What the fed can do to save the housing bubble?

[KingKong]

Enough has been said about the catastrophic sequence of a housing bubble. From another angle, since the sequence of a housing bubble is so severe, the fed will do everything it can to prevent it.

Now the question is what can the fed do to prevent this from happening?

Last housing bubble caused the S&L scandal and taxpayer had to bail out the banks. What the fed have to do to prevent the deja vu?

[powayseller]

I ask myself this same question. Any action which slows the housing bubble, such as raising interest rates and providing guidance on lending standards (i.e. this week’s OCC guidance to reduce risky lending), will bring the housing market to a screeching halt. This is because ARM holders can’t meet the higher payments and new borrowers can’t qualify for the loans needed to get into the houses they wish to buy. The OCC guidance doesn’t even carry any weight – it’s only a guidance. Even as the OCC issues guidance, at least one lender did just the opposite this week (see http://www.f*ckedborrower.com), and dropped their lending standards further, in the spirit of competition; they don’t want their customer to go to another lender with lower standards. One day out of bankruptcy is now good enough, the lowest of 3 FICO scores instead of just the average. The looser the standards, the more risky borrowers get loans, the worse the results when it collapses.
What can the fed really do? Any action reducing home prices:
1) reduces people’s retirement nest egg that is in home equity,
2) shuts down the housing ATM that is propping up the economy (with 1/3 of GDP a result of consumption) and
3) eliminates the source of most of the new jobs: the real estate related service and goods. Mortgage companies, home improvement stores, furniture retailers, remodeling and contracting businesses, realtors, escrow and title companies, are all at risk.

What would you do if you were Ben Bernanke? Wait and see what happens this spring? Print more money? I’d love to hear what others think.

[KingKong]

I am not as pessmistic as you are. Since they were so much free money, people has a large amount of cash or stock on hand. So it will soften the blow from the housing bubble.

Case in point: you sold your house for $800K and netted probably $300K cool cash. You have to put it somewhere. No matter where you put it, it is going back to the economy.

[powayseller]

kingKong, do you think I’m part of a large trend, i.e. people selling their homes, not having spent ANY of the equity, and then saving it waiting for a correction? I thought most people had spent their equity, and when they do have to sell, have nothing left to save. Also, I think I’m in the minority in anticipating the correction. I would like to hear which group of people has cash, because I’ve been reading, from the government even, about the housing ATM. Real cash comes from saving, not debt. I also think we’ll see a 50% decline in housing over 3 – 5 years, based on needing to get back to a trough baseline of per capita income/median house price needing of 9. Now the ratio is 14.5, and if you track SD history back to 1976, you’ll see that each correction brought us back to a ratio of 9. KingKong, I would love to hear any counter points you may make. Thank you.

[KingKong]

powayseller, thanks for the discussion.

I am in a old neighbourhood. The price doubled from its previous peak of 1990’s. We only had fewer people selling and each told me that they do not need the money from the sale.

As for your anticipated 50% drop. I am confused on the math, the current ration of median house price to per capita income is 14.5 and the lowest is 9. That implies a 30% drop. If it is a 50% drop, the ration should be 7.25. Plus, the per capital income should increase with inflation and it will further soften the drop. I am expecting a 20 to 25% correction. I would love to hear your arguement.

[powayseller]

A 30% drop would bring us back to the trough ratio of 9, which we had in 1985 and 1998. However, a 50% drop would bring us back to where we should be if home prices had risen with inflation, as they typically do. At 5% inflation, home prices should have continued on from their 1997 value of $200K to be about $320K today. I think we could have a larger than 30% correction via the median house price/per capita income ratio, because this time we have so many other factors: most new jobs tied to real estate, easy credit, equity already spent (housing ATM), and the deficit and falling dollar which could cause their own recession. In January, we’ll see a glut of inventory, and then just watch it go down from there.
Interesting point about the people who claim they don’t need the equity from the sale of their house:) I’ve heard so many homeowners tell me they hope housing values drop, they hope I’m right in selling, they don’t care if values go down. Are they all nuts?? They are in denial. Admitting they cared means they must do something about it, and homeowners are too emotionally invested in their homes to sell, are too worried about the stigma of being a renter, and are too used to hearing that you must own a house to build equity and reduce taxes. It’s a new mindset for folks. If they really don’t need the money from the sale, ask them if they would be willing to donate it to charity.

[KingKong]

I am more or less in the thinking that one should own his /her primary residence. My argument is that there are two risks to it: higher mortgage rate and home value decrease. If you take an affordable 30 year fixed, your payment is fixed until you are paying off the house and it greatly reduces your risk. The only risk you can’t avoid is that if you have to for whatever reason sell, you might sell for far less than what you paid for.

I know a family that sold their house in 2000 and became renter because the consecutive double digits increase prior to that. Every year I saw him, I can see the pain in his face and have to hear over and over his argument why the housing can’t go up permanently. From this painful observation, I think it is important to own your primary residence.

I think the risk in the market is for people who over extended themselved. There are two types here too: over extended to get in a primary residence and landlords who own multiple units through over extended leverage. I felt sympathy for the former and disgust for the latter.

[Jim Brubaker]

How can you justify the cost?

I bought a house in 1985 as a rental, real good price, my payements were 300 and the rent I received now is 825.

I made my living in San Diego selling VA repos to investors that wanted rental real estate in 1998. In 2001 I couln’t look someone in the eye and tell them it was a good time to buy real estate.

In order to invest in real estate sucessfully, you need to be able to purchase the place for 100 times the monthly rent. That isn’t going to happen around here real quick.

The question you have to ask yourself, why would anyone buy real estate to rent at a negative cash flow?

Of the answers I can think of, common sense is not one of them.

[powayseller]

Thread bumped. Another in a series of Piggington Meet-up Day Anniversary Posts, from the beginning days of the forum.

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