patrick.net

There is nothing magical about Fannie and Freddie loans, the government makes a shitload of money (now) on these things with the right level of insurance, qualification baseline and down payments.

It's just simply subprime lending and Fannie and Freddie borrowers pay an extradordinant sum (pissing money away). The private market will just pick it straight up (pay subprime rate as well) with modification and business as usual like the rest of the world. There will still be economic motivation to lend to subprime borrowers regardless if it is Freddie, Fannie or private bank.

Fannie and Freddie made something like 85B on pre-tax income on US opeations alone in 2013. That is by far the most profitable enterprise that makes money from just one country. Apple, a moneymaker themselves can only manage like 50B in pre-tax income in a worldwide market. Plenty will pick up the slack. There are 85 billion reasons why subprime lending will be here no matter what happens. The profit margins tell me Fannie and Freddie loans are too expensive already. Lenders are better off financing oustide of them anyway.

So hot guy Michael adds on to the article: "My father in law was a 22 year old college student, the son of blue collar Russian imigrants, with a wife and new baby. He was able to purchase a new home in Campbell California with his single income, something that older, high wage two income families struggle to do today. My father and grandparents have similar stories.
Over the long term, between the building department fees and regulations and Fannie Mae's price inflation, the government has not helped families looking to purchase a home."
Once again, I agree.

hrhjuliet says

Over the long term, between the building department fees and regulations and
Fannie Mae's price inflation, the government has not helped families looking to
purchase a home."
Once again, I agree.

The market is a function of many things, Fannie and Freddie is not even material in the overall scheme of things.

The wealthy who owns 2 homes now will be owners of 4 homes in the future. That's just the way it is going to be.

SFace says

It's just simply subprime lending and Fannie and Freddie borrowers pay an extradordinant sum (pissing money away).

Except that Fannie and Freddie don't securitize subprime loans, last I checked. Last I checked, there is no government regulation requiring them to do so.

During the housing bubble, FRE and FNM did hold subprime securities and other types of non-prime securities (such as Alt-A) in its portfolio, and the latter caused significant losses. However, even during the peak of the madness, Fannie and Freddie never suffered very many losses due to true subprime loans. They did suffer more losses due to other types of loans that are lazily called "subprime" by the media, but aren't traditional subprime loans. Look at the losses at Fannie and Freddie due to "loans similar to subprime" and Alt-A on the third page of the article:

http://online.barrons.com/article/SB120493962895621231.html?mod=article-outset-box&page=3

I'd also note that Fannie and Freddie never had as many subprime and other non-prime loans as most private banks did in their portfolio and that their share of the loan market dropped as the bubble progressed. Their subprime portfolio tended to perform better than private banks' subprime portfolio too.

There's a lot of detail here if you're interested:

http://www.ritholtz.com/blog/2011/12/fannie-and-freddie-fantasies/

It is one of many factors, but Freddie and Fannie still have to be done away with. The institution is waste of time and money.

corntrollio says

Except that Fannie and Freddie don't securitize subprime loans, last I
checked. They did securitize some Alt-A loans, which were believed to be as
secure as prime, but were not underwritten in the same way. This caused some of
their losses, but traditional subprime never really did.

Of course it is subprime. You pay for it in the upfront fees and insurance. The substance is the same. Those things piss money away which is the very substance of subprime.

hrhjuliet says

It is one of many factors, but Freddie and Fannie still have to be done away with. The institution is waste of time and money.

Look at what happened over the last 3-4 years. The rich/hedge funds snapped up all the houses as soon as prices got below rental parity. Fannie/Freddie or not, prices will not drop below rental parity for long...

SFace says

Of course it is subprime. You pay for it in the upfront fees and insurance. The substance is the same.

No, it's not. It sounds like you don't know the difference.

Loans are evaluated for credit, capacity to pay, and collateral. Subprime loans have lower credit, but have good capacity to pay and good collateral. These are not the same as the various flavors of non-prime loans that private banks issued during the boom.

Maybe you're thinking of FHA or something else. FHA is not securitized by FNMA or FHMLC. I believe GNMA handles FHA-based securities for the most part, and they never had any issues with them.

"If average home prices were still twice the average income"

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

that ship sailed a long time ago.

Average household income is $50,000. A $100,000 mortgage at 4.5% interest has a monthly PITI etc. of $600/mo, which is easily affordable on a $50,000 income. Too easily, which is why home prices are higher, since we all bid up the price of housing to the edge of our affordability, or beyond, if the bank is stupid enough to lend us the money.

