The Malignant Face of Greed

I have followed the real estate speculation of recent years with some concern and frustration. Now called the “sub-prime” crisis in an act of misleading reductionism, this debacle has great potential to harm us. There are several aspects of the current morass that strike me as relevant.

First, otherwise good people actively, even gleefully, participated in a process of driving up home prices in the interest of their own enrichment. This process directly contributed to the impossibility of home ownership for a startling number of working families. Many LDS participated in such speculation, an activity with many different names. Even those of us who abstained directly may have invested in mutual funds heavily influenced by REITs, whatever our broader claims to moral superiority by abstaining from real estate speculation (I am guilty here of not thinking through the repercussions of simplistic investment advice).

Second, the seers of the market religion, the financial companies, banks, hedge funds, and the like played a loanshark game with unjustifiable gambles (euphemized as incorrect “risk management”), engaging in behavior that we have historically associated with cocaine-addicted day traders. The wisdom of Wall Street, the market force in which many of us place great faith and trust, somehow appears to have believed the same absurd possibility that cash-poor and appetite-enriched Americans would be able to ride the wave of absurd real estate speculation with fluid, tenuous, and unsupportable mortgages. The fact that this system managed to repackage this misbehavior into nearly unidentifiable “instruments” is an index of the fragility of endless “innovation” in pursuit of pure greed.

Third, we in the LDS tradition could have read the Kirtland financial collapse and real estate speculation history and realized where this was headed by historical analogy. Similar behavior almost destroyed us in the late 1830s, when Kirtland was awash in real estate speculation, unsustainable mortgages, and personal consumption based in credit. When reality struck, the system collapsed, and the church barely survived intact.

I wonder what we have lost as individuals and as a community from our participation in real estate speculation, whether we could have resisted better, struggled harder to shirk Mammon. Owing to our greed, our fear of regulation of financial markets, our soul-dissipating love of wealth and its trappings, we have participated in a system that has bankrupted many of our financially and socially fragile siblings, enriching (transiently, in retrospect) wealthy speculators at the expense of the economically marginal among us. Were we powerless to resist the behaviors of Babylon? Would it have made a difference for Latter-day Saints to abstain from “turning” houses or participating in construction companies bent on over-production? What if we had refused to invest in REITs or demanded that brokers not invest our money in repackaged loanshark mortgages?

I am most interested not in economic indicators or the health of the US (and global) economy, but in our moral and spiritual health.

Comments

  1. Thanks, Sam.

    A few years ago I had a conversation with my financial advisor, (LDS, btw) about this topic, specifically about investing in sub-prime mortgages. He advised strongly against it, and shared with me his aphorism about the market: “Sometimes bulls make money, and sometimes bears make money. But pigs always get slaughtered.” He also went on to help me understand that there were other considerations beyond yield.

    It’s an interesting question. Many of us wouldn’t buy shares in an industry we considered morally objectionable (casinos, or alcohol producers, for instance), but unwise borrowing and lending can be just a destructive as alcoholism or gambling, literally ruining people’s lives. We are warned from the pulpit about the moral dimension of incurring unwise or excessive debt, but I guess we need to also realize that the lender who extends unwise or excessive credit is also culpable. I have read with smug satisfaction how some lenders are now losing their shirts, but I guess I need to learn to curb that impulse as well.

    I think I have a slightly different view of the market than you do, since I believe it does not so much drive behavior as simply reflect it. In this case, the market is holding up a mirror in front of us, and you’re right, it isn’t pretty.

  2. Jonathan Green says:

    Housing bubble bad, speculation bad, etc., etc. But I think your economics are off and your moral calculus is mushy.

    How does massive overproduction of housing price poor people out of the market? The problem with sub-prime lending was not that people were too poor to afford a house–but that people too poor to afford a house ended up owning one, and under bad terms.

    And I really don’t see this as an opportunity for bemoaning the state of Mormon or American morals. Collective guilt lets the people most responsible off the hook, and you’re spreading culpability so broadly that anyone who bought a home or invested in mutual funds is in some sense responsible.

    There are certainly opportunities with the current difficulties to point to some real, specific problems with our economic system, but all I’m seeing in your post is that people like to buy houses, and people like to invest their money in ways that promise a good return for the amount of risk involved.

  3. ed johnson says:

    First, otherwise good people actively, even gleefully, participated in a process of driving up home prices in the interest of their own enrichment.

    Could you explain what you mean by this? Exactly who and what are you talking about here?

    Also, I believe most REITs invest mostly in commercial real estate, or in residential rental real estate (apartments). I believe there are only a few that invest primarily in mortgages, and I don’t think they make up that big a part of the mortgage-backed security market.

  4. In the UK, one of the reasons house-prices have rocketed (thus pricing ordinary people out of the market) is that wealthy London professionals have driven up prices through their sheer buying power. There are whole swathes of the English countryside with houses that are only occupied at the weekend. These are the second and third homes of the rich who can pay any price to fulfill their dream of owning a cottage in the shires. Ordinary locals cannot afford to buy homes in their own towns and many end up having to rent homes from these absentee landlords.

    This is a massive problem. The government thinks the solution is to build millions of more homes, but unless something is done to prevent people buying them all up simply to extend their portfolio, the problem will continue. The “market” has created a vast number of people who will be forever “house poor.” The average price of a home across the UK is now 5-6x the average salary, meaning that the average person will never qualify for a non-sub-prime mortgage.

    This was never the case previous to about 2000.

  5. Dang, capitalism unchecked doesn’t work so well does it.

  6. ed johnson says:

    The government thinks the solution is to build millions of more homes.

    Then I would agree with the government. You don’t?

    In the U.S., the places with the high housing costs are exactly the places where it is very hard to get a permit build new housing. Here’s the abstract to a paper by Harvard economist Ed Glaeser:

    Does America face an affordable housing crisis and, if so, why? This paper argues that in much of America the price of housing is quite close to the marginal, physical costs of new construction. The price of housing is significantly higher than construction costs only in a limited number of areas, such as California and some eastern cities. In those areas, we argue that high prices have little to do with conventional models with a free market for land. Instead, our evidence suggests that zoning and other land use controls play the dominant role in making housing expensive.

    Glaeser has several papers on this theme, available on his website. In general he finds that land use regulations are responsible for a large fraction of the increase in housing prices over the last couple of decades.

  7. Ed,
    I 100% agree that we need more homes, but we also need policy that makes it more difficult for property tycoons to simply buy them all up. I would guess that a sizeable chunk of new homes in the UK are not occupied by their owners. The tax system could come in handy here.

  8. Name (required) says:

    The solution, of course, to all of this is Soviet style communism.

    OK–A free market system might seem a bit cruel to those who aren’t financially savvy, but thats how life works. Bad things happen to people and we often talk about how God gives them that experience (or allows the experience) in order for them to grow. When I hear the reports of difficulties from people’s unwise speculation, I just see that as them going through another class in the school of life. If they’re smart, they’ll learn from it. If not, they repeat it during the next financial cycle.

  9. Name,

    I think what Sam is getting at is that some of us might be acting as schoolmasters in that school with no regrets whatsoever, and is that right to do? He used the phrase “financially and spiritually fragile”, so I think that includes the naive and unwise. I think we have an obligation to educate them in a less painful way. I am glad that our advisor I mentioned in comment # 1 helped me to understand that there were spiritual as well as financial dimensions to my conduct.

    In Nov. 1857 Brigham Young talked about the naivete of the saints and said their lack of understanding is what led them to do dishonest things. This was the address where he said that there are elders in the church who will cheat a widow out of her last cow, then go down on their knees that night and thank God for helping them to prosper. To the extent that we gain our living by preying on the naive or the desperate, we are still in the same boat.

  10. Sam MB,

    Right on.

    -Serenity Valley

  11. So what about people like us – we bought our first home when the market was really hot (scraped up enough for closing costs, but had to get a no-downpayment loan). It was not an extravagant home by any means, but was in a nice neighborhood. We sold it 2 years later b/c of a job change and made a good bit of money, enough for 20% down on our next home (which was actually cheaper than our first home b/c it was in a different area of the country). So, we unquestionably benefited from the real estate market and were just lucky enough to do our buying and selling while things were still good. For us, a lot of it was chance; does that mean we were unrighteous or taking advantage of others to do so? Or is it only when you’re willfully and greedily taking advantage of the system?

