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Thread: chart of the week - negative equity

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    Default chart of the week - negative equity

    Yes, that's right, as of this month about 8% of US mortgage holders now owe more money on their mortgages than those homes are worth.

    Also, a total of about 28% of US mortgage holders lack the 20% equity now necessary to re-fi ... in the absence of a gov't bailout program anyhow.

    ... and the situation for US mortgage holders in 2008 is likely to be even worse than 2007, as will the consequences on mortgage lenders !



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    Default Re: chart of the week - negative equity

    Going out to buy a rifle tomorrow.

    It's gonna get crazy right around... 2012.

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    Banned Melonie's Avatar
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    Default Re: chart of the week - negative equity

    It's gonna get crazy right around... 2012
    I'll give it until spring of 2009 ... depending of course on next November's election results.


    Keep in mind that falling real estate values reduce property tax receipts for local gov'ts and reduce capital gains tax receipts for state gov'ts. This has already thrown California into a 'fiscal emergency', which will ultimately result in the firing of civil service employees ... many of them being LE. At the same time, blocks and blocks and blocks worth of abandoned houses will create a 'safe haven for criminals' within major cities, as we're already seeing in Detroit. At the same time, desparate people with little or no opportunity to find 'good paying' jobs after their former employer is bankrupted, moves elsewhere or is taxed / regulated to death may decide to MAKE opportunities for themselves ... by preying on others !

    A 'Mad Max' scenario wouldn't be all that much of a reach ... especially for certain cities that already have a 'head start' in that direction. However, what is far more likely to happen is that those being 'preyed upon' will vote for safety over liberty, resulting in a future USA that resembles the former DDR. Taking your previous point, it may turn out that based on 2008 election results we wind up with 'Mad Max' for four years, then abruptly shifting to 'Stasi Time' after the 2012 election. It's happened this way before (in Weimar Germany, in 'white' Russia etc ).

    ~
    Last edited by Melonie; 12-15-2007 at 06:52 PM.

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    Default Re: chart of the week - negative equity

    You're greatly exaggerating the problem to the worst possible extreme. There is no chance of the United States turning into the DDR or Mad Max. There is no comparison between the United States and Weimar Germany or White Russia. The United States didn’t just lose a Wold War and does not have to page huge war reparations. There is no major communist insurgency going on the United States. There have been recessions before in the US and there will be recessions again.

    If state and local tax revenues decrease as a result of falling housing prices, state and local governments can always increase taxes and other fees. That’s what NYC mayor Michael Bloomberg and a number of other mayors and governors did during the last recession.

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    Default Re: chart of the week - negative equity

    ^^^ well, there are some major economic similarities if you stop and think about it.

    The fact that 'the US didn't just lose a World War' isn't exactly true in terms of impact to the economy. In both WW1 and WW2, the US won those wars and Germany lost. As a result of these wars Germany's industrial base was destroyed, making them non-competitive on a global basis. Germany's gov't coffers were also emptied as a result of paying the cost of fighting these wars. Arguably the US has just incurred the cost of fighting a mideast war, and at the same time America's industrial base has been destroyed ... albeit by global competition rather than bombing.

    The fact that the US 'does not have to pay huge war reparations' also isn't exactly true in economic terms. Yes Germany's economy was burdened by a nationwide 'tax' used to pay war reparations to the UK / France / US. But today the US economy is also burdened by a nationwide 'tax' that similarly removes money from the domestic economy and sends it off to foreign recipients. The fact that the transfer is occurring in America today as a result of foreign oil purchases and Chinese / Korean / Japanese product purchases doesn't change the basic similarities in economic impact of a sustained 'bleeding' of money from the domestic economy to foreign recipients.

    Your comment that 'there is no major communist insurgency' also isn't exactly true in economic terms either. There are currently all sorts of politicians / advocacy groups calling for the institution or expansions of programs that will forcibly extract 'wealth' from certain segments of the US economy and transfer that 'wealth' to other segments of the US economy. As with the DDR, the more likely it becomes that 'wealth' will be extracted from those with capital and from those that have high skill levels, the less likely it will be that those people will continue to invest and continue to improve their skills. Similarly, the more likely it is that non-productive people will be the recipients of transferred wealth, the less likely they will be to work hard and produce (or work at all). The minimum wage increase, social welfare programs, the gov't backed 'mortgage bailout' plan etc. all add to the Moral Hazard of this wealth transfer.

    Your conclusion that 'state and local gov'ts can always increase taxes' has some reality problems as well. This approach could be used in New York City in the past because the existance of the NY stock and commodity exchanges, the existance of New York corporate HQ's etc. prevented those who would be the major targets of tax increases from 'voting with their feet' in order to avoid those taxes - since the physical location of their workplace was 'locked'. This is certainly NOT THE CASE where many other states and many other businesses are concerned ! As New Jersey is currently discovering, recent tax increases have already prompted many higher earning NJ residents to quickly become residents of different states.

