NINJA loans to be made without any repercussions on the lender making the loan. The "lend to securitize" business model was how they operated - they made the high commission subprime loans and flipped them to the Street to be packaged up and stamped with a AAA credit rating from the ratings agencies. Why would the lender care if the loan paid or didn't? It was off their books.

Combined with completely asleep at the wheel regulators, the lend to securitize model is one of the largest cause of the financial crisis.

[Osmium Steele]

Everything you stated is accurate. What you left out was the securities were created in response to lenders accumulating the bad paper, not before. They were structured to get the loans off the books and help the lenders remain profitable. Thus, they were a symptom.

Now, why would lenders knowingly make increasingly large numbers of subprime loans, killing profitability, prior to having a way to unload them? Fannie and Freddie largely stopped taking sub-prime loans around this time.

Keep digging.

[AVGWarhawk]

Didn't we already try this by giving Banks large bailouts so they could rework loans, even though most did nothing but invest it as they pleased since there were no regulations or guidelines to how they used the money.

Banks are sitting on trillions in unused homes, if Chase bank alone flooded the markets with all the foreclosed homes they have at once it would drive prices down even more. The banks don't really care, the taxpayer already paid the cost of the home for them, it's just a double dip when they can sell them.

The banks are not lending unless your credit is stellar. And, yes, home values have dropped due to foreclosed homes going dirt cheap. Currently, my family would like a larger home. Normal stepping stones of home purchase for most is start small and go larger over time via selling the current home at a profit/down payment for the next. Currently, we are on the threshold of breaking even or at a small loss if we sold our home. This means we would have to save up with a down payment for our next home just as if we were starting all over again.

[AVGWarhawk]

You can't stop the drop in home values. They're dropping because they were overvalued in the first place...

Good point and I agree. Then again, a item is only worth what someone is willing to pay.

[AVGWarhawk]

Besides I seem to recall a lot of complaining just a few years ago about the lack of affordable housing. Surely this drop in house values will do a lot to address this...

The affordable housing issue was addressed by Fannie Mae and Freddie Mac at behest of the government. We see where that got us. They made it affordable on paper. Reality was something much different.

[mookiemookie]

Everything you stated is accurate. What you left out was the securities were created in response to lenders accumulating the bad paper, not before. They were structured to get the loans off the books and help the lenders remain profitable. Thus, they were a symptom.

Now, why would lenders knowingly make increasingly large numbers of subprime loans, killing profitability, prior to having a way to unload them? Fannie and Freddie largely stopped taking sub-prime loans around this time.

Keep digging.

If you're trying to get at the "blame CRA" argument, know that it's been absolutely obliterated.

And the data doesn't bear out your assertion:

Origination rates didn't increase exponentially until after 2001:

http://i.imgur.com/tjZF1.png

However securitization rates remained fairly stable prior to that in the early years of the runup (97-03) except for the dip after LTCM and the Asian crisis.

http://i.imgur.com/WzilR.png


If what you said was true, you would have seen high origination rates pre-2003, and then increasing securitization rates. That's just not the case.

You have to ask yourself what happened in 2001 to cause the acceleration in issuance? The Fed lowered rates to 1% and kept them there - money was dirt cheap and that fueled speculation. Asset managers scrambled for yield anywhere they could get it (look at the yields on emerging market debt from 2000 through about 2008 for another asset class that saw a pop due to this), and the demand for AAA rated subprime ABS with huge spreads was just what the doctor ordered.

[mookiemookie]

The affordable housing issue was addressed by Fannie Mae and Freddie Mac at behest of the government. We see where that got us. They made it affordable on paper. Reality was something much different.

FNMA seemed to work just fine for 70 years before the crisis.

[AVGWarhawk]

FNMA seemed to work just fine for 70 years before the crisis.