  12. Every time I hear about the housing “correction” I think of Proverbs 3:
    11 My son, despise not the chastening of the LORD; neither be weary of his correction:
    12 For whom the LORD loveth he correcteth; even as a father the son in whom he delighteth.

    Correction is good… bring it on!

  13. annahannah says:

    So, if my son bought derelict properties and fixed them up (nicely) and turned a profit, should he be considered evil or unwise when he took something bad and made it good? Yes, he would have earned a SMALL profit (betw 4-10,000), but he did a lot of work. Now, because of the market he has 2 homes that will cost him his shirt because they won’t sell. These are average homes, starter homes really.

    We have friends in our ward whose homes have been on the market for years. Because of this mess, they won’t sell. One will be foreclosed on (the owner has become disabled), one is still on the market, and one took an enormous loss.

    How does this affect faith? Many prayers have ascended heavenward to get these homes sold. Sometimes people have to move. What happens when you lose your retirement in 2 cases and just your shirt in another. Good people. Yes, they surely are being tried. And some are thinking that God doesn’t care very much for them when he allows them to become homeless through other’s greed.

  14. Name (required) says:

    #11-more power to you. If you buy something (a house, a stock, etc.) and later you can sell it for more, then that is great. There is absolutely no need to feel guilt because maybe you’ve gained while someone else has lost.

    I have very little sympathy for those that took out loans based on incorrectly stated incomes, fudged appraisals, artificially inflated credit ratings, etc. If these people are facing foreclosure, then it will be a good lesson to them. Most of the speculators actually made money in the whole real estate run-up (like #11).

    #9–I’m not the schoolmaster. The schoolmaster is life. While the church welfare system does favor helping those in need, I believe that the church has a specific policy against welfare payments for losses that are due to speculative investments.

  15. Is there a chance that the overpriced housing market will affect the Church in certain financial markets in a generation?

    Looking strictly at my stake (and the neighboring ones) in North Texas, 90-95% (or even more) of the growth is due to professionals between 28-50 relocating from California, Utah, New England, Chicago, and the like. We hear the same refrain from the young ones: We couldn’t afford to live there; we couldn’t afford to purchase even a modest home. The older ones are cashing in on 15 years of modest homeownership (and who wouldn’t?).

    My brother-in-law is born and raised in the LA area, and he and my sister are fleeing just as fast as he can find another job outside California. It doesn’t matter where.

    Obviously, we haven’t lost the best and brightest from these areas, but when you start losing scores of active, righteous, upwardly mobile young Mormons to the land of cheaper housing construction, what will it do to the Church in the expensive areas in a generation?

    Unrelated to the housing market, but related to economic conditions, is the plight of the Church is places like Northern Ohio. Almost everyone I knew in the Church growing up who had the ability to leave, left. Those from my generation who returned did so out of coincidence more than anything. And growth-wise, the Church in Northern Ohio hasn’t progressed in a generation.

  16. Obviously, we haven’t lost the best and brightest from these areas

    I meant to say, “Obviously, we haven’t lost all of the best and brightest from these areas.”

  17. Jonathan, I’m watching people and lives implode and wanting to think it through. As far as mushy morals and flimsy economics, there is a long history of religious visionaries (including our own founding prophet dear) who have engaged in similar thinking, so while you are correct that my questions are unlikely to pass muster at a conservative think tank, I am nevertheless interested in working through these topics and suspect that important moral truths will be missed by an uncritical accommodation with the prevalent worldview.

    Part of my point was that we have developed a system that a) diffuses immoral financial behavior so broadly that almost all of us become complicit (loanshark mortgages become rebundled until unrecognizable, REITs depend on the overall real estate speculation to expand, and individuals like jab find themselves in situations where if they don’t sell their home for more than it is reasonably worth (thus putting the buyer into greater debt than would otherwise be the case), they may lose the option to live in a home similar to the one they have lived in before), b) argues strongly against regulation of suspect, predatory, and dangerous practices on the grounds that it limits the efficiency of the “market,” and c) pushes any hope of a moral calculus further and further away from our central attention. It may be that there is no way for us to escape the cycle, but that does not exclude us from thinking carefully about the morality of a system that at its core relied on simple greed without careful consideration of the moral “externalities.”

    In part this post was inspired also by people I met over the course of the last five years whose eyes glittered with ambition, eager to make huge profits from real estate “investing.” The phenomenon seemed particularly in-your-face in Utah (though it happened a great deal everywhere, and I am in no way indicating that Utah or its Mormon population is distinctive in this regard). What no one acknowledged or admitted, was that this “boom” in real estate had a huge negative effect on the poor, effectively and rapidly pricing them out of home ownership or pushing them deep into debt. This tragic juxtaposition is what has caused me to think more about this and my own complicity in this mess.

  18. Great questions, Sam. Everyone might not agree on the exact specifics, but I think everyone should consider the basic questions deeply and sincerely.

    I have believed for a long time that the primary reason the Church preaches a debt-free life is to allow us to have discretionary income to provide relief to the poor, instead of having to give it in interest payments to those who already are rich – in many cases, “filthy” rich in the truest sense of the word. If we are paying overly huge mortgages and other extraneous interest payments, I believe we are violating one of the most fundamental teachings of the Gospel as articulated in our scriptures, attempted in our collective history and modeled by the Savior Himself.

    I have learned this the hard way, and I appreciate your thoughtful post.

  19. StillConfused says:

    #1 – the way I have heard it phrased is “The pigs get fatter but the hogs get slaughtered”

  20. What no one acknowledged or admitted, was that this “boom” in real estate had a huge negative effect on the poor, effectively and rapidly pricing them out of home ownership or pushing them deep into debt.

    As a poor person watching the housing boom over the past several years I’ve been concerned by the incredible boom in housing and I always thought it was odd that it was never mentioned how bad the boom was for lower-income prospective buyers. And I also thought it was weird that there wasn’t much talk about the possibility of a bubble burst.

  21. I have very little sympathy for those that took out loans based on incorrectly stated incomes, fudged appraisals, artificially inflated credit ratings, etc.

    That’s not what the sub-prime crisis is about, Name. A few years ago you could state your income with complete accuracy and, even if it wasn’t high enough for the house you wanted, it wasn’t hard to find an online mortgage calculator and a mortgage broker to tell you it was. In fact, you’d probably have had a harder time finding one that wouldn’t tell you you could afford the house you wanted. In other words, lots of people got sub-prime mortgages because they didn’t know they were sub-prime. If decades-old conventional wisdom (including the imposing culture of middle class acceptability) says that of course you buy rather than rent if you possibly can, and someone tells you they’ll give you a mortgage, you figure that their willingness to give you hundreds of thousands of dollars is the best verification you could possibly get that you can afford your house. Otherwise, why would anyone be foolish enough to take a risk on you?

    Just to show how much more complex the situation is than you suggest:

    We moved over the summer back to Utah to take a job at BYU, and put our house in the Midwest on the market — a market that had appreciated at a steady 8-9% per year for the previous thirty years. Unfortunately, at the same time as our house went on the market, the seven-year ARMS expired on a bunch of mortgages in a development outside of town. The in-house mortgage broker that set up shop in the model home just inside the front gate of the development had “aggressively” extended mortgages to families that in reality couldn’t afford them–or at least wouldn’t be able to when their arms expired; and, it turns out, these people likewise weren’t in a position to refinance during the arm. But no one–NO ONE–back then was expressing caution about home ownership as a risky investment. Certainly not the mortgage broker the met prospective buyers after they toured the home they wanted. (Furthermore, there was almost certainly some misrepresentation to the buyers about the structure of the mortgages, because I’m told a number of people in the developer/mortgage broker cartel that built that subdivision are now serving time.)

    As a result, between 20-25% of the mortgages on the homes in that development are currently “not being serviced” (that is, they are either in foreclosure or are two months behind in payments). That means a glut of desperate sellers in the market competing with my house (and its desperate seller).

    The chain extends even further. The previous occupant of our house here in Utah had been waiting to sell for six months. In their relative desperation they agreed to let us rent, and to purchase an option to buy when our house sells. So, they’re waiting anxiously for our sale. Meanwhile, our house has not sold yet, so we finally had to agree to a similar situation with a renter/prospective buyer for our home. And so on and so on. I should mention, too, that everyone involved in this situation is gainfully employed and has represented themselves and their financial circumstances honestly — except for that mortgage broker in the model home in the development outside of town.