This nation is funneling $2T/yr into housing:

http://research.stlouisfed.org/fred2/series/DHUTRC1A027NBEA

as percent of income:

http://research.stlouisfed.org/fred2/graph/?g=tq5&dbeta=1

this has risen to double the proportion it was in the 1950s, largely thanks to two-income households bidding up the cost of housing.

Housing in all desirable areas is in great scarcity, that's what makes desirable areas desirable, not too many fucking people.

Bellingham Bill says

Housing in all desirable areas is in great scarcity, that's what makes desirable areas desirable, not too many fucking people.

And only people who can afford to live in desirable areas. The riff raff cannot get in.

hrhjuliet says

but Freddie and Fannie still have to be done away with. The institution is waste of time and money.

I disagree. We need a 'public option' for housing finance, too, where life necessities like housing don't get sucked into the 1%'s maw.

I'd rather the interest I'm paying on a mortgage go to DC than some hedge fund in the Caymans.

Bellingham Bill says

hrhjuliet says

but Freddie and Fannie still have to be done away with. The institution is waste of time and money.

I disagree. We need a 'public option' for housing finance, too, where life necessities like housing don't get sucked into the 1%'s maw.

I'd rather the interest I'm paying on a mortgage go to DC than some hedge fund in the Caymans.

+1. That's the whole point, the money will inevitable flow somewhere.

tatupu70 says

And only people who can afford to live in desirable areas. The riff raff cannot get in.

Prop 13 is a beautiful thing. My BIL is an extremely hard-core libertarian/conservative. They're renting a $900,000 place in a very nice part of LA that was inherited and has a Prop 13 value of $500,000.

We don't get into politics much, well I don't, but I like picking around the edges of this reality he's stuck in, paying sky-high rent to someone who's doing absolutely nothing to earn this money. . .

The contradictions are heightening. . .

Bellingham Bill says

tatupu70 says

And only people who can afford to live in desirable areas. The riff raff cannot get in.

Prop 13 is a beautiful thing. My BIL is an extremely hard-core libertarian/conservative. They're renting an $900,000 place in a very nice part of LA that was inherited and has a Prop 13 value of $500,000.

We don't get into politics much, well I don't, but I like picking around the edges of this reality he's stuck in, paying sky-high rent to someone who's doing absolutely nothing to earn this money other . . .

The contradictions are heightening. . .

My neighbor once responded. I have been paying property tax for 40 years (in inflation adjusted amount), how long have you?

Well you know, If you hold 900K worth of Edison Electric stocks, you have done nothing to earn the 40K in dividends too.

SFace says

My neighbor once responded. I have been paying property tax for 40 years (in inflation adjusted amount), how long have you?

Well, if the property is being rented, then the renter is paying the property tax to the property owner. That's sort of how the system works. People who are not renting their properties are paying their own property taxes.

In any case, property taxes in CA are a joke. Local governments are largely supported by state income tax proceeds kicked to them by the state government and sky-high sales taxes, so who cares what your uninformed neighbor says?

Heraclitusstudent says

The purpose of Fannie/Freddy is to push debt, make people debt slaves, artificially inflate housing, and maybe use the increased debt as a short term stimulus of the economy.

When Democrat politicians say "affordable housing" they really mean "unaffordable housing".

What are Fannie/Freddie doing that makes rents go up? Unless you can answer that, you can't make an argument that they are increasing house prices.

control point says

Yeah, declining prices is just what will encourage homebuilders to increase the supply of houses.

That's a BS argument: Homebuilders can build new homes for $250K. That's about the average price of a NEW house in the US.

That's way below the median price of *any* house in CA.

hrhjuliet says

I do not believe in blaming the democrats, but I do believe what you wrote above is correct.

Democrats are hypocrites. Republicans are irrational. I hate republicans even more on that account.
But I won't vote for politicians that do everything possible to inflate housing prices.

Heraclitusstudent says

hrhjuliet says

I do not believe in blaming the democrats, but I do believe what you wrote above is correct.

Democrats are hypocrites. Republicans are irrational. I hate republicans even more on that account.

But I won't vote for politicians that do everything possible to inflate housing prices.

Agreed. Here is what I purposed on Patrick's latest thread:
How about both conservatives and liberals joining together and demanding to end all campaign financing and setting all elected officials pay to the minimum wage? Wouldn't that automatically guarantee a better caliber of elected officials?

The internet could then be used for its original hope: direct democracy. A web page could be created were anyone could sign in as a candidate. Each candidate would be asked 100 important questions, plus have to state how important each issue is to them in percentages. The sign-up to run for office would not be complete until all questions were answered. That would be each candidate's "payment." There would be a place on each candidate's sight for Q&A and a bio. The website could have a test to see who your views are in alignment with to help narrow down different candidates to explore. The test could be the same 100 questions and same percent scale.