    Thus attempts by NJ to raise tax rates is arguably already resulting in zero increase in tax revenues ... and is projected to result in a decline in tax revenues in 2008 ... as more and more businesses and higher earning taxpayers will continue to leave the state. This problem is inherent in a progressive tax system where the top earning 25% of residents wind up paying 85% of total tax revenue dollars. If only 5% of the NJ population decides to 'vote with their feet', but those 5% are part of the top earning 25%, this translates into a loss of 5/25 * 85% or 17% of total NJ tax revenue dollars ! And if some of those 5% are actually members of the top earning 1% who pay 37% of total tax revenue dollars, the loss in NJ tax revenue dollars will be even greater. And if the state of NJ attempts to increase state and local taxes by 17% to offset the loss of tax revenues caused by the 5% of NJ residents having moved to other states, it only provides a stronger motivation for remaining high tax bracket NJ residents to move to other states as well !

    Also, there is the Laffer Curve issue to consider ... that once the percentage of tax burden reaches a certain point, higher earning residents will stop making 'productive' investments (i.e. those related to US businesses and jobs) and instead will shift to tax favored / tax exempt investments / foreign investments in order to achieve a higher de-facto 'after tax' return on their investment. In states like NY and CA, where the combined federal plus state plus local tax rate is already in the 50% neighborhood, a fair amount of this has already occurred ... which is arguably contributing to the capital reserve problems of US banks !

    The 'tin foil hat' crowd would argue that there is some percentage of tax levels where 'saturation' occurs ... and if any gov't attempts to raise taxes above that level it results in a contraction of the economy by one means or another. Arguably, NY and CA and NJ are already close to the 'saturation' point. The only way to avoid having to raise tax levels above the 'saturation' point is to cut gov't spending ... with obvious effect on civil service employees, on social welfare benefit recipients etc. This brings us right back to the 'Mad Max' theory, with fewer cops trying to suppress an increasing number of desparate people who have seen their social welfare benefits cut and decide to 'help themselves' to the fruits of their neighbor's labor ! This may be a particular possibility in NY and CA and NJ because these states have been reasonably successful in preventing those 'neighbors' from owning guns, meaning that desparate people will have a much higher probability of success when attempting to 'help themselves' to their neighbor's property !

    ~
    Last edited by Melonie; 12-16-2007 at 11:36 AM.

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    Default Re: chart of the week - negative equity

    The cost of fighting our current wars is insignificant compared to the cost to Germany of fighting two world wars. If you don’t watch the news, you couldn’t even tell a war is going on, while Germany was completely devastated. I think that even with the war costs, we’re spending a smaller percentage of our GDP on defense than we were in the 1980’s.

    Our industrial base has not been destroyed. We’re still an industrial power. We’re the world leader in aerospace and defense industries. Boeing has a backlog of several years for its airliners. I’m pretty sure we’re still the leading producer of automobiles in the world. Besides the big three, a number of German and Japanese companies manufacture a large number of vehicles here. Even Rolls Royce is moving some of its production to the United States. We’re also one of the leading steel producing countries.

    The money we spend on foreign products is not comparable to war reparations. We’re getting something in return for what we are paying. In addition, many foreign countries are buying products from the United States. Our trade deficit is at a two year low. Any economist will tell you that trade is a good thing.

    You’re way off about wealth being forcibly extracted from certain segments of the US economy and transferred to other segments of the US economy. The income of the wealthiest Americans has been increasing much faster than the income of the poorest Americans. The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans.

    http://www.nytimes.com/2007/12/15/bu...erland&emc=rss

    I don’t know where you’re getting your information on New Jersey from, but according to this document, tax revenues in New Jersey increased significantly (29% in 2005 and 11.6% ytd 2006) as a result of a tax rate increase. (See page 2)

    http://www.njleg.state.nj.us/legisla...et/final07.pdf

    The Laffer Curve has thoroughly been discredited. Tax cuts by Reagan and Bush 43 significantly decreased tax revenues. Tax increases by Clinton significantly increased tax revenue. The Laffer Curve is based on hypotheticals, not actual facts.

    Your statement about desperate people helping themselves to the fruits of their neighbor’s labor because they had their welfare benefits cut sounds like it’s based more on conservative propaganda than reality. I don’t see losing benefits as a major factor in crime. The largest segment of our criminal population, young males, probably do not get many benefits to begin with. The welfare reform act, passed under President Clinton limited welfare benefits to two years. Most of those recipients who lost their benefits ended up getting jobs, not stealing from their neighbors.