  22. Question 1. Yesterday, I bought a hamburger at Wendy’s, thereby influencing the price upwards and depriving someone somewhere of a meal. Should I feel guilty about my lunch?

    Question 2. Criticizing a boom only after the bust is too easy. Those who say, “I told you so,” usually didn’t. So, where is the current boom, DURING which we can now apply our newfound market ethics?

  23. Sam MB, I still have no idea what you’re really talking about.

    You seems to be saying that all of us bear responsibility for being involved in this. I would help if you tolde us what, exactly, we did that was morally suspect? Are you saying it’s morally suspect to buy a house? To sell a house at the market price? To take out an adjustable rate mortgage? To own mortgage backed securities through a mutual fund? Certainly there was exploitation and graft within the mortgage lending industry, and much foolishness among those that bought some of the repackaged debt. But how does that implicate an average person? Those who bought near the peak were (in retrospect) foolish, but were they evil?

  24. Ed, one group that Sam is bashing are the house flippers.

  25. Sam, Good post, and one for us all to reflect on. I’ve watched friends get out of high tech to get into real estate for the “easy money”, who now are struggling. This is a topic of discussion in our stake, where we fear, even for a fairly affluent area, for the huge demands in the coming year or two for fast offering funds to support medical costs, insurance, and food for families overburdened with mortgage or credit card debt. There’s a lot of blame to go around, but also a lot of need for compassion as well for the foolish, and for those seduced by too-easy credit. And I am certainly not without some extra debt (or guilt) of my own that we are in the process of trying to reduce. We, however, are still pretty fortunate, and will weather this crisis.

    I am reminded of the counsel of Haggai, Ch 1 v 6: “Ye have sown much, and bring in little; ye eat, but he have not enough; ye drink, but ye are not filled with drink; ye clothe you, but there is none warm; and he that earneth wages earneth wages to put into a bag with holes”. Pretty accurate description of the current economic situation.

  26. We are in the middle of a lawsuit with a vacation resort where my wife slipped and fell, injuring her leg. We only wanted medical expenses recomped, plus a minimal time & suffering, and MAYBE another trip to make up for the ruined one. Our lawyer, recommended to us by friends, is a successful shark and sees much bigger numbers. The way things are going, this thing may not even go to trial.

    I bring this up because the potential settlement could very well get us the house we otherwise couldn’t afford, not in any small part due to the wonderful glut of repo’s and new homes blanketing the ‘burbs in our area.

  27. Clair, the issue may be more of someone who refinanced with easy money so that they could buy a new car to go to Wendy’s in to buy the burger. Not the burger itself.

  28. Clair – Question 1: Ignoring it by choice.

    Question 2: A current boom isn’t necessary to learn the lesson. The unfortunate part of this is that too many people who are in a position to be a wide-spread voice don’t do so – often because they are raking in enough money to remain silent. Also, fwiw, there has been a united and strident voice warning of this basic issue for decades – the Prophet and apostles. If all members had understood and followed their counsel all these years, this post would be quite different.

    Further exacerbating the situation is the attitude of many in the court system. It is a different application, but I sometimes visit courtrooms to sit and observe. Recently, there was a defendant who had been the victim of deceptive sales tactics by a used car company – so blatant that the judge herself bemoaned that the company that initiated the sale had gone out of business (due to a pattern of ethical violations) and couldn’t be held accountable for the individual results of its deception. Here’s the kicker, that makes it relative to this post:

    The judge said, in essence, “It is obvious this defendant was deceived as to the quality of the care he purchased. It is obvious that the car broke down and became unusable after only two months of ownership due to the company’s deception. It is obvious that the defendant can’t afford to pay off the entire loan amount – and would not be required to pay the entire amount if the original seller was still in business. However, since a different company bought the original debts, and since that company cannot be held liable for the original company’s deception, the defendant will have to reach a compromise and pay a portion of the actual purchase price.” I understand the decision from an intellectual standpoint, but there is something deeply wrong with the way we view debt when the consumer is punished for a lender’s deception. Natural effects, I understand and simply lament; legal calcification I simply abhor. Situations like this need to be addressed formally and can’t be left just to market forces.

    ed – I think it is quite obvious what Sam is addressing, and simple buying and selling and financing of houses is not it.

    1) I have been in sales and marketing for the last 10 years – selling products and services that require a significant financial investment, and I believe it is my moral responsibility to explain fully and clearly to my clients all issues relative to price and payment options. It is my responsibility to ensure that they make informed decisions, at the very least, and, if I am convinced they are making a choice that is almost guaranteed to harm them in the long run, to let them know of my concerns. In the end, if they choose to make an informed decision with which I disagree, I am obligated to allow them to do so, but I always have written documentation that shows my objection and my alternate suggestion(s). A tiny part of that is legal protection, but most of it is what I see as a moral imperative.

    Sam and Ronan – I apologize for how basic this question and answer are, since I don’t want to sound condescending. Who sets market values for homes? Primarily, it is those who make a commission off of the sale of those homes – the builders and real estate agents. Consequently, there is tremendous incentive and pressure within the industry to allow and encourage whatever price increases the market will support – skewing the picture inordinately in areas where land and housing is scarce. In this scenario, it takes a very altruistic builder/salesman to buck the natural greed associated with sales and price homes in a way that does not maximize their own profit. Lacking organization policy/regulation, it is hard to resist the temptation to charge each potential customer whatever that individual customer is willing to pay.

    I agree that many people are “complicit” in the housing boom and bust cycle problem, but I have a hard time thinking of a reasonable solution short of regulation – which I have a hard time accepting on principle. This is one area where I truly am torn.

  29. #26 – fwiw, I admire your initial inclination. I will leave it at that.

  30. Ray,
    I have no interest in fighting the market when it comes to house prices. I can only speak for the UK: build more modest family homes, and promote policy (perhaps through the tax system) that disincentives property investors from buying them all up.

  31. When loan origination and loan ownership were decoupled a moral hazard arose due to the fact that the person best able to evaluate a home owner’s risk of default no longer had a financial incentive to make accurate determinations. In addition, the use of collateralized debt obligation funds and credit derivatives transfered risk to disparate investors in small bite sizes such that no single investor had the proper incentive to insist on credit controls or to monitor credit worthiness–the functional equivalent to the separation of ownership and control in the corporate context. Lost in the popular press are two important facts: 1) regulation exists that prevented most people from buying collateralized bonds–which is why, unlike Enron, there have been no stories about people losing their retirement because they had it all tied up in CDOs (although we do see stories of people losing money who speculated in real estate, treated their home equity like a credit card or were victims of circumstance who bought at the wrong time).

    Sophisticated financial institutions will continue to purchase asset-backed securities because they desire steady yields–but they will perform better due diligence instead of relying solely on the word of the rating agencies. The rating agencies will impose stricter requirements on the issuers. The issuers will be forced to get better classes of assets backing their securities. The market for bad assets will either dry up or be priced to reflect a higher amount of risk. Fewer people with bad credit will be able to obtain loans for houses, cars, etc.

    We can expect to see (1) higher interest rates for mortgages, (2) tighter origination terms, (3) lower asset prices (including lower home prices) and the negative wealth effect on consumers that will result there from and (4) changes in rating agency (and perhaps legal and accounting) standards applicable to the securitization industry.

  32. Mathew – Thanks for the following: “When loan origination and loan ownership were decoupled a moral hazard arose due to the fact that the person best able to evaluate a home owner’s risk of default no longer had a financial incentive to make accurate determinations.” In all my ramblings, I missed the key point.

  33. Where queno and I live there simply has not been this ever escalating increase and subsequent drop in home prices. Hence we have not seen people that live here in Dallas either invest in RE and get rich or get caught up in the hype of a over inflated market.

    I invite struggling young families in high priced markets to do what I did in 2001 and leave your high priced RE market and move here to TX. Think 55-75K a square foot. 60-70K a year leads to a nice comfortable lifestyle when your mortgage payment including taxes is often around $1000 monthly

    I personally blame greed. Both on industry and honestly just as much if not more on the idiots that signed up for ridiculous mortgages for RE that was simply over-priced. I review credit reports and tax returns constantly at work and I can tell you that for the last 5 years Personal tax returns have not “lined up” with the size of mortgages that families typically carry in CA and other high end markets. People have been lying on mortage applications to qualify for loans in large numbers. They simply do not have enough income to keep up with their debt payments. This then led to large home E loans to make up for the shortfall in cash flow. Now with the bubble burst these unwise greedy consumers are caught.