Yes, until a demanded to make affordable housing available to everyone. Reduce down payment. Create interest only loans. Sub-prime. Before all of this down payments were a substantial amount. Upwards of 11% or higher. So, a 200k home you would require $22,000 down at 11%. Fair chunk of change to save. For most unobtainable. So again, drop down payment. Be extremely creative with loans. Toss in the new found credit card extravaganza as a result of getting home loan credit...bingo...in the money pit. Foreclosure, housing crisis.

It is evident the creative loan making, reducing requirements for a substantial loan and some folks just not reading what they were signing made the bubble bust.

[mookiemookie]

Toss in the new found credit card extravaganza as a result of getting home loan credit...bingo...in the money pit.

Oh, no no, we sold the home equity line of credit as a smarter alternative to a credit card. My favorite line to use was "why pay 15-20% on a credit card, when you could open a home equity line of credit and pay 5%?" It worked well.

But to use the Nuremburg defense, I was young and stupid then and only doing what they told us to do. Now I'm no longer as young, but still stupid. :ping:

[AVGWarhawk]

Oh, no no, we sold the home equity line of credit as a smarter alternative to a credit card. My favorite line to use was "why pay 15-20% on a credit card, when you could open a home equity line of credit and pay 5%?" It worked well.

But to use the Nuremburg defense, I was young and stupid then and only doing what they told us to do. Now I'm no longer as young, but still stupid. :ping:

Truth be told Mookie, in 1989 I got a home loan on my first home. I had to fork over $13,000. I was provided a loan that was called ARM. A stupid adjustable rate loan. As you said, Nuremburg, young and dumb. I signed not really fully understanding the loan terms. Within 12 months the loan "adjusted" to a higher interest rate and mortgage went up a additional $175.00/month. I learned quickly/the hardway and refinanced to a conventional loan even quicker. For me, I was in a position to do that. For the others, not so much and the bubble bursts. As far as home equity, God love my mother, she always said you cannot live off your home equity. Do not refinance repeatedly looking to pay off bills. People did just that, refinanced several times. Or, some got second mortgages!

[mookiemookie]

Truth be told Mookie, in 1989 I got a home loan on my first home. I had to fork over $13,000. I was provided a loan that was called ARM. A stupid adjustable rate loan. As you said, Nuremburg, young and dumb. I signed not really fully understanding the loan terms. Within 12 months the loan "adjusted" to a higher interest rate and mortgage went up a additional $175.00/month. I learned quickly/the hardway and refinanced to a conventional loan even quicker. For me, I was in a position to do that. For the others, not so much and the bubble bursts. As far as home equity, God love my mother, she always said you cannot live off your home equity. Do not refinance repeatedly looking to pay off bills. People did just that, refinanced several times. Or, some got second mortgages!

Yup. They put a lot of pressure on us to offer every single person who came across our desk a loan of some sort. Refi this, refi that. I feel like in some small way I contributed to the whole crisis.

In most places, you'd get paid more for selling an ARM. That's probably why your loan officer got you to do that. The old "screw your customer" routine.

[AVGWarhawk]

Yup. They put a lot of pressure on us to offer every single person who came across our desk a loan of some sort. Refi this, refi that. I feel like in some small way I contributed to the whole crisis.

In most places, you'd get paid more for selling an ARM. That's probably why your loan officer got you to do that. The old "screw your customer" routine.

The ARM loan was offered for the reduced monthly payment that would conveniently work with my GROSS income. Never mind actual take home pay, expenses like eating not taken into consideration. :doh: As far as the pressure, it was to keep the numbers up and providing affordable housing for all no matter what it took or how you manipulated the numbers. Loan created and sold off 2 weeks later. Sweet deal for the banks I say. Until the floor came out underneath them.

So, you were an integral part of the collapse and degradation of society as we know it? :O:

[mookiemookie]

So, you were an integral part of the collapse and degradation of society as we know it? :O:


Shocking that I'd have a hand in screwing something up bigtime, isn't it? :woot:

[AVGWarhawk]

Shocking that I'd have a hand in screwing something up bigtime, isn't it? :woot:

Distressing. :O: