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The Banking Industry Wants To Help You!
Yes folks, more good news from the folks who bought you payment option ARMS, collaterized debt obligations (CDO), and credit default swaps. The banking industry (at least the folks not yet in jail) has a great plan to make home buying affordable and stabilize house prices.
They propose that the federal government should make it so that everyone can get a 4.5 percent mortgage through Fannie and Freddie's financing. I know it's rude to question the wisdom of the people who didn't see the housing bubble, but let's try to think about this one for a moment.
House prices have historically not been very responsive to interest rates, but let's assume that the drop in interest rates from 5.5 percent to 4.5 percent can raise house prices by an average of 5 percent. That would raise the price of an average home from around $225,000 to around $236,000. (In reality, the boost might mean that prices would not drop by 5 percent.)
That might sound good. But let's think a little bit about the future, after the current crew of bank executives have gotten their fat paychecks and moved on. Let's imagine that it is five years later and today's new homebuyers have decided to sell their house.
Let's further assume that the economy has recovered and inflation and interest rates are at more normal levels. A typical rate on a 30-year mortgage would be above 7 percent if we ignore the extraordinary experience with collapsing bubbles of recent years. So, let's imagine that five years from now mortgage interest rates are once again at 7.0 percent, which is still low by historical standards.
Okay, if a 1.0 percentage point drop in mortgage interest rates led to a 5 percent increase in house prices, then a 2.5 percentage point increase in interest rates should lead to at least a 10 percent drop in house prices. That means that the home for which today's buyer paid $236,000 will sell for about $213,000 when she sells it in five years. Of course, it is entirely plausible that the interest rates could rise back closer to 8 percent where they were through much of the 90s.
As the bankers say, homeownership is the best way to accumulate wealth. I know it's rude to think about the future when you deal with bankers -- after all, just think what would have happened if the regulators had thought about the future when they looked at the explosion of subprime ARMs?
Anyhow, it might be useful if folks gave the bankers' latest scheme a little thought before embracing it this time. Anyone want to buy some CDOs?
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The article is not credible. It makes too many unsubstantiated assumptions. Too many external contributors are not factored into the calculations
The 1st premise is that housing is not responsive to interest rates. Every person in the real estate industry will tell you differently. It' s common sense. If the cost of owning an asset drops, more people can afford the asset and so the demand goes up. The very reason for the high market prices were the low interest rates 6 years ago..
2nd Premise. That mortgage rates were be 7% five years from now. There is no proof of that. They can be anywhere based upon future market conditions. Many other factors may affect mortgage rates in 5 years. They are impossible to predict.
3rd . Assuming rates are higher, It doesn't mean the prices will fall. People don't lower the price of a house when the market is soft. They hold the property until the market rebounds. Plus. anticipated increases in housing is a factor in price. If people believe prices will go up, they will pay a premium, offsetting a higher interest rate.
There are very few periods of time when Real estate falls in value. They aren't making any more of it. And populations keep increasing.
Yes, I am sure, but we need our pocketbooks protected...
Could our government hire those unemployed skill workers - especially with financial background to be bailout money compliance officers?
Perhaps we can utilize watchdog to make sure our money is spent where it is suppose to. This way, we can lower unemployment - creating job to protect taxpayers!
Editor, please convey this to Capitol Hill and incoming Administration!
Thank you!
Sir, are you taking into account, when selling, the 5-6% realtor fees, inspections, title fees, warranty, ect? On a $200k sale, you are looking at the mid $180s as your final take.
Foreclosures are costly... $200K final intake is even less...
Because you have more than normal charges...
Who is maintaining the property until it is sold?
Other than Realtors/Real Estate agents there are other fees...
so... restructuring sometimes is less costly...to OWNER occupied only...
munki, no doubt, but I was just bringing up a fact Mr. Baker was not taking into consideration the hit you take on selling a property. Foreclosures are bank killers.
You are exactly right. Lowering the interest rate to 4 1/2 % won't work. I was in the mortgage business for 25 years and personally closed more than 5,000 home loans. You want to stop all these foreclosures. Give the homeowner some equity
If the lenders want to avoid disaster this is what they will have to do. Allow home owners to do a new appraisal and lower there balance to 80% of the new value. This will mostly be people who either refinanced or bought there home in the last 7 years.
Consumers are not going to struggle making payments on a loan of $400,000 when the house next door just sold for $350,000. no matter what the interest rate is. Instead lower their balance through a loan modification to $300,000 giving them $50,000 in equity. Consumers will do whatever they can to keep that house and in good condition and avoid foreclosure.
Better banks have these loans continue performing uninterruptedly at a 60% return then to go 2-5 years without any return and having all those out of pocket expenses deferred maintenance, property taxes, vandalism, HOA fees, R.E. sales commission, and eventually ending up years later with a 60 % payoff anyway.
Even an 80% revaluation will not be enough to fix the problem. Since a baseline was set in 1890, homes have stayed between 90% and 110% of that baseline until the last 8 years. During the last 8 years the "value" of the homes has shot up to 200% of the baseline!! 80% of the 200% would only bring you down to 160% of the baseline value, which means that as the market continues to bring itself back to the actual value most people will AGAIN be upside down in their homes, though not by as much!
What is the baseline your talking about?
I disagree. Recalculating mortgage balances is a nightmare. It's not a practical option. Its almost logistically impossible.
1. People that have mortgage balances higher than the value of their home do not all go into foreclosure. Most will wait out the market. It usually people with personal problems that walk away from a home. Divorce, job loss, medical bills are the main reason for foreclosure. Most people will want to preserve their credit scores.. Speculators and home flippers will take off. Those are foreclosures.
A better solution is to lower their interest rates so their carrying costs will be easier for them. Most people expect to stay in their homes for many years. Most will wait the 3 or 8 years for prices to rise. Dropping the rate from 8% to 4% will cut in half their payment. It may even be cheaper than renting. Plus, it gives them hope for a housing recovery.
>House prices have historically not been very responsive to interest rates
I disagree with your fundamental assumption. The entire economy over the past 8 years has been based on skyrocketing housing prices caused by record low mortgage rates. Whether owners re-fi'd to free up disposable income, bought a bigger house, 2nd homes, or took money out of their homes to buy boats and wide-screens, it was ALL about record low mortgage rates.
Housing prices have what, on average, doubled over the past 8 years?
Yes, housing prices have doubled, but that's not because of the low interest rates! That's based on the housing bubble, with people buying houses for WAY more than the average value over the last 100 years!
I've been in the real estate business for 30 years. Doing everything. The low rates caused the market to go up. It was cheaper to own a house than to rent one plus you got appreciation, plus a tax break. The low rates allowed people to buy a more expensive house and that increased demand and increased prices. THE LOW RATES. That caused the price to go up. Lower rates now and values will at least stabilize and have a base in which to appreciate.
First they need to answer the question.
Why would anyone want to get ino debt?
What about the millions of American's who are already up to their eye balls in debt?
It's my understanding that some of those very same banks, are cutting credit lines, jacking up interest rates, and closing the credit cards of millions of Americans.
Soon millions of their potential borrowers, will be in debt collection, and facing bankrucpy laws pushed through congress by them.
I prefer a different idea, how about stiffer consumer protection laws, and a rollback of bankrupcy reform and credit card reform.
Then mabybe people would be more comfortable taking on more debt.
They aren't talking about increasing debt. They want to lower the cost of debt. The lower rates will attract more people into the market. The increase in demand will stabilize prices and stable prices will attract more buyers. More buyers means the CDO's ( securities banks hold now valued at zero or 25 cents on the dollar. ) will increase in value and may be sold by banks, that frees up more credit and lowers the cost again.
Other credit issues you talked about are for a different topic. Not housing.
The drop in interest rates would entice some buyers who have been on the fence to buy now; this would generate sales which in turn will push the prices up. Thus, as supply dwindles and demand stays up or increases with the lower rates, the market may stabilize. Then, have the banks lower points and other closing costs and the realtors and title companies drop their "fixed" fees. What's the downside? NONE.
