Owning a house is far more expensive than you are indicating here. Its not just mortage vs rent. Its mortage + insurance (not cheap) + taxes (incredibly not cheap) + upkeep and repairs + home own assocation fees (usually) vs rent.
To be fair, tenants insurance is generally more expensive than home insurance and you should have one or the other. As well, rental dwelling insurance, property taxes, maintenance, and homeowners assn fees are included in rent anyway or the landlord would be losing money.
I think that the internet has been for years on the path to creating what is essentially an electronic Necronomicon: A collection of blasphemous unrealities so perverse that to even glimpse at its contents, if but for a moment, is to irrevocably forfeit a portion of your sanity.
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?? Are you saying capital cannot mean "money" (in whatever form it takes)? Please tell me I am just missing your point here.
I'm saying that "capital" in "capitalism" doesn't mean money. Also, credit is not the basis of capitalism. Private ownership of capital is. (Where capital means productive goods, like an assembly line)
Back on topic. The Fed throwing a bunch of short-term money into the banking system is not (yet) the end of the world. They did the same before Y2K and after 9/11. The value of doing so is mostly psychological. It is meant to prevent a "bank run" scenario where everybody is worried they can't get back their cash, so everybody tries to cash in.
Also, if owning a house weren't cheaper (on average) than renting it, there wouldn't be any landlords.
That is such an assinine comment. To take a very simple example: The house I am renting for $1450 a month would probably sell for $750k-$900k. How is this possible (and indeed a common occurance around here)? Easy, the house was bought by my landlord in the late 90s when it was only worth about 150-200k.
A lot of people are very wrongly convinced that "buying is better" because they grew up in / got used to the situation of the last 15 years or so. When housing prices are near the top of the curve / coming down it often makes more sense to rent.
?? Are you saying capital cannot mean "money" (in whatever form it takes)? Please tell me I am just missing your point here.
I'm saying that "capital" in "capitalism" doesn't mean money.
I haven't heard this. Where did you pick it up?
I don't know, but he was trying to answer this statement ealier:
What is absolutely hilarious is that the actual meaning of what is translated as "usury" in the bible is charging any interest at all. Basicially, the fundamental basis of capitalism is a sin.
by pointing out that being able to loan money with interest is NOT the basis of capitalism.
That is such an assinine comment. To take a very simple example: The house I am renting for $1450 a month would probably sell for $750k-$900k. How is this possible (and indeed a common occurance around here)? Easy, the house was bought by my landlord in the late 90s when it was only worth about 150-200k.
If your landlord thought he could sell that house for $750K, he would obviously not be renting it to you for $1450 a month. What he paid for the house is completely irrelevant.
If he won that house and all associated maintenance and taxes in a lottery, would he rent it to you for free?
No.
There are two possibilities here:
a) Your landlord doesn't understand the market value of this asset and you are reaping the profits of his ignorance. Landlords this incompetent are quickly eliminated in housing markets. Only the sharp ones stick around and grow.
b) You have no idea what the house you rent could be sold for right now.
That is such an assinine comment. To take a very simple example: The house I am renting for $1450 a month would probably sell for $750k-$900k. How is this possible (and indeed a common occurance around here)? Easy, the house was bought by my landlord in the late 90s when it was only worth about 150-200k.
If your landlord thought he could sell that house for $750K, he would obviously not be renting it to you for $1450 a month. What he paid for the house is completely irrelevant.
If he won that house and all associated maintenance and taxes in a lottery, would he rent it to you for free?
No.
There are two possibilities here:
a) Your landlord doesn't understand the market value of this asset and you are reaping the profits of his ignorance. Landlords this incompetent are quickly eliminated in housing markets. Only the sharp ones stick around and grow.
b) You have no idea what the house you rent could be sold for right now.
Ask yourself, what's the more likely explanation?
Or, alternatly c) He intends to move back from SoCal late next year and thus wants to keep hold of the property you disgusting little prick. I am aware of the value based on several similar properties that have sold in the recent past. Hell, not 100 feet down the sidewalk a tiny townhome just went for $516,000.
Now shut the fuck up and stay out of conversations which you are whoefully unprepared to understand.
?? Are you saying capital cannot mean "money" (in whatever form it takes)? Please tell me I am just missing your point here.
I'm saying that "capital" in "capitalism" doesn't mean money.
I haven't heard this. Where did you pick it up?
Capital as an economic term refers to one of the factors of production. The other three are land, labor, and enterprise (now called "entrepreneurial ability").
It can mean "a pile of money" in finance or accounting. But that is not its sense in "capitalism," which is an economic term. Super happy bonus fact: Economists refer to a pile of money as "wealth." I know, weird that the term wouldn't just have a consistent definition across disciplines.
That is such an assinine comment. To take a very simple example: The house I am renting for $1450 a month would probably sell for $750k-$900k. How is this possible (and indeed a common occurance around here)? Easy, the house was bought by my landlord in the late 90s when it was only worth about 150-200k.