  34. Name (required) says:

    #21–Thanks for sharing your story, but you left out the most important details. What did you originally pay for your home? What are you trying to sell if for? I see way too many people who complain about the ‘horrible’ real estate market. When you talk with them, you find out that they bought a home for $150k five to seven years ago and they are appalled that they can’t sell it now for $500k. In an act of desperation, they lower their sales price to $490k and it still won’t sell. What on earth are they to do?

    In the example community that you gave, real estate was appreciating at 8-9% per year. If people bought homes at $150k and then they appreciated at 8% for seven years, the value would be $257k. Maybe these home aren’t selling well at $257k, but I’ll show some sympathy when they won’t sell for the original $150k. Is this the case, or are people complaining that they won’t sell for $257k or even a ‘bargain’ price of $200k-$225k?

  35. #30 – Ronan, I agree with that approach.

  36. I definitely agree that life is the schoolmaster. The bleeding-hearts here need to realize that in the almighty marketplace, there is no right or wrong, just winners and losers. Man prospers according to his own genius and the management of his creature, conquers according to his strength. It is the effect of a frenzied, deranged mind under the thumb of foolish, ignorant leaders that would have us do anything less than look up with boldness and make use of our rights and privileges.

  37. Amen, Korihor (#36). The commies in the room might not like it, but unbridled competition is the name of the game. It may cost the weak the roofs over their or even more (this one dude I knew…), but it’s every man for himself, and I can’t be expected to be my brother’s keeper. If he can’t take care of himself or his investments, that is–or was ;)–his problem. I shouldn’t have to feel ashamed for coming out on top. I glory in the freedom that the increased property (flocks, in this case) brought me.

    Long live the marketplace!!!

  38. Brad Kramer says:

    Not to speak on his behalf, but I suspect that Cain (#37) meant to say “It may cost the weak the roofs over their HEADS…”

    Just a thought.

  39. 34. I’ll show some sympathy when they won’t sell for the original $150k. Is this the case, or are people complaining that they won’t sell for $257k or even a ‘bargain’ price of $200k-$225k?

    Short-selling (taking a loss on the sale after paying closing costs and realtor commission) is not at all uncommon in that market.

    In our case, we bought at X two years ago. We put in about $15,000 of improvements (closer to $30,000 if you include labor). We did so not with the intention of flipping–we anticipated staying long-term–but just because they were needed. Window replacements, roof repairs, that sort of thing.

    We decided to rent the place out at a painful but not life-threatening monthly loss in hopes of riding out the market for a bit, rather than accept the one offer we’ve gotten so far–for $8000 more than what we still owe (which would be a short sell, figuring in closing costs and realtor fees). So, to answer your question, no, we’re not simply holding out waiting for the $100k we think we’re entitled to.

    Curiously, this IS the kind of mindset we encountered in Utah when we started house hunting here, right before the market nose-dived. I had lots of friends and relatives encouraging me to look at the house down the street from them, etc., even though they should have known those homes were way outside our price range. I couldn’t figure out why they’d recommend those homes to us, knowing as they did our general income leve, until I realized that they had lived inside the bubble of the Utah housing market for so long they simply assumed that our house in the Midwest would sell immediately, and for a $100k profit. (I also had friends and relatives trying to get me to buy the spec homes they had built!)

  40. Ray (#29),

    I can appreciate your reservation beyond the reply, because I’m sure I came off as a maroon shouting cha-ching! with my fist in the air. But the fact that the resort sniffed at my wife’s injury and made no effort to amicably resolve the issue, I felt no guilt taking them to court. We hoped to avoid that step. We are not people who fake or exaggerate injury or misfortune, and we loathe those who do. We would still be happy if we were just compensated with the minimum I said before. However, to be dismissed so lightly as opportunists left us little recourse but to sue. If you think we shouldn’t get a shark to go toe-to-toe with their well-paid legal team, then you are nobler than me.

    I’m not going to apologize for taking advantage of the crippled housing market, either. We live in Southern California, made a home here, and have waited 18 years to find an opportunity to buy– avoiding just the kind of mess so many others have plunged into and are now suffering from. We’re still get to pay $600K for a home that went for $200K ten years ago.

  41. Sorry…

    We still get to pay $600K…”

  42. Name (required) says:

    #39–A few thoughts:

    1-I suspect that the people with the 7 year expiring ARMS are in the situation that I described in #34, even if you are not. Correct me if I’m wrong here.

    2-You aren’t in that situation because you’ve only had your home for 2 years. Even ‘solid’ investments have short term (

  43. Name (required) says:

    The #42 post had a problem. Here it goes again:

    #39–A few thoughts:

    1-I suspect that the people with the 7 year expiring ARMS are in the situation that I described in #34, even if you are not. Correct me if I’m wrong here.

    2-You aren’t in that situation because you’ve only had your home for 2 years. Even ‘solid’ investments have short term (

  44. Name (required) says:

    Final time: I had a ‘less than’ sign that was getting interpreted as an html symbol…

    #39–A few thoughts:

    1-I suspect that the people with the 7 year expiring ARMS are in the situation that I described in #34, even if you are not. Correct me if I’m wrong here.

    2-You aren’t in that situation because you’ve only had your home for 2 years. Even ‘solid’ investments have short term (less than 5 years) ups and downs. You happened to buy at the peak. These things happen. Even in your situation, though, you turned down an offer for $8k more than you owe. Its a loss after fees, but hardly a substantial loss. Lots of people take bigger losses on the stock market every day. Its part of life and part of short term investing. If you buy a stock today and sell it tomorrow, even if it hasn’t gone down in value, you’ll lose money in the fees. Where is the big crisis here? Where do morals even come into this?

    3-I’m currently trying to sell a car. I bought it seven years ago and believe it or not, it has gone DOWN in value. WAY DOWN. Maybe the next blog post should be about the crisis that I’m in. Maybe the government should come and bail me out. Maybe if I just hold on to it longer, the market will turn around. Why does this line of thought sound so stupid when we are talking about cars, but people think it makes sense if we are talking about houses?

  45. Jonathan Green says:

    “…so while you are correct that my questions are unlikely to pass muster at a conservative think tank…”

    Where the heck did that come from?

    If houses are overpriced, people build more of them. If speculators buy up all the houses, they still have to find people to live in them. All those extra houses glut the rental market, making rents fall. How are the poor victimized by cheaper rent?

    Your critique of capitalism isn’t working out because you’re trying to argue that the system is fundamentally and irredeemably rotten at its core, when the case you’re dealing with is one where the system was clearly flawed in a way that is amenable to correction. If you want to argue that capitalism is evil, then pick a case where well-informed rational actors in a well-functioning market do something awful. It shouldn’t be hard to find.

    And that’s the same problem with your attribution of culpability. If a flaw in the system is being exploited by a few, then spreading culpability widely serves the interests of the perpetrators.

  46. Name (required),

    I read Sam as wondering if we feel entitled to ignore the corrosive effects of greed on our souls as long as there is a market justification for our actions. His point, I think, is not that the government ought to always impose controls, but that if we take our cues as to what is good and bad from the market we are worshipping a false God. That’s a pretty modest proposal–one I entirely agree with.

    I don’t agree with many of the examples he uses to illustrate his point but the general thrust of his post is wonderful.

  47. Name:

    RE your #1: I accept your invitation to correct you if your wrong. You’re wrong. Many houses are selling at or below sale price.

    RE your #2: You said “Even in your situation, though, you turned down an offer for $8k more than you owe. Its a loss after fees, but hardly a substantial loss.” I’ve already divulged far more about my personal situation than I should have in this thread, but let me just say that in many cases (not necessarily mine) your solution (which carries only, as you you handily put it, an “insubstantial” loss) is not even workable in many circumstances, because if assets aren’t available cover the loss the seller can’t produce a clear title.

