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I read a lot of economics blogs and columns, in part because I am a masochist but I also really like to see what economists are saying or not saying about housing. At Marginal Revolution today there is a discussion about theories behind the involvement of Fannie and Freddie in the mortgage market. The post states that the old consensus was that the GSE's were in place to make housing more affordable. EPIC FAIL ALERT. The notion that Fannie Mae, Freddie Mac, and the Federal Reserve have ever made housing more affordable is ludicrous and comical. If you define affordable as low interest rates then you can definitely argue that they succeeded but you are ignoring the most important factor in whether housing is affordable: your income.
We used to consider housing affordable if you spent roughly 25 percent of your gross monthly income on housing. During the peak of the housing boom, Fannie Mae was routinely backing loans at 65 percent of people's gross monthly incomes. If you expand your definition of affordable to mean, "at the cusp of bankrupting you" then well done, Fannie. You made housing more dangerously affordable than ever.
What we have in many parts of this country is a mismatch in the supply of housing with what consumers can actually afford, you know, given their crappy job prospects. The government inflated housing bubble changed what we view as affordable and made a 3 bedroom house in the suburbs with granite countertops seem like a public good. It's not. We have a vast amount of homes that are affordable to a small amount of people. This cannot be fixed by government intervention, it will require rising incomes and economic growth which will increase demand for what is currently, unaffordable housing.
HUD projections show that in my region, housing demand will be for homes in the $125,000 to $200,000 price range. This is affordable given our median income levels and these are the homes that are actually selling right now. What we have is a plethora of homes priced from $250,000 to $350,000 that even if you have 20 percent to put down (a modern miracle), once you factor in taxes and insurance you would need income in excess of $72,000 a year to afford. This is assuming that you don't have any other debt. If you have a car payment, student loan, and an average credit card balance this ups your income requirement to $100,000 a year to afford the payment. Better get on the The Ladders website.
On the other end of affordability we have many families that are working class, what is quickly becoming a class of the working poor. They may have combined incomes of $45,000 per year and they have consumer debt and spend virtually all of their incomes monthly. For this family, an affordable house carries a mortgage payment of $1125 including taxes and insurance. For this family, a home that costs $150,000 is affordable. Unfortunately, many of these families are living in $250,000 houses because they qualified for twice what they could actually afford with the help of Fannie, Freddie, and the Federal Reserve.
We have a number of housing problems which are exacerbated by our poor economy. People underwater on their mortgages are trapped unless they say screw it and walk away and why wouldn't they; what incentive do they have to stay? Do you really think people struggling to stay afloat are going to put the virtue of their word over a rational economic decision? Didn't think so.
A bigger problem exists for unemployed homeowners. Because economies tend to have local and regional agglomeration characteristics in particular industries, you end up with a lot of unemployed people in one area with similar skill sets. If these unemployed people were mobile, as in able to sell their house and not take a complete financial schlacking, they could move to where their skills might be employable. Unfortunately, we have a labor force that is very immobile right now which makes unemployment even worse. Being a renter right now has tremendous advantages, particularly if you can move to take advantage of opportunity.
Perhaps, the Banks should become landlords and turn short sales and foreclosures into rentals. This would slow down the decline in housing values because the properties wouldn't go to market and then drag down appraisals for the next two years for other homes in the area. Bankers would make great Slumlords, they wouldn't even require training.
Showing posts with label Contributors to Crisis. Show all posts
Showing posts with label Contributors to Crisis. Show all posts
Tuesday, August 24, 2010
Housing Will Save Us!!! Oh Wait, Nevermind.
The Geniuses of the Federal Reserve (wouldn't that make a totally un-sexy calendar) have declared that a double dip recession is becoming more likely following a weak housing report and high unemployment. Can you remember the last time that economic news didn't include the phrases "weak housing" and "high unemployment"? Why is it then that every news release about the economy seems to be written with an underlying tone of surprise like economists and media types are really saying, "I can't believe that housing is still weak and people are still unemployed, the economy seems so robust."
The coverage of Charles Evans, Chicago Federal Reserve Bank President, can be found here. Here is a quote from the article:
"Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover."
I have to call Bullshit on this statement. Housing as measured by fixed residential investment has contributed on average 4.1 percent to GDP since 1929. It is actually a very small part of our economy when compared to consumer spending, government spending, and private investment. It is not an engine of economic growth, it is a symptom of economic growth. Economists should know better. When consumers feel good about their job security and have rising wages, they invest in housing. Therefore, housing sector growth lags economic growth not the other way around. When did we quit recognizing this and start treating housing as a bigger component of our economy than it actually is?
If you don't want to take my word for it because I blog under the name Turdy and swear like a sailor, take a look at this graph I created tracking the private sectors housing investment over time as a percentage of GDP.
What should jump out at you from this graph is that housing rebounds after the trough of the recession historically. The fact that intelligent economists at the Federal Reserve and serving as Obama's Economic Advisors are arguing that housing can and should lead us out of the recession are bullshitting you. It is distracting you from what is really wrong with our economy; businesses have so little faith in our economy and face so much uncertainty about government policy that they are paralyzed. As long as this is the case, there will not be economic growth.
It must make you wonder how a sector that directly contributes such a small share of GDP could facilitate the destruction of the larger economy. The answer is that the housing bubble fueled indirect contributions to GDP through lax lending standards and consumers use of their homes as ATMs. Housing didn't gain that much in share of GDP during the bubble, it reached a peak of 6.1 percent in 2005 which was a 50 year high but still only 2 percent over its long term average. During this same period however, consumer spending on goods and services grew because people felt wealthier which led to increases in goods manufacturing and spilled over to other sectors of the economy. When the bust occurred, the reversal of the positive spillovers was catastrophic for manufacturing, retail, and other major sectors of the economy.
