Treat house mortgages just like Reg-T margin.

[Sandybestdog]

I bought a house last year with 3% down plus closing costs. The fact that housing prices went down probably 40% in my area is the only way I could afford a house. My mortgage of $1200 will be easily maintanable so long as my income stays about the same, or maybe a little lower.

It seems the problem is not people not being able to afford their house, but people being so massively flipped. The person I bought the house from bought it in 2006 at the height of the boom at $265k. I don't think she was behind in the mortgage, but was moving out of the country. What is she supposed to do? People buy and sell their homes for many purposes. It's not her fault that she just so happened to buy at the top. You would think that after 5 years of paying a mortgage, you would at least be able to break even after selling expenses. But after I bought it for $150k, she was probably at least $50k flipped.

If the powers that be hadn't pushed prices so high, there wouldn't be so many short sales.

 

[piezoe]

Quote from KINGOFSHORTS:

One of the things that brought the Great Depression was allowing people to speculate using 90% margin borrowing or more to speculate on stock.

Well you know how that went.

Well 21st century comes around, and what do we do, allow people to speculate on another trading instrument with 90-100% margin. (housing)

And we know how that went, a repeat of 1929. And of course what happens when you let speculators and investors jump in, prices go up.

With that in mind, I think the best thing you can do is have something similar to Reg-T for housing.

Want to buy a house, you need to put 50% down in order to meet the mortgage margin.


What this will do is drive the price of housing rather quickly over time and drive out the high margin speculators out of the market as well.

Once you require a 50% down payment you will no longer see 200K homes in places with average salaries of 30K and instead housing will go back to more realistic price points. That 200K home will probably end up selling for 75-80K which makes it more realistic for average salaries.

With the Middle class American much less house poor if prices drop to realistic levels, you would see the economy grow as the velocity of money increases due to more money being spend in the community instead of going into a big money sink (ie: big mortgage)

Every now and then someone posts something worth reading, and then thinking about it. Thank you.

 

[S2007S]

I know someone right now that is still in foreclosure that hasnt paid a mortgage payment in months, maybe a year or so, after the rates adjusted their mortgage was over $6,000 a month, so without spending that money in mortgage payments every month now they can go out and spend it on dinners, entertainment, clothing, so that is true, most of the money that would have gone towards mortgage payments is now just going into the economy as many, many, people, probably millions of people have stopped paying their mortgage. And everyone thinks the economy is getting better?? HAHA. After you pump trillions of dollars into a worthless economy of course things are going to "turn around"!

 

[S2007S]

Quote from denner:

Right, we get that, but you're sort of missing the point. The housing bubble was engineered deliberately to "feed" Wall Street, to generate short term job growth and to "stimulate" the economy to counter-act the tech collapse and the post-911 recession.

I still contend that the FR shifted its focus to gaming asset prices to counter-act the lack of wage growth from the early 1990's and onwards. Sort of a Pavlovian trick to get people to borrow up to their eyeballs and prolong this paper shuffling economy of ours.

Exactly right, it was engineered, as I have been saying time and time again this whole economy is now based off of asset bubbles, its the only way to produce growth in this economy. Its not real growth, its all stimulated growth and thats what many people completely fail to understand. There is no growth, its all money being pumped into the system, its the zero percent interest rates and all the massive QE, thats not real growth....fools only believe that to be real growth.

 

[Epic]

Quote from S2007S:

I know someone right now that is still in foreclosure that hasnt paid a mortgage payment in months, maybe a year or so, after the rates adjusted their mortgage was over $6,000 a month, so without spending that money in mortgage payments every month now they can go out and spend it on dinners, entertainment, clothing, so that is true, most of the money that would have gone towards mortgage payments is now just going into the economy as many, many, people, probably millions of people have stopped paying their mortgage. And everyone thinks the economy is getting better?? HAHA. After you pump trillions of dollars into a worthless economy of course things are going to "turn around"!

OK, just one quick question.

Is there any real difference between that person in your example paying their mortgage vs going out to dinner? What you are suggesting is that had the money been used for a mortgage payment it would not have "gone back into the economy". Do you really think that there is some vault somewhere that all mortgage payments are paid into, never to be seen again by those of us participating in the real economy?

In reality, there is almost no difference in terms of economic strength between someone spending money on a mortgage vs them spending the money on movie tickets and dinners.

 

[Epic]

Quote from KINGOFSHORTS:

One of the things that brought the Great Depression was allowing people to speculate using 90% margin borrowing or more to speculate on stock.

Well you know how that went.

Well 21st century comes around, and what do we do, allow people to speculate on another trading instrument with 90-100% margin. (housing)

And we know how that went, a repeat of 1929. And of course what happens when you let speculators and investors jump in, prices go up.

With that in mind, I think the best thing you can do is have something similar to Reg-T for housing.

Want to buy a house, you need to put 50% down in order to meet the mortgage margin.