If your landlord thought he could sell that house for $750K, he would obviously not be renting it to you for $1450 a month. What he paid for the house is completely irrelevant.
If he won that house and all associated maintenance and taxes in a lottery, would he rent it to you for free?
No.
There are two possibilities here:
a) Your landlord doesn't understand the market value of this asset and you are reaping the profits of his ignorance. Landlords this incompetent are quickly eliminated in housing markets. Only the sharp ones stick around and grow.
b) You have no idea what the house you rent could be sold for right now.
Ask yourself, what's the more likely explanation?
Or, alternatly c) He intends to move back from SoCal late next year and thus wants to keep hold of the property you disgusting little prick. I am aware of the value based on several similar properties that have sold in the recent past. Hell, not 100 feet down the sidewalk a tiny townhome just went for $516,000.
Now shut the fuck up and stay out of conversations which you are whoefully unprepared to understand.
Clearly this guy is not planning on renting to you long-term, unlike the vast majority of the housing market. This is just a temporary situation and he is actually planning on being eliminated from the housing market. You found a good situation, but that is hardly representative of most cases. He couldn't have you paying this kind of rent long term, it just wouldn't make fiscal sense, especially if someone else wanted the spot (and, considering the price of that townhome, you probably live in a high-demand area) for a long-term solution and was willing to pay more.
And there's no need to insult people like that because you disagree with them.
?? Are you saying capital cannot mean "money" (in whatever form it takes)? Please tell me I am just missing your point here.
I'm saying that "capital" in "capitalism" doesn't mean money.
I haven't heard this. Where did you pick it up?
Capital as an economic term refers to one of the factors of production. The other three are land, labor, and enterprise (now called "entrepreneurial ability").
It can mean "a pile of money" in finance or accounting. But that is not its sense in "capitalism," which is an economic term. Super happy bonus fact: Economists refer to a pile of money as "wealth." I know, weird that the term wouldn't just have a consistent definition across disciplines.
I'll find you a primary reference tomorrow.
You know, I've taken four economics classes now, and piles of money are refered to as capital.
In fact, let me quote Adam Smith using "capital" to refer to a pile of money.
As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so the capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner.
That is such an assinine comment. To take a very simple example: The house I am renting for $1450 a month would probably sell for $750k-$900k. How is this possible (and indeed a common occurance around here)? Easy, the house was bought by my landlord in the late 90s when it was only worth about 150-200k.
If your landlord thought he could sell that house for $750K, he would obviously not be renting it to you for $1450 a month. What he paid for the house is completely irrelevant.
If he won that house and all associated maintenance and taxes in a lottery, would he rent it to you for free?
No.
There are two possibilities here:
a) Your landlord doesn't understand the market value of this asset and you are reaping the profits of his ignorance. Landlords this incompetent are quickly eliminated in housing markets. Only the sharp ones stick around and grow.
b) You have no idea what the house you rent could be sold for right now.
Ask yourself, what's the more likely explanation?
Ok, so without further information, Riemann's example is very anecdotal. But his situation could be similar to the situation in my area, where the cost of houses has far outpaced the rent people can afford. Landlords would have an impossible time finding people who could afford a three bedroom, two bath house (typical family home) for more than $1000 because of the average wages in the area. But to purchase the same home, one would be hard pressed to find one that wasn't a dump for under $300k.
That actually seems to be the situation in a lot of markets. The cost of ownership has greatly exceeded the cost of renting an equivalent property.
I can't speak for Canada, but I suspect your current housing market is similar to ours.
At the moment, interest rates are high and in many areas, sellers are still desperately trying to hold the line on their prices so they don't take a bath on reselling the house. That is, there's a lag between rate hikes and price cuts. Also, there's a large but uncertain number of homes facing foreclosure over the next year or two.
Basically, it's a terrible time to buy property. You're going to get screwed on your rate and your property is going to lose value unless you're in an ironclad market.
Actually, we're lagged way behind you guys, here. We' still in the irrational "housing prices are going up up up , they've trippled in 5 years, buy now on 0% down payment credit and flip it in two years for the massive profits" segment, though I get the feeling we're hitting the peak.
I'm fucking renting until I can snap up someone's foreclosure. You'd have to be an idiot to buy now.
I'm fucking renting until I can snap up someone's foreclosure. You'd have to be an idiot to buy now.
All signs point to: RENT, until further notice? I can't say I have a problem with that. Although, with the exception of the extreme bubble markets perhaps, there are good enough deals to be found to justify purchasing. At least, from my point of view of wanting to provide shelter for my family. From a perspective of being concerned about my ROI, I wouldn't buy to save my life.
I'm fucking renting until I can snap up someone's foreclosure. You'd have to be an idiot to buy now.