The downside is the fact that since the numbers began being kept in 1890 the cost of housing (after accounting for inflation) has hovered right around 110% of the baseline established in 1890. Until this boom. Then suddenly the numbers shot up to around 200% of the baseline! Even after the 15% or so that housing costs have come down so far, you're STILL way overvalued on your home! That means that you will take out a low interest loan today, and then tomorrow, or next year, or five years from now you will find yourself upside down even after making many payments. You will CONTINUE to be upside down until you've paid enough of the loan to finally bring the principle below the REAL value of your home! In MY case that will probably be around 15 years into my loan!
great article, thank you so much!
This is like the assumption that cutting the minimum wage back down to $4.25/hr would result in a HUGE boom for the economy because costs for everything would be cheaper!
This sounds LIKE MORE TRICKLE DOWN to the Home Owners? Maybe get to Homeowners? NOT!
It is time for Americans to have the benefit of the FED Interest Rate that the Paulson Banksters have.
The Banksters get money at 1% right now and then lend it to Americans at 6% to 30% for credit cards.
Just think about that the Banksters pay 1% and we pay 18% to 30% on credit cards and all they do is a little bit of paperwork that could be automated completely. That means they make 18 times to 30 times what they paid for almost no effort. This is why they think all the other scams they invented are OK including the TRICK adjustable Mortgages, the illegal Naked Shorts, the illegal 30 to 1 to 100 to 1 Leveraging, the TOXIC Derivatives, and the Default Swaps among other swaps.
Eliminate most of the Banksters:
1. Nearly all Banking functions are definable by a series of mathematical equations linked to databases and linked to customers.
2. Most Bank Functions can be automated via ATMs and the Internet including loans, cash, and deposits and even planning.
3. What would be lost? Middle men who charge exorbitant FEES and pay top 1,000 Executives $10's Million to $100's Million! A Massive layer of Corruption! An undeserving Industry!
Just HOW IMPORTANT ARE BANKS IN TODAY's Age of Technology? They are Obsolete with Technology and so we can REMOVE a LAYER of Corruption!
Here's an idea. How about people buy a home and stay there? Most of our parents are still in the homes we were raised in. Its only recently that people started to "downsize." Buy a home, as big as you can afford, and live with it. No, not everyone will get their own bedroom. No, people might have to wait in for their turn in the bathroom. But guess what? One of these days, you own it. If you can pay taxes on it, you can live there forever!
Maybe the problem isn't houses going up 5% or down 5%. Maybe the problem is everyone thinking they need a new house every 5 or 6 years.
There are times when it's reasonable to buy a home (thinking that you will be there forever) and then 5-10 years down the road your employer sends you elsewhere..... In THAT case I can agree with the idea of not living in the home until you cannot anymore.
In almost every other case..... You are ENTIRELY correct! Home Ownership is NOT designed to create wealth! The purpose of home ownership is to have a location that you can call your own where you live!
Who really makes the money when home prices go up?
Local communities make out pretty good when property taxes increase (bureaucrats get paid more and we get a few new laws, but somehow schools never seem to get better). Banks make a fortune on larger mortgages. Speculators and flippers also get rich. But what about the average home owner who stays in their home 30 years? A few do make money if they sell at the right time, but the majority are in many ways worse off.
I'd rather see stable prices. People who want to speculate should do it in the stock market.
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Okay. I am thinking about it. I don't think that your assumptions about the relative effects of increases vs. decreases of interest rates on home values makes sense. There is no reason that I can think of that this would have a normal distribution effect.
I think the point is that all housing values will fall if a growing percentage of the houses remain empty.
Just a thought.
That's EXACTLY the point that Dean was making. The mortgage companies are saying that if Freddie and Fannie were to offer a one percent drop in interest rates (from 5.5% to 4.5%) for all mortgages, this will result in home prices RISING. Dean was pointing out how this is NOT the reason people pay what they pay for homes!
No, he says if a 1% drop causes a 5% rise in prices, then a 2.5% increase could cause a 10% drop in prices. I am saying that I am unaware of any evidence that home prices respond to fluctuations in interest rates in this manner. The analogy is arbitrary.
If we cannot get people into home that are now empty, all house prices will remain low and that is something that should be avoided.
What about foregiveness for foreclosure. Instead of having to wait several years to buy another home, how about helping them purchase something within their means?? Otherwise we'll have empty homes for a long time...
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