Senate OKs $15,000 tax break for homebuyers

The $7500 tax credit from the Housing and Economic Recovery Act of 2008 had to be paid back, without interest, over 15 years. Is that going to be true with this as well? Or is this credit free and clear?

I agree–lets call a spade a spade. Either its a bona fide credit or its not!

Roberto you presuppose that you can call a bottom…..LOL….never going to happen…

Everyone looks back and says yea that was pretty obvious..

And it is with 20/20 hind site but if you are investing or buying a home for the long run…. you are bottom fishing here and if it goes down more before it goes up a lot in the next 5 years you will not care if you hit the exact bottom.

The questions for investors is can I make the lease work at this level with a $15K inducement…

Am I missing something ?

i think that if you can couple it with a 4% interest rate for 30 to 40 years so you get the affordability in line there is a lot of money on the sidelines waiting to go into real estate or stocks..

This combo of good rate and $15K works for both investors and new primary resident buyers. The combo is a winner that will help stem the tide.

3% Treasures just don’t get it done over the long haul.

It isn’t referenced in that story, but I the proposals coming from Congressmen that I have heard, always had a provision that the credit had to be for a primary residence. I don’t think investors will be able to take advantage of this program, which is a good thing from my perspective as a taxpayer who has to underwrite the deal.

On the surface, it would seem that the $15K credit will get added right away to whatever market price would have existed before. But there may be some multiplier here that is not at first obvious. If sellers (like me) can get a better price for their house when selling, and there is more interest from buyers because of the twin low interest and principal assistance programs, I will be able to sell faster and for a price, maybe even higher than the $15K that is added to the market by the rebate.

But there is also the leverage of the mortgage. If I am going in with 20% down, then the $15K is added to my down payment or equity, so I can really buy a new house at a price higher in value that is 5 times that $15K, or $75K, as opposed to before. So, we are pushing the market up by $75K per house, in theory.

There are factors that will not allow the full realization of that leverage, like the delay of the credit till April 2010 (I doubt it will apply against 2008 taxes). If this were a rebate at time of sale, it would be that much more effective, but very hard to administer by the Feds. The IRS is already in place to deal with tax credits, so is an efficient way to administer stimulus.

In any case, I think net-net, this is a big plus and will likely set the bottom of the market if enough people are stimulated to go buy a house with this program along with lower interest rates, and if the mortgage market problems are addressed (easier terms, lower credit scores, and more aggressive workouts for those underwater).

This program should have a very substantial short term effect. In Phoenix it will probably be enough to stabilize prices and make a significant reduction in inventory. The problem is that it just delays and extends the housing downturn by borrowing future sales. Demand will fall off a cliff when the program ends, and price declines and rising inventory resume.

Other unintended consequences which I anticipate:

If there’s no provision against it (and I haven’t heard anything) expect this program to initiate an incredible epidemic of buy-and-bail.

Expect many people who probably should be saving, paying off debt, building up an emergency fund and taking on less financial risk to overextend themselves to take advantage of this program.

Both of these will lead to more waves of foreclosures down the road.

The important things is do something… Sometimes a not so great action is better than not action.

Lets take action…. Some action will help.

Or congress can sit around and talk about it till it just does not matter any more. Frankly they are pretty good at that.

If congress would just let us all refinance at 4% instead of all this bank propping up. Can you imagine the qualified buyers with money that would jump at investing at these levels… 4% is still 1% above what the US government is getting on treasuries so it is a no brainier….

It is so simple it is lost of the idiots that run this fine country but this what they need to do..

At 4% my mortgage would drop $600 a month and I would purchase a second home in AZ in a heart beat…… As it is now I am waiting for the rates to drop. I am already approved just waiting.

If the government would just give me the loan they would make 1% over me buying treasuries and we would both win…

Like I say it is a no brainier. They don’t even have to wait for the robber barons that run banks to loan the money to me that is coming from the government anyway.. Lets cut out the thieving middle man.

Oh an yea give me the $15K incentive to do this so I can unlock that $600 / month for the life of my loan. I promise to stimulate the economy…LOL

Very well said Brian but it will never happen even though it would be so much cheaper than the Congress bail out.

Your plan helps all of us normal people and Washington will have none of that. It has to pay off all the people that put them there.

If you have to pay back favors and stuff your rich friends pockets you cant see the simple way to fix the problem for less money.

