[mike777]

"There are some technical problems with implementing this, but the basic idea is that the market risk should be carried by bond owners, not loantakers. Bond owners are typically retirement funds and Arabic oil states. They operate on long terms, they are professional investors, and they can spread the risk by investing in other things than mortgage bonds."

Not sure what you mean by market risk. Market risk can have alot of components.

People who take out loans have interest rate risk if they take loans. Interest rates may go up or down and they may have some risk depending on the loan terms and how rates move in either direction. Those who takeout loans also have other risks. Example they get sick and have no money to repay loan and lose the house and may still owe money on loan after sale of house.

People who own floating rate bonds have interest rate risk and all kinds of other risk.

I hope you do not advocate that people who loan money take all the risk and those who borrow assume none?

[mike777]

"The cause is the same in all bubbles"


There is a real debate if bubbles even exist, this includes the famous tulip bulb craze. Tough to define the cause if they do not exist. Of course there is always volatility in finance, 100% of every day.

"The losses of value will of course by assymetrical - areas that had the most ficticious appreciation will have the most loss, like California, Nevada, Colorado, Florida, and Arizona - while some areas may remain relatively stable. But those stable area would be those that had the least price appriciation or had price appreciation caused by qualified supply"


This is a big assumption. Those who loan money may not live where those who borrow money live, too big an assumption. Example, Germany loaned money to Calif. Calif cannot repay bonds, owners in Germany hurt.

In any case I think you misuse the word assymetrical here.

In any case what problem are you trying to solve, risk of life?

btw my tiny closed up block has only 12 homes on it. Two have been sold this past year. Another has been rebuilt and has been up for sale for over a year and now my next door neighbor who has the biggest house on the biggest lot has to sell for financial reasons. 33.33% of the houses up for sale in 12 months.

[sceptic]

Quote

But .... this whole problem was created (well, at least made worse) by tax rebates that drove the prices up, requiring enormous mortgages. And now they are proposing to solve it by spending even more government money.

Mini ProfilePMEmail PosterYahoo
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Helen you are wrong , not even close

What drove the prices up,

Take 1990 crash about 9 - 12 months prior to this happening the governement reduced double tax allowances so only one person could claim, this caused a small surge in prices (I do not think it was the reason it crashed and burnt, it was just a foolish move on the inevitale happening, ,the problems and the effect were already in place for it to happen


the current situation is one caused predominately by the availability of credit (I do not even begin to think that the current government can accept responsibility in full, about 10 years ago, the buy to let market opened up and legislation about rental laws changed, the effect of this was dual ownwership, i.e. one person could own (easily) more than one property and get a rental income, when I started doing it, the rate on my investment of return was about 10% comfortably, the current return if fullymortagaed is in the region of less than 4-5%

the mortages around 10 years ago were available in bulk, the lack of controls on someone being able to afford the investment were relaxed (by the banks) this is what caused the price increase, then when it was made aware that bricks and mortar were a money making machine, everyone jumped on the band wagon. the banks did not carry out proper checks on peoples income and claims, the FA's and mortgage brokers, did not do proper checks and aided the buyers to mislead the banks of thier status(not that it took much misleading when the banks etc, were willing to turn a greedy blind eye

they drove the price up, the ridiculous loans available i.e 125% of the property value, the ease with which someone could buy big chunks of property from new developers for no cash outlay, pure debt was rife, you could make a fortune by knowing how to get money.

I would like to have seen the Northern Rock crash and burn, all we are doing by proping it up, is giving a bank an open cheque to do what the f*** they want, I would feel sorry for the investors of N \Rock, but I think it is the right thing to do, whilst I am no economist, you can see that the only thing that caused this is pure greed on the bank and shareholders part

No one considers the consequence on the ordinary person trying to buy a home for thier family, greed has made things quite bad for our kids and is in part perhaps why a portion of the youths are giving up on the state, because quite honestly as usual they are only applying lipservice to people

[sceptic]

I totally disagree with Winston blaming America, our country has its own people to blame, Demark has its own people to blame< germany has its own people to blame

Imigration, buy to let, the EU, also sorts of factors, I really just do not buy that US have fucked us all over, we have made our own mess of things, all this was foreseeable, no one wanted to listen and they were all scared money would be diverted from them selves to go and earn these manic returns somewhere else

If you want to blame someone.. Blame MR Greedy bastard

[csdenmark]

Posters here seems to look for causes and solutions inside housing and/or bank sector. You will find nothing there. Those institutions are just doing their job working inside a framework. Bubbles come from something, I hope you know that.