Economic recovery will rely on the consumer in this recession as it has in EVERY RECESSION IN OUR HISTORY. Before people buy houses, they need to be able to pay for necessities like transportation, food, and child care. When they feel secure in their jobs and have wage growth, they will start investing in more long term investments like housing but we are nowhere near that point. It is a colossal waste of time for everyone to worry about propping up the housing market and suggesting that it will grow our economy. We have already paid the price for the fallacy of this argument, why must we continue on the same path?
The coverage of Charles Evans, Chicago Federal Reserve Bank President, can be found here. Here is a quote from the article:
"Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover."
I have to call Bullshit on this statement. Housing as measured by fixed residential investment has contributed on average 4.1 percent to GDP since 1929. It is actually a very small part of our economy when compared to consumer spending, government spending, and private investment. It is not an engine of economic growth, it is a symptom of economic growth. Economists should know better. When consumers feel good about their job security and have rising wages, they invest in housing. Therefore, housing sector growth lags economic growth not the other way around. When did we quit recognizing this and start treating housing as a bigger component of our economy than it actually is?
If you don't want to take my word for it because I blog under the name Turdy and swear like a sailor, take a look at this graph I created tracking the private sectors housing investment over time as a percentage of GDP.
 |
| Data from Bureau of Economic Analysis, Graph and Data Analysis by Turdy, Design based on Calculated Risk Blog |
It must make you wonder how a sector that directly contributes such a small share of GDP could facilitate the destruction of the larger economy. The answer is that the housing bubble fueled indirect contributions to GDP through lax lending standards and consumers use of their homes as ATMs. Housing didn't gain that much in share of GDP during the bubble, it reached a peak of 6.1 percent in 2005 which was a 50 year high but still only 2 percent over its long term average. During this same period however, consumer spending on goods and services grew because people felt wealthier which led to increases in goods manufacturing and spilled over to other sectors of the economy. When the bust occurred, the reversal of the positive spillovers was catastrophic for manufacturing, retail, and other major sectors of the economy.
Economic recovery will rely on the consumer in this recession as it has in EVERY RECESSION IN OUR HISTORY. Before people buy houses, they need to be able to pay for necessities like transportation, food, and child care. When they feel secure in their jobs and have wage growth, they will start investing in more long term investments like housing but we are nowhere near that point. It is a colossal waste of time for everyone to worry about propping up the housing market and suggesting that it will grow our economy. We have already paid the price for the fallacy of this argument, why must we continue on the same path?
Tuesday, August 17, 2010
Just when you thought it couldn't get worse....
This article in the WSJ is today's reason that I am fast tracking my plans to become a pirate. Here is the opening sentence:
"The U.S. government will likely continue to play a role in guaranteeing mortgages, but policy makers must figure out how to design a system that doesn't lead to a rerun of the collapse of mortgage-finance giants Fannie Mae and Freddie Mac, Treasury Secretary Timothy Geithner told attendees at a housing summit convened on Tuesday."
Arggh. My immediate irritation is with the word "design". The government couldn't design an exit strategy from a wet paper sack yet they can design a system to prevent financial ruin? No, they cant and the fallacy that you can design a system to control a spontaneous order like our market economy is mortifying and dangerous. I was even more disturbed to find out that two economists I greatly respect seem to be throwing support to Geithner on their blog.
The argument pervasive at the moment is that without government backing there will be no private capital in the mortgage markets and this will lead to a further decline in housing prices, more underwater homeowners, and more stress to the economy. Currently, the government is involved in backing 90 percent of mortgages whether implicitly or explicitly. As far as I can tell the idea is to wean the government out of its involvement in the business of housing by temporarily increasing its role, an idea that is so profoundly crazy I cannot believe it is being taken seriously by smart people.
I agree with the ultimate goal that the government (read taxpayers) will not be intimately involved in every loan made for housing. The problem lies in the fact that once the government is involved, it changes the expectations of the private players and becomes the new rule of the game. The incentives will not be there for the private sector to take a role because the expectation will be that the government will continue to prop up the market. Private capital will flow into areas other than mortgages and the taxpayer will end up with the flaming crap bag on their steps. Temporary government intervention typically turns into permanent government intervention because it distorts market signals and diverts investment to alternative sectors.
I don't know about you but if I hear the phrase, "Mortgage Rates are at historic lows," one more time I am going to exercise my second amendment rights and blow up my television. Mortgage rates have been too low for too long, another part of the problem. The Treasury officials are arguing that without a government guarantee on mortgages, mortgage rates will soar. Fantastic! Let them soar, they have been distorting the real cost of lending and altering borrowers decision making calculus for too long. Interest rates are prices and as such, they should reflect the risk associated with lending and the cost of doing business. Let interest rates rise and more private investors will enter the mortgage markets. Keep interest rates below the actual market rate and the government will be the only entity dumb enough to jump in.
I am so tired of government stimulus that I think I need a Valium to cope with my over-stimulation.
"The U.S. government will likely continue to play a role in guaranteeing mortgages, but policy makers must figure out how to design a system that doesn't lead to a rerun of the collapse of mortgage-finance giants Fannie Mae and Freddie Mac, Treasury Secretary Timothy Geithner told attendees at a housing summit convened on Tuesday."
Arggh. My immediate irritation is with the word "design". The government couldn't design an exit strategy from a wet paper sack yet they can design a system to prevent financial ruin? No, they cant and the fallacy that you can design a system to control a spontaneous order like our market economy is mortifying and dangerous. I was even more disturbed to find out that two economists I greatly respect seem to be throwing support to Geithner on their blog.
The argument pervasive at the moment is that without government backing there will be no private capital in the mortgage markets and this will lead to a further decline in housing prices, more underwater homeowners, and more stress to the economy. Currently, the government is involved in backing 90 percent of mortgages whether implicitly or explicitly. As far as I can tell the idea is to wean the government out of its involvement in the business of housing by temporarily increasing its role, an idea that is so profoundly crazy I cannot believe it is being taken seriously by smart people.