All signs point to: RENT, until further notice? I can't say I have a problem with that. Although, with the exception of the extreme bubble markets perhaps, there are good enough deals to be found to justify purchasing. At least, from my point of view of wanting to provide shelter for my family. From a perspective of being concerned about my ROI, I wouldn't buy to save my life.
Note that I'm in the Canadian housing market, specifically in one that is insanely inflated at the moment. Whether or not it's a good time to buy in the US is another story, and one that depends on the market you're in.
Well yeah, the question of whether to buy or not in the US is very much dependent on what market you're in, when considering cost. But we're definitely well on our way to stricter lender underwriting, which is universal across the country (AFAIK). Unfortunately, I don't live in a market that isn't heavily inflated.
So what is the outcome of all this mess? Will the government regulate or eliminate interest only and negative amortization loans?
The outcome is that people who invested in risky loans will lose money and people who bought houses they couldn't afford will lose houses. The government might tighten the regulatory screws (i.e. raise barriers for entry into the market) but they won't eliminate such loans.
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MichaelLCIn what furnace was thy brain?ChicagoRegistered Userregular
edited August 2007
It's just boggling to me how someone would pay $500k+ for a townhouse around here (near-Chicago suburbs) when you can get a 3bdrm house in IND or near WI for $120k. Or the lot in a suburb here that sold for $1.7mil. Yeah, just a lot.
Where are these people getting this money? Are they just building house-of-cards financial plans, hoping they don't come crashing down, or not giving a rat's ass that they're creating these future problems for their kids?
It's just boggling to me how someone would pay $500k+ for a townhouse around here (near-Chicago suburbs) when you can get a 3bdrm house in IND or near WI for $120k. Or the lot in a suburb here that sold for $1.7mil. Yeah, just a lot.
Where are these people getting this money? Are they just building house-of-cards financial plans, hoping they don't come crashing down, or not giving a rat's ass that they're creating these future problems for their kids?
If they can afford it they are getting a shorter commute, better life. If they can't they are getting fucked.
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MrMisterJesus dying on the cross in pain? Morally better than us. One has to go "all in".Registered Userregular
It's just boggling to me how someone would pay $500k+ for a townhouse around here (near-Chicago suburbs) when you can get a 3bdrm house in IND or near WI for $120k. Or the lot in a suburb here that sold for $1.7mil. Yeah, just a lot.
Where are these people getting this money? Are they just building house-of-cards financial plans, hoping they don't come crashing down, or not giving a rat's ass that they're creating these future problems for their kids?
If they can afford it they are getting a shorter commute, better life. If they can't they are getting fucked.
So what is the outcome of all this mess? Will the government regulate or eliminate interest only and negative amortization loans?
The outcome is that people who invested in risky loans will lose money and people who bought houses they couldn't afford will lose houses. The government might tighten the regulatory screws (i.e. raise barriers for entry into the market) but they won't eliminate such loans.
I heard some stuff about the government bailing them out.
on a $750k appraised house, $1450/month doesn't even take in enough income to cover property taxes. the owner obviously has more money than sense. if i had to pay $20k in prop taxes on a rental unit per year i'd damn sure collect at least that much in rents. sounds like a seriously f-ed up real estate environment to be collecting that little rent on such an expensive property (e.g. the $285k house down the street rents for $1750 monthly)
So what is the outcome of all this mess? Will the government regulate or eliminate interest only and negative amortization loans?
The outcome is that people who invested in risky loans will lose money and people who bought houses they couldn't afford will lose houses. The government might tighten the regulatory screws (i.e. raise barriers for entry into the market) but they won't eliminate such loans.
I heard some stuff about the government bailing them out.
The problem is too big for a bail out. Like hundreds of billions of dollars too big.
This event is having global ramifications for a reason.
Actually at this rate, it will probably drive the US economy into recession in about 4-6 months.
So what is the outcome of all this mess? Will the government regulate or eliminate interest only and negative amortization loans?
The outcome is that people who invested in risky loans will lose money and people who bought houses they couldn't afford will lose houses. The government might tighten the regulatory screws (i.e. raise barriers for entry into the market) but they won't eliminate such loans.
I heard some stuff about the government bailing them out.
The problem is too big for a bail out. Like hundreds of billions of dollars too big.
This event is having global ramifications for a reason.
Actually at this rate, it will probably drive the US economy into recession in about 4-6 months.
I dont suppose you can cite any sources for the last claim, or provide an extremely detailed explanation as to why it is true. I am a newbie in this feild and I am trying to learn, but currently I have no idea what to believe and what not to believe, so anything I learn must come from a reliable source, until I am able to judge for myself.
Well I am a bit pressed for time right at this moment, but I will describe to you the mechanics of why this could happen (stats at this point would take me time I don't have, but I will get them later for you).
