patrick.net

Remove government loan guarantees, and you’ll get private loan guarantees that might cost a little more. All risk has a dollar value attached to it, and currently the dollar value assigned to mortgage market risk is CHEAP! 1% or maybe 1.5% at the most.

Following this premise, why isn't there already a private lending institution falling all over itself to serve the strategic defaulter? Particularly the jumbo loan defaulter with hoard-loads of cash, but only one major blemish to their credit: foreclosure. Why is all of this money being allowed to languish on the sidelines? Perhaps the interest on the loan could be a little higher, or the down payment requirements more dear in order to offset the risk, but it seems to me that these private lenders/private guarantors whom you suggest are so eager to originate and guarantee all variety of home mortgages are really asleep at the switch where this demographic is concerned.

Incorrect.

The bankers made billions of dollars. They get to keep the money regardless of whether the bank fails or not. They couldn’t care less.

I don't think it's a closed book. Witness:

http://www.ritholtz.com/blog/2010/08/coming-soon-bank-ceo-perp-walks-jail-time/

gameisrigged says

It was also the implicit guarantee that banks won’t be allowed to fail. When you go to Vegas, what stops you from betting every cent you have in the world? The fact that you could lose all your money is what stops you.

The problem is that banks have in the past and continue to this day to fail. Did this implicit guarantee help IndyMac?

@tatupu,
I shop at WalMart very rarely, and do so at opening time. Their focus is on a demographic that I am not comfortable having to deal with, observe, or have observe my family. I feel I need a shower after a WalMart visit. The parents do not control their kids. The store is made a pig pen due to selfish behavior. The workers look frustrated and are normally dressed/made-up to look like about a 75% effort was made getting ready for work. So, I happily go to SaveMart for food (17 years now) -- super clean and first name basis with me and wife, plus they pay their employees a better wage, plus there is no spanish isle signs (its a personal thing), and the difference in price is more than made up by the comfort enjoyed ... in my opinion. For the non-food stuff that can be had at WalMart we go to a Target in a "whiter/richer/cleaner" town a little ways away. It is clean, the workers are nice, and I really like the wider-than-normal parking slots. I avoid door dings like the plauge.

@Doc Nomo,
B.Frank and his boyfriend at Fanny, plus leftist social programs, carry most of the blame for setting up the system to fail .. ala Piven and Cloward. In my uneducated opinion.

BAP--I'm sorry. I've just changed my example to SaveMart instead.

Also, I agree we're not Japan. But the whole 2-4 year thing is pretty bogus. Not saying it will take longer, but you really have to intentionally ignore the govt intervention during the past 1.5 years to believe that a) we have hit a legitimate bottom and b) that there is a time expiration on a market correction. It will correct until the fundamentals support the market, which they don't.

No shit wages are higher now. That doesn't mean houses should cost double what they did then.

klarek says

That doesn’t mean houses should cost double what they did then.

15 year rates are 3.5% now, vs 8% 10 years ago.

http://research.stlouisfed.org/fred2/series/MORTGAGE15US

$2500/mo TCO @ 8% buys you $350,000, at 3.5% it buys you $600,000.

Note also the conforming limit has been raised from $240,000 to $730,000 in this time.

But what happened during the bubble blow up of 2008-2009 was mass default, and the Fed and Treasury stepped in with several trillion of backstop money to replace the bad debts.
This created permanent new money in the system.
I agree, but just to clarify, the amount created/printed was $1+ trillion (definitely less than $2 trillion). A lot of backstop money was loan programs (with no outright creation). I still think there is a lot of debt repudiation that needs to happen before the system hits sustainable levels. At this point, the scenarios you lay out (ala Japan) seem the most likely way to get us where we need to go... slowly.... and painfully....

EBGuy says

the amount created/printed was $1+ trillion (definitely less than $2 trillion

Money is coming from both the Treasury and the Fed. Wait . . . doing research TARP only cost $66B

http://in.reuters.com/article/idINIndia-50953520100819

supposedly.