I agree with the ultimate goal that the government (read taxpayers) will not be intimately involved in every loan made for housing. The problem lies in the fact that once the government is involved, it changes the expectations of the private players and becomes the new rule of the game. The incentives will not be there for the private sector to take a role because the expectation will be that the government will continue to prop up the market. Private capital will flow into areas other than mortgages and the taxpayer will end up with the flaming crap bag on their steps. Temporary government intervention typically turns into permanent government intervention because it distorts market signals and diverts investment to alternative sectors.
I don't know about you but if I hear the phrase, "Mortgage Rates are at historic lows," one more time I am going to exercise my second amendment rights and blow up my television. Mortgage rates have been too low for too long, another part of the problem. The Treasury officials are arguing that without a government guarantee on mortgages, mortgage rates will soar. Fantastic! Let them soar, they have been distorting the real cost of lending and altering borrowers decision making calculus for too long. Interest rates are prices and as such, they should reflect the risk associated with lending and the cost of doing business. Let interest rates rise and more private investors will enter the mortgage markets. Keep interest rates below the actual market rate and the government will be the only entity dumb enough to jump in.
I am so tired of government stimulus that I think I need a Valium to cope with my over-stimulation.
Tuesday, August 10, 2010
Welcome to the Scam
It has taken me a few days to process the op-ed written by Treasury Secretary, Timothy Geithner. The title of his piece, "Welcome to the Recovery", is so ironic it took me two days to quit laughing. If you haven't read this epic work of bullshit, you can find it here.
This is economic recovery? Surely, you jest. If you aren't disappointed by this "recovery" than you have incredibly low standards and should immediately stop reading this blog. You would be just as happy reading Brittany Spears blogging about the housing crisis.
The disappointment that this is what smart people call economic recovery is akin to finding out that heaven is just a really huge Department of Transportation office and that you will spend eternity waiting in line to renew your heaven license, only to find out you didn't fill out the paperwork correctly and must take a new number. When did we decide to accept such low standards for economic recovery?
I no longer want to be an economist because it is mortifying that myriad intelligent economists are spewing the propaganda and bullshit to convince the American public that things are getting better. The worst part is that these economists know better and if they don't, they should. Every piece of economic data that is released is discarded if it is negative and explained away. If there is the slightest bit of implied positiveness in a number, it is heralded as a sure sign of recovery. The problem with this is that most of the data is suspect, and the analysis of the data is even worse.
I recommend that you immediately take everything Bernanke and Geithner say and infer the opposite for at least the next 18 months or so. If they say the auto industry is booming, I want you to hear, "The auto industry isn't declining at the frightening speed it was thanks to the infusion of your future into this dinosaur industry." If they tell you the private sector is investing, you should hear, "The private sector is investing in things that don't really create jobs and the increase looks great because it is a positive number, but investment plummeted so much that it had nowhere to go but up." When Geithner says businesses have repaired their balance sheets, you should hear, "Businesses have made use of many loosey goosey accounting standards and in addition, by laying off a huge part of their labor force they can direct the money they were paying in wages to paying off debt that has been called due by struggling banks." This is just a brief sampling of how to take bullshit and turn it into truth, I am working on a patent for a portable economic bullshit translator that resembles a Kindle. Stay tuned for that.
The hard core truth is that the financial crisis is both a symptom of a false economy created with government incentives and the cause of our new economy. Without the government infused housing bubble, perhaps we might have recognized back in 2003 that the strength of our economy was an illusion. Instead, we rode the false economic growth like a reckless drunk on a mechanical bull.
A gentleman asked me the other day if the current economy was Keynesian. I was baffled but wrote his comment off to someone trying to impress me with their vast economic knowledge earned by listening to Rush Limbaugh. Maybe I wrote him off to soon, perhaps, he was implying that the cause of the crisis was Keynesian economics and that is highly likely. Regardless, modern economics cannot describe what our economy is and therefore it cannot purport to know how to fix it. Keynesian policies will only make the economy worse because the underlying assumptions are not valid. We have undergone structural changes in our economy that have altered the framework of neo-classical economics, so much so that if I were teaching economics right now I would have my students tear up their textbooks. The government intervention in the economy and the perverse policies of the Federal Reserve have irrevocably altered our economy and now our economy has new DNA. The basic tenets of economics are the only economic principles that are applicable now and my mantra, "Incentives Matter", is the key to understanding the crisis and eventually recovering.
I have blogged before that I think there are only two possibilities about economics right now:
I would bet that if Geithner and Bernanke went to happy hour and were drunk enough to be very honest about the economy they would say, "We are royally fucked."
This is economic recovery? Surely, you jest. If you aren't disappointed by this "recovery" than you have incredibly low standards and should immediately stop reading this blog. You would be just as happy reading Brittany Spears blogging about the housing crisis.
The disappointment that this is what smart people call economic recovery is akin to finding out that heaven is just a really huge Department of Transportation office and that you will spend eternity waiting in line to renew your heaven license, only to find out you didn't fill out the paperwork correctly and must take a new number. When did we decide to accept such low standards for economic recovery?
I no longer want to be an economist because it is mortifying that myriad intelligent economists are spewing the propaganda and bullshit to convince the American public that things are getting better. The worst part is that these economists know better and if they don't, they should. Every piece of economic data that is released is discarded if it is negative and explained away. If there is the slightest bit of implied positiveness in a number, it is heralded as a sure sign of recovery. The problem with this is that most of the data is suspect, and the analysis of the data is even worse.