(Also at this point I will mention that my area of expertise revolves around structured debt products and the securitisation thereof, which gives me a good understanding of how this process works... though I am hardly an 'expert').
Okay, why could this result in a recession for the US?
The reason why this defaults could do this is due to the way in which mortgages influence the overall economic system. The first way is the most basic (and most obvious). People buy homes and take out a mortgage, this represents a creation of capital in the market and an injection into the circular flow- all these people are paying off their mortgages, which means money is going around in the system, allowing whomever is collecting the repayments more scope to further inject into the circular flow through business expansion/hiring people/investment. Ultimately, this filters back into the economy at large.
Now when this process starts to degrade, it has a similar effect on the circular flow, but due to nature of the problem, its effect is double. Why is that? Well, what happens is that all those people who default on their loans reduces the ability of the corporations who wrote those loans to stay solvent. For various reasons, a corporation going bankrupt has an detrimental effect on economic prosperity many times worse than basic economics would suggest. This is mainly due to the effect it has on 'animal spirits' or market sentiment. If enough businesses fail this negative market sentiment can become sector-wide, which once again is even worse. Furthermore, all these people who have defaulted are also no longer injecting anywhere near as much into the economy because their expenditure on basic retail goods tends to fall through the floor. As the retail market represents a significant chunk of the US economy (something like 33%), large-scale loan defaults represent an extremely unsettling sign for future profit outlooks for these companies (witness large-scale drops in many retail companies on the NYSE this past week).
Now as you have probably picked up on, I have been referencing the stock market a bit. This is because mortgages as you know them do a lot more for the economy than you might realise... they are in fact (in many ways) one of the most important engines of an economy due to way in which the create wealth multipliers for the banks that write them.
How do they do this? Ok, this is where my experience comes in; Banks write a bunch of loans (say $100 billion). Now they are receiving $100 billion over 30 years or so plus interest. This is definately nice, but anyone who understands the concept of par value would realise that $100 billion right now is way better than $200 billion (including interest) in 30 years. But this $200 billion is illiquid because the mortgage allows them to pay it off over years and not be subject to a margin call or something similar.
So what do banks do? Why, they securitise it! What I mean by that is that they take their 'portfolio' (not the right term but easier to understand) of loans and sell them on as debt to the market (ie Bonds backed by Assets). This means that they sell the 'rights' to the principle and interest to the portfolio of loans to the market (ie insto investors usually) in exchange for the $100 billion upfront.
They then use this money to start the process all over again and write more loans!
Ingenious huh? Its called engineering income. There are a myriad ways of doing this (CDOs, ABS, RMBS, CMBS, CDSs etc etc). Essentially its like multiplying your income.
Every large bank does this.
Now, over the past few years banks have been making a lot of money off of very cheap debt as the market has snapped up these bonds due to a bullish market and soaring housing prices, coupled with easy access to further mortgages (through the ascendancy of sub-prime loans). This has driven down margins on debt offerings (ie the premium investors get for investing in these products), which has been a boon for money making institutions.
Now what has happened is that this wheel has started to stall as sub-prime loans have fallen over faster than a deck cards in a typhoon. This has potentially catastrophic ramifications for the banking and finance sector, as everything from the retail banking to mergers and acquisitions (actually ESPECIALLY mergers and acquisitions) relies on access to this type of debt to continue fuctioning and making profits. It is an engine and if it stalls it can bring down the whole system with it into a recession.
So, in summary, considering the way in which sub-prime has a massive knock on effect in the economy and the potential extent of the rot, there is a very real possibility that the US economy may go into recession as the money-making engine grinds to a halt.
This was a very brief summary (time constrained as I am), I will get some figures and expand upon this in more detail if requested (if I haven't bored the shit out of everyone already!).
Docken, that's interesting stuff, I'd like to hear some more with some facts/figures too.
I still don't understand how the bank sells the principle + interest to the market. Basically what banks do is collect liquid money from everyone (mortgage payments, investors who buy the rights to those payments..? this doesn't make sense but anyways) and then redistributes that liquid money into unliquid companies and such? (business loans, credit lines, etc).
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Docken thanks for that, and it'd be great if you provide more information. You're the first person I've talked to that has actual knowledge on what seems to be a key part of this, namely banks selling their debt, which is something I dont really understand. Trusty internet, there is usually someone knowledgeable around.
THERE is a paradox at the heart of the financial markets. And that paradox is playing a key role in the continuing tumult. It is commonly assumed that the growth of hedge funds has dispersed market risk. In particular, credit risk has been packaged up and resold. When bad debts occur, the pain is spread far and wide instead of focused on the high-street banks, which hold the deposits of ordinary consumers. The result should be a more robust financial system.
At the same time, however, financial regulators have been looking for ways to keep tabs on the fast-growing hedge-fund industry. They are naturally keen to avoid a repeat of 1998, when the collapse of Long-Term Capital Management (LTCM) prompted a liquidity crisis. Many regulators have decided they can keep in touch with hedge funds by monitoring the activities of the prime brokers that serve them.