The french president has addressed part of the problem. International free trade which puts pressure on wages by setting price standards for goods inside a country bearing no relation to that particular country's internal rates.

Nicolas Sarkozy was able at the final negotiations about the new EU-treaty to change the responsibilities for the European Central Bank. Besides controlling inflationary rate the obligation now also will be a social responsibilty.

I am pretty sure nobody but himself assumed this to be substantial. But read - even before the treaty has been ratified he has raised words about free trade attacking WTO(World Trade Organization). He is in fact supporting the french based world organization ATTAC - which also has a strong base in Germany.

[helene_t]

sceptic, on Feb 25 2008, 07:05 AM, said:

I totally disagree with Winston blaming America, our country has its own people to blame, Demark has its own people to blame< germany has its own people to blame

You bloody traitor. Go sit in the corner, facing the wall, and write this text

Quote

All our misery comes from the USA. Americans are evil. We Europeans are morally superior

over 100 times. Not until you've done it you can return to the forum

[kenberg]

sceptic, on Feb 25 2008, 01:05 AM, said:

I totally disagree with Winston blaming America, our country has its own people to blame, Demark has its own people to blame< germany has its own people to blame

Imigration, buy to let, the EU, also sorts of factors, I really just do not buy that US have fucked us all over, we have made our own mess of things, all this was foreseeable, no one wanted to listen and they were all scared money would be diverted from them selves to go and earn these manic returns somewhere else

If you want to blame someone.. Blame MR Greedy bastard

Yes, but there will always be Greed Bastards. Perhaps I am a Greedy Bastard. The challenge is to design the system so that it works reasonably well even given the existence of Greedy Bastards.

Greedy Bastards depend upon the existence of Gullible Fools, another species that will always be with us. Again, policy has to deal with this. Here is a thought. A couple of years back the bankruptcy laws were changed. A bad idea, I thought. The laws as they were put some restraint on the GBs. If they talked a GF into a stupid debt, there was always the out of bankruptcy. This put some restraint on the GB to not give totally ridiculous loans to the GF. Of course the current scenario has the GBs threatening to crash the economy if we don't bail them out of their stupid loans. A resourceful lot, those GBs.

[Winstonm]

Quote

There is a real debate if bubbles even exist, this includes the famous tulip bulb craze. Tough to define the cause if they do not exist.  Of course there is always volatility in finance, 100% of every day

.

I agree. I am aware of this debate. The term bubble is difficult to quantify. It is most likely a lazy term applied too frequently. Barry Ritholtz, managing partner of Ritholtz Research and Associates, would agree with you - he has stated that a bubble should have little-to-no underlying value, i.e., the internet bubble where valuations were collateralized by hand-socks.

Quote

"The losses of value will of course by assymetrical - areas that had the most ficticious appreciation will have the most loss, like California, Nevada, Colorado, Florida, and Arizona - while some areas may remain relatively stable. But those stable area would be those that had the least price appriciation or had price appreciation caused by qualified supply"


This is a big assumption. Those who loan money may not live where those who borrow money live, too big an assumption. Example, Germany loaned money to Calif. Calif cannot repay bonds, owners in Germany hurt.

I was talking only about the loss of wealth effect to the homeowner. Housing prices will fall further in the states mentioned than some other states. I was not talking about the losses to the lenders.

Quote

In any case I think you misuse the word assymetrical here.

Quite possible - it was late.

Quote

In any case what problem are you trying to solve, risk of life?

No, risk of contagion to the healthy.

You might also comment on this, Mike. I have been considering a hypothesis that the lowering of interest rates to stimulate borrowing in housing only accomplishes a compression of economic time. In the housing mania, for example, future buyers were lured into present-day activity due to an artificial inducement, i.e., lowered borrowing costs. But in actuality, all that has been done was to compress some number of future years growth into a lesser number of years - say, 20 years of historical growth compressed into 7 years. Not only does this affect economic activity, but it also creates a demand/supply imbalance that drives up prices. When a high percentage of future buyers have acted, or when interest rates are sufficiently raised, the driving mechanism of compression fails. Having borrowed future economic activity, when the future arrives there are fewer actors and thus a reversion to mean occurs, invariably an overshoot to the downside below the mean.