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    Default Re: chart of the week - negative equity

    heh heh heh

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Melonie View Post
    ^^^ well, there are some major economic similarities if you stop and think about it.

    ... Arguably the US has just incurred the cost of fighting a mideast war, and at the same time America's industrial base has been destroyed ... albeit by global competition rather than bombing.
    The US industrial output for 2006 was roughly $2.7 trillion dollars and growing. That makes US industrial output larger than the enitre economy of the People's Republic of China. To put that in more perspective, the US industrial output is larger than any economy in world, except for Germany, Japan and the US. A position that US industrial output has occupied for the last half century. Hardly destroyed, by competition, or anything else.

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    Default Re: chart of the week - negative equity

    tax revenues in New Jersey increased significantly (29% in 2005 and 11.6% ytd 2006) as a result of a tax rate increase.
    as I said, 2007 NJ tax revenues have arguably been stagnant ... we won't know official numbers for a few months yet. 2008 NJ tax receipts are PROJECTED to decline vs 2007. The point is that the 'immediate success' in increasing revenues via tax increases that NJ had implemented in 2005 and 2006 also have consequences. Those consequences involve a certain number of businesses / residents 'voting with their feet'. As is the case with any change in economic trend, it often takes a while before the consequences are recognized and evaluated, plans are made, and then reactions take place. NJ is indeed seeing an exodus of 'upper middle class' residents in 2007. The actual dollar cost of this reaction won't be known for several months yet since their 2007 tax returns aren't due until April 2008.

    We’re the world leader in aerospace and defense industries. Boeing has a backlog of several years for its airliners
    this is admittedly true. However, what isn't publicized is the percentage of aerospace and defense industry profits that is the direct result of US gov't contracts, which are funded by tax money and which could easily 'evaporate' if there is a change in policy in Washington DC next year.

    I’m pretty sure we’re still the leading producer of automobiles in the world. Besides the big three, a number of German and Japanese companies manufacture a large number of vehicles here. Even Rolls Royce is moving some of its production to the United States.
    You can't seriously be making the argument that the 'big three' US auto producers are still a profitable industry ??? All are operating at a loss.

    As to the profitability of foreign car makers who operate US production facilities, like the defense contractors it's impossible to tell what percentage of their profits is due to business operations versus the various forms of gov't subsidies they have received as pursuasion to locate their plant in a certain city / state. There is also an issue that there are no guarantees these plants will continue to operate when the gov't subsidies expire. But more importantly, there is no way to know what percentage of profits stays in the US economy, versus being channeled back to Japan / Germany.

    The income of the wealthiest Americans has been increasing much faster than the income of the poorest Americans. The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans.
    actually, this validates my point. A main reason that incomes for the top 1% 'uber rich' are rising while 'upper middle class' people at the top 10% level have stagnant incomes, is due to rising taxes and the ability of the 'very rich' to employ various tax avoidance schemes while people at the top 10% level don't have access to those same tax avoidance schemes. Ask Bill Clinton about the tax advantages of being paid in equity by a Cayman Islands hedge fund.

    To put that in more perspective, the US industrial output is larger than any economy in world, except for Germany, Japan and the US
    to put THAT in perspective, a generation ago US industrial output exceeded China, Japan and Germany combined. Also, there is no distinction as to how much of your $2.7 trillion dollars in 2006 output was actually profitable, versus holding market share at a loss while plans to move offshore can come to fruition.

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Melonie View Post
    to put THAT in perspective, a generation ago US industrial output exceeded China, Japan and Germany combined. Also, there is no distinction as to how much of your $2.7 trillion dollars in 2006 output was actually profitable, versus holding market share at a loss while plans to move offshore can come to fruition.
    US industrial output does exceed Japan, Germany and China's industrial outputs, combined. To make it clear, the US $2.7 trillion industrial output exceeds the entire economy that is goods and services of China. Only Japan and Germany's total economies are larger than just our industrial output. Corporate profits increased to historical highs as a percentage of GDP. Looks like you have been drinking too much of Lou Dobbs Koolaid lately.

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Zofia View Post
    US industrial output does exceed Japan, Germany and China's industrial outputs, combined. To make it clear, the US $2.7 trillion industrial output exceeds the entire economy that is goods and services of China. Only Japan and Germany's total economies are larger than just our industrial output. Corporate profits increased to historical highs as a percentage of GDP. Looks like you have been drinking too much of Lou Dobbs Koolaid lately.


    Sources?

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    Default Re: chart of the week - negative equity

    This just makes me so glad that I was working as a dancer (no proof of income, so I had to put a big down on my home) when I got financed for my home.