This makes sense. After all, prime brokers provide the finance that allows hedge funds to gear up their returns and lend them the stocks so they can sell individual shares short (ie, gamble that their prices will fall). And monitoring is made all the easier because three investment banks—Goldman Sachs, Morgan Stanley and Bear Stearns—dominate prime brokerage. The trio act as brokers for about 60% of hedge-fund assets.
But this is where the paradox appears. Hedge funds are supposed to be dispersing risk. But if their chief financiers are just three Wall Street banks, is this dispersion more apparent than real? Could banks have shown risk out of the front door by selling loans, only to let it return through the back door of prime broking? Take credit insurance. Banks that own corporate bonds may use the swaps market to hedge against a company defaulting. But if the other side of the swap is taken by a hedge fund whose finances are dependent on loans from that same bank, has risk really been transferred?
The prime-brokerage arms of investment banks also face a number of potential conflicts of interest. The trading desks of those banks will be operating in the same markets as the hedge funds and often taking the same positions.
This is hardly surprising; many hedge-fund managers have previously worked on trading desks and will be using systems developed at their old employers. But it creates the opportunity for banks to trade against their clients' interests. As became clear in the fallout from 1998, banks that were aware of LTCM's loss-making positions had a real advantage.
Of course, prime brokers say they go to great lengths to keep themselves separate from their trading desks. Still, most hedge funds are sufficiently suspicious to maintain links with several brokers, so that no single firm is aware of all their positions.
In some ways prime brokers may also act against the interests of their own parent banks. At the moment, brokers are trying to rein back the funding they provide to the smaller and weaker hedge funds. This is quite natural, given the recent problems in credit markets. The brokers may have been pledged collateral against their hedge-fund loans but, as Merrill Lynch recently discovered in its dealings with two Bear Stearns hedge funds, it may not be possible to sell that collateral for anything like the current market price.
However, taking away credit from hedge funds means they have to sell assets. And that may hurt the trading desks of the investment banks as prices fall. It may also hurt the syndication departments and bond-sales desks—the divisions that peddle the debt the banks have underwritten. Without hedge funds to buy the bonds or loans, the risk may end up back on the banks' balance sheets.
The fundamental problem is the nature of market liquidity. When hedge funds are doing well, prime brokers are happy to lend them money; in turn, the use of geared money by hedge funds drives up asset prices. (Although some funds will take short positions, the industry normally has a net long position.)
But when prime brokers turn off the funding tap, this virtuous circle may turn vicious. Hedge funds may be forced to sell their most liquid holdings since more complex positions may be impossible to offload. So a problem in one part of the financial system, such as American subprime mortgages, can quickly become a global issue. As Richard Bookstaber wrote in his recent book, “A Demon of Our Own Designâ€: “Trying to control the risk ends up creating the liquidity crisis.â€
The financial system will probably survive this sell-off: the global economy looks resilient enough. But the market turmoil may be a dress rehearsal for the real crisis that will emerge when the economy is in poorer shape.
Wouldn't other groups jump at the chance to buy assets that hedge funds possess? This may be doom and gloom for those nads deep into hedge funds, but there should be others who are liquid and would see the risk that larger instututions are shedding off as worth it.
Well I am a bit pressed for time right at this moment, but I will describe to you the mechanics of why this could happen (stats at this point would take me time I don't have, but I will get them later for you).
(Also at this point I will mention that my area of expertise revolves around structured debt products and the securitisation thereof, which gives me a good understanding of how this process works... though I am hardly an 'expert').
Okay, why could this result in a recession for the US?
The reason why this defaults could do this is due to the way in which mortgages influence the overall economic system. The first way is the most basic (and most obvious). People buy homes and take out a mortgage, this represents a creation of capital in the market and an injection into the circular flow- all these people are paying off their mortgages, which means money is going around in the system, allowing whomever is collecting the repayments more scope to further inject into the circular flow through business expansion/hiring people/investment. Ultimately, this filters back into the economy at large.
Now when this process starts to degrade, it has a similar effect on the circular flow, but due to nature of the problem, its effect is double. Why is that? Well, what happens is that all those people who default on their loans reduces the ability of the corporations who wrote those loans to stay solvent. For various reasons, a corporation going bankrupt has an detrimental effect on economic prosperity many times worse than basic economics would suggest. This is mainly due to the effect it has on 'animal spirits' or market sentiment. If enough businesses fail this negative market sentiment can become sector-wide, which once again is even worse. Furthermore, all these people who have defaulted are also no longer injecting anywhere near as much into the economy because their expenditure on basic retail goods tends to fall through the floor. As the retail market represents a significant chunk of the US economy (something like 33%), large-scale loan defaults represent an extremely unsettling sign for future profit outlooks for these companies (witness large-scale drops in many retail companies on the NYSE this past week).