In this sense expansion is artificial, as it has really only been time-compression. At the end, having lured the preponderance of future qualified economic actors to change their time preference, demand slows and can only be replaced by non-qualified actors - estimates claim that 25% of all home loans in 2005 and 2006 were high risk.

Charts of U.S. home prices give this impression - a huge bulge from the mean in the years 2000-2007.

[hrothgar]

Winstonm, on Feb 25 2008, 08:03 PM, said:

Quote

There is a real debate if bubbles even exist, this includes the famous tulip bulb craze. Tough to define the cause if they do not exist.  Of course there is always volatility in finance, 100% of every day

.

I agree. I am aware of this debate. The term bubble is difficult to quantify. It is most likely a lazy term applied too frequently. Barry Ritholtz, managing partner of Ritholtz Research and Associates, would agree with you - he has stated that a bubble should have little-to-no underlying value, i.e., the internet bubble where valuations were collateralized by hand-socks.

This strikes me as a pretty meaningless distinction:

Let's take real estate as an example: Ritholtz would seem to say the following

Real Estate has intrinsic value, therefore its inappropriate model the real estate market as a bubble

I would claim that the value of real estate is characterized by both an intrinsic component and a speculative component. Ideally, we should be able to disaggregate the two components and model each one separately (allowing for certain cross effects)

Yes, this difficult (deservedly so). This is why the quants on Wall Street earn the big bucks...

Please note: Part of what makes this all really ugly is the fact that good predictive models become obsolete as soon as they become well known. Lets assume that I developed a model that was accuately able to describe the stock market. If this model were to "leak" everyone would start trading on it, the P/E ratios wiould all adjust and my model would stop providing any alpha...

In effect, the nice simple little market that I was able to describe has disappeared and been replaced with something more complex

(BTW, for what its worth, I think that its a mistake to provide much in the way of bailouts. Sorry if folks screwed up, but you can't spend your days gambling at the casino and then go running to daddy asking him to cover all your losses when something goes South)

[helene_t]

mike777, on Feb 25 2008, 06:13 AM, said:

I hope you do not advocate that people who loan money take all the risk and those who borrow assume none?

I do (assuming we are talking about the risk related to overall housing prices only). Home owners are primarily interested in a place to live. They may not have any capital, let alone risk-willing capital. In particular they may not be interested in taking risks for borrowed money. Also they may have insufficient knowledge about the housing market to assess the risk they are taking. Or the time horizon they want for their investment may be different from the time they want to live in an owned house.

Therefore it would be beneficial for some home owners if there was an efficient market for house-market-futures, where they could buy off the part of the risk of their investment that is related to future house market perturbations.

Of course some home owners do have risk willing capital. Fine. They would not need my system but could just do it the existing way, thereby saving the risk premium and overhead.

Not sure why the financial sector has not come up with something like this by itself. Maybe there is a flaw in my thinking. Or maybe the financial sector is just conservative.

[Winstonm]

Helene,

I'm unclear whether or not this would do the trick. The U.S. housing problem is one of owner solvency - the solvency issue created the oversupply in available houses (As of today, 10.3 months supply of houses are on the market.) This is siimply supply/demand inbalance at this point, causing falling prices.

Also, there have been in place mechanisms to manage bondholder's risks via the Credit Default Swap, or CDS. This is basically an insurance policy to offload the risk to a second party, who takes a fee.

The real crux of the entire fiasco is that the models used assumed steadily rising home prices. In a conference call a couple of years ago, I believe it was Fitch, was asked point blank what would happen to their model if home prices fell 1-2%.

The answer was a rather prescient: The model would fail.

[mike777]

helene_t, on Feb 25 2008, 12:56 PM, said:

mike777, on Feb 25 2008, 06:13 AM, said:

I hope you do not advocate that people who loan money take all the risk and those who borrow assume none?