    Eight percent is HUGE! That is a whole lot of upside down mortgages! Sheesh. Will things never improve?

    On a side note, I had my home on the market this year (it didn't sell). Today a real estate agent knocked on my door looking for listings. He was working a list of expired listings, I'm guessing. Door to door real estate agents? I've never seen anything like that before. They must be getting desperate.

    I've got a large amount of equity in my home (like $100K), so i guess he felt that I'd be willing to settle for a low-ball offer faster than someone who had little to no equity in their home. Sucker. That is why I'm still living here. I can afford this house just fine, thank you very much.

    Now it is just the waiting game.


    Promote yourself and earn more money! This is a business that is owned by strippers for strippers. Let's make that money!


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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Paris View Post
    This just makes me so glad that I was working as a dancer (no proof of income, so I had to put a big down on my home) when I got financed for my home.

    Eight percent is HUGE! That is a whole lot of upside down mortgages! Sheesh. Will things never improve?

    On a side note, I had my home on the market this year (it didn't sell). Today a real estate agent knocked on my door looking for listings. He was working a list of expired listings, I'm guessing. Door to door real estate agents? I've never seen anything like that before. They must be getting desperate.

    I've got a large amount of equity in my home (like $100K), so i guess he felt that I'd be willing to settle for a low-ball offer faster than someone who had little to no equity in their home. Sucker. That is why I'm still living here. I can afford this house just fine, thank you very much.

    Now it is just the waiting game.



    Lots of stories of REAs there. They don't much care for em either!

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    Default Re: chart of the week - negative equity

    Eight percent is HUGE! That is a whole lot of upside down mortgages! Sheesh. Will things never improve?

    On a side note, I had my home on the market this year (it didn't sell). Today a real estate agent knocked on my door looking for listings. He was working a list of expired listings, I'm guessing. Door to door real estate agents? I've never seen anything like that before. They must be getting desperate.

    I've got a large amount of equity in my home (like $100K), so i guess he felt that I'd be willing to settle for a low-ball offer faster than someone who had little to no equity in their home. Sucker. That is why I'm still living here. I can afford this house just fine, thank you very much.
    Thanks for bringing this thread back on topic. Yes, the 8% figure is accurate, and comes from a bar chart from the link in my very first post in this thread. More disturbingly, that same bar chart shows that if real estate prices decline another 5%, the percentage of home owners with negative equity will rise to 12% - and if real estate prices decline by an additional 5% (10% total vs present), the percentage of home owners with negative equity will rise to 17%.

    The real issue here is Moral Hazard. Anybody who is the least bit familiar with mortgage amortization schedules knows that making 7 years worth of payments on a 30 year mortgage only pays down the outstanding balance by 9% !!! So in reality there are a whole bunch of negative equity homeowners out there who face the following choice ...

    A. they can struggle to make the next 7 years worth of mortgage payments and STILL not have enough equity built up to meet a 20% re-fi loan qualification requirement, or

    B. they can walk away ... file bankruptcy ... let the lender eat the negative equity as a loss ... and seven years later have pristine credit again which will enable them to buy the 'same' house at a lower price with a new mortgage offering better terms than their current one.

    An additional risk factor these negative equity homeowners face ... which is also a risk that you and other homeowners that do have a fair amount of equity face, is rapidly rising property tax rates and insurance costs. Nobody is really sure yet where this is headed, as the property tax rate is primarily a function of local gov't spending levels versus the 'performing' property tax base - other than being sure that the direction is up not down. Same goes for homeowner's insurance costs, which are a function of 'decay rates' in particular cities / neighborhoods. Where a negative equity homeowner is concerned, while it might just be possible for them to stay current with their existing mortgage payments at present property tax and insurance cost levels, if property tax and/or insurance costs increase by 20-30-40% in the near future they may NOT be able to stay current with their mortgage (and also afford to eat and drive to work) and will wind up losing their house and ruining their credit 2-3-5 years down the road in any case. 'Walking away' now dumps this potential problem on the lender as well.

    At the moment, the 'wild card' is the possible financial subsidies that 'qualifying' homeowners may be eligible to receive as a result of a gov't 'mortgage bailout' plan. Undoubtedly many homeowners are hoping that they will 'qualify' ... or will take active measures such as going on a wild spending spree, running up new credit card debts and ruining their credit rating to make sure that they 'qualify'. If they do 'qualify', there's a good chance that a bankruptcy court judge will 'cram-down' their outstanding mortgage balance as well as their monthly mortgage payment size, which would essentially hand them $50-$100k-$150k worth of mortgage debt relief at the expense of the lender. But if they don't 'qualify', then 'walking away' now would leave them far better off 7 years down the road than trying to stick it out and winding up losing their house anyhow.