Now as you have probably picked up on, I have been referencing the stock market a bit. This is because mortgages as you know them do a lot more for the economy than you might realise... they are in fact (in many ways) one of the most important engines of an economy due to way in which the create wealth multipliers for the banks that write them.
How do they do this? Ok, this is where my experience comes in; Banks write a bunch of loans (say $100 billion). Now they are receiving $100 billion over 30 years or so plus interest. This is definately nice, but anyone who understands the concept of par value would realise that $100 billion right now is way better than $200 billion (including interest) in 30 years. But this $200 billion is illiquid because the mortgage allows them to pay it off over years and not be subject to a margin call or something similar.
So what do banks do? Why, they securitise it! What I mean by that is that they take their 'portfolio' (not the right term but easier to understand) of loans and sell them on as debt to the market (ie Bonds backed by Assets). This means that they sell the 'rights' to the principle and interest to the portfolio of loans to the market (ie insto investors usually) in exchange for the $100 billion upfront.
They then use this money to start the process all over again and write more loans!
Ingenious huh? Its called engineering income. There are a myriad ways of doing this (CDOs, ABS, RMBS, CMBS, CDSs etc etc). Essentially its like multiplying your income.
Every large bank does this.
Now, over the past few years banks have been making a lot of money off of very cheap debt as the market has snapped up these bonds due to a bullish market and soaring housing prices, coupled with easy access to further mortgages (through the ascendancy of sub-prime loans). This has driven down margins on debt offerings (ie the premium investors get for investing in these products), which has been a boon for money making institutions.
Now what has happened is that this wheel has started to stall as sub-prime loans have fallen over faster than a deck cards in a typhoon. This has potentially catastrophic ramifications for the banking and finance sector, as everything from the retail banking to mergers and acquisitions (actually ESPECIALLY mergers and acquisitions) relies on access to this type of debt to continue fuctioning and making profits. It is an engine and if it stalls it can bring down the whole system with it into a recession.
So, in summary, considering the way in which sub-prime has a massive knock on effect in the economy and the potential extent of the rot, there is a very real possibility that the US economy may go into recession as the money-making engine grinds to a halt.
This was a very brief summary (time constrained as I am), I will get some figures and expand upon this in more detail if requested (if I haven't bored the shit out of everyone already!).
Fuck me. I read "billion" as "million" for your orignation amount. Deleted my post. I will say that I see no problem with securitization as long as underwriting standards are maintained (which is always a challenge). Obviously there is a problem when Moody's is giving CDO's comprised of sub-prime loans AAA ratings, but in general a securitization is a good instrument to increase liquidity in the market and move assets to those who value them the most.
Note that I'm in the Canadian housing market, specifically in one that is insanely inflated at the moment. Whether or not it's a good time to buy in the US is another story, and one that depends on the market you're in.
The Canadian major city markets are quite inflated, but they've still gone up quite a bit from June 2006 to June 2007. As I recall, Toronto, Montreal, Calgary, and Edmonton were slowing down while cities in Manitoba and Saskatchewan were actually going up pretty quick. I'm waiting for a crash, but I've been waiting a long time. I don't believe the Canadian housing markets are in as bad shape as the American markets, since we didn't get the same level and type of ridiculous loans.
Somehow Victoria is still shooting upwards and the feeling of being an idiot too late to the party when I bought almost three years ago, has gone away. Seriously, the $100,000 townhouse when built in 2003 was $225,000 when I got it in 2005, and is over $325,000 now.
I think that the internet has been for years on the path to creating what is essentially an electronic Necronomicon: A collection of blasphemous unrealities so perverse that to even glimpse at its contents, if but for a moment, is to irrevocably forfeit a portion of your sanity.
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If you ever need to talk to someone, feel free to message me. Yes, that includes you.
I'm saying that "capital" in "capitalism" doesn't mean money. Also, credit is not the basis of capitalism. Private ownership of capital is. (Where capital means productive goods, like an assembly line)
Back on topic. The Fed throwing a bunch of short-term money into the banking system is not (yet) the end of the world. They did the same before Y2K and after 9/11. The value of doing so is mostly psychological. It is meant to prevent a "bank run" scenario where everybody is worried they can't get back their cash, so everybody tries to cash in.
The FDIC does the same for us small timers.
That is such an assinine comment. To take a very simple example: The house I am renting for $1450 a month would probably sell for $750k-$900k. How is this possible (and indeed a common occurance around here)? Easy, the house was bought by my landlord in the late 90s when it was only worth about 150-200k.
A lot of people are very wrongly convinced that "buying is better" because they grew up in / got used to the situation of the last 15 years or so. When housing prices are near the top of the curve / coming down it often makes more sense to rent.
I haven't heard this. Where did you pick it up?