    But at any rate, the whole point of this discussion wasn’t that I was duped when I took out MY mortgage, or that some easily attributable moral injustice had been exercised directly against me in the transactions involving my house, but that shady practices elsewhere in the market (namely, the nearby development) had made the market suck for me and everyone else trying to sell a house (as a residence, not as an investment). This was in response to your casual dismissal of the situation, in which you insinuated that the only people hurt in this crisis were greedy rubes who couldn’t afford the McMansions they bought.

    RE your #3: You said “Why does this line of thought sound so stupid when we are talking about cars, but people think it makes sense if we are talking about houses?” How about because cars have NEVER appreciated and houses have ALWAYS appreciated, from an annual perspective, EVERY year since 1967, which is the first year the NAR compiled stats?

    And who said anything about a government bailout? I certainly didn’t, and I don’t think the original post suggested anything like that. All I was saying is that the problem under discussion was caused by more than just some people buying greedily beyond their means, and that it affects the market in a much more complex way than you’re suggesting.

  48. 46, that’s the general gist. I wandered more broadly because I think we rarely do, afraid to see what me might uncover. I’m not certain it was immoral for me to invest in an REIT (or for others to profit from sales of houses or real estate speculation), but I think the question deserves to be posed.

    45, the problem is that capitalism can be defined both broadly and narrowly as needed to defend it. In part this is a problem with financial markets which were allowed, through unfettered capitalism, to exploit those less sophisticated. The rational actors model of capitalism seems to me a defensive heuristic–one of the main problems of capitalism is its ability to ignore externalities, implications, and variations in perfect understanding.

    Was going to do second paragraph expanding along the lines of 46’s interpretation, but out of time. I will confess that, perhaps irrationally, I am putting some extra emphasis on the meaning of home ownership, but this is not a strange affectation.

  49. I cannot express how happy I am to see the housing market tanking. I hope that it continues to fall for some time, and I think that it will. In a best-of-all-possible worlds scenario, the prices will return to their 1980 or even 1970 levels (adjusted for inflation).

    I don’t care who loses money, but somebody’s got to — and lot’s of it. The alternative is to have a real estate market in which homes are permanently unaffordable anywhere that has convenient access to a major metropolitan area. That’s what they have in Europe. Yuck!

    Burn market! Burn!

  50. #49:

    I finally agree with DKL on something!

  51. #45

    If houses are overpriced, people build more of them. If speculators buy up all the houses, they still have to find people to live in them. All those extra houses glut the rental market, making rents fall. How are the poor victimized by cheaper rent?

    Your faith in the invisible hand is admirable, but if the above were true, wouldn’t the market just self-correct, avoiding a crisis, sub-prime or no, in the first place?

    When houses are decreasing in value (and construction costs rising), where’s the incentive to build new ones? When all the po’ folk bail on their houses and move out, they flood the rental market, driving up rents, much to the satisfaction of speculators with pockets deep enough to hold their position, so it’s hard to predict any great benefits for the poor.

  52. I agree with DKL also. :)

  53. Name (required) says:

    #46– Maybe I’d agree with you if you had examples to illustrate the point. As it is now, I’m not exactly sure what you are talking about.

    #47–

    RE your #1: I accept your invitation to correct you if your wrong…

    Maybe you really are in a horrible market, but where I live, there isn’t a house to be found for anything close to 2001 prices. People where I live still may face short sales–but just because they borrowed against their perceived rising equity.

    RE your #2: …in many cases…assets aren’t available cover the loss.

    Point taken. If you borrow money without being in a position to repay the loan, they you are in a bind.

    RE your #3: How about because cars have NEVER appreciated and houses have ALWAYS appreciated…?

    Have you ever heard the line ‘past results do not indicate future performance’. I believe that this line is included in every mutual fund prospectus and advertisement as well as every major financial report from public companies. If you don’t believe the statement, that’s your problem.

  54. Sam Kitterman says:

    There is one side to the housing bust which America media seems not to talk about. The number of foreign financial entities which invested heavily in the sub-prime market here in the U.S. and who are taking the same “bath” as financial institutions here in the U.S. Several banks in Germany did so and are having to be bailed out by more solvent companies there given the consequences of those banks failing…
    Although I agree the housing market needed a leveling, this falling through the basement (and from all accounts, not getting better for another year) is something that in the end will hurt us all, even you, DKL….

  55. The bright side of this debacle is that many borrowers and lenders are learning painful lessons from mistakes that they are not likely to repeat. In particular (in my opinion):

    1) Adjustable rate mortgages and short term real estate loans are dangerous and should be avoided.

    2) Loaning and borrowing at high interest rates is not a sustainable practice.

    I believe that adjustable rates on any form of existing obligation (credit card balances, mortgages, etc.) is an abhorrent business practice that should be outlawed. They seem virtually designed to produce foreclosures and bankruptcies at the worst possible time. I suspect that if there were no ARMs and no short term real estate loans the present problem would be largely avoided.

  56. When I moved to San Diego a few years ago, to take a lawprof job that doesn’t really pay all that well, and with some (but not really significant) savings, and student loan debt outstanding . . . I was shocked to find financial firms lining up to offer me mortgages of $600k and up. I certainly should not have qualified for a loan that size based on income, debt, and savings, but the mortgage companies were really just throwing them around like candy. Meanwhile, a modest 3-bedroom in most parts of town town was going for %550k, $600k, or more.

    We decided to rent.

    Now, the floor has fallen out. Houses that were selling for $550 or $600k three years ago, are selling for $425k now, and they’re still not moving. It’s anyone’s guess where the bottom is.

    The real problem was financial services companies, completely ignoring prudential guidelines and handing out huge loans to people who shouldn’t have ever been in the market for loans that size. They were offering me loans that I had no way to realistically pay off, and adding in all kinds of suggested gimmicks (various arms, interest-only, over-30-year, balloons) to try to disguise that basic, irrefutable fact. And they were pushing this on tens of thousands of people, some of whom fell for it and went in way over their heads.

    That tactic made a lot of commissions for mortgage brokers, and they passed the loans on to syndication and securitization and never looked back.

  57. Have you ever heard the line ‘past results do not indicate future performance’. I believe that this line is included in every mutual fund prospectus and advertisement as well as every major financial report from public companies. If you don’t believe the statement, that’s your problem.

    Yeah, thanks, I get it. But if I came you in forty years with a jar full of cash that I’d kept under the floorboards for my retirement, wondering why my prudence hadn’t provided enough for me to live on, you’d surely also say “That’s your problem.” There are some risks that everyone in society is expected to take, like investing and buying a home. In this case the arguably unethical actions of some (which, as Sam MB suggests, might have been enabled by a willing public unconcerned about how that risk might ultimately be distributed) increased that risk, and those of us who must sell houses in this market must absorb the fruits of that risk for those that don’t.

    In other words, if your entire response to Sam MB’s post is to say “Ha ha, sucks to be you!” to anyone rocked by the downturn of the housing market, regardless of whether one was in the market speculatively or recklessly or not, then all I can do is commend you for your ability to drag your knuckles up from the ground and operate a computer keyboard.

  58. I agree with DKL as well.

    Homes are simply unaffordable for one income families in the better school districts in to many markets.

  59. John Taber says:

    queuno #15:

    I’m seeing something similar in my stake (Delaware, Maryland Eastern Shore), particularly at my end of it.

  60. StillConfused says:

    Greed on one hand and sloth on the other. We should always be vigilant in doing the right thing for our families. Greedy folks do not excuse our duty to be well educated and well informed and act in a prudent manner.

  61. annahannah says:

    But at any rate, the whole point of this discussion wasn’t that I was duped when I took out MY mortgage, or that some easily attributable moral injustice had been exercised directly against me in the transactions involving my house, but that shady practices elsewhere in the market (namely, the nearby development) had made the market suck for me and everyone else trying to sell a house (as a residence, not as an investment). This was in response to your casual dismissal of the situation, in which you insinuated that the only people hurt in this crisis were greedy rubes who couldn’t afford the McMansions they bought.

    Since the original post talked about spiritual aspects, responses to the issue, I have to say that a lot lot lot of ordinary people are hurting badly and I confess to not see an excess of charity here

  62. Sam Kitterman: Although I agree the housing market needed a leveling, this falling through the basement (and from all accounts, not getting better for another year) is something that in the end will hurt us all, even you, DKL…

    and

    Jeremy: …if your entire response to Sam MB’s post is to say “Ha ha, sucks to be you!” to anyone rocked by the downturn of the housing market, regardless of whether one was in the market speculatively or recklessly or not, then all I can do is commend you for your ability to drag your knuckles up from the ground and operate a computer keyboard.