    Thus it's distinctly possible that once the gov't 'mortgage bailout' plan's rules and eligibility requirements get sorted out, and once bankruptcy judge powers regarding 'cram-downs' gets sorted out, there will be a big surge in underwater homeowners who don't 'qualify' for a bailout deciding to simply 'walk away'. This in turn will create another cycle of real estate market devaluations, causing yet more homeowners to fall into a negative equity situation, prompting yet more newly underwater homeowners to simply 'walk away'.

    In the absence of a gov't bailout program and future cycles of negative equity homeowners walking away, the crystal ball prognosticators generally predicted that US real estate markets would have bottomed in the third quarter of 2008 see
    However, as a result of the gov't bailout program, the increasing negative equity, and the Moral Hazard thus created, it is now fairly likely that the actual US real estate market bottom will be pushed out to 2009 or 2010.

    Also, a big adjunct to the gov't bailout program has been official changes in lending standards for Fannie / Freddie acceptance, as well as new creditworthiness directives from bank regulators. As a result, these new rules and regulations will remove a whole bunch of potential home buyers (such as yourself and myself and every other independent contractor dancer) from the demand side of the real estate market valuation equation by cutting off our access to new mortgage loans with anywhere near reasonable down payment requirements and interest rates. From Deogol's link ...

    (snip)"“Damato said that it would be impossible to find a lender for almost anyone who wanted a loan without income documentation, so many of the laws are already out of step with the current market. And, that market changes weekly and sometimes daily.”

    “‘I could do stated (undocumented) income loans on conforming loans until last week. … Now I can’t,’ he said. ‘It’s changing every day.’”"(snip)

    So in a sense, your decision to send the real estate agent packing was probably a very good idea ... since if you had sold your present house and terminated your present mortgage under the just released gov't bailout related changes in lending rules you would now be forced to seek a 'non-conforming' loan to purchase a new house ... which now typically carries an 8% interest rate versus a 6% interest rate on mortgages that conform to Fannie/Freddie resale standards (which now require full documentation and verification of income).

    ~
    Last edited by Melonie; 12-19-2007 at 11:50 PM.

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    Default Re: chart of the week - negative equity

    Don't forget the other problem - people who burn through their IRAs, savings, and other holdings simply to pay the bank. Then, they lose everything anyhow. This is another scenario more and more data is being discovered on.

    People get pretty pissed off when they play by the rules, act responsibly, and lose everything.

    The answer is increasing wages with the threat of inflation - but some would say it is already here (regardless of the government jury-rigged numbers.) Anyhow, not an issue with all the declines in wages, labor arbitrage via illegal aliens, guest workers, off shoring, and visa holders among other forms of job destruction that is going on out there.

    It was interesting, today, Cramer actually admitted there is a deep structural flaw and that there is a risk to many banks. This could turn into a real problem.

    The country lasted about 120 years before a revolution occurred (the civil war) - we are due another one. Especially with this last 3,500 page spending bill Congress whipped together in the dead of night undoing everything the people called for.

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    Default Re: chart of the week - negative equity

    ^^^ don't get me started on the Omnibus Spending Bill a.k.a. the 2007 PORK barrel ... which should be as infamous for spending items that were cut as for spending items that were tacked on.

    Back on the mortgage topic, you've hit on the truth of the matter as Sec. Paulsen did in your previous link ...

    (snip)"“Paulson and Schwarzenegger said their programs aren’t designed to help everyone. ‘Some of these people won’t have the capability to be homeowners and will become renters again,’ Paulson said.”"(snip)

    Historically speaking, the Clinton era HUD directives to Fannie / Freddie as well as 'community service' lending directives to banks were responsible for about a 7% increase in US home ownership levels (63% historical average vs 70% current per HUD secretary Alfonso Jackson - see ). So 7 out of 70 or 10% of US homeowners arguably were never able to afford becoming homowners in the first place... and were only enabled to do so by gov't directives to lenders that they MUST write (shaky) mortgages that would never have been approved under previous lending standards - in the interest of increasing home ownership levels for minorities and the 'poor'. Thus one way or another, that 10% of US homeowners will be permanently removed from the real estate market and returned to the rental market.

    Then you have Deo's issue of wage level arbitrage ... where for whatever reason the after tax income levels of most 'middle class' Americans will remain stagnant, while at the same time the costs of home ownership i.e. property taxes + insurance costs + rising mortgage interest rates are rising, and at the same time the costs of 'necessary items' i.e. food, gasoline, health care etc. are also rising. The bottom line is that many Americans have been living beyond their means for a very long time, that Americans have enjoyed below market interest rates for a very long time, that many Americans have been paid at rates which are well above the 'global' cost of similar workers, that these imbalances are coming to an end, and that as a result these people can no longer afford to be homeowners - period.

