Why is low housing prices a problem?

[peilthetraveler]

Quote from noob_trad3r:

If housing prices plummet lets say to 1980 prices wont that make the wages people earn tolerable?

If wages are deflating over the decades, dont assets need to deflate?

If the average wage is 34K, then the average home should not cost 500K it should cost 70K

And that would be better for our economy since amercians wont be house poor and would have much more discretionary income left over for spending.


http://money.cnn.com/2011/01/25/real_estate/november_home_prices/index.htm?hpt=T2

Its a problem because most people will walk away from a house if they go underwater. If you owe $300k on your house and your neighbors house (which is identical to yours) goes up for sale for $150, what is the smart thing to do? Stay in your house? Or walk away and buy your neighbors house. With 20% down ($30k), you basically just walked away from $150k of debt and still have an identical house with lower payments.

Now...why is this a problem? Because who do you think is going to pay for that $150k the bank lost? Will it will just disappear and be forgotten about? No, the taxpayers will end up paying it so basically the debt gets passed on to everyone through higher taxes, and budget cuts. You kids will get less tax dollars going to education because someone walked away from a house declining in value.

Hope that helps explain it.

 

[Random.Capital]

Quote from Tucker Robinson:

20% down should be standard business practice. Rent untill you can aford a sizable down payment.

20% down is not a "sizable down payment" unless you accept continued government distortions in the mortgage markets. A market-sustainable mortgage looks more like 50% down, 7 year term & amortization.

 

[LeeD]

Quote from antitrust:

Securitization is key here
...
If the banks had to hang on to the loans none of this would of happened

Royal Bank of Scotland (one of the largest mortgage lenders and banks in the UK) hanged on to the loans. However, in order to keep lending the bank financed its mortgage book with short term loans in the money market. When the crisis hit and investors figured out the bank's books might not be as sound as they once seemed, they stopped lending and the bank would have collapsed if not for the government support.

Note it's the same scenario as in the US but no securitisation involved.

P.S. The CEO who got RBS into this mess got a £703,000 p.a. defined-benefit pension paid by the bank.

 

[Swan Noir]

It probably is a very bad idea for housing prices to outstrip the potential for the populace to pay for them. That said, once prices ARE at those levels, it is an even worse outcome for some if they quickly retrace to affordable levels.

Here's the rub. Many of us who want the market to dictate price are aware of the political realities. If houses prices retrace a great deal more the mortgage holders begin to go broke. And, since they have enough political clout to tamper with the process on the way down just as they did on the way up, we end up with a bastardized system that relies on our political leaders.

And most of them are imbeciles.

Quote from noob_trad3r:

it seems stupid to think that it is a good idea to make housing so expensive that it requires people to borrow for 30 years and be house poor.

 

[LeeD]

Quote from Swan Noir:

It probably is a very bad idea for housing prices to outstrip the potential for the populace to pay for them. That said, once prices ARE at those levels, it is an even worse outcome for some if they quickly retrace to affordable levels.

Here's the rub. Many of us who want the market to dictate price are aware of the political realities. If houses prices retrace a great deal more the mortgage holders begin to go broke. And, since they have enough political clout to tamper with the process on the way down just as they did on the way up, we end up with a bastardized system that relies on our political leaders.

And most of them are imbeciles.

You are drawing very dark picture.

The only way house prices can retrace to affordable levels without upsetting homeowners if they retrace in real (inflation-adjusted) terms while staying flat or growing slowly in nominal terms.

The ideal scenario for debt-ridden homeowners is double-digit inflation while interest rates stay low. Undoubtedly, salaries will lag behind inflation but this will be dwarved by the owed morgage falling compared to income.

Naturally, savers will be devastated by such a scenario but I guess as a group they don't have the clout.

 

[LeeD]

Quote from noob_trad3r:

it seems stupid to think that it is a good idea to make housing so expensive that it requires people to borrow for 30 years and be house poor.

In government policy there is no such thing as "greater good". Whatever the outcome is, there is always someone who wins and someone who looses out.

So, ask yourself: "Who wins from it?" Who wins form high property prices? Who wins from people having to borrow for 30 years? Who wins from boom-and-bust cycles?

 

[antitrust]

Quote from peilthetraveler:

Its a problem because most people will walk away from a house if they go underwater. If you owe $300k on your house and your neighbors house (which is identical to yours) goes up for sale for $150, what is the smart thing to do? Stay in your house? Or walk away and buy your neighbors house. With 20% down ($30k), you basically just walked away from $150k of debt and still have an identical house with lower payments.

Now...why is this a problem? Because who do you think is going to pay for that $150k the bank lost? Will it will just disappear and be forgotten about? No, the taxpayers will end up paying it so basically the debt gets passed on to everyone through higher taxes, and budget cuts. You kids will get less tax dollars going to education because someone walked away from a house declining in value.

Hope that helps explain it.

of course banks get to walk away from commercial properties without any scrutiny from the dumbed down masses. The same crowed trying to pass legislation against strategic foreclosures does just that. Well when we do it it's good business, when you do it you're a deadbeat. What a nation of suckers


http://www.mybudget360.com/commerci...o-124-trillion-making-room-for-more-bailouts/

http://www.californiabankruptcyatto...-increasingly-walk-away-from-their-loans.html

http://moneywatch.bnet.com/saving-m...you-should-walk-away-from-your-mortgage/1323/