I do (assuming we are talking about the risk related to overall housing prices only). Home owners are primarily interested in a place to live. They may not have any capital, let alone risk-willing capital. In particular they may not be interested in taking risks for borrowed money. Also they may have insufficient knowledge about the housing market to assess the risk they are taking. Or the time horizon they want for their investment may be different from the time they want to live in an owned house.

Therefore it would be beneficial for some home owners if there was an efficient market for house-market-futures, where they could buy off the part of the risk of their investment that is related to future house market perturbations.

Of course some home owners do have risk willing capital. Fine. They would not need my system but could just do it the existing way, thereby saving the risk premium and overhead.

Not sure why the financial sector has not come up with something like this by itself. Maybe there is a flaw in my thinking. Or maybe the financial sector is just conservative.

Helene:

I am still not exactly sure what you are advocating but let me take a stab.

You want a financial instrument that hedges the risk of your house going down in price, correct?

One way now is that you can gift your house but have the right to live in it the rest of your life. Now you have a roof over your head and your house can fall to zero, no problem. I assume the house is paid off and you got a roof over your head.

Or you can sell your house or reverse mortagage it but have the right to live in it the rest of your life.

Of course you need to somehow work out who pays the real estate taxes, and cost of maintence of the house.

Bottom line if you do not want the risk of ownership you need to transfer that risk or the PV of the house to someone else...you can right now.

I do disagree with your basic premise though....It seems the mantra I have heard for over 50 years is "buy a house, build equity" NOT...buy a house have a roof over your head.

[mike777]

"The real crux of the entire fiasco is that the models used assumed steadily rising home prices. In a conference call a couple of years ago, I believe it was Fitch, was asked point blank what would happen to their model if home prices fell 1-2%."

Lets back up a second. Fitch, Moodys, Standand and Poor are in the opinion business. If you want to borrow money, you pay the opinion business to give you a rating. Let me repeat this, it is the ones who want to borrow the money who pay for the opinion, not the ones who are going to loan the money.

I pay my neighbor to say I am a good credit risk, now please loan me millions. My neighbor says sure pay me thousands and I will issue an opinion you are an AAA good guy.....and you believe it...nice racket ehhhh

Now whose fault is it, my neighbor.....mine for paying him or hmm you?

[Winstonm]

Quote

Lets back up a second. Fitch, Moodys, Standand and Poor are in the opinion business.

I would call it opinion racket - but that's another debate.

I only used the Fitch conference call as that is the only one I have personally read, but the point I was trying to make is that eveyone bought into flawed models - buyers, sellers, lenders, originators, appraisers, securities dealers.....and the all the models - not just Fitch's - said home prices only go one way - up.

Quote

It seems the mantra I have heard for over 50 years is "buy a house, build equity" NOT...buy a house have a roof over your head.

Maybe not quite that long, but surely two generations had been convinced that home prices only go up.

I like your idea better - have a roof over you head. If only that had been the mantra we would not be in this fix.

[hrothgar]

mike777, on Feb 25 2008, 10:33 PM, said:

I do disagree with your basic premise though....It seems the mantra I have heard for over 50 years is "buy a house, build equity" NOT...buy a house have a roof over your head.

Comment 1: I think that the old "Buy a house build equity" theory largely reflected the fact that most people didn't have good alternative investment vehicles

Comment 2: I just did a fairly serious cost / benefit analysis studying whether or not it makes sense to buy a house or continue to rent an apartment. Rent turned out to be the overwhelming favorite.

Rent now, I'm renting a very nice two bedroom apartment for about 1200 a month. I have plenty of space in a nice town and I'm walking distance to work and the commuter rail lines. I always heard that you shouldn't buy unless the home price is roughly 100 times your monthly rent. I'd have to pay 500K for anything comperable.

Maybe rental prices in the Boston market are still artifically low compared to home prices; however, even with all the various savings associated with home ownership its still a lot better to sock away 50 grand a year into mutual funds rather than paying down a mortgage, paying real estate taxes, homeowner's insurance, and either (condo fees or maintenance). I rather be making interest than paying it to someone else.

Yes, houses are nice. Yes its nice not to worry about capital gains. Even so, over 25 years the stock market will typically outperform the Real Estate market 4:1. Moreover, if I do decide that the real estate market has bottomed out, I can always start investing cash into real estate funds...