    There IS NO FIX to this issue ... well, barring the adoption of some new entitlement program where a good portion of the cost of home ownership is paid for by additional wealth transfer from some Americans to other Americans anyhow. As Deogol alludes to, if this were to be proposed, i.e. young workers who can't afford to become homeowners themselves having their taxes increased in order to subsidize someone else's mortgage payments, it could indeed spark another 'revolution'. If you throw in SSI / medicare demands on young worker's future tax rates as the baby boomers retire en-masse, I give it 10 years max before a generational 'revolution' begins ... sooner if more 'bailout' programs a.k.a. new entitlement programs wind up being enacted (right after the next presidential election for example). In the meantime, we're already seeing this happen at the state level where young 'professional' people are leaving CA, NY, NJ etc. in droves to avoid the high state income taxes, sales taxes and property taxes that essentially prevent them from becoming homeowners in many areas of those states.

    Deogol also raises an important point about Moral Hazard i.e. underwater homeowners 'walking away' from their mortgages. IRA's and 401k's are indeed protected during bankruptcy proceedings. Thus if an underwater homeowner has say $100-$200k in their retirement account, and if that underwater homeowner is faced with the prospect of withdrawing money from those retirement accounts (with penalties and interest) in order to try and stay current with their mortgage payments in an environment of rising interest rates plus rising costs of home ownership plus rising costs of 'necessary' expenditures, they indeed run the risk of losing both their house as well as their retirement fund assets over the course of the next 2-3-5 years. On the other hand, if they decide to 'walk away', they are guaranteed that their retirement account assets will be untouched in bankruptcy court and will continue to earn interest ... perhaps adding another $25k-$50k in tax free interest earnings over the course of the next seven years to the $100-$200k retirement fund balances they have now - which would not have existed had they chosen to try and stick it out as underwater homeowners ! From a Moral Hazard viewpoint, the retirement account issue adds a huge amount of additional cash value to underwater homeowners decisions to just 'walk away'.

    At the moment, about the only 'negative' to the walk away scenario is that the IRS has traditionally treated mortgage debt forgiveness as taxable income. However, as part of the gov't bailout package, there has been talk about changing this policy as well. If that does in fact happen i.e. the IRS being directed to ignore debt forgiveness 'income' in regard to total taxable income, then the Moral Hazard equation will become almost irresistable for underwater homeowners that don't / can't qualify for a gov't bailout.

    And speaking of Jim Cramer ...

    (snip)"Cramer on walking away: "When your house drops 20% in value, then it doesn't matter whether you're prime or subprime. It's better to walk away, even if you're wealthy. Because you don't want to lose your credit card, and you don't want to lose your car. Your house is the one thing that's fungible. It's smart to walk away... It's actually a good thing. I know that sounds a little counter intuitive. But if your home declines 20% in value, it's really important to sell it, or walk away from it.""(snip)

    from

    ~
    Last edited by Melonie; 12-20-2007 at 12:47 AM.

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Melonie View Post

    B. they can walk away ... file bankruptcy ... let the lender eat the negative equity as a loss ... and seven years later have pristine credit again which will enable them to buy the 'same' house at a lower price with a new mortgage offering better terms than their current one.


    ~
    How do you know that seven years from now they will be able to buy the 'same' house at a lower price? In 1991, I doubt many people would have predicted that in seven years we would be going through the biggest economic boom in our history.

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    Default Re: chart of the week - negative equity

    Economic boom for who?

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Melonie View Post

    There IS NO FIX to this issue ... well, barring the adoption of some new entitlement program where a good portion of the cost of home ownership is paid for by additional wealth transfer from some Americans to other Americans anyhow. As Deogol alludes to, if this were to be proposed, i.e. young workers who can't afford to become homeowners themselves having their taxes increased in order to subsidize someone else's mortgage payments, it could indeed spark another 'revolution'. If you throw in SSI / medicare demands on young worker's future tax rates as the baby boomers retire en-masse, I give it 10 years max before a generational 'revolution' begins ... sooner if more 'bailout' programs a.k.a. new entitlement programs wind up being enacted (right after the next presidential election for example). In the meantime, we're already seeing this happen at the state level where young 'professional' people are leaving CA, NY, NJ etc. in droves to avoid the high state income taxes, sales taxes and property taxes that essentially prevent them from becoming homeowners in many areas of those states.
    There is no need to fix the issue. There are always going to be people that need to sell their houses and there are always going to be homebuilders building new houses. They are going to have to sell them at a price that someone can afford and is willing to pay.