It is a very sad state Washington has become….

Brian’s plan would fix the housing issue in 3 months instead of 5 years.

What people are forgetting is that the economy is still losing jobs at a 600,000 clip January alone. And Phoenix is getting hurt badly on the jobs front. For those that expect the housing bubble to re-inflate I have news for you. We ain’t seen the bottom on the economy or the housing bubble yet. And that is especially true IMO in the Phoenix area where jobs continue to be lost and in fact job losses are now accelerating. And a $15,000 tax credit (tax credit that is worthless when you don’t have a job or not enough income to pay taxes) won’t make the slightest dent in getting the economy out of its death spiral from people who have been living on credit and debt and no savings for so long. I predict that Phoenix prices will continue to fall and once reach bottom will stay there for a long time while underperforming inflation.

Larry, did you even read my post number 18? It addressed your concerns

If you watched Face the Nation today I am sure it made you bitter like it did me. The two sides are just fighting. There is so much animosity it makes you sad.

There is not common sense left when all they want to do is be on the “winning side”

They could split this package into two pieces and quickly pass the piece that is agreed upon. But they don’t even make this very obvious common sense move.

Their words say they care but their action say they just want to be right and they could absolutely care less about middle America.

McCain - Says he deeply regrets the bi-Partisan nature of the association but is the leader of the bitter republicans. What hypocrisy.

The Demi (sorry don’t remember his name) - Says that he want to cut some of the non stimulus and then proceeds to say that even these non-stimulus items stimulate. What hypocrisy

The Presidents staff person says that they just don’t even know where the first $350 billion went. Lies

These are all very scary people…..

Larry

I am not forgetting anything and if you were a regular reader here, you would see that I have not painted any rosy pictures about the economy. My point, and the point of many professional economists, is we can’t have a healthy recovery until the housing market is fixed. This recession was started by a popping of the housing bubble (not the stock market as in 1930s). Until that which is broken is fixed, nothing else will get better. We had no economic problems at all until people starting losing their houses.

Some of the bloggers on this site are in a lot of pain because they are on the wrong side of this crash. Those people will not consume, and therefore, the economy will not recover, until they feel better about their RE assets and get back above water again. So, the first order of business for the Feds, if they are going to “stimulate” is to fix the housing crisis. The other option, which some here advocate, is to do nothing and let nature (free market) take its course. That is an expensive option and we would see unemployment, and the social costs that go with that, explode to the upside.

I have consistently maintained it is a lot cheaper to fix the housing problem ($300-500B) than it is to deal with the consequences of doing nothing. Fixing the banks, like was tried in September and October, without addressing the underlying problem, housing, doesn’t work either, as has been proven. That is my story and I am sticking to it.

To Brian:
My point is that you can not fix housing (no matter how much money you throw at it) until you fix jobs. It does not matter how low housing goes if jobs continue to be lost like the 600,000 just this past month. Banks are not going to lend to people with no job and 10-20% down any more. The liar, ALT-A and 100% financing loans are gone forever. People need jobs. If you want to fix housing first you need to fix jobs then you need to fix salaries and that will eventually fix housing as prices continue coming down. Eventually the two will cross. Throwing more money into housing now will just prolong the problem even further down the road. IMO, you throw as much money as you can to employee people with infrastructure projects, clean energy etc… Builders already overbuild houses over the last 6 years to last us for the next 10. And unfortunately they build lots of the wrong product. McMansions.

To Brian:
You said “capitalism does not work that way”. What you are asking is socialism not capitalism. You are asking for gov. to bailout housing the same way they are bailing out banks and wall street. And there is no “bailout” about it. What Republican Bush did with TARP 1.0 was socialism loud and clear. And now you want more socialism by bailing out housing without fixing the underline problem of jobs jobs jobs and low salaries.

The fact is that over the last 10 years salaries have been stagnant (not even keeping up with inflation) while high paying jobs got exported and outsourced while Bush created huge deficits with tax cuts for the rich and war in Iraq. And so Americans, now with less money & low paying jobs, had to borrow more and more in order to keep up. So now you have a big population with huge debt and no savings and now no jobs and low salaries.

What we need is jobs and tax cuts for the middle class and higher salaries. It is the only way for Americans to get out of their huge debt load and start saving again. And this isn’t going to happen overnight. It will take years to get out of the mess the tax cuts for the rich, the $1 trillion dollar war in Iraq, the bank/wall street deregulation and the gargantuan deficits put us under.