The fact Realtors are lobbying heavily for housing market subsidies tells you everything you need to know above such subsidies.

http://www.chicagonow.com/getting-real/2013/12/realtors-just-love-those-government-housing-market-subsidies/

Heraclitusstudent says

The fact Realtors are lobbying heavily for housing market subsidies tells you everything you need to know above such subsidies.

http://www.chicagonow.com/getting-real/2013/12/realtors-just-love-those-government-housing-market-subsidies/

Figures.

control point says

http://research.stlouisfed.org/fred2/graph/?g=toT&dbeta=1

Housing affordability is significantly higher than it has ever been.

Didn't NAR change their formula to make it so more people found housing "affordable"?

Heraclitusstudent says

That's a BS argument: Homebuilders can build new homes for $250K. That's about the average price of a NEW house in the US.

That's way below the median price of *any* house in CA.

Except that in certain parts of CA, it costs significantly more to build due to fees and permitting and other government requirements.

tatupu70 says

What are Fannie/Freddie doing that makes rents go up? Unless you can answer that, you can't make an argument that they are increasing house prices.

What are Fannie/Freddie doing to make rents go down?
Unless you can answer that you can't make an argument we need them.

tatupu70 says

What are Fannie/Freddie doing that makes rents go up? Unless you can answer that, you can't make an argument that they are increasing house prices.

The market does not operate in a vacuum. If owning housing is subsidized, causing prices to go up, then renting prices will usually go up too, whether it's to pay off those more expensive housing or just to fill the gap.

Take away the subsidies, and the price of housing should go down, and theoretically rental prices should go down too, but none of this operates in a vacuum, and it doesn't happen immediately.

The price of a rental is theoretically the cost of owning plus a profit (a penalty for liquidity or whatever you want to call it), but market distortions can change the formula and it may shift around a bit sometimes based on various conditions, but should apply over the long-run if there aren't distortions.

corntrollio says

Didn't NAR change their formula to make it so more people found housing
"affordable"?

Call it Crazy says

Right... Go look at the source for that graph: NAR!!! Yep, totally unbiased
data....

You guys are such douches..

http://research.stlouisfed.org/fred2/graph/?g=tqP&dbeta=1

Interest carry cost of median home compared to median income. 20% down.

Historical numbers, not NAR numbers. I just used math.

corntrollio says

The market does not operate in a vacuum. If owning housing is subsidized, causing prices to go up, then renting prices will usually go up too, whether it's to pay off those more expensive housing or just to fill the gap.

Take away the subsidies, and the price of housing should go down, and theoretically rental prices should go down too, but none of this operates in a vacuum, and it doesn't happen immediately.

The price of a rental is theoretically the cost of owning plus a profit (a penalty for liquidity or whatever you want to call it), but market distortions can change the formula and it may shift around a bit sometimes based on various conditions, but should apply over the long-run if there aren't distortions.

A very good answer to a good question. Thank you.

Call it Crazy says

YOU posted the graph with the NAR as the source of the data...

The new graph tells the same story as the NAR graph. Ergo, the NAR graph is at worst, directionally correct. At best, it is absolutely correct.

Either way, your ad hominem to the point is inaccurate.

Now, do you want to actually debate something here with facts of your own, or are you going to continue with logical fallacies that don't even stand up to 5 seconds of scrutiny?

corntrollio says

The market does not operate in a vacuum. If owning housing is subsidized, causing prices to go up, then renting prices will usually go up too, whether it's to pay off those more expensive housing or just to fill the gap.

I disagree. If owning is subsidized, causing more people to own, it will necessarily cause less people to rent and drive rental costs down. Renters don't care what your house payment is. It's supply and demand.

corntrollio says

Take away the subsidies, and the price of housing should go down, and theoretically rental prices should go down too, but none of this operates in a vacuum, and it doesn't happen immediately.

See answer above--I completely disagree.

corntrollio says

The price of a rental is theoretically the cost of owning plus a profit

The price of a rental is supply and demand. I guess in the infinite long run it is cost of owning plus a profit, but that never occurs. Because everyone's cost of owning is different.

Heraclitusstudent says

What are Fannie/Freddie doing to make rents go down?

Unless you can answer that you can't make an argument we need them

They are reducing the number of renters. That should reduce rental prices.

