37 replies to this topic

[dcengr]

Its very easy to see if the home price is above what it "should" cost. Take the average wage of the neighborhood, then compare that against the average home cost. Traditionally, the home value should not exceed 3x a yearly gross wage of the occupants. Another way to calculate it is by taking 30% of their yearly gross and comparing that against the borrowed sum, which I would think is somewhere between 5-20%. Ofcourse, individual situations vary, but this is just a guideline that has been used for a while (far as I know, but I'm no realestate investor) Places in california, its easy to see this equation isn't satisfied. If one wanted to get fancy, they could sharpen their pencil and add up what the taxes, utilities, interest rates, etc would be and calculate a better number. Suffice to say, california is worse because cost of living here is higher than many other places. The real economic problem for homes, as I've said in the past, is when a recession hits. While people CAN make payments, the default rate will still be manageable. Its no surprise that the 90s had a housing dip. People lost their jobs and had to MOVE or couldn't afford the mortgage. These would be honest folks who weren't the investors or scammers. BUT we also have the boomer retirement problem. Everyone knows the boomers did not save enough. And with the stock market dumping, housing dumping, bonds dumping.. whatever they had saved up is probably reduced. Plus decreasing demographics makes tax base smaller than before, not to mention the boom years did a lot to raise infrastructure costs and government spending base, which will now be harder to support. Now you have to ask yourself, this sounds pretty bad, but has this happened before in history? In recent history, no. But go back about 70 years, and you will see what happened. In my 1937 scenario, I often mentioned there was a realestate bubble during that period in addition to a commodities bubble and many other similarities. Storms of war are just around the corner.. invest in guns. See, I told you I'm a LT bear

[OEXCHAOS]

(Otherwise, I hope Rogerdodger is right and this crisis is overstated by the Carlton Sheets factor. Maybe this crisis is more like the mess you make on the stove when the pot boils over, and the smoke detector goes off, and there's a big spill to clean on top of the stove but, once the heat is off and the boiling subsides, you notice that very little soup actually boiled over. You clean up the mess, and then have your dinner.)

Great analogy!

[milbank]

(Otherwise, I hope Rogerdodger is right and this crisis is overstated by the Carlton Sheets factor. Maybe this crisis is more like the mess you make on the stove when the pot boils over, and the smoke detector goes off, and there's a big spill to clean on top of the stove but, once the heat is off and the boiling subsides, you notice that very little soup actually boiled over. You clean up the mess, and then have your dinner.)

Great analogy!

Not to "pour ice water" (pun intended) on the analogy but, the amount of people foreclosing isn't the issue. It's the amount of foreclosures and what affect those foreclosures have on home prices. The amount of foreclosed homes on the market in such a short span will lower prices for many years and put many responsible homeowners "under water" (no pun intended) for many years.

[dcengr]

Not to "pour ice water" (pun intended) on the analogy but, the amount of people foreclosing isn't the issue. It's the amount of foreclosures and what affect those foreclosures have on home prices. The amount of foreclosed homes on the market in such a short span will lower prices for many years and put many responsible homeowners "under water" (no pun intended) for many years.

This is somewhat true. The money that was lent to these speculators came from somewhere, and everyone will feel its effects. But I tend to believe it was spread around quite a bit to china, middle east, and other emerging wealth countries, so the effect isn't concentrated.

So it goes that money flows from one pocket to another pocket and back to the same pocket in an ever lasting circle jerk.

[milbank]

Not to "pour ice water" (pun intended) on the analogy but, the amount of people foreclosing isn't the issue. It's the amount of foreclosures and what affect those foreclosures have on home prices. The amount of foreclosed homes on the market in such a short span will lower prices for many years and put many responsible homeowners "under water" (no pun intended) for many years.

This is somewhat true. The money that was lent to these speculators came from somewhere, and everyone will feel its effects. But I tend to believe it was spread around quite a bit to china, middle east, and other emerging wealth countries, so the effect isn't concentrated.

So it goes that money flows from one pocket to another pocket and back to the same pocket in an ever lasting circle jerk.

I speaking more of the concentration of foreclosures timewise having a very bad affect on prices that will affect those who bought responsibly.

Unfortunately, the situation at hand is not a "circle jerk" game which can go on eternally. That would have been OK and all would be well and balanced.
This situation is the result of having entered the inevitable "The Minsky Moment" in a "greater fool" game which is doomed to always end badly.

Edited by milbank, 12 April 2008 - 03:34 PM.

[milbank]

I should have added our country doesn't play "circle jerk" capitalism. We only do "greater fool" capitalism because the game players never lose that game. It's played because it's rigged so that the ultimate "greater fool" is always the taxpayer.

[dcengr]

I should have added our country doesn't play "circle jerk" capitalism. We only do "greater fool" capitalism because the game players never lose that game. It's played because it's rigged so that the ultimate "greater fool" is always the taxpayer.

That has never stopped the US from moving forward, and still being on top of all the other nations.

[milbank]

It is my fervent hope that continues. My biggest fear is that we are playing by the British playbook of one hundred years ago.

Edited by milbank, 12 April 2008 - 04:18 PM.

[pdx5]

If this is widespread, and I believe it most likely is, then the number of homeowners facing foreclosure is much smaller than the number of foreclosures.

You are correct....no. of foreclosures most likely exceeds no. of individuals by some number.

HOWEVER.......whenever a home gets foreclosed, the lender certainly loses capital. For example,
if bank loaned out $300k to the buyer, that money went to the previous owner/builder. Then the home
gets foreclosed and the bank can not sell it at $300k, but instead has to auction it off for $250k, then
the bank lost $50k minus whatever principal the owner paid off in intervening time, most likely a small
amount.

So your premise seems correct that fewer individuals are affected by foreclosures therefore will have less
impact on consumer spending, but do not overlook the negative impact on banks.

[U.F.O.]

Another game that's being played is the "buy the cheap house (mortgage) and default on the rich". Very prevalent in CA and NV. Example: You bought a house in 2004 for $300,000 and it's now worth $200,000. You go buy a "like" property down the street for $200,000 and default on your original loan. You get foreclosed on but you've lowered your primary residence mortgage payment by 1/3. U.F.O.