I recommend that you immediately take everything Bernanke and Geithner say and infer the opposite for at least the next 18 months or so. If they say the auto industry is booming, I want you to hear, "The auto industry isn't declining at the frightening speed it was thanks to the infusion of your future into this dinosaur industry." If they tell you the private sector is investing, you should hear, "The private sector is investing in things that don't really create jobs and the increase looks great because it is a positive number, but investment plummeted so much that it had nowhere to go but up." When Geithner says businesses have repaired their balance sheets, you should hear, "Businesses have made use of many loosey goosey accounting standards and in addition, by laying off a huge part of their labor force they can direct the money they were paying in wages to paying off debt that has been called due by struggling banks." This is just a brief sampling of how to take bullshit and turn it into truth, I am working on a patent for a portable economic bullshit translator that resembles a Kindle. Stay tuned for that.
The hard core truth is that the financial crisis is both a symptom of a false economy created with government incentives and the cause of our new economy. Without the government infused housing bubble, perhaps we might have recognized back in 2003 that the strength of our economy was an illusion. Instead, we rode the false economic growth like a reckless drunk on a mechanical bull.
A gentleman asked me the other day if the current economy was Keynesian. I was baffled but wrote his comment off to someone trying to impress me with their vast economic knowledge earned by listening to Rush Limbaugh. Maybe I wrote him off to soon, perhaps, he was implying that the cause of the crisis was Keynesian economics and that is highly likely. Regardless, modern economics cannot describe what our economy is and therefore it cannot purport to know how to fix it. Keynesian policies will only make the economy worse because the underlying assumptions are not valid. We have undergone structural changes in our economy that have altered the framework of neo-classical economics, so much so that if I were teaching economics right now I would have my students tear up their textbooks. The government intervention in the economy and the perverse policies of the Federal Reserve have irrevocably altered our economy and now our economy has new DNA. The basic tenets of economics are the only economic principles that are applicable now and my mantra, "Incentives Matter", is the key to understanding the crisis and eventually recovering.
I have blogged before that I think there are only two possibilities about economics right now:
- Our models were always wrong and we just got lucky because the spontaneous order of the economy was strong enough to counteract our stupidity. In this theory, the economy used to have a very strong immunity to the falsehoods of economists.
- Our models were once applicable, but we have so screwed up the natural economic order that we have to start over or at least go back to Adam Smith.
I would bet that if Geithner and Bernanke went to happy hour and were drunk enough to be very honest about the economy they would say, "We are royally fucked."
Sunday, July 4, 2010
Independence from the Myth of Homeownership
It is Independence Day and I have been contemplating whether it is time for us to collectively say we don't buy the myth of homeownership anymore and declare our independence from the fallacy. Will we do this? Of course not.
The government likes homeowners and for good reason. Homeownership provides stability, a tax base, and makes people far less mobile than they otherwise might be. All of this allows for easier governance and more far reaching impacts. This isn't just a goal at the Federal level, municipal governments enjoy these benefits as well and are incredibly reliant upon homeowners as a means of survival. This is why the government promotes homeownership and creates the propaganda we know as the "American Dream."
In 2001, I was invited to dinner at a small business owner's home. The evening was pleasant at first, but when I made what I thought was an innocuous and indisputable observation, they turned on me. The hideousness that came out of my mouth was, "Housing isn't always a good investment, the stock market outperforms housing over time. People would be better off renting and investing their money in the market." What had been a pleasant evening with food and wine turned into an absolute shitfest. The couple, twice my age, looked at me like I had just declared that I was going to eat them with fava beans and chug a nice Chianti. Actually, it was worse than that. In heated voices, they provided me anecdotal evidence of how if they didn't own homes they never could have started their business. I cried Bullshit. At one point, the wife rolled her eyes at me and called me a naive child. Then when I provided economic evidence for my argument, they called me Un-American. Apparently providing statistical data supporting the fact the return on investment of the stock market is greater than that for housing is unpatriotic, who knew? I lack the ability to back down from an argument and because I was so convinced I was right, I didn't shut my yapper and was never invited back to their home. Their final argument as they shoved me out the door was that the dot-com bust proved me wrong. Is there nowhere that I can hide from foreshadowing and irony?
So how did I go from arguing against homeownership to becoming a homeowner and then profiting from shoving other people into the same situation? The answer is complicated but I think it was the combination of the propaganda post September 11th along with the recognition that the market was about to boom. I bought my first house with the expectation that I would make a lot of money on the investment plus, I needed somewhere to live. I never thought I would become a salesperson for the American Dream and there was no way I could have anticipated how good I would be at it. I guess I'm saying that I sold out.
When you stop and think about what happened after September 11th it is hard to not realize how fragile our economy is. I don't think we ever recovered from the 2001 recession, certainly not in terms of incomes and real wealth. We had a fake recovery, fueled by an illusion. The housing boom made people feel wealthier, and on paper they actually were. That is why we had the rapid increase in household wealth and the record consumer spending expansion. The price we paid was the ensuing decline in household wealth, the single greatest decline in modern history and nearly tenfold what we experienced during the OPEC crisis in the 1970's. Without the government fueled housing boom we would still be in the recession of 2001. Reread that statement because I don't think it gets enough play in the media.
It seems ironic that people get up in arms about government spending to get out of this recession when they didn't bat an eye while government incentives "got us out" of the last one. The sad and scary fact is that this recession is really the double dip of the last one and since we aren't recovering, we might get a triple serving of economic smackdown.
Perhaps, I'm wrong, but I don't think so. Here is a basic fact about our housing boom recovery that supports what I am arguing: We really didn't have inflation during the recovery according to government measures. Inflation is not always a bad thing, in fact, in a true period of economic growth we should have inflation due to rising wages which increases demand and puts upward pressure on prices. We actually had stagnant wages during this time and by some measures, we experienced wage erosion. That is the opposite of economic growth, that is economic decline.
The booming economic years of 2003-2007 were a myth, just like homeownership. The government stimulated us into recovery through less transparent measures than it is using now. Incentivizing homeownership through legislation, expansion of the GSEs and arbitrarily low interest rates was our stimulus and ultimately has proven more costly than we can even comprehend.