[mike777]

Ralph Nader who is running for President has a plan.

Tax speculation, much much more. Tax labor or food, much much less.
That sounds like a good first step to stop those Greedy B.

IF we can get rid of or at least slow down/make it very very difficult for those Greedy B who are just in this to make money or speculate that will help. And if they do make alot of money.....tax the heck out of them.

Denmark, the happiest place in the world, pays people to go to school, they pay them to stay home with their young children.

In the USA we make people pay to go to school or make them pay for childcare.

[sceptic]

I wonder if anyone thinks that one family one home is a good thing and houses are not investments they are for people to live in not make money out of

[mike777]

sceptic, on Feb 25 2008, 03:23 PM, said:

I wonder if anyone thinks that one family one home is a good thing and houses are not investments they are for people to live in not make money out of

I wonder if anyone thinks apartments are places to live in and a good thing and not investments to make money out of.

One way to stop having people stop thinking of their house as an investment is to let the bank get all the appreciation or depreciation. Of course you still own the house so that means you must pay for the taxes, interest, water, sewer, garbage pickup, insurance and upkeep, cut the lawn, fix the roof, fix the pipes, etc or the bank gets the house back now for free and you are out in the street. Local schools, teachers, books, buildings are paid for by the local home owners, so you still got to pay for all of that even if you have no children yourself. About every ten to twelve years you got to rip out the furnace and aircond. Let's assume that costs around 20k or more. You can put in your own numbers on the upkeep of a house.

[mike777]

hrothgar, on Feb 25 2008, 03:18 PM, said:

mike777, on Feb 25 2008, 10:33 PM, said:

I do disagree with your basic premise though....It seems the mantra I have heard for over 50 years is "buy a house, build equity" NOT...buy a house have a roof over your head.

Comment 1: I think that the old "Buy a house build equity" theory largely reflected the fact that most people didn't have good alternative investment vehicles

Comment 2: I just did a fairly serious cost / benefit analysis studying whether or not it makes sense to buy a house or continue to rent an apartment. Rent turned out to be the overwhelming favorite.

Rent now, I'm renting a very nice two bedroom apartment for about 1200 a month. I have plenty of space in a nice town and I'm walking distance to work and the commuter rail lines. I always heard that you shouldn't buy unless the home price is roughly 100 times your monthly rent. I'd have to pay 500K for anything comperable.

Maybe rental prices in the Boston market are still artifically low compared to home prices; however, even with all the various savings associated with home ownership its still a lot better to sock away 50 grand a year into mutual funds rather than paying down a mortgage, paying real estate taxes, homeowner's insurance, and either (condo fees or maintenance). I rather be making interest than paying it to someone else.

Yes, houses are nice. Yes its nice not to worry about capital gains. Even so, over 25 years the stock market will typically outperform the Real Estate market 4:1. Moreover, if I do decide that the real estate market has bottomed out, I can always start investing cash into real estate funds...

Yes, our family and people they work with refused an offer to relocate to Boston just a couple of years ago. I love Boston and there are alot of great reasons to live there. I do note that the Boss of my spouse is located there and she has to fly up there all the time.
Housing costs is not one.

I do note someone is trying to build up equity/make a profit/speculate by owning your apartment/home. Just not you. Of course they may fail. IF they fail we can only hope the government steps in and helps them, saves them due to some social contract or something like that.

Not so funny is that for some renters, if the real estate owner goes bankrupt the bond owner may be able to force you the renter out in the street, even if you made all your rent payments on time.

As I listed in my post above, most people never factor in just how much the "cost" of a house really is.

[kenberg]

I don't doubt that the shrewd investor can do better in the stock market. But:
A. I am not a shrewd investor in stocks.
B. I don't have the personality to become a shrewd investor. I get bored easily with such things. I am not saying they are intrinsically boring, just that I get bored.

I am 69, I own my home. I plan to live in it for the foreseeable future. No rent. No mortgage. I would call this an investment that has worked out. I have some other investments. I can't quite remember what they are, but I have some stuff about them around here somewhere. These, as you might expect, aren't doing so well. Or at least I don't think they are. Maybe I should look.

We all have to know who we are. I would lose my shirt trying to play Warren Buffet. I'm closer to Jimmy Buffet.

Ken