    In spite of their pretensions, both of these views are represent terribly unsophisticated economic outlooks.

    Whenever our nation’s economy is confronted with a newly deflationary segment, a veritable chorus of people from both the left and the right (the despising of deflation knows no party boundaries) join in to bemoan all the loss.

    This unfortunately predictable response comes from a reflexive bias that has haunted the US economy since the Great Depression: Some amount of Inflation is good, but any amount of deflation is bad.

    My question is this: Why weren’t these nattering nabobs of negativism critiquing the harmful effects of inflation in the housing market the same way that they’re now bemoaning the harmful effects deflation. I sure as hell was.

    Home inflation works like wage inflation — everyone who participates views themselves as its benefactor. With wage inflation, everyone is earning more, even if prices eventually catch up. With home inflation, homeowners say, “look at how much my home is going to make for me.”

    Well, plenty of people will profit from the deflation, too. Including renters like Kaimi and those who held on to their modest homes that they purchased 8+ years ago at a much lower price.

    Given the level of inflation that has occurred, deflation is necessary. And whatever harm it inflicts will be short-term — very short-term. The upside (viz., re-adjusting housing prices from hyper-inflated to market-sustainable norms) will have lasting consequences.

  63. One thing that would take some of the insanity out of the housing market would be to eliminate the mortgage interest deduction and replace it with a broad based tax rate reduction instead.

    That would end the phenomenon of people buying larger and more fancy houses than they really need (especially at the high end) because a large part of the cost is subsidized by the government.

  64. Here is an interesting tidbit from Forbes yesterday about the Salt Lake City housing boom:
    Home prices nationwide posted their biggest drop in 16 years last month, according to the National Association of Realtors.

    But someone forgot to tell the folks in Salt Lake City. There, the median home sale price jumped 21% in the second quarter this year, versus the same period last year.

    It’s not that Salt Lake City is entirely immune to the national housing downturn. In fact, new housing permits are down this year, and there is a glut of Macmansions, says John Taylor, investment specialist at Commerce CRG, a unit of developer Cushman & Wakefield. But with more people moving into the area, thanks in part to a percolating job market, demand for affordable existing homes is still healthy, while commercial construction is up 40% from last year. Apartment vacancy rates are less than 2%, and longtime residents worry about a land grab from commercial property investors flocking in from California and Las Vegas.

    http://www.forbes.com/2007/11/08/homes-housing-property-forbeslife-cz_do_1108housing.html?feed=rss_news

  65. The Angel of Correction has passed over SLC, apparently. Same here in my corner of SoCal, btw. This is a very uneven, inelastic market.

    re: 33
    You mean 55-75 dollars per square foot, not 55-75K, don’t you bbell? It just occurred to me that the cost in your area is about a TENTH what it is where I am sitting (which explains why I’m sitting in a condo, alas). I agree with your 3rd paragraph 100%, but do you really want all those “unwise greedy consumers” moving to your neighborhood?

    re: 56
    I had the same experience, Kaimi. When we were buying a place almost five years ago, it was unbeliiieeeeevable how much they wanted to lend us here. It was just nuts. We proceeded cautiously, locked in a very low fixed mortgage, and now can ride out whatever happens just fine. Not every homeowner West of the San Andreas fault is an idiot. I sure hope you and your family buy your dream house down there when the market bottoms out.

  66. According to my husband, this is all the baby boomer’s fault. Take, take, take.

  67. StillConfused says:

    The Salt Lake market is turning now. As with most things in life, Salt Lake is just a little slow to catch on.

  68. It’s all very simple… a house is only worth as much as someone will pay for it. Screw appraisals and real estate agents.

    We are bound by our own stupidity.

    If a house is too expensive, tell the owner/agent they are nuts and find a cheaper one. Don’t get into creative lending to get a more expensive mortgage.

    I was taught simply that if you can’t afford something, don’t buy it. There are all kinds of reasonable formulas to help people know how much house they can reasonably afford.

    Good rule of thumb, some people say that your mortgage payment shouldn’t be more than 33% of your monthly salary. And that’s from people who don’t pay tithing… so really it’s 23% for tithe payers ;)

  69. Actually for tithe payers it would be 33% of 90%, which would be 30%.

    In case you’re wondering—yes, I do feel special for pointing that out.

  70. Sam Kitterman says:

    DKL (#62) asked, My question is this: Why weren’t these nattering nabobs of negativism critiquing the harmful effects of inflation in the housing market the same way that they’re now bemoaning the harmful effects deflation. I sure as hell was.

    We bought our first (and only home to-date) back in 1987, a 1687 sq. ft. home with a larger lot (paid $1K for that) in So. Nevada at a time when California developers had only begun to penetrate our market with So. Cali. prices. Over the years we have looked at getting a bigger house (3 children, their pets and friends) seem to diminish one’s living space) and yes, we found the inflation in the house market to be insane.
    And given that I was nor am a presence in the financial industry, the construction industry, public government or any other industry leader having some “voice”, the only thing I did by protesting was by saying “NO”, won’t do that, won’t buy that larger homes at prices that were insane by developers whose profit margins were akin to the profit margins Exxon, Mobil and others have been making for more than ten years….

    The reality is market swings happen whether it be residential or otherwise. The agony is that that inflation and deflation in the housing market is far far greater than most of us have experienced (except for those who lived in the Great Depression)….And in the end, the bottomless pit the housing market has fallen into WILL HURT US ALL just like INFLATION hurt those working to buy their first house.

    Take a look at your neighborhood and how many homes sit empty or are in foreclosure and tell me that isn’t hurting the equity in your home, the home you’ve put financial (and blood/sweat) work into in order to make it nice and enjoyable for your family, let alone the impact of empty homes being targets for vandalism. and yes, that’s why we are all hurt when this type of downfall happens.

    Sam K.

  71. I agree with Sam and others that speculative bubbles reap horrible consequences on society and individuals. However, we need to be careful not to invoke moralizing language improperly because that invokes faulty reasoning that is only to reminiscent of nineteenth and twentieth century anti-Semitism.

    The housing bubble is not the result of failing virtue. It also is not the result of speculators’ machination. It’s the result of interest rates that have been consistently too low since 1999.

    The subprime mortgage crisis is the result of poorly designed financial institutions which made impossible to hold the actors accountable for their actions.

    Markets work if and only if actors reap the benefits and the costs of their actions. When banks can make profits immediately by issuing mortgages but are not responsible for the long term risk because they sell the mortgage to someone else, then the outcome will be suboptimal.

    The reason is that the bank has every incentive to give the mortgage and little incentive to deny it.

    There are a couple additional layers to the subprime mortgage disaster, such as the emergence of so-called mortgage brokers who only get paid when they place a mortgage, but in a nutshell they all share this feature.

    The problem can be easily avoided by relatively simple regulations. The entities that confer mortgages have to remain responsible for the risk in case of default.

    There is a place for virtue in the economy but in this case the problem merely requires rational regulation to design the market relations properly.

  72. Sam Kitterman: Take a look at your neighborhood and how many homes sit empty or are in foreclosure and tell me that isn’t hurting the equity in your home.

    No. If the market tanks, it helps me. I’d be happy for my home to have a market value of 1/4 the amount that it’s worth right now, even if I lose money on it, because it would indicate that I would save many time that much when I shop for an upgrade into a bigger house. In the meantime, I’m stuck in the same starter home that we bought about a decade ago.

    And I positively salivate with house-greed thinking of the house to which we could upgrade in a more reasonable market.

    No downside for me.

  73. Hellmut: The problem can be easily avoided by relatively simple regulations.

    Famous last words…

  74. Sam Kitterman says:

    I fully understand, let alone “feel”, that “house-greed”, DKL, about upgrading. My wife has for years wanted to move to a single story home with approximately 2200 – 2300 sq. ft.

    I simply can not agree that the end result of this particular bottoming of the market will really mean the average middle-income, middle-age American Family will be able to do that….

  75. Re #71: The housing bubble is not the result of failing virtue. It is also not the result of speculators’ machination. It’s the result of interest rates that have been consistently too low since 1999.