Why can't we go back to housing prices being about twice the median income? Normal markets price adjust all the time. What would happen if Freddie and Fannie were eliminated? What if at the same time we tightened regulations for foreign investors, or better yet, made it a law that only tax paying citizens can purchase property? We could tax the 1% their share and force everyone the government bailed out to pay back the government at 14% interest. How about more afforadable housing? How about a tax on anyone owning more than one home? How about eliminating prop 13 while on this roll? If all that happened, and it could (and we the people could push for all of the above) then where would housing prices be?

Businesses and governments rise and fall. Is it impossible to imagine that housing prices could go back to former healthy numbers? Is the American housing market the most infinite institution in all of history? Is the American housing market and our government immune to change in a way no government or business has ever been before?

It takes some nerve to be so dishonest as to argue that houses are at their most affordable, while at the same time most expensive when you consider the price tag.

Yea, we all know that rates have never been lower, so the fuck what? What kind of asshole wants to finance a house with a 30 year mortgage? Anchored to 30 yrs worth of exhorbitant PMI?

I want to buy a house with cash, hence, an honest person would not dare to muddy the conversation with such bullshit as "housing is more affordable now, than ever.

Is it just coincidence that these lyijg ASSHOLES! All cheerlead the democrap party while blaming all societies ills on republicans. The same people that blindly support the affordable care (republican) act.

How can anyone take these people seriously if they are willing to be so dishonest on this particular issue,,,,the entire point of this website and its forums existence

errc says

Yea, we all know that rates have never been lower, so the fuck what? What kind of asshole wants to finance a house with a 30 year mortgage? Anchored to 30 yrs worth of exhorbitant PMI?

Why is renting for 30 years OK, but paying a mortgage for 30 years is being a debt slave?

If you don't want to pay PMI, then save some damn money and put 20% down.

hrhjuliet says

Why can't we go back to housing prices being about twice the median income?

get the specuvestors out of the market would have to be the first step.

http://www.zerohedge.com/news/2013-11-25/70-brooklyn-home-sales-are-hedge-funds-investors-and-international-buyers

How about more afforadable housing?

Housing is housing, the price level is largely set by the need for it and how much we are able to pay vs. the mix of available homes. Price is the sorting mechanism for who gets what from the mix, not what you get per se.

If by "affordable" you mean subpar quality aka "shitty", then that's not the place we need to save money on, all that will result is us paying more for shittier places to live.

What is actually needed is more QUALITY housing supply. Not gold-bricked $500/foot that developers prefer building, but decent stuff that ticks everyone's checklist for "reasonable" build finish and amenities and won't fall apart in 10-15 years.

How about a tax on anyone owning more than one home?

That would be good. We can imagine a lot better ways to penalize, er, de-incentivize, land-hoarding. Parcel taxes, rent taxes, land value tax. . .

then where would housing prices be?

absent more supply than the demand, whatever we are able to borrow, or whatever cash buyers want their cash-on-cash yield to pencil out at.

So if landlords can rent out a place for $1100 -- call it $12,000/yr gross -- $120,000 would give them 10% gross yield, $240,000 would be 5%.

With 4.25% interest rates, a family who can handle a PITI etc of $1200/mo can buy a $220,000 place (with 20% down).

The thing about real estate is this:

https://research.stlouisfed.org/fred2/series/CUUR0000SEHA

wages go up, rents go up.

it's a brutal cycle. breaking it is tough; even the nordic socialist paradises have screwed themselves with housing borrowing debt, and the periphery -- Spain, Greece, Ireland -- doubly so. Only Germany and maybe France is doing OK here, and I guess the former communist bloc, since they started with zero mortgage debt in 1990 at least.

India is horrific for housing, as is China. Maybe Mexico is OK but consumer credit doesn't exist there basically. UK, home of "buy to let", is screwed.

Japan blew themselves up with housing in the late 80s, but at least their ongoing depopulation should result in continued collapse of real estate -- when one out of four houses are empty, prices simply HAVE to go down.

http://www.japantimes.co.jp/news/2014/01/07/national/abandoned-homes-a-growing-menace/

Housing is a really peculiar sector of the economy, since land cannot be manufactured or shipped, yet it is considered capital anyway.

Obscuring this peculiarity is partially how the rich stay that way. It's really quite something.

We're so immersed in land economics that we cannot really see them for what they are. Just like fish in water, or worms in soil, do not think about the reality of the medium they're living in.

control point says

You guys are such douches..

http://research.stlouisfed.org/fred2/graph/?g=tqP&dbeta=1

Interest carry cost of median home compared to median income. 20% down.

Historical numbers, not NAR numbers. I just used math.

