Sunday, July 22, 2007

US Housing Market

Bill Moyers discusses the "housing market meltdown", the ongoing subprime mortgage and hedge fund crisis, and the "housing bubble" and "homebuying mania" with the New York Times' Pulitzer-prize winning business reporter Gretchen Morgenson.

Part 1.


Part 2.

21 comments:

Uncertain Buyer said...

Summarizes what a lot have been saying on these Blogs for some time.

I don't see the same ATMing of Housing by Canadians, but in certain markets there is definitely a lot of building and increasing inventory. Will we crash here? Hard to say. I think Alberta, especially Edmonton is going to be in trouble.

beta said...

Last year the Van Sun reported that in '05, 38% of homeowners in BC used their house as an ATM.

I doubt that figure has decreased in '06 or thus far in '07. I know of a few people who've cashed out several times to buy boats, SUVs, furniture, trips, pay taxes, etc.

Scotia Bank has an ad campaign encouraging people to take out mtg 'equity' to finance anything from renos to a vacation.

CIBC is currently pimping its similar product, the "Home Power Line of Credit".

Given the negative savings rate across Canada and especially in BC, it's obvious that people are using their houses as ATM's. A lot of people are running on financial fumes right now, and it won't last once RE appreciation slows, let alone goes negative.

rentah said...

Thanks for the great clips.
I've been following Morgenstern's commentary since the tech bubble, first time I've seen her on video.

I note that she blamed almost everybody party to these loans EXCEPT the people who were actually applying for and receiving them. Clearly she is an advocate for the 'little guy'.

There are folks doing the housing ATM thing here in Vancouver (I personally know a few), but I suspect it's less intense than in the US.
It'll still increase the acceleration to the downside when we do crash, though.

HADENOUGH said...

More people are doing the ATM thing here than imagined.

I think as Canadians we like to think of ourselves as soooo different from Americans- especially when things go wrong in that country.
Really, we are not that much different from the US. Canadians are big consumers also. I have noticed a change in cars since I moved to Victoria 5 years ago. We see more high end cars than before. Huge amounts of renovations going on etc.

Also, I know people at my kids school who have bought 2nd properties on credit. Many have taken out 2nd mortgages for renovations. People think it is okay because they see their property as constantly moving upwards. If you say the contrary they get so upset and you can hear the fear in their voices.

People have really thought they "had it made" the last few years (without having to do much) and I think there is so much denial out there it is scary.

casual observer said...

"I note that she blamed almost everybody party to these loans EXCEPT the people who were actually applying for and receiving them."

Exactly. The Banks and Wall Street wouldn't have been able to market these financial products if they didn't have "little people" wanting and applying for these mortgages. I am tired of this lack of personal responsibility.

Nobody held a gun to these people's heads and forced them to take out a mortgage. Perhaps there should have been more regulations in place like the "know your client" rules for securities, however these are easily bypassed. With my discount brokerage, all I had to do was sign a form stating that I did not want to be part of the "know your client" safeguards.

She's talking about the U.S. RE market, but the same scenario can/will play out here. Vancouver, and most of Canada for that matter, is just as frothy as the States was. We're just a couple of years behind them.

Lenders here are going down the same road that lenders took in the U.S. - zero down, extended amortization, mortgage brokers, inflated appraisals, multiple non-related borrowers, etc. If you can fog a mirror, you can get a mortgage. Why will the eventual outcome be any different north of the 49th parallel?

People bought into the myth that RE always goes up. It was re-enforced by recent price history. Not many people looked backwards at RE prices beyond five years ago. When I have mentioned to people that RE prices can and do drop, they look at me as if I was telling them that I was abducted by aliens. Sort of a puzzled look, almost like they feel sorry for me that I just don't "get it".

My personal feeling is that there is disappointment built into this story, and I suspect that it comes near the end.

Uncertain Buyer said...

I do have a Line of Credit secured against the equity of my house. The reason for that is a lower interest rate. I borrow what I can pay back and use it instead of credit cards, car loans, etc.

It's a far cry from spending all the equity in my home. I personally don't know too many people that spend alot of their equity. I do have a friend who has a neighbour who does. That is one person in many that I know.

rentah said...

uncertain buyer: Okay. BUT how many of those homeowners you know are ALSO saving as much as they usually would?
How many are underpreparing for retirement based on the knowledge (hope) that their properties will increase in value?

patriotz said...

It's a far cry from spending all the equity in my home.

You spend the equity in your home, or any other asset, by selling it. Unrealized capital gains are not savings and cannot be spent.

Borrowing money, whether secured against your house or any other asset, is not spending equity. It's just borrowing, and it has to be paid back.