Am I saying the housing crisis is the fault of the government? Hell yes. I recognize that greedy bastards on Wall Street and Main Street played a role, but, they were merely responding like rational economic actors to the incentives the government was providing. I almost feel sorry for the poor bastards on Wall Street who are being demonized by indignant politicians for causing the crisis. Hi Pot, have you met Kettle?
So, Happy Independence Day. Enjoy your potato salad and beer, it is as American as dogs in bandannas. In the spirit of the holiday, I offer this from the Declaration of Independence:
."..that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness."
Notice that homeownership isn't a fundamental right. Let's remember that the next time we hear about the American Dream. Don't even get me started on the liberty part....
The government likes homeowners and for good reason. Homeownership provides stability, a tax base, and makes people far less mobile than they otherwise might be. All of this allows for easier governance and more far reaching impacts. This isn't just a goal at the Federal level, municipal governments enjoy these benefits as well and are incredibly reliant upon homeowners as a means of survival. This is why the government promotes homeownership and creates the propaganda we know as the "American Dream."
In 2001, I was invited to dinner at a small business owner's home. The evening was pleasant at first, but when I made what I thought was an innocuous and indisputable observation, they turned on me. The hideousness that came out of my mouth was, "Housing isn't always a good investment, the stock market outperforms housing over time. People would be better off renting and investing their money in the market." What had been a pleasant evening with food and wine turned into an absolute shitfest. The couple, twice my age, looked at me like I had just declared that I was going to eat them with fava beans and chug a nice Chianti. Actually, it was worse than that. In heated voices, they provided me anecdotal evidence of how if they didn't own homes they never could have started their business. I cried Bullshit. At one point, the wife rolled her eyes at me and called me a naive child. Then when I provided economic evidence for my argument, they called me Un-American. Apparently providing statistical data supporting the fact the return on investment of the stock market is greater than that for housing is unpatriotic, who knew? I lack the ability to back down from an argument and because I was so convinced I was right, I didn't shut my yapper and was never invited back to their home. Their final argument as they shoved me out the door was that the dot-com bust proved me wrong. Is there nowhere that I can hide from foreshadowing and irony?
So how did I go from arguing against homeownership to becoming a homeowner and then profiting from shoving other people into the same situation? The answer is complicated but I think it was the combination of the propaganda post September 11th along with the recognition that the market was about to boom. I bought my first house with the expectation that I would make a lot of money on the investment plus, I needed somewhere to live. I never thought I would become a salesperson for the American Dream and there was no way I could have anticipated how good I would be at it. I guess I'm saying that I sold out.
When you stop and think about what happened after September 11th it is hard to not realize how fragile our economy is. I don't think we ever recovered from the 2001 recession, certainly not in terms of incomes and real wealth. We had a fake recovery, fueled by an illusion. The housing boom made people feel wealthier, and on paper they actually were. That is why we had the rapid increase in household wealth and the record consumer spending expansion. The price we paid was the ensuing decline in household wealth, the single greatest decline in modern history and nearly tenfold what we experienced during the OPEC crisis in the 1970's. Without the government fueled housing boom we would still be in the recession of 2001. Reread that statement because I don't think it gets enough play in the media.
It seems ironic that people get up in arms about government spending to get out of this recession when they didn't bat an eye while government incentives "got us out" of the last one. The sad and scary fact is that this recession is really the double dip of the last one and since we aren't recovering, we might get a triple serving of economic smackdown.
Perhaps, I'm wrong, but I don't think so. Here is a basic fact about our housing boom recovery that supports what I am arguing: We really didn't have inflation during the recovery according to government measures. Inflation is not always a bad thing, in fact, in a true period of economic growth we should have inflation due to rising wages which increases demand and puts upward pressure on prices. We actually had stagnant wages during this time and by some measures, we experienced wage erosion. That is the opposite of economic growth, that is economic decline.
The booming economic years of 2003-2007 were a myth, just like homeownership. The government stimulated us into recovery through less transparent measures than it is using now. Incentivizing homeownership through legislation, expansion of the GSEs and arbitrarily low interest rates was our stimulus and ultimately has proven more costly than we can even comprehend.
Am I saying the housing crisis is the fault of the government? Hell yes. I recognize that greedy bastards on Wall Street and Main Street played a role, but, they were merely responding like rational economic actors to the incentives the government was providing. I almost feel sorry for the poor bastards on Wall Street who are being demonized by indignant politicians for causing the crisis. Hi Pot, have you met Kettle?
So, Happy Independence Day. Enjoy your potato salad and beer, it is as American as dogs in bandannas. In the spirit of the holiday, I offer this from the Declaration of Independence:
."..that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness."
Notice that homeownership isn't a fundamental right. Let's remember that the next time we hear about the American Dream. Don't even get me started on the liberty part....
Friday, July 2, 2010
Return to the Scene of the Crime
I haven't blogged in awhile, not because I am uninspired but rather, I have been busy turning parts of this blog into a book. Well that and I took a vacation back to the land where all the debauchery described here occurred.
Returning to the place where I worked as a loan officer for three years and lived for twice that time brought mixed emotions. My hope was to avoid running into any of my previous costumers or real estate contacts, unless of course by choice. That mission was accomplished. I didn't want to see old customers because I was in fear of getting physically or verbally assaulted because of the loans I had done for them. and frankly, I feel sorry for a lot of people who are trapped in the sandbox where I made a ton of money for awhile and then fled.
I was struck immediately by the impacts of the housing crisis on the entire region and while it should have come as no surprise, I still was shocked to see predictions I had made long before coming to pass. My friend and co-blogger, A.Hole, and I met my friend and real estate agent, Judy Moody, for happy hour. Of course, we drank a lot and as to be expected, talked about real estate and gossiped about former colleagues we still didn't like. I heard stories of homes purchased for $800,000 in 2006 selling at short sale for $350,000. One of these homes was purchased by a gentleman that only earned $50,000 a year. Obviously, he was the beneficiary of a liar's loan but he was just one of thousands who purchased a home he couldn't afford in a highly speculative market.