LOL, "only" $66B. That's a fuckton of money, or was. 60,000 $100k/yr wage-earners working for 10 years, the payrolls of AAPL and GOOG combined.

I definitely agree that $1+trillion is nothing to sneeze at -- the Fed more than doubled its balance sheet over the course of the crisis! But then again, Ben can just pull a lever and accounts get credited. That TARP money is actual debt. The Treasury has to sell bonds and T-bills; luckily, folks are still buying from the lender of (second to last?) resort, the US gov't.

klarek says

LOL that’s funny, can you back that up? Do you think 2003 = 2000?

In 2001-2003 the upper class got a massive tax cut, the middle class got access to all the money they wanted to borrow.

By 2007 this state of affairs led to the funneling of $6T+ of new debt through the system.

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

The money may have passed through the middle class' hands but it did not end there.

The debt sure has, though.

klarek says

d) 2000 was not pre-bubble, though that’s a minor quibble

2000 was certainly pre-bubble in areas w/o dotcom activity.

zillow doesn't have the 90s on their charts anymore, but 1992-1995 was a serious housing recession that was only levelled out by 1999. I was looking at $200,000 condos in Irvine back then so I should know :)

Interest rates were pushed up in the late 90s, which did put a damper on continued home price appreciation.

Yes, I understand. Your anecdotal evidence (your friends) are representative of the RE investor class of America. No RE investors were buying until coincidentally in Spring 2009, which caused the market to rebound. The credit had nothing to do with it, it was your friends. You might very well be part of the league of justice too. Save the housing market, battle super villains, etc.

Troy says

dude, you really don’t know what you’re talking about. I’ve been watching Jim The Realtor’s youtube stuff and the buy-side pressure has been significant.

I have watched nearly every video of his. So does that mean that you too don't know what you're talking about since my knowledge base overlaps yours? Or maybe I'd gain some valuable insight by using only anecdotal evidence of one realtor (albeit the only decent one in the biz).

RE investors have been snagging up properties for years. There's no metric out there to suggest this activity has increased. First time buyers, though, have increased. Call it a coincidence, but it swelled in between the time the tax credit started and when it ended, with a slow down in the middle (when the credit should have expired but was then extended). Housing sales, home prices, etc. ALL followed that trend.

Before the next few CS reports come out and you bulls have to tuck your tails between your legs, let's just pretend you're right for a second. Why did the market spike up right when the tax credit became active? What was it about that particular point that made your super-hero investor friends jump into the deepend where they wouldn't have before?

How is that one better exactly?

There’s a reason bear markets only last 2-4 years.

...however, this is a secular bear market.

To quote Harry Dent " The Best case is your house will be worth what it was in 2000 and at worst 1995" You will see real estate crash to levels you did not think possible. I for one happen to agree and see that being the case, and that is why I am looking for NAT. housing to get to 110-130 and East Bay to drop back to mid 1990's by 2014

Austinhousingbubble says

You assume I need help understanding what is a highly glossed-over premise. No, actually.

That's why I'm surprised you continue to argue against such an obvious point.

tatupu70 says

you can’t really justify why you think an outdated chart is better than the more recent one…

It doesnt take much brain power to figure out SF Bay Area prices tracked inflation over the past 25+ years except for the past 12 years due to insane reasons.

Outdated or not. Its simple to figure what prices should be in any one BA city for anyone home. That will be 1996-97 prices plus inflation (30-35%). Simple math and no need to look at anyone chart. Back to soberity!!

What does it mean for realtors and other vested interest ? They will see their take home earnings slashed by half to a third. Yes, the VI laugh at this...