    Too low compared to what? In a stable economy with sound money why shouldn’t interest rates be low? Or do you mean too low in the sense of unsustainability, resulting in a serious correction when rates rise to normal levels again?

    If the latter, then the problem is not the low rates per se, but rather that people are recklessly betting on them staying that way (via ARMs, short term balloon loans, etc.).

  76. low income/high satisfaction says:

    Good rule of thumb, some people say that your mortgage payment shouldn’t be more than 33% of your monthly salary.

    Yikes! My rental for this one-bedroom apartment, no air conditioning, no washer/dryer, no dishwasher, no parking, iffy electricity, ancient refrigerator, no insulation, wide crack under door, splintery floors, and bad plumbing is more than I can afford!

    Its location, however, is perfect.

  77. I’d love to see the New York City housing market tank. However, rather quite unfortunately, New Yorkers did not participate in these sub prime loans, and New York’s housing market continues to climb. The average home is now somewhere in the $700,000 range. In Manhattan it is at $1,300,000. Doh!

  78. Add our local governments to the list of the greedy. They calculate what the market will bear in fees and permitting costs (up to 5 years of interest carry, legal fees, the uncertainty of future markets, lost opportunity costs, etc.) and charge the developer accordingly. They are in on the joke; they know the developer cannot bear those costs alone and will pass them on to the consumer. Texas is relatively inexpensive largely because permitting there is quite cheap and easy.
    There’s plenty of blame to go around at the moment, but take some hope. If the mortgage companies will properly underwrite and offer responsible loans, if those who purchase our loans will note what they are buying (and both are likely) and if the feds restrain themselves enough to allow the lenders with money to lend to keep the market going, we may well be near the bottom of the trough. The peak of US housing starts was 2.2m early in 2006. The low point of the deep cycles in recent decades was a little under 1m. We are at 1.2m housing starts annually. That news doesn’t comfort those suffering now and some markets will bleed more than others, but it should point to a little more bad news and a better day soon.

  79. Clark Goble says:

    Molly, that’s true to a point but realize that the local government has to make a guess about future services will cost the government. One problem with fast growing subdivisions is when the cost of services to government isn’t matched by income to the government. (This happens more often than one might expect)

    However as you suggest a danger is that governments seek to get upper income developments without worrying enough about lower income residences. That’s somewhat understandable since low income residents tend to be closer packed but use at least as much resources per individual as high income. (That’s up for debate I guess – a rich home probably uses much more water per capita than an apartment complex. But overall you tend to have denser population and less revenue for the resources)

  80. Certainly an additional issue, Clark, though I find myself wondering about the wisdom of the major change in policy which has transferred a far greater portion of the costs of growth from the larger society, where they usually were until the last few decades, to the newcomer, many of whom are first time homebuyers, apartment dwellers, small business owners starting in the burbs because they can’t afford the cities–not necessarily those best able to pay. I see a moral question there. We who have our homes might think a bit more about the costs we transfer to the newcomer as expedient mitigation fees to our distinct economic advantage.

    You bring up an interesting point about what growth governments want. I think the answer is often retail. Those sales tax revenues are golden and much more attractive than the property tax or the uses that generate it. And the growth of retail brings us face to face with our values.

  81. DKL ideally what you want is a depressed market where you are moving and a seller’s market where you are now.

  82. Molly, I think the big change was the rapid growth of suburbs since the 80’s. One doesn’t have a choice. Consider a small town of 10,000 people and subdivisions that will bring in 30,000 people. Is it really fair to make those 10,000 people to foot the bill?

  83. I have a question about whether the mortgage issues really are just capitalism run amok.

    In a book about family trends, the author stated that pre-WWII, buying a home meant putting down at least 50% of the cost, and getting a mortgage for only 5 or 10 years. Banks wouldn’t loan money for longer terms than that.

    After WWII, the govt introduced Freddie Mac and Fannie May, which subsidized home loans to the point where someone could put just 5% down and get a 30 year loan. So it is the govt’s policies that made it possible for people to buy a home entirely on credit.

    I don’t know much about finance, so I don’t know how much of that is accurate. But if govt subsidies and support are the reason banks are even willing to lend money for 30 years at a time with no down payment, then we can’t exactly blame the mortgage crisis on free markets. The free market (pre-WWII) required at least 50% down and a payoff in less than a decade.

    As I said, I don’t know enough about home financing to check my source. Am I way off base?

  84. You’re certainly right about the timing and the cause, but I see some choice. No, the 10,000 can’t pay all or even most of the bill but might it not be fair for counties and states to bear more of the burden?
    Of course by now I am laughing at myself. I do not mean to make these political issues and the moral issues which support them seem so easy in a few blogged sentences. They aren’t.

  85. 84 relates to 82.

    Melinda, Friday Sen Bennett made a fascinating comment in the Bernanke hearings commenting that just before the current boom the Senate urged the mortgage lenders to loosen credit to lend more to those with less. Some did so. Boy, did they do so. But you are right: for lots of social and economic reasons, the government has encouraged home ownership for a long time.

  86. Molly, why is that fair? Why should I living in Provo subsidize the services in St. George? Aren’t you really just asking to abolish local government?

  87. #75 Mark D, interest is the price of money. In a market economy, the price is supposed to express the relative scarcity of a commodity.

    Prices are supposed to guide the behavior of people. If an item is scarce then it is supposed to be expensive so that people buy less. If there is plenty of supply of an item then the price is supposed to be low to encourage the consumption of the item.

    Interests rates that are too low are encouraging overconsumption of money. Low interest rates were not the only contributor to the tech bubble on the stock market but they fed the frenzy.

    When credit is too cheap then the amount of money grows faster than goods and services. That is inflation. You are right that by historical standards, US inflation is relatively low but our inflation is still substantially higher than in the EU. The same is probably true of Japan.

    More importantly, the surplus capital generated by low interest rates inflated financial products. Hence the recurring bubbles that have affected various sectors of the American economy. So far the lion share of inflation occurred in the financial sector destroying the savings of millions of Americans saving for retirement.

    That’s the price of interest that are too low.

    In the market place, self-interest is supposed to guide the decisions of economic actors. There’s nothing wrong with people who are trying to get the best return on their investment. On the contrary, these investors are eliminating waste, which is an ethical act.

    The problem arises not from greed but rather from the misleading information that the low price of money, i.e. the interest rates, communicated to investors. Interest rates were so low that they did not properly reflect the scarcity of tangible value.

    When people have wrong information then they are more likely to make bad decisions. The low interest rates since 1999 have been communicating the wrong information.

  88. #83 Melinda, I don’t know about the details that you are citing but in terms of basic economics you are fundamentally correct. However, without government intervention, most of us would have to live in apartments.

    Whether or not that would be a good thing is really a political question. It certainly would have avoided the current sprawl problems in American urban planning.

    Also keep in mind that the regulation of mortgage credit market worked fairly well over the decades.

    Finally, the current issue with subprime mortgages is largely of the making of the private sector. While the Federal Reserve greased the ballooning of the mortgage credit market with low interest rates, banks issued credit of their own volition.

  89. Hellmut, unless I’m mistaken low interest rates came after the tech bubble. Interest rates were low in 1998 but the bubble was already there then. (Arguably it was started in 1995) Also low is relative. In 1998 the lowest point for a bank prime rate was 7.75% with it being 8% most of the year and most of the following year. It then slowly increase so by 2000 it was back up to 9%. After the crash in 2001 the Fed started dropping it and banks followed suit. This continued after 9/11. So in March of 2000 it was 9% and by June of 2001 it was down to 6.75%. Well below any rate in the 90’s.

    As I recall Greensban did this first in reaction to the dot com bust and then in reaction to the aftermath of 9/11. The great flaw folks have criticized Greensban for is not caring about what was going on in the subprime market when he should have. It’s arguable about whether rates should have been kept so low as long as they were too.

  90. Whoops – figures from here. I’m too lazy to lookup something better.

    The issue of whether home ownership is a good thing is an interesting one. It’s characteristic of Americans (and perhaps Canadians) but not Europeans. A funny thing I once saw was a tour guide for Europeans trying to explain why home ownership was so important for Americans and how this affected our society.

    While I agree the subprime issue is largely a making of the banks themselves there clearly was some very deceitful practices going on. Both in terms of how collections of loans were sold to other banks or investors but also how they were reported. Loans that were risky were being reported as very safe, for instance. There also clearly were some dubious and dishonest practices by mortgage companies. But while I think illegal things were going on the banks really should have been looking closer at what they were buying.