What you are advocating is legislating higher paying jobs and more of them?!! Give me a break. You sound like some union boss. The UAW controlled auto industry is going down in America because of that mentality.

We did not outsource high paying jobs. Menial, low wage jobs were outsourced (tele-service from a script), those that couldn’t be done more cheaply here in America. It is always that way with outsourcing: you send jobs to where labor is cheaper. That is the price of (somewhat) free markets and globalization. How do you think the Chinese feel when their students come here to get educated? That is essentially outsourcing education jobs from China to America. Do they complain? No. It is what we do best and they understand that. The jobs go to the country with the greatest advantage: Adam Smith’s Invisible Hand.

The housing bailout (and yes, that is what it is, I think we can all admit), is a one shot deal. If you want to call it socialism, go ahead. But by most definitions, socialism is a permanent philosophy towards governance not a one-shot deal to get something broken, fixed. The housing “bailout” is anything but permanent. This is why moderates ask for it, and conservatives tolerate it.

In any case, the deal is done in Congress and this is all just chatter. The moderate position will win again, as it should. We aren’t going to start dictating wages and jobs from the Federal government (haven’t we learned that “union mentality” kills an economy and jobs??) and instigating protectionism, which has been proven over and over in history, to destory economies.

Why do you continue to make this a Partisan issue? I am a moderate. I vote for Democrats as well as Republicans and I respect many of the positions of Libertarians. In a “flat world” (read Tom Friedman’s many books if you don’t know that term), the Invisible Hand is alive and well. The internet made it possible and there is no turning back. This is fundamentally the source of Islamic terrorism, which hates the idea of “flatness” and equality. There is no way to build a wall around America and get it back to where we were in the 1950s or even 1990s. The horse is out of the barn, so to speak. We need to move forward.

The housing crisis, in a way, is part of this process. It was caused by too liberal social policies in Congress, which tried to force home ownership down to an income level and credit worthiness where it hadn’t been before (for a good reason, as it turns out). At the same time, the western world’s relative prosperity in the 1980s and 1990s began transferring to Asia, India and even Africa in the early 2000s, with liberalization of trade and the adoption of open market capitalism, even in former Communist countries. This transfer was through the export of consumer products to the west and the import of Dollars and Euros to the east. The Asian economies, especially China which still controls foreign fund flows, had to hold or recycle those foreign currencies to keep their own currency from revaluing higher, hurting export competitiveness. So what did they do? They bought RMBS and CDO securities like crazy.

This is the seldom told story of the housing crisis, the availability of super cheap money. The blame (rightfully) gets put on greedy Wall Street banker middlemen who packaged and originated the securities for huge fee, as well as the Congress that loosened banking rules to allow for this loan processing, but none (wrongly) goes to the global cash flow processes that provided the cheap money in the first place.

There will be a long period of adjustment (beyond my lifetime) while wages around the world level out. I don’t understand the argument where American’s can demand higher wages, when there are plenty of places around the world where the same work can get done with as much quality or more, for less. Better to lift the rest of the world up to our standards of living (which is what we do when we outsource) than to take our standard of living down to a third world country. Is that what you want?

Stagnant wages, if they in fact were stagnant (I am a middle wage guy and my wages always increased with inflation, and they haven’t gone down this year with deflation, so I think my buying power has not lost any ground) are a part of a flexible economy. I don’t like CEOs getting paid 2000% more any more than you. I don’t think they deserve it and I am all for “clawbacks” for those who got their gains through some form of fraud, including kiting their stock price based on questionable financial tactics. But the real blame for high CEO wages lies with shareholders (you and me, either directly or through the funds we hold in our retirement accounts or pensions) that do not hold their Boards and Executives accountable. There are some states (Delaware is the best example), that make it almost impossible for shareholders to do so. Go after those state laws for starters, if you don’t like the system. Carl Icahn has a website where he is creating a coalition of ordinary investors to do so. I tihnk we can actually make a difference through this type of effort.

http://www.icahnreport.com/report/2008/10/join-the-united.html

Peacemaker John….now there is something we can all agree with!

Brian,

You seem to have an excellent understanding of the economic factors at work here and I agree with most of the things you’ve said (I my impression is that actually Larry agrees with most of it as well).

