patrick.net

Can't dispute the hot guy who posted on this article.

The working class do not qualify in places like the Bay Area. Plus, the gentleman is right, it will only make prices inflate, which also makes rental prices increase, which continues to bar the working class out.

I wish that was the case. Rental prices are too high for the working class. When someone buys a home at an inflated price with an expectation of renting it out to help buy off the mortgage, or make their investment work, they jack up the rental price. I can't begin to tell you how many friends have had their rent increased because their new landlord needs to pay off a large loan. In the Bay Area working families often share 900 square foot apartments and homes, sometimes three families to one apartment. The rent is too high for the working class.

Heraclitusstudent says

If you help the poor, you price out the middle. This should be obvious. The rich will not be priced out and will still buy the same percentage regardless of everything else.

The only thing that can help home ownership access is more supply and lower prices, not more demand.

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

Rentals and owner occupied homes are substitutes.

If you increase the demand for owner occupied homes, you lower demand for rentals. If you lower demand for rentals, you lower rents.

If you decrease the demand for owner occupied homes, you increase the demand for rentals. If you increase the demand for rentals, you increase rents.

Providing an avenue for potential middle and lower income homebuyers to become qualified market participants does increase demand and prices for owner occupied homes - but it hurts landlords by increasing the capital outlay for properties (by increasing prices) and lowering demand for rental supply.

Anything that hurts rent seeking is a.ok in my book. Anything that mutes the sucking sound to the top should be encouraged.

There are homes in the Bay Area under $416,000? How will a mortgage on a house this inflated not make a debt slave out of someone making under $70,000? If rent is so low, shouldn't the poor rent instead of buy?

hrhjuliet says

Wouldn't an overall decrease in prices be a bigger boost to the working class?

Yes.

I think they should reinstate 20% down. Otherwise prices go up by how much government is going to back in lending... that helps no one other than a few middle men who collect commission on selling a loan to FN/FR.

hrhjuliet says

Wouldn't an overall decrease in prices be a bigger boost to the working class?
How about loosening the reigns of the permit department, and building more lost
cost housing?

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

hrhjuliet says

If average home prices were still twice the average income, like the used to be,
most middle-class people could afford a home.

You mean when interest rates were 14%?

P&I at 14% on a $80k loan is $947.90
P&I at 4% on a $160k loan is $763.86.

control point says

hrhjuliet says

If average home prices were still twice the average income, like the used to be,

most middle-class people could afford a home.

You mean when interest rates were 14%?

That is an extreme. Most rates were around half that. What is a better scenario for someone who makes $70,000 a year: an average home priced at $140,000 with a 7% loan, or an average home priced at $600,000 with a 5% loan? If you had to choose, what would you pick? Why?

control point says

You mean when interest rates were 14%?

Why not? They function best going up and down, that is their natural state, as opposed to ZIRP. The more an economy is debt financed, the riskier it becomes and the bigger the crashes become. This is simple logic as debt is a promise on forward labor, the longer the riskier. People may lose their jobs, become disabled, die, abandon their agreements, leave the country and the only people who made out were the middle-men (real estate "agents", lending brokers etc.) and even the banks, provisioned that they get bailed out. You want mostly cash transactions or very short loans, max. 5 years, maybe 10 to the extreme, everything else is bullshit and leaves the burden on the future generations if and when it comes crashing down.

hrhjuliet says

In the Bay Area working families often share 900 square foot apartments and homes, sometimes three families to one apartment.

My understanding is that a similar situation exists in LA. I ran across an electrician down here (in Houston), we got to talking and he told me he was from LA. I asked why he left, he said he was making almost $40 an hour, full time work, but he was having to share an apartment (2 bedroom I believe) with 5 other guys to make ends meet. The ends met comfortably but still, it was a LOT of money. Here in Houston, he took a pay cut but is able to live with his family in a 2200 square foot house, that he bought, has a new truck and money left over at the end of the month.

Call it Crazy says

I bought my first home when rates were around 12%...

BUT, I didn't pay 5x or 6x my income for it.....

Artificially suppressed (QE) interest rates are what caused the normal purchase ratios to climb to where they are today....

Oh, you must have bought during the Carter admin too!!! Yeah, my first house, we got on a blind assumption (unheard of today) and got 'in' at a fantastic 10% rate. My first house was 1200 square feet and the price was $50K. We refinanced once before we moved and dropped that rate all the way to 8%. Sold it about 10 years later for double what we had paid for it.

Call it Crazy says

They are building more low cost housing, it's called multi-family or apartments:

AKA - crap. Damn I hate apartment and condo living. To me, it's not living, it's just a well appointed prison.

hrhjuliet says

That is an extreme. Most rates were around half that. What is a better
scenario for someone who makes $70,000 a year: an average home priced at
$140,000 with a 7% loan, or an average home priced at $600,000 with a 5% loan?
If you had to choose, what would you pick? Why?

Well anyone can pick numbers out of the sky to make their case, however, there is a metric that tracks this, here:

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

Housing affordability is significantly higher than it has ever been.

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.