A lot of people south of the border are now finding this out the hard way, and plenty more this side will soon.

BUT how many of those homeowners you know are ALSO saving as much as they usually would?

People who borrow money for consumption aren't saving at all, they're dissaving.

the pope said...

RE: personal responsibilty - I completely agree, if you overbuy, or purchase something for more than its worth and it loses value, the only person to blame is yourself. I don't care how slick the advertising is, if you fall for it and find yourself in a sticky spot its your own fault.

Uncertain Buyer said...

Savings?? Don't make me laugh. I will be lucky, after tax's, mortgage, utilities, etc. if I have more than a couple of hundred a month left over.

That's life, my mortgage +tax's is just a couple hundred over rent for a condo, and less than a house. For me I would much rather be in a mortgage than rent. I don't have a choice, except cutting back on my already conservative lifestyle.

I do have a fairly good paying career, but I am single and in this age of two income families it is hard to keep up.

patriotz said...

Savings?? Don't make me laugh. I will be lucky, after tax's, mortgage, utilities, etc. if I have more than a couple of hundred a month left over.

The principal part of mortgage payments is savings. Like all debt repayments, it has a tax-free return. That's why in normal times buying a house is a good long-term savings vehicle.

However, buying doesn't make sense unless the cost of renting the money (interest part) and other carrying charges (taxes etc) don't exceed the cost of renting the same house.

And we are as far away from that today as we have ever been.

mohican said...

It sounds like you are in a fair situation uncertain buyer - BTW - nice to hear from you again.

My evaluation of whether I should buy or rent goes like this:

Buy if: Rent > Mortgage Interest + Taxes + Strata/Maintenance + Interest on Downpayment

Rent if: Rent < Mortgage Interest + Interest on Downpayment + Taxes + Strata/Maintenance

It sounds like you are in the buy situation or at least are pretty close.

On the discussion about the Housing ATM in Canada - it happens lots here. You may not know anyone directly who is a serial refinancer or HELOCer because they don't tell you or you run in a circle that is more prudent than average (this is my case). All I can tell you is at the bank branch I work in they are busy, busy, busy with refinancing and HELOCs.

rentah said...

mohican: interesting. You imply that you personally have an 'ownership premium' of 0%. My ownership premium is about 25%, so for me:

Buy if: Rent > 0.80 x (Mortgage Interest + Taxes + Strata/Maintenance + Interest on Downpayment)

[note: There is no 'correct' ownership premium, it varies interpersonally.]

mohican said...

rentah - you are correct - I am unwilling to pay a premium to 'own' a place because of the risks involved - pipes bursting, assessments being levied, etc, etc. I feel that I should be compensated for these risks and so I am unwilling to pay extra because that would result in me not being compensated for the risks.

freako said...

"- I am unwilling to pay a premium to 'own' a place because of the risks involved - pipes bursting,"

On the other hand, an owner is protected from rental risk. For example, say that your city or neighbourhood becomes really trendy. Rents may double, but an owner has "locked in" his costs. Risks cut both ways in that sense.

freako said...

Also, don't forget that this boom can INDIRECTLY affect the savings rate. Some people may not take out HELOC's, but they save a lot less of their income. Should prices fall, they will have a savings shortfall, which will alter their behavior.

Patiently Waiting said...

I guess another kind of ownership risk is having to replace the building altogether. It seems that many buildings don't have 20 years left in them yet people are taking mortgages in excess of 20 years. Do banks stop to think about that?

Patiently Waiting said...

I mean the amortization is over 20 years, not the term.

rentah said...

My ownership premium is 25%, largely because of the risk of being asked to move from a rental. And I really don't like moving.
Despite my handle, I'd like to own.
But I'd also like to buy at reasonable value.

mohican said...

"On the other hand, an owner is protected from rental risk. For example, say that your city or neighbourhood becomes really trendy. Rents may double, but an owner has "locked in" his costs. Risks cut both ways in that sense."

You are correct freako - it cuts both ways - "owners" are also exposed to significant interest rate risk every time their mortgage term is due.

freako said...

""owners" are also exposed to significant interest rate risk every time their mortgage term is due. "

True enough, but partially mitigated by the fact that:

a) Rates generally rise in a strong economy, so an owner would likely be in a stronger wage/employment situation.

b) Higher rates are generally associated with higher inflation. Higher inflation, of course, reduces the real obligation of the outstanding mortgage. In other words, a mortgagee is essentially short a bond. Since bonds fall in value when rates rise, an owner is ahead. Of course, rising rates will also take a bite out of the price of the home, but that is another story.