Can The Crisis Be Minimized?
A reader sent this Copenhagen Post story regarding two professors who think more can be done about the bubble than holding "who spilt the milk" hearings. "The two, legal experts specialising in the real estate market, see the situation as so critical they warn that the state should start to consider the establishment of a government financed organisation designed to help bail out homeowners when the market fails."
"It seems that lenders have been able to turn a significant portion of customers into life-long debtors, for example with interest only mortgages. The development has also created a niche for private speculators, that is to say, individuals who are buying property for resale, rather than as a place to live."
Many readers have said the government will only screw-up this mess further and they should not bail out the market. That's probably true and I would add the problem in the US is too large. But these gentlemen are right to say the government should do something, even if its just to try and "talk down" prices.
13 Comments:
"The two, legal experts specialising in the real estate market, see the situation as so critical they warn that the state should start to consider the establishment of a government financed organisation designed to help bail out homeowners when the market fails."
So would these two "experts" consider prices dropping, a "market failure" ?
Thought this was a free market!? So prices can double or triple in a few years, but are not allowed to come back down? Talk about an absrud idea.
If the gov does chose this path, maybe all those who missed the boat should be offered subsidies to buy...cause heck, their tax dollars will be used to bail out the foolish people who bid prices up.
The US system is seriously broken.
I have no more hope in this country.
Want A simple answer? NO. The real estate market has the same type of hyperspeculative disease than the Internet stocks. How else can it end ? Like the NASDAQ crash. And what will do the Fed ? Drop the interest rates and litteraly let the dollar crater and accept in a real big way inflation. Anyways it's already the case.
Can't afford an apartment in NYC (the average is $1.2 Million)? Why not buy a two-family house and rent half of it?:
http://www.nydailynews.com/business/story/301938p-258470c.html
According to the article, monthly expenses for a $500,000 house in Richmond Hill, Queens with 5% down would be "at most" $3,386. Rent from your tennant would be "$1,500 per month for a two-bedroom, two-bathroom apartment. So, you only have to come up with $1,886."
In other words, you'd be paying $386 more to "own" than to rent. AND you'd have to play landlord. (They don't have expenses for repairs/maintenance in their sample budget.)
You know who is responsible fot the mess ? THE BANKS. They know how the game is stupid. But they could not care less because ultimately taxpayers, what's new !!!!, will be footing the bill. Socialization of the losses and privitazation of profits. This is what's so fantastic about banking. The real risk are always passed to someone else but you keep the profits 100 % to you.
Greenspan must be very frustrated today. He is yelling at the top of his voice that we have a deficit problem and yet the DOW goes up 200 points. Hillarious.
(The real risk are always passed to someone else but you keep the profits 100 % to you)
Nice business, huh? The long term solution should be to get the government out of housing.
Two words: 'Moral Hazard'...
People knew there were risks, they ignored them... they should NOT get bailed out - period.
On the other hand I see no problem in relocating people who have lost all to some kind of 'public housing' to start over... I don't want to see families on the street.
But the mini-mansion(s) is(are) forfeit.
But Anonymous in NYC, when you own that house in Richmond Hill, you're an OWNER, can't you see? You OWN, you aren't just "throwing money away on rent." The brainwashing is very strong!
Here's a real life story from the Jersey Bubble - A friend of a friend just bought a new house, for a million bucks. Bought his old house around 4 years ago for about 400K, sold it for over 800K. Here's the kicker- it was on the market for 725K, there was bidding war, and the "winners" bid 60K over the next highest bid! Hey, it's only money.
Will,
Thanks for the local account. It really helps us get a grip on the situation.
will, regarding:
...there was bidding war, and the "winners" bid 60K over the next highest bid! Hey, it's only money.
It's not actually money any more; it's a payment. Reminds me of casino chips.
The CEO of DR Horton (DHI) was interviewed on TV Wednesday stating customers are buying a payment. A brilliant financial decision when taking on several hundred thousand in debt.
Ben, awesome site, keep up the good work!
If, in fact, peopel are "buying payments" rather than buying assets, then, to me, that is irrefutable evidence that the appraisal process is broken beyond repair. Appraisals should be made on the financing vehicle rather than the asset as the asset has become irrelevant in the whole process.
I remember some of this from the early ninties. People were shocked when the principle became an issue. We are trained by the lenders to think about "can you afford the payment?". If the market even flattens, these people will be forced to remember that ultimately "it's the principle of the thing!"
6:36 Anon,
...are "buying payments" rather than buying assets.
Yes, and buyers who purchase homes based on 'asset value' (after the huge run-up of the psat several years) must believe RE never goes down.
Writing a check for a million-dollar home is impressive. For their next door neighbor with a $800K IO first and $100K HELOC to fund the property taxes and 'toys,' the squeeze is coming.
Leverage works both ways; an extreme lesson in downside risk is underway.
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