Economics 101 as it applies to housing is that housing demand is driven by employment. In theory, people need income to buy a home. The housing boom took this fundamental tenet of economics and spit on it. In the area where I lent money, we had very little employment and most of it was tied to tourism. A great number of people in the sandbox are reliant upon unemployment in the winter as their jobs are seasonal but, the vast majority of people were self employed or directly employed by industries associated with housing. This includes a plethora of self employed individuals, real estate agents, and construction contractors. Our housing boom was driven by people on the other side of the bridge purchasing second homes and investment properties and our local speculators, who behaved like they were players in the gold rush. People who had no business owning one home found themselves temporarily exercising domain over small, crappy housing empires. It couldn't last.
A number of things conspired to cause the decimation of the housing market in the sandbox. Fannie Mae, the Federal Reserve, and government policies were the catalyst but, the local developers and real estate players pushed the market over the edge.
Much like the Tragedy of the Commons, where everyone acting in their self interest brings about a negative outcome for themselves and the greater good, real estate developers went nuts. With no consideration to the sustainable supply of certain types of housing in the region, condo developers saturated the market with units that demand could not possibly keep up with. Planned urban developments went up everywhere, even where they shouldn't. Development in a protected wetland was possible if you knew the right people; no one thought about whether they should do it, they just doled out favors and protected the fat cats of the region. The spoils of the boom went to the early developers and investors who amassed wealth at an unprecedented rate. Seeing the gains to these early entrepreneurs, every Tom, Dick, and Harry wanted in on the splendor. The last to get in are suffering the most as profits were driven out and then the market collapsed completely, much like the species crash of an unsustainable animal population. The housing market is very Darwinian, but the fittest in this case were those who got in first and then had the good sense to the get the hell out while the gettin was good and those who had political ties to avoid silly things like zoning laws and environmental regulations that the unconnected were subject to.
At a particularly drunken happy hour at a bar by the Bank of Hell ruled by the Mortgage Devil, I got in an argument with people who had invested in a condo development on what they call a river. Growing up on the Mississippi, I felt the need to point out that their so called river looked like a polluted ditch and bore no resemblance to a real river. They argued with me and then realizing I wouldn't change my stance that not all waterfront property is created equal, they changed their tactic to arguing that the new condo development would appeal to young professionals. I responded, "To attract young professionals you must have jobs and this town doesn't so I think there is a pretty major flaw in your understanding of the demand for these units." No amount of Ketel One keeps me from making sound economic sense but these people were having none of it. They told me I didn't understand real estate and they would prove me wrong. Yeah, right. I went by the project and one whole building is sitting sheathed without Tyvek, unfinished and blighted. The other condo building they actually finished has a vacancy rate that appears to be 90%. As I predicted, young professionals go where the jobs are and are not swayed to deviate from their economic self interest by a creek filled with litter and surrounded by crime.
The entire region looked sad to me despite the flood of tourists from Pennsyltucky, New Jersey, Washington D.C., Baltimore, and surrounding cities. The housing market in the sandbox looks to be at least a year away from even the seeds of recovery and with the economy still struggling, financial distress for people underwater in their homes or turning their second homes into rental properties is nowhere near over. A glance at the rental listings for the area show how the flood of housing units for rent has depressed rental prices. Great for renters? Perhaps, if they could find a job.
Buying at the beach became the American Dream with the help of incentives from the Federal Government yet, our government is accepting no responsibility for its contributions to the crisis. Even those people in the sandbox who have encountered economic ruin due to their belief that the housing market was a never ending path to wealth blame the "Greedy Bastards on Wall Street." Ummm, people want to make more money, duh. That is only a problem when the government provides incentives to do so at the expense of common sense, economic sustainability, and future economic growth.
If the government gives your kids free reign in a candy store for a decade, you will get a bunch of fat kids with cavities. What happens when you give adults these same incentives but trade the candy store for the housing market, oh yeah, an incredible bust and recession.
On a positive note, if you are independently wealthy and require no employment, I can guide you to some tremendous values in a resort community. If however you want to live at the beach but need income to support the habit, I got nothing.
Returning to the place where I worked as a loan officer for three years and lived for twice that time brought mixed emotions. My hope was to avoid running into any of my previous costumers or real estate contacts, unless of course by choice. That mission was accomplished. I didn't want to see old customers because I was in fear of getting physically or verbally assaulted because of the loans I had done for them. and frankly, I feel sorry for a lot of people who are trapped in the sandbox where I made a ton of money for awhile and then fled.
I was struck immediately by the impacts of the housing crisis on the entire region and while it should have come as no surprise, I still was shocked to see predictions I had made long before coming to pass. My friend and co-blogger, A.Hole, and I met my friend and real estate agent, Judy Moody, for happy hour. Of course, we drank a lot and as to be expected, talked about real estate and gossiped about former colleagues we still didn't like. I heard stories of homes purchased for $800,000 in 2006 selling at short sale for $350,000. One of these homes was purchased by a gentleman that only earned $50,000 a year. Obviously, he was the beneficiary of a liar's loan but he was just one of thousands who purchased a home he couldn't afford in a highly speculative market.
Economics 101 as it applies to housing is that housing demand is driven by employment. In theory, people need income to buy a home. The housing boom took this fundamental tenet of economics and spit on it. In the area where I lent money, we had very little employment and most of it was tied to tourism. A great number of people in the sandbox are reliant upon unemployment in the winter as their jobs are seasonal but, the vast majority of people were self employed or directly employed by industries associated with housing. This includes a plethora of self employed individuals, real estate agents, and construction contractors. Our housing boom was driven by people on the other side of the bridge purchasing second homes and investment properties and our local speculators, who behaved like they were players in the gold rush. People who had no business owning one home found themselves temporarily exercising domain over small, crappy housing empires. It couldn't last.