What this will do is drive the price of housing rather quickly over time and drive out the high margin speculators out of the market as well.

Once you require a 50% down payment you will no longer see 200K homes in places with average salaries of 30K and instead housing will go back to more realistic price points. That 200K home will probably end up selling for 75-80K which makes it more realistic for average salaries.

With the Middle class American much less house poor if prices drop to realistic levels, you would see the economy grow as the velocity of money increases due to more money being spend in the community instead of going into a big money sink (ie: big mortgage)

There are pretty much just two things that will happen by suddenly requiring a 50% down payment.

1) Houses will get smaller.

2) The number of people working in residential construction will shrink.


That's pretty much it. Of course that is after the immediate 50% drop in home prices as well as massive deflation throughout the entire economic price structure.

 

[piezoe]

Quote from S2007S:

Exactly right, it was engineered, as I have been saying time and time again this whole economy is now based off of asset bubbles, its the only way to produce growth in this economy. Its not real growth, its all stimulated growth and thats what many people completely fail to understand. There is no growth, its all money being pumped into the system, its the zero percent interest rates and all the massive QE, thats not real growth....fools only believe that to be real growth.

There is no question that Greenspan was goosing the economy going into the 2004 election through inaction on mortgage excesses and leaving interest rates too low too long coming out of the recession. His big mistake, however, was to be a poor economist in not realizing that if you let market forces take care of excesses you could bring on a disaster. Market forces will, of course, correct excesses on their own, but by the time that happens you may have a totally collapsed economy on your hands. His laissez faire brand of capitalism has been thoroughly discredited.

Equally bad is the practice of putting only half of Keynes prescription for recessions in place. Keynes was right, but he made it clear that when the government leverages up in times of recession it must be followed by equivalent leveraging down, i.e., raising taxes and reducing spending during boom times. The Fed controls the first half of this cycle; Congress the second.^* Bernanke has fulfilled his responsibility, though one can certainly, and fairly, criticize aspects of the Fed's actions. The problem is that none of us have any faith that Congress, when it comes time to carry out the second half of the Keynes recession cure, will act responsibly and cut spending or raise taxes. We all are quite certain that instead Congress will go on spending like morons and also raise the indirect inflation tax. That is a very unsatisfactory way to run an economy and is certain to eventually lead to big trouble!

_____________________
^* this is a fundamental flaw in the structure of the economic control mechanism in the United States, now that the U.S. Dollar is a fiat currency.

 

[denner]

Quote from Epic:

OK, just one quick question.

Is there any real difference between that person in your example paying their mortgage vs going out to dinner? What you are suggesting is that had the money been used for a mortgage payment it would not have "gone back into the economy". Do you really think that there is some vault somewhere that all mortgage payments are paid into, never to be seen again by those of us participating in the real economy?

In reality, there is almost no difference in terms of economic strength between someone spending money on a mortgage vs them spending the money on movie tickets and dinners.

It's an interesting question, but I'd argue that people who are less inclined to spend that $3,000 or $6,000 per month on a mortgage payment might have different consumption patterns when compared to the where and how that $6,000 towards the mortgage would make its way into the broader economy.

 

[Epic]

Quote from denner:

It's an interesting question, but I'd argue that people who are less inclined to spend that $3,000 or $6,000 per month on a mortgage payment might have different consumption patterns when compared to the where and how that $6,000 towards the mortgage would make its way into the broader economy.

Historic data says otherwise. Housing serves as a de facto saving for most people. People spend the same portion of their income and save roughly the same portion of their income over time. The only thing that changes is method of savings. When shelter and transportation make up a smaller portion of expenditures, then people spend the extra money on other things, and choose other methods of saving along with their home.

Let's say that the median home is worth $200K for easy numbers and appreciates a nominal 5% ($10K) annually. And let's assume that the household cost of shelter is the typical 25% of household income, so something like $1500/month. That family is using the appreciation and equity to serve as savings.

OTOH, let's assume in this thread that increased down payment and other factors brought home values down to "realistic" levels of 1/2 of current values. The home is now worth $100K and appreciates by only $5K annual. But the family has an extra $600/month to save. If they save the entire amount, they will come out roughly the same at the end of the year.

The problem is that most of them won't save the entire amount. They will save 1/2 and waste the other half. The economy doesn't care either way really. They money gets back into the broader economy the same regardless, whether it is invested directly, or spent on goods and then invested downstream. But it does make a difference to the family. They usually end up with a lower net worth when their home is less valuable. It is strictly their own fault. They could've invested the difference in something with a better return, but they usually don't.

So expensive housing does effectively boost the average family's net worth. The problem is when it is taken to the extreme. Once you pass about 30% of household income for shelter, it becomes difficult to keep your head above water long enough to realize appreciation. And you've made yourself very vulnerable to forced liquidation at the worst possible time.