    The cost of food, gasoline, and healthcare isn’t always going to rise faster than wages. Historically, over the long term, the cost of food has gone down relative to wages. The U.S. government just passed a bill requiring auto makers to significantly increase the average mpg of their fleet. As auto makers build more fuel-efficient vehicles, people will be spending less money on gasoline.

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Deogol View Post
    Economic boom for who?
    Pretty much the entire country, although some people benefited much more than others. People who had money invested in stocks and stock mutual funds and workers in high-tech industries did especially well. Even strippers were doing much better back then.

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by eagle2 View Post
    Pretty much the entire country, although some people benefited much more than others. People who had money invested in stocks and stock mutual funds and workers in high-tech industries did especially well. Even strippers were doing much better back then.
    Oh, back then... how far back then? Pre 2001?

    I think you are looking at the situation with some rose colored glasses.

    Is a housing bubble really economic growth?

    Are stagnating wages economic growth?

    Is having the most people in prison (including more crap countries) a sign of economic growth?

    Having millions of Americans living off of credit (cards/HELOCs) a sign of economic growth?

    I think, when economic historians look back at these times, they are going to point to this period as THE DEFINITION of a "debt driven economic system."

    Sure, I can look at these numbers and say yea - good year eh? But if I look under the numbers - I get some numb-ers! This isn't because of factories opening up. It isn't because people are earning more. This isn't because of innovations.

    The admittedly simplistic look at this is an economy based exploiting people in other countries working in conditions and for amounts of money Americans far long ago deemed inappropriate for themselves and massive massive massive amounts of credit card debt, auto debt, mortgage debt, HELOC debt, and every form of debt imaginable out there.

    This is a country being economically hollowed out in every manner possible in ways that aren't even spoken of amongst the Britney watchers - yet they smell something is not right out there but will go along until "their cheese moves."

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by Deogol View Post
    Oh, back then... how far back then? Pre 2001?

    I think you are looking at the situation with some rose colored glasses.

    Is a housing bubble really economic growth?

    Are stagnating wages economic growth?

    Is having the most people in prison (including more crap countries) a sign of economic growth?

    Having millions of Americans living off of credit (cards/HELOCs) a sign of economic growth?

    I think, when economic historians look back at these times, they are going to point to this period as THE DEFINITION of a "debt driven economic system."

    Sure, I can look at these numbers and say yea - good year eh? But if I look under the numbers - I get some numb-ers! This isn't because of factories opening up. It isn't because people are earning more. This isn't because of innovations.

    The admittedly simplistic look at this is an economy based exploiting people in other countries working in conditions and for amounts of money Americans far long ago deemed inappropriate for themselves and massive massive massive amounts of credit card debt, auto debt, mortgage debt, HELOC debt, and every form of debt imaginable out there.

    This is a country being economically hollowed out in every manner possible in ways that aren't even spoken of amongst the Britney watchers - yet they smell something is not right out there but will go along until "their cheese moves."
    Even a poor person in America has a better lifestyle than the richest in America 80 years ago. That is economic growth

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    Default Re: chart of the week - negative equity

    Deogol,

    Did you even read my original statement? I said:

    "In 1991, I doubt many people would have predicted that in seven years we would be going through the biggest economic boom in our history."

    I was referring to 1998.

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    Default Re: chart of the week - negative equity

    Quote Originally Posted by eagle2 View Post
    Deogol,

    Did you even read my original statement? I said:

    "In 1991, I doubt many people would have predicted that in seven years we would be going through the biggest economic boom in our history."

    I was referring to 1998.
    Ah. Very good then.

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    Default Re: chart of the week - negative equity

    There is no need to fix the issue. There are always going to be people that need to sell their houses and there are always going to be homebuilders building new houses. They are going to have to sell them at a price that someone can afford and is willing to pay.
    This is an absolutely true statement. However, the 'point of balance' between the cost of housing and the size of house payments that your average person can afford to pay doesn't necessarily have to fall anywhere near the level that the US has been used to over the past 50 years. Have you ever been to a 'border town' i.e. El Paso TX vs Juarez, Mexico or Chula Vista, CA versus Tijuana, Mexico. On a global economic basis, what makes unskilled workers on the northern side of the border able to (previously) afford a lot better housing than unskilled workers on the south side of the border ?