Well, you're the one who used NAR data, not me.

I don't know if medians are fully accurate for housing prices, but it'll do. I would include principal + interest + tax + insurance, although ideally it'd include maintenance too.

Even if principal comes back to you, you will eventually have to pay it. That's why I'd much rather pay 8% on a $300K loan vs. 3% on an $800K loan. The interest cost in the first year is roughly the same, but I can pay off the former much quicker and if the interest rate drops, I'm golden.

tatupu70 says

I disagree. If owning is subsidized, causing more people to own, it will necessarily cause less people to rent and drive rental costs down. Renters don't care what your house payment is. It's supply and demand.

That assumes that all of the housing being purchased are being newly occupied and not part of existing occupied housing stock, right? The reality is that assumption is false -- if renting is no longer a viable enterprise, landlords will sell houses to these new owners, so in the long-run. What you're saying shouldn't happen or else there would be a lot of vacants.

If you are a proper investor, if you're not getting the right percentage return on your rental, you should sell and deploy your money elsewhere. Why take the risk if the return sucks?

Someone on PatNet recently suggested that 3% would be an appropriate return on a house in Palo Alto, but that only works if you're speculating. When you're getting 2.7% on 10-year government bonds, 5% in intermediate bond funds, and some crazy number in the stock market, it's stupid to risk your money for 3% on speculation.

hrhjuliet says

Why can't we go back to housing prices being about twice the median income?
Normal markets price adjust all the time. What would happen if Freddie and
Fannie were eliminated? What if at the same time we tightened regulations for
foreign investors, or better yet, made it a law that only tax paying citizens
can purchase property? We could tax the 1% their share and force everyone the
government bailed out to pay back the government at 14% interest. How about more
afforadable housing? How about a tax on anyone owning more than one home? How
about eliminating prop 13 while on this roll? If all that happened, and it could
(and we the people could push for all of the above) then where would housing
prices be?

Politics in a nutshell. 50% wants something and the other 50% doesn't. It is a waste of time. The reason you are for somemthing is also something many are against for the same reasons.

In a capitalistic society, resources are scarce and things people like are coveted and competed for. Things will always get more competitive, not less competitive in the future.

corntrollio says

That assumes that all of the housing being purchased are being newly occupied and not part of existing occupied housing stock, right?

Nope--just that people have to have a place to live. So, they either buy or rent. Those are your two options. corntrollio says

If you are a proper investor, if you're not getting the right percentage return on your rental, you should sell and deploy your money elsewhere. Why take the risk if the return sucks?

Yes--I agree.

tatupu70 says

Nope--just that people have to have a place to live. So, they either buy or rent.

Right, but what you're saying can't really happen easily in the long-term.

tatupu70 says

I disagree. If owning is subsidized, causing more people to own, it will necessarily cause less people to rent and drive rental costs down. Renters don't care what your house payment is. It's supply and demand.

Let's go back to the quote above -- you can't say it's supply and demand and then say that the rental market will act completely independently of the purchase market. Those markets are intertwined, as you apparently agree now. If there are fewer renters, then fewer people will be landlords because it won't be as lucrative, so rents can't go down independently in the long term.

hrhjuliet says

Why can't we go back to housing prices being about twice the median income? Normal markets price adjust all the time. What would happen if Freddie and Fannie were eliminated? What if at the same time we tightened regulations for foreign investors, or better yet, made it a law that only tax paying citizens can purchase property? We could tax the 1% their share and force everyone the government bailed out to pay back the government at 14% interest. How about more afforadable housing? How about a tax on anyone owning more than one home? How about eliminating prop 13 while on this roll? If all that happened, and it could (and we the people could push for all of the above) then where would housing prices be?

Name one thing from above we shouldn't push for, and if we shouldn't, why?

corntrollio says

Except that in certain parts of CA, it costs significantly more to build due to fees and permitting and other government requirements.

That's exactly the point: subsidize demand, penalize supply.

That's the game they play to raise prices, and this is plain evil.

corntrollio says

Let's go back to the quote above -- you can't say it's supply and demand and then say that the rental market will act completely independently of the purchase market. Those markets are intertwined, as you apparently agree now. If there are fewer renters, then fewer people will be landlords because it won't be as lucrative, so rents can't go down independently in the long term.

I've always agreed that they are intertwined. In the long run, the only thing that can lower house prices is more supply. Freddie and Fannie have no effect. But they do allow people who would be renters for life the opportunity to buy. Which takes money from the landlord's pockets and puts it in the back in the pockets of the new homeowner. IMO, that is a good thing.