A number of things conspired to cause the decimation of the housing market in the sandbox. Fannie Mae, the Federal Reserve, and government policies were the catalyst but, the local developers and real estate players pushed the market over the edge.
Much like the Tragedy of the Commons, where everyone acting in their self interest brings about a negative outcome for themselves and the greater good, real estate developers went nuts. With no consideration to the sustainable supply of certain types of housing in the region, condo developers saturated the market with units that demand could not possibly keep up with. Planned urban developments went up everywhere, even where they shouldn't. Development in a protected wetland was possible if you knew the right people; no one thought about whether they should do it, they just doled out favors and protected the fat cats of the region. The spoils of the boom went to the early developers and investors who amassed wealth at an unprecedented rate. Seeing the gains to these early entrepreneurs, every Tom, Dick, and Harry wanted in on the splendor. The last to get in are suffering the most as profits were driven out and then the market collapsed completely, much like the species crash of an unsustainable animal population. The housing market is very Darwinian, but the fittest in this case were those who got in first and then had the good sense to the get the hell out while the gettin was good and those who had political ties to avoid silly things like zoning laws and environmental regulations that the unconnected were subject to.
At a particularly drunken happy hour at a bar by the Bank of Hell ruled by the Mortgage Devil, I got in an argument with people who had invested in a condo development on what they call a river. Growing up on the Mississippi, I felt the need to point out that their so called river looked like a polluted ditch and bore no resemblance to a real river. They argued with me and then realizing I wouldn't change my stance that not all waterfront property is created equal, they changed their tactic to arguing that the new condo development would appeal to young professionals. I responded, "To attract young professionals you must have jobs and this town doesn't so I think there is a pretty major flaw in your understanding of the demand for these units." No amount of Ketel One keeps me from making sound economic sense but these people were having none of it. They told me I didn't understand real estate and they would prove me wrong. Yeah, right. I went by the project and one whole building is sitting sheathed without Tyvek, unfinished and blighted. The other condo building they actually finished has a vacancy rate that appears to be 90%. As I predicted, young professionals go where the jobs are and are not swayed to deviate from their economic self interest by a creek filled with litter and surrounded by crime.
The entire region looked sad to me despite the flood of tourists from Pennsyltucky, New Jersey, Washington D.C., Baltimore, and surrounding cities. The housing market in the sandbox looks to be at least a year away from even the seeds of recovery and with the economy still struggling, financial distress for people underwater in their homes or turning their second homes into rental properties is nowhere near over. A glance at the rental listings for the area show how the flood of housing units for rent has depressed rental prices. Great for renters? Perhaps, if they could find a job.
Buying at the beach became the American Dream with the help of incentives from the Federal Government yet, our government is accepting no responsibility for its contributions to the crisis. Even those people in the sandbox who have encountered economic ruin due to their belief that the housing market was a never ending path to wealth blame the "Greedy Bastards on Wall Street." Ummm, people want to make more money, duh. That is only a problem when the government provides incentives to do so at the expense of common sense, economic sustainability, and future economic growth.
If the government gives your kids free reign in a candy store for a decade, you will get a bunch of fat kids with cavities. What happens when you give adults these same incentives but trade the candy store for the housing market, oh yeah, an incredible bust and recession.
On a positive note, if you are independently wealthy and require no employment, I can guide you to some tremendous values in a resort community. If however you want to live at the beach but need income to support the habit, I got nothing.
Thursday, April 29, 2010
We Sell Money: Part I The Habitual Offenders
So, I guess the time has come to address some of the loans we made while at the Bank of Hell. This is tricky for me because I could write an entire book on this subject alone and it would probably trigger your gag reflex and a pained expression of righteous indignation. I'm going to try and take this slow and do this in installments in an attempt to lessen the odds you want to beat up your local banker.
Make no mistake about it, a loan officer is a salesman. Unlike people who peddle things you don't want and don't need, loan officers peddle money. Being a loan officer was a little like what I imagine it is like to be Santa Claus, you have something almost everyone wants and you make people happy. Now I recognize that I am a shitty Santa Claus, the kind that would get you a house and allow you to run up all your credit cards and then my bank will come take it away before you were even done playing with it.
I did so many loans for some customers that three years later I still remember their phone numbers and addresses. These customers were either people that I refinanced multiple times to take cash out of their homes or people who were bit with the speculation bug and were investing in lots of properties. The latter included people buying houses to flip and slumlords. A. Hole reminded me this morning that I once told a customer working on becoming a slumlord that he had been a very busy boy and was wearing me out. I believe my frustration with him peaked that day because he was signing his fifth contract on an investment property in four weeks, and every loan was a nightmare. I had quite a few of these pain in the ass customers who expected my bank to finance properties for them ad nauseam and for awhile, we actually did.
Banks typically limited the number of properties they would finance for one customer, usually this number was around ten. Ten properties, with at least ten loans to one customer, is a considerable amount of risk for a bank to bear on the residential side. What it allowed investors to do was to capitalize on great residential loan terms and rates instead of getting a commercial loan. Commercial loan rates are higher, require larger down payments, and must make sense in terms of cash flow while residential loans do not have these downfalls. There was a point at the Bank of Hell where I had four deals for one borrower who was purchasing four rental units and I was able to finance these for him with no down payment and an interest only mortgage payment. That was selling money at its finest.