I don't know, but he was trying to answer this statement ealier:
by pointing out that being able to loan money with interest is NOT the basis of capitalism.
If your landlord thought he could sell that house for $750K, he would obviously not be renting it to you for $1450 a month. What he paid for the house is completely irrelevant.
If he won that house and all associated maintenance and taxes in a lottery, would he rent it to you for free?
There are two possibilities here:
a) Your landlord doesn't understand the market value of this asset and you are reaping the profits of his ignorance. Landlords this incompetent are quickly eliminated in housing markets. Only the sharp ones stick around and grow.
b) You have no idea what the house you rent could be sold for right now.
Ask yourself, what's the more likely explanation?
Or, alternatly c) He intends to move back from SoCal late next year and thus wants to keep hold of the property you disgusting little prick. I am aware of the value based on several similar properties that have sold in the recent past. Hell, not 100 feet down the sidewalk a tiny townhome just went for $516,000.
Now shut the fuck up and stay out of conversations which you are whoefully unprepared to understand.
Capital as an economic term refers to one of the factors of production. The other three are land, labor, and enterprise (now called "entrepreneurial ability").
It can mean "a pile of money" in finance or accounting. But that is not its sense in "capitalism," which is an economic term. Super happy bonus fact: Economists refer to a pile of money as "wealth." I know, weird that the term wouldn't just have a consistent definition across disciplines.
I'll find you a primary reference tomorrow.
We've met?
And apparently you stole his lunch money or something.
Clearly this guy is not planning on renting to you long-term, unlike the vast majority of the housing market. This is just a temporary situation and he is actually planning on being eliminated from the housing market. You found a good situation, but that is hardly representative of most cases. He couldn't have you paying this kind of rent long term, it just wouldn't make fiscal sense, especially if someone else wanted the spot (and, considering the price of that townhome, you probably live in a high-demand area) for a long-term solution and was willing to pay more.
And there's no need to insult people like that because you disagree with them.
You know, I've taken four economics classes now, and piles of money are refered to as capital.
In fact, let me quote Adam Smith using "capital" to refer to a pile of money.
Ok, so without further information, Riemann's example is very anecdotal. But his situation could be similar to the situation in my area, where the cost of houses has far outpaced the rent people can afford. Landlords would have an impossible time finding people who could afford a three bedroom, two bath house (typical family home) for more than $1000 because of the average wages in the area. But to purchase the same home, one would be hard pressed to find one that wasn't a dump for under $300k.
That actually seems to be the situation in a lot of markets. The cost of ownership has greatly exceeded the cost of renting an equivalent property.
Actually, we're lagged way behind you guys, here. We' still in the irrational "housing prices are going up up up , they've trippled in 5 years, buy now on 0% down payment credit and flip it in two years for the massive profits" segment, though I get the feeling we're hitting the peak.
I'm fucking renting until I can snap up someone's foreclosure. You'd have to be an idiot to buy now.
All signs point to: RENT, until further notice? I can't say I have a problem with that. Although, with the exception of the extreme bubble markets perhaps, there are good enough deals to be found to justify purchasing. At least, from my point of view of wanting to provide shelter for my family. From a perspective of being concerned about my ROI, I wouldn't buy to save my life.
Note that I'm in the Canadian housing market, specifically in one that is insanely inflated at the moment. Whether or not it's a good time to buy in the US is another story, and one that depends on the market you're in.
The outcome is that people who invested in risky loans will lose money and people who bought houses they couldn't afford will lose houses. The government might tighten the regulatory screws (i.e. raise barriers for entry into the market) but they won't eliminate such loans.
― Marcus Aurelius
Path of Exile: themightypuck
Where are these people getting this money? Are they just building house-of-cards financial plans, hoping they don't come crashing down, or not giving a rat's ass that they're creating these future problems for their kids?
If they can afford it they are getting a shorter commute, better life. If they can't they are getting fucked.
― Marcus Aurelius
Path of Exile: themightypuck
You can get fairly cheap housing around here, for instance, because here SUCKS.
But a shitty house in a slum vaguely near Monterey is half a fucking million dollars minimum.
I heard some stuff about the government bailing them out.
The problem is too big for a bail out. Like hundreds of billions of dollars too big.
This event is having global ramifications for a reason.
Actually at this rate, it will probably drive the US economy into recession in about 4-6 months.
I dont suppose you can cite any sources for the last claim, or provide an extremely detailed explanation as to why it is true. I am a newbie in this feild and I am trying to learn, but currently I have no idea what to believe and what not to believe, so anything I learn must come from a reliable source, until I am able to judge for myself.
(Also at this point I will mention that my area of expertise revolves around structured debt products and the securitisation thereof, which gives me a good understanding of how this process works... though I am hardly an 'expert').
Okay, why could this result in a recession for the US?