Unfortunately, the details get lost in the haste. Your premise: if the government stepped away completely from the mortgage market as loan originator/guarantor supreme, private lenders/guarantors would be rushing to fill the void, albeit, attaching a necessary premium to offset the risk. I contend that if this were the reality, then we would already be seeing these same institutions rushing the void created by the newly dispossessed strategic default crowd -- particularly the jumbo prime loan defaulters with plenty of cash to play with. I also contend that the risk premium attached to any mortgages (particluarly, 30 yr conforming) would prove comparatively prohibitive to most families; think something along the lines of 30% minimum down, which is a number I most often see floated in this scenario. Even if a family had the 30%, the popular sentiment today is to start with as little skin in the game when it comes to home mortgages.

tatupu70 says

I’d argue that they should more closely follow wage inflation and not general inflation.

You can argue all you want! Salary/Wage increases by employers are pegged to inflation.
Talk to a corporate controller, company financial analyst or your HR department, you get the same story.

tatupu70 says

Why 1996-97 as your baseline? That seems a bit arbitrary…

If you been here, you would understand what a sober/normal period the early-mid 90s were.
Fact is we have fewer public companies and employees today than we had back in 1994.
315 Public companies in 1994 vs under 241 today. Our current number of employers are shrinking.

http://www.siliconbeat.com/2010/02/17/vanishing-public-companies-lead-to-the-incredible-shrinking-silicon-valley/

What void in lending are you talking about? Sub-prime? People without a down payment? There isn’t a void in lending and there wouldn’t be if government support ended.

I was referring to the prime jumbo defaulter with stellar credit minus foreclosure. Why is there not a private model in existence already for this class of borrower? It's a growing demographic that seems ripe for the picking for all these private lenders so eager to make these jumbo loans.

do think that sans government interference, we’d see higher down payment requirements. That’s a FAR cry from the doomsday scenarios painted here.

Much higher. Again, forget about 3.5% -- 30% seems most likely. Whether you paint it doomy or not, it'd effectively shave away a large portion of the borrowing public. And again, the popular mindset today is to have as little skin in a mortgage starting out as possible.

Of course, the more likely scenario is that prices would fall of a cliff, especially if this were accompanied by a rate hike. That, or some kind of government program, such as community service in lieu of down payment.

thomas.wong1986 says

You can argue all you want! Salary/Wage increases by employers are pegged to inflation.
Talk to a corporate controller, company financial analyst or your HR department, you get the same story

Well, that's not true. First of all, we're not talking about salary increases. We're talking about wage inflation. Those are two different things. Second--your employer may tie salary increases to inflation, but not every company does. Most look at salary surveys, etc. It's kind of difficult to pay someone who has been there 10 yrs. less than a new hire out of school--but that's what may happen if you only use inflation.

thomas.wong1986 says

If you been here, you would understand what a sober/normal period the early-mid 90s were.

So, why not use 1992 as your baseline then. You chose a mid to late 90s year. Anyways, what you consider sober/normal may not be so.

tatupu70 says

So, why not use 1992 as your baseline then. You chose a mid to late 90s year. Anyways, what you consider sober/normal may not be so.

Fine with me... use 1992 if you like.

tatupu70 says

Well, that’s not true. First of all, we’re not talking about salary increases. We’re talking about wage inflation. Those are two different things. Second–your employer may tie salary increases to inflation, but not every company does. Most look at salary surveys, etc.

Survey is called the Bradford Salary Guide and it is tied to inflation. If you noticed, any employers who deviates from inflation often go under. Silicon Graphics is a prime example of over compensation and over spending. Result .. bankruptcy!

thomas.wong1986 says

Survey is called the Bradford Salary Guide and it is tied to inflation. If you noticed, any employers who deviates from inflation often go under. Silicon Graphics is a prime example of over compensation and over spending. Result .. bankruptcy!

That is completely ridiculous. The survey is a ...wait for it... survey. It finds out what people in certain job titles/functions get paid throughout the country. It has absolutely nothing to do with inflation.

In any event, you can easily pull up a graph of median real wage over time. According to you it should be a straight horizontal line--I guarantee you it is not.