What banks didn't limit was the number of times you could refinance the same home which was a huge relief to the customers that I refinanced anywhere from five to six times in a three year period. This is the phenomenon that made me aware we were headed into a recession in late 2006. The spiral of doom began with me refinancing someone and getting them cash out of their home to consolidate other consumer debt, resulting in a lower monthly mortgage payment and cash in hand for the customer. Feeling wealthier because of the cash in hand and the appreciation in their home's value they would proceed to spend money like a drunken sailor, to be fair here I must point out some actually were drunken sailors, but I digress. Once the money ran out they would start using their credit cards again to maintain the standard of living they couldn't afford because their wages weren't rising but they didn't care because they knew their home value was appreciating. Once they had run up more debt they would return to the Turdy Ferguson ATM again and apply for another cash out refinance.
The scariest customers were those who were simultaneously becoming slumlords while also using their primary homes as an ATM to purchase more real estate. I had a few of these customers as well. You might wonder whether I ever considered telling them this was a bad idea. The answer is no, why the hell would I tell them that? Every loan they signed for made money for me and at the time, I was in true believer mode. True believer mentality in the mortgage industry was that we were making people wealthier. I used to have my prepared sales pitch about why customers should not put money down on their homes and it went a little like this:
Customer: "How much money do I need to put down?"
Turdy: "Well that is the great thing, I can get you a loan with no down payment."
Customer: "Isn't that risky?"
Turdy: "Not for you, why should you bear the risk of the investment? Banks are institutions set up to take risks, they are experienced at it. Let them take the risk for you."
Customer: "Hmmm, I never thought of it like that."
Turdy: "Let me put it another way, not putting money down allows you to maximize your return on the investment in the house. You can invest the money you would have put down on the house in the stock market and earn a rate of return on that. Then every single penny of equity on your new home is pure return because you didn't make an investment to get that return. Being fully leveraged means pure profit."
Customer: "Wow, I had no idea I could do that. When can I close?"
While my skills at selling were admirable, no one was better than the Mortgage Devil. He was a true believer of epic proportion. When A. Hole ran into him shortly after the bubble burst all the Mortgage Devil could say was, "Look how those greedy bastards on Wall Street fucked it up for the rest of us". Irony with your nonsense, Sir?
That my friends is today's lesson on how you inflate a bubble.
Make no mistake about it, a loan officer is a salesman. Unlike people who peddle things you don't want and don't need, loan officers peddle money. Being a loan officer was a little like what I imagine it is like to be Santa Claus, you have something almost everyone wants and you make people happy. Now I recognize that I am a shitty Santa Claus, the kind that would get you a house and allow you to run up all your credit cards and then my bank will come take it away before you were even done playing with it.
I did so many loans for some customers that three years later I still remember their phone numbers and addresses. These customers were either people that I refinanced multiple times to take cash out of their homes or people who were bit with the speculation bug and were investing in lots of properties. The latter included people buying houses to flip and slumlords. A. Hole reminded me this morning that I once told a customer working on becoming a slumlord that he had been a very busy boy and was wearing me out. I believe my frustration with him peaked that day because he was signing his fifth contract on an investment property in four weeks, and every loan was a nightmare. I had quite a few of these pain in the ass customers who expected my bank to finance properties for them ad nauseam and for awhile, we actually did.
Banks typically limited the number of properties they would finance for one customer, usually this number was around ten. Ten properties, with at least ten loans to one customer, is a considerable amount of risk for a bank to bear on the residential side. What it allowed investors to do was to capitalize on great residential loan terms and rates instead of getting a commercial loan. Commercial loan rates are higher, require larger down payments, and must make sense in terms of cash flow while residential loans do not have these downfalls. There was a point at the Bank of Hell where I had four deals for one borrower who was purchasing four rental units and I was able to finance these for him with no down payment and an interest only mortgage payment. That was selling money at its finest.
What banks didn't limit was the number of times you could refinance the same home which was a huge relief to the customers that I refinanced anywhere from five to six times in a three year period. This is the phenomenon that made me aware we were headed into a recession in late 2006. The spiral of doom began with me refinancing someone and getting them cash out of their home to consolidate other consumer debt, resulting in a lower monthly mortgage payment and cash in hand for the customer. Feeling wealthier because of the cash in hand and the appreciation in their home's value they would proceed to spend money like a drunken sailor, to be fair here I must point out some actually were drunken sailors, but I digress. Once the money ran out they would start using their credit cards again to maintain the standard of living they couldn't afford because their wages weren't rising but they didn't care because they knew their home value was appreciating. Once they had run up more debt they would return to the Turdy Ferguson ATM again and apply for another cash out refinance.
The scariest customers were those who were simultaneously becoming slumlords while also using their primary homes as an ATM to purchase more real estate. I had a few of these customers as well. You might wonder whether I ever considered telling them this was a bad idea. The answer is no, why the hell would I tell them that? Every loan they signed for made money for me and at the time, I was in true believer mode. True believer mentality in the mortgage industry was that we were making people wealthier. I used to have my prepared sales pitch about why customers should not put money down on their homes and it went a little like this:
Customer: "How much money do I need to put down?"
Turdy: "Well that is the great thing, I can get you a loan with no down payment."
Customer: "Isn't that risky?"
Turdy: "Not for you, why should you bear the risk of the investment? Banks are institutions set up to take risks, they are experienced at it. Let them take the risk for you."
Customer: "Hmmm, I never thought of it like that."
Turdy: "Let me put it another way, not putting money down allows you to maximize your return on the investment in the house. You can invest the money you would have put down on the house in the stock market and earn a rate of return on that. Then every single penny of equity on your new home is pure return because you didn't make an investment to get that return. Being fully leveraged means pure profit."
Customer: "Wow, I had no idea I could do that. When can I close?"
While my skills at selling were admirable, no one was better than the Mortgage Devil. He was a true believer of epic proportion. When A. Hole ran into him shortly after the bubble burst all the Mortgage Devil could say was, "Look how those greedy bastards on Wall Street fucked it up for the rest of us". Irony with your nonsense, Sir?
That my friends is today's lesson on how you inflate a bubble.
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