    Even a poor person in America has a better lifestyle than the richest in America 80 years ago. That is economic growth
    My point here is the same point that I tried to make earlier ... that in large measure the standard of living for unskilled workers on the northern side of the border has been subsidized by forcible wealth transfers as well as by previous gov't directives to lenders that they must write X number of 'shaky' loans despite the inherent risk and despite any inherent ability of the borrower to actually repay the loan over the entire course of its 30 year term. The former has been subsidized by direct transfer of tax money from 'skilled' American workers, and the latter has been subsidized by 'skilled' American workers being forced to pay higher interest rates on their own credit cards / mortgage loans / car loans to allow lenders to partially cover their losses on 'shaky' loans to unskilled Americans that will never be paid back !

    Well, those gov't directives to lenders have now been officially changed, to the point where the vast majority of unskilled workers will no longer be able to obtain mortgage financing. Also, those forcible wealth transfer payments are beginning to fall into question i.e. California's 'surprise' 10 billion dollar additional state budget deficit. Without the easy credit and trick mortgages of the past, and with some reduction in wealth transfer payments, just what sort of house do you suppose that unskilled Americans could actually afford to buy ? You might look south across the border to see the answer ! Not exactly a promising market for homebuilders !

    The cost of food, gasoline, and healthcare isn’t always going to rise faster than wages. Historically, over the long term, the cost of food has gone down relative to wages. The U.S. government just passed a bill requiring auto makers to significantly increase the average mpg of their fleet. As auto makers build more fuel-efficient vehicles, people will be spending less money on gasoline.
    This flies directly in the face of logic. A - arguably the total amount of crude oil on this planet is not growing. As oil companies must drill deeper, and must drill in more difficult areas, and must transport the crude oil farther between the well and the refinery, the production cost goes up - and that cost will be passed on to the final customer. B - oil is a global commodity, such that any decreases in consumption that result from new US CAFE mileage standards will be more than offset by consumption growth in developing countries i.e. China, India. There is no way that the price of oil = gasoline is going to be going down until some new paradigm emerges that reduces WORLDWIDE oil consumption for transportation and stationary energy purposes. The widespread use of coal and nuclear power could potentially make a dent ... but neither is going to happen in the USA in the short term at least.

    Price increases are also assured for food ... most recently by this week's spending bill that quadruples the mandate for production of US corn based ethanol. Since the amount of highly productive farmland is finite, gov't mandates to produce more ethanol will do two things on a much larger scale than last year's original mandate.

    #1 - US farmers will plant more corn in response to refiner demand, which will displace wheat / soybeans / every other crop. US farmers will also plant more acreage i.e. less productive land, which in turn generates a higher marginal cost of production thanks to greater requirements per acre for fertilizer / water / diesel fuel. Thus costs of producing all of these global agricultural commodities will rise. Also, these agricultural commodities are an 'input' to other foods from beef and poultry (feed cost) to processed foods (tortillas, pasta), which will cause market prices for ALL of these to rise.

    Also # 2, being global commodities, food prices are also affected by worldwide food production versus worldwide food demand. From that standpoint, Africa's food production is way down - for reasons stemming the entire range from evicting white farmers from their land in Zimbabwe to european consortiums growing Jathropa on African 'plantations' for biofuels instead of edible crops. The UN has been all over the news about the issue of biofuel crops displacing food crops leading to widespread food shortages. Also, last year, droughts reduced agricultural land productivity such that China and many other countries are importing greater amounts of food. So you can be confident that food prices will continue to rise in the short term.

    On the other hand, the after tax incomes of both skilled and unskilled Americans are unlikely to rise. On the supply side, you've got unskilled illegal immigrants + H1B 'professional' immigrants. On the demand side you've got factory closures / outsourcing / automation. On both sides you've got rapidly rising state and local US taxes. The only major segment where incomes are still rising are union / civil service jobs. This trend will only get worse as more and more US businesses seek to shed domestic employees and the associated high costs of mandatory and competitive benefits - and particularly so for unskilled US employees.

    On the subject of health care, as long as new diagnostic equipment and new cutting edge drugs and treatments are being developed, costs will continue to rise. Health care costs will only stabilize if the type of treatment we receive 5 years from now is identical to the treatment we would receive today.


    Circling back on topic, all of these factors indicate that the ability of an unskilled American worker to afford a house in the future will continue to decline. In most cases, it is arguable that under market driven conditions (i.e. in the absence of gov't mandates to the contrary), unskilled American workers outside of union / civil service jobs have been permanently eliminated from the ranks of would-be home buyers by the most recently released regulatory lending standards. As I pointed out earlier, the consequences of this RETURN to 'sane' lending and creditworthiness standards will reduce the size of the US single family home market by somewhere around 10%. Thus it will take 10% growth in the number of 'skilled' US workers - who actually earn enough money after taxes to be able to afford a house / get approved for mortgage financing - to soak up the number of available single family homes that are already standing !

    ~
    Last edited by Melonie; 12-21-2007 at 02:27 AM.

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