  91. 86 Just a few thoughts less this be a threadjack. If enough’s enough, Sam, let me know. I find it fair because of the economic and social benefits of growth to a larger region, because we are often transferring costs once borne by society at large (and which we who are older did not have to pay for our homes) to our children and because mitigation and impact fees now include a wide array of costs that I believe are particularly the province of the wider society. Public art, affordable housing, child care facilities, general environmental damage (as opposed to mitigation for a specific wetland) have been charged to developments under the common rule that the costs can be reasonably attributable to the new development. That can be pretty tenuous and the power between developer and governmental entity often tips heavily toward the government. Going to court demands interest and legal costs too difficult to bear for all but the largest developers–regardless of the overreaching. So, you decide how much more you have to charge the customer. Some mitigation and impact fees are appropriate; some unduly penalize the newcomer. I don’t like the current balance. But I do understand the force is not with me.

  92. In the UK, one of the reasons house-prices have rocketed (thus pricing ordinary people out of the market) is that wealthy London professionals have driven up prices through their sheer buying power.

    OK, now let’s talk about the advent of the two-income family, caused by wives entering the workplace. Seems to me that this has caused a shift in “sheer buying power” as well.

    Once upon a time, my one income was enough to support a family of 7 (to say nothing of dogs and cats). No longer. We’re down to a family of 6 now, thanks to one married daughter, and things are still nigh unto impossible.

    I’m sure that it’s not just the two-income workplace that has caused the situation, but I’m pretty sure that it figures in there to one extent or another, along with globalization, etc., etc.

  93. Hellmut (#87),

    During the 1950s and most of the 1960s the prime rate was less than five percent, and inflation was typically less than two. That is a much lower interest rate than prevails today, lower during a period of sustained economic growth. So you are not going to convince me that low interest rates per se are a bad thing. Especially when the opposite policy is a prescription for driving the economy into recession.

    And considering that the Fed’s typical policy on interest rates is to raise them gradually until the economy shows signs of going into recession, and then lower them until it shows signs of recovery, I don’t think any serious argument can be made that the Fed’s lever on interest rates is the primary cause of inflation in the U.S. over the past twenty years or so. The causes must be more structural than that.

    Real estate is a special case anyway, because the supply is limited in many areas. If anything besides unwise lending and borrowing practices stands out as the cause of the recent real estate bubble it would be a flight of capital from stocks into perceived safer investments after 2001. I don’t know what could be done about that except to increase the level of financial literacy and eliminate the government subsidy of large and expensive homes.

  94. Mikeinweho.

    Yes,

    55-75 Sqft. To get to $75 sqft requires granite, custom appliances, wood floors etc. One of my HT families is struggling to sell a 3000 Sqft house for $150K.

    I also agree with Mark N that 2 income families put upward pressure on home prices.

  95. StillConfused says:

    Isn’t this really about lifestyle choices. I supported my daugther on $550 a month as easily as I support her on $15,000 a month. The difference is the choices that are made. And I don’t place blame on anyone in the process.

  96. Molly Bennion brings up a good point. Populists have criticized lenders for decades for lending too little to the poor and disadvantaged. Now that lending to the poor and disadvantaged has proven economically hurtful, those same populists are criticizing the lenders for lending too much to the poor and disadvantaged. Such are the hypocrisies of those who make a career of criticizing lenders.

  97. MikeInWeHo says:

    re: 94
    That is very, very true. If your income has risen over the years, I bet your definition of “necessity” has expanded considerably.

    My lifestyle growing up in Michigan in the 70s placed us in a small 3BR room. The most advanced electronics inside were a color TV and dial phone connected to a party line (remember those?). We had two cars, ate out occasionally, and drove to Florida on vacation. It was a great life, at least in my memory. The whole thing was supported by my dad’s salary as a mid-level college administrator.

    My parents still live in the same town, long retired. If you went and met the guy who replaced my dad at the college, you’d find he lives in a huge house, has a working wife, drives an SUV and an upscale sedan, has multiple TVs, cell-phones, etc. There’s now an upscale mall in town replete with Banana Republic, PF Chang’s, and Williams-Sonoma store. It’s tough to get a table at Chang’s. The lifestyle of this semi-rural Michigan town has changed dramatically since I moved away.

    If the new guy adopted the lifestyle we lived in the 70s, he could easily life off his currently salary and save a large chunk of it.

    Writ large, and you see what has happened in America. StillConfused is correct; this is about lifestyle choices.

  98. Dan is wrong on two counts:

    First, morally wrong in hoping the New York housing market tanks. As a homeowner for a quarter century here with a huge amount of unrealized gain in my home, I really don’t want the market to tank–at least not until after I sell.

    Second, he’s wrong about the lack of sub-prime borrowing in New York. Maybe there isn’t much in Manhattan, but there’s plenty out in Corona and Bushwick and East New York and elsewhere in the parts of the city where real people live. And some of those folks undoubtedly made deals that have turned against them–properties that were mortgaged to near 100% of value are now worth less than the debt, and when rents fall, those folks will be in big trouble.

  99. DKL, lending to the poor is clearly a terrible idea. If only those populists hadn’t put guns to the heads of lenders to force them to breach their fiduciary duty vis-a-vis the poor!

  100. Mike,

    I think a review of the actual costs of living in the 70s would reveal that back in the day, your parents paid through the nose for television sets and telephone service. Just because you can’t give old technology away today doesn’t mean that it wasn’t costly at the time, perhaps even more so than today’s magic phones. And if you think your family’s two cars got better mileage/cost less than a modern SUV…

  101. Good thinking, Peter LLC!

    The truth is that criticizing lenders has been a popular pastime for centuries. Criticizing them at this juncture is terribly unoriginal.

    The truth is that 90% of subprime loans are being paid on time, and 30% are no more than 30 days overdue.

  102. re: 99
    Yes, good point. I’m aware of real-cost/value issues and have no interest in trading my iPhone and plasma TV for my parents’ party line service and RCA console. Clearly I’m on the side of the equation that has (materially) benefitted from all the changes.

    But that wasn’t the point of this post. Sam MB asked: Are we morally and spiritually better off? The answer to that question is a lot less clear than whether or not my car is a better value than my dad’s 1976 Oldsmobile.

  103. Steve Evans says:

    DKL, agreed re: criitizing lenders. It was easier when the only usurists were Jewish! Somehow an auto-da-fe involving the executives of Countrywide seems… out-of-touch.

  104. Mark:

    Once upon a time, my one income was enough to support a family of 7 (to say nothing of dogs and cats). No longer. We’re down to a family of 6 now, thanks to one married daughter, and things are still nigh unto impossible.

    I’m sure that it’s not just the two-income workplace that has caused the situation, but I’m pretty sure that it figures in there to one extent or another, along with globalization, etc., etc.

    The shrinking of family to typically at most 2 kids is a big change as well. It means that more money is there for arguably important costs like homes. If one wants a large family one is going to be very much out of the mainstream and mainstream purchases. Ironically since a large family requires a large home. (Although looking at the typical house size from the 50’s and 60’s they lived in much smaller homes than we do – typical homes today are at least 3000 square feet whereas most older homes manage with 1500 square feet)

  105. Perhaps this guy can lead us out of this morass.

  106. Peter (#51) – My view is that the market IS self-correcting, or attempting to.

    I think the main principle on the topic of this thread is that we as individuals take responsibility for our choices. That includes taking in to account the impact our choices may have on others.

  107. Now you guys have have put me off watching “It’s a Wonderful Life” this year.

  108. most REITs invest mostly in commercial real estate, or in residential rental real estate (apartments).

    Yep.

    However, the sub-prime mortgage, bundle into bonds, sell on the market without disclosures, take a profit on both ends … now that has sparked a significant problem, and the public debate on whether to let CitiGroup and others go under or not has just started.

    Some interesting stuff.

  109. Ok, its been a couple of days, but this one is still making me laugh:

    #21 In other words, lots of people got sub-prime mortgages because they didn’t know they were sub-prime.

    Good one!

    Also:

    #33 bbell – thanks for the tip, sounds like Texas is a good place to invest before the next boom!

Follow

Get every new post delivered to your Inbox.

Join 9,475 other followers