The reason why this defaults could do this is due to the way in which mortgages influence the overall economic system. The first way is the most basic (and most obvious). People buy homes and take out a mortgage, this represents a creation of capital in the market and an injection into the circular flow- all these people are paying off their mortgages, which means money is going around in the system, allowing whomever is collecting the repayments more scope to further inject into the circular flow through business expansion/hiring people/investment. Ultimately, this filters back into the economy at large.
Now when this process starts to degrade, it has a similar effect on the circular flow, but due to nature of the problem, its effect is double. Why is that? Well, what happens is that all those people who default on their loans reduces the ability of the corporations who wrote those loans to stay solvent. For various reasons, a corporation going bankrupt has an detrimental effect on economic prosperity many times worse than basic economics would suggest. This is mainly due to the effect it has on 'animal spirits' or market sentiment. If enough businesses fail this negative market sentiment can become sector-wide, which once again is even worse. Furthermore, all these people who have defaulted are also no longer injecting anywhere near as much into the economy because their expenditure on basic retail goods tends to fall through the floor. As the retail market represents a significant chunk of the US economy (something like 33%), large-scale loan defaults represent an extremely unsettling sign for future profit outlooks for these companies (witness large-scale drops in many retail companies on the NYSE this past week).
Now as you have probably picked up on, I have been referencing the stock market a bit. This is because mortgages as you know them do a lot more for the economy than you might realise... they are in fact (in many ways) one of the most important engines of an economy due to way in which the create wealth multipliers for the banks that write them.
How do they do this? Ok, this is where my experience comes in; Banks write a bunch of loans (say $100 billion). Now they are receiving $100 billion over 30 years or so plus interest. This is definately nice, but anyone who understands the concept of par value would realise that $100 billion right now is way better than $200 billion (including interest) in 30 years. But this $200 billion is illiquid because the mortgage allows them to pay it off over years and not be subject to a margin call or something similar.
So what do banks do? Why, they securitise it! What I mean by that is that they take their 'portfolio' (not the right term but easier to understand) of loans and sell them on as debt to the market (ie Bonds backed by Assets). This means that they sell the 'rights' to the principle and interest to the portfolio of loans to the market (ie insto investors usually) in exchange for the $100 billion upfront.
They then use this money to start the process all over again and write more loans!
Ingenious huh? Its called engineering income. There are a myriad ways of doing this (CDOs, ABS, RMBS, CMBS, CDSs etc etc). Essentially its like multiplying your income.
Every large bank does this.
Now, over the past few years banks have been making a lot of money off of very cheap debt as the market has snapped up these bonds due to a bullish market and soaring housing prices, coupled with easy access to further mortgages (through the ascendancy of sub-prime loans). This has driven down margins on debt offerings (ie the premium investors get for investing in these products), which has been a boon for money making institutions.
Now what has happened is that this wheel has started to stall as sub-prime loans have fallen over faster than a deck cards in a typhoon. This has potentially catastrophic ramifications for the banking and finance sector, as everything from the retail banking to mergers and acquisitions (actually ESPECIALLY mergers and acquisitions) relies on access to this type of debt to continue fuctioning and making profits. It is an engine and if it stalls it can bring down the whole system with it into a recession.
So, in summary, considering the way in which sub-prime has a massive knock on effect in the economy and the potential extent of the rot, there is a very real possibility that the US economy may go into recession as the money-making engine grinds to a halt.
This was a very brief summary (time constrained as I am), I will get some figures and expand upon this in more detail if requested (if I haven't bored the shit out of everyone already!).
I still don't understand how the bank sells the principle + interest to the market. Basically what banks do is collect liquid money from everyone (mortgage payments, investors who buy the rights to those payments..? this doesn't make sense but anyways) and then redistributes that liquid money into unliquid companies and such? (business loans, credit lines, etc).
Fuck me. I read "billion" as "million" for your orignation amount. Deleted my post. I will say that I see no problem with securitization as long as underwriting standards are maintained (which is always a challenge). Obviously there is a problem when Moody's is giving CDO's comprised of sub-prime loans AAA ratings, but in general a securitization is a good instrument to increase liquidity in the market and move assets to those who value them the most.
The Canadian major city markets are quite inflated, but they've still gone up quite a bit from June 2006 to June 2007. As I recall, Toronto, Montreal, Calgary, and Edmonton were slowing down while cities in Manitoba and Saskatchewan were actually going up pretty quick. I'm waiting for a crash, but I've been waiting a long time. I don't believe the Canadian housing markets are in as bad shape as the American markets, since we didn't get the same level and type of ridiculous loans.
Somehow Victoria is still shooting upwards and the feeling of being an idiot too late to the party when I bought almost three years ago, has gone away. Seriously, the $100,000 townhouse when built in 2003 was $225,000 when I got it in 2005, and is over $325,000 now.
If you ever need to talk to someone, feel free to message me. Yes, that includes you.