Because of this, I am mystified that you think the plan you proposed would work. It contradicts almost everything else you’ve said.

You agree that cheap money was a primary culprit and now you’re proposing cheap (actually free) money on a massive scale.

You agree that the congressional mandate to push house ownership to lower income was mistake, but now you’re proposing a bill that allows and encourages millions of people who couldn’t otherwise afford it to buy houses.

You agree that there is a globalization of wages going on, yet you propose the government prop up home prices above what this new wage structure can afford.

What happens when your program ends? You will have “borrowed” sales from years into the future. Who’s going to buy a house AFTER the $50000 giveaway expires? Prices will almost immediately drop 10% (actually more because of time value of money) and there will be no buyers because everyone able to buy a house will have done so already, so the decline will start anew.

All your program does is provide a temporary reprieve at the expense of extending the downturn.

Rich…on the subject of the pitfall of “my program” (again, really just an extension of what we will get this week anyway, whether I advocate it or not), I have thought of this problem of the end of the rebate period. I am sure the Congress is also thinking about it, because it is pretty obvious. They will need to come up with some type of gradual phaseout or it will do just as you say, cause prices to drop the day it expires.

As for putting millions of people in homes who can’t afford them: I didn’t propose anything of that kind. At the very least, we will hopefully see credit standards no lower than 650 (that is the exact number I used) with no “liar loans”. All the people who have been foreclosed will not meet that criteria, so they will not be “rescued”. Those who are now underwater, but have hung on based on their ethics and desire to maintain a good credit rating will be rewarded. This is exactly how it should work: reward those who deserve it and punish those who don’t.

There is a large backlog of credit worthy people ready to buy a home right now (according to our own John Wakeman), if this program is implemented it helps break loose the pentup demand. Those that have wanted to move from one home to another will be able to make the move. Our housing system is like a merry-go-round, constantly moving and you hop onto the horse that looks good to you when it comes around. But right now, that merry-go-round is broken and no one is allowed to hop on (another cheap metaphor).

A love Brian’s credit puchbowl analogy. It is deadon. Not just the housing mortgage market but everyway possible we could devise to live beyond our means. So now we are like the drug addict. There is going to be some withdrawal pain we have to go through to get clean. Sometimes things have to get worse before they can get better.

Anyone remember the electric bumper cars in the amusement parks of days gone by? Remember how you could ram your buddies and others and all end up log jammed together– unable to move. You would keep turning your steering wheel left and right until someone gained a little space and the pack would start to break apart. Right now our economy is like the log jammed bumper cars. No one really able to move. (for a multitude a reasons–probably psychologically being the biggest) At some point we are going to need a meaningful stimulus to get going again. I don’t profess to know when that will be or what it will be. And I am of the opinion it doesn’t necessarily have to be from the government. Probably a combination of things. But ijust like the bumper cars it will start with just a little daylight. Even when it starts we won’t know it. Later, some will look back and argue about what was the turnning point. Did jobs pick up first or was it the housing market? I think what the government has done so far is money down the drain. I would rather see money go to the folks to get them moving rather than prop up bad businesses. We are the bumper cars.

One closing comment on government regulation. I’m not opposed to government oversight. It can be useful. However, I believe its value over the long term is limited. It just doesn’t work. Regulators have no incentive and many times are beholding to those they are regulating. An then of course the regulations are written (influenced!!) by the industry leaders that are being regulated. (helps maintain that competitive advantage) The latest case of failed regulation would be BM. He operated in a highly regulated industry area and for five years people were blowing the whistle on him to the regulators. No action taken. The best regulation is when people act with their own self interest in mind. If John cheats me in a real estate deal, I scream bloody murder to everyone I know. And hopefully I exercise some discretion when he says I can afford that house because he can get it financed with nothing down and no principal payments for five years.

sorry…. J Wake….end of a long day

Roberto
Given that you wisely say you did not get out at the absolute top how can you say you will still just sit and wait if you get $15K tax break to take the plunge.

It is inconceivable to me that you can’t find a home you like (5 of them) and start making offers that are 15% to 20% lower than comps (not asking price) and get yourself a great deal and take advantage of the $15K write off. So what if it goes down 5 or 8% after you buy before it goes up. You are obviously not planning to sell in a month so 15% off these levels plus the $15K is a deal. Right?

Investors will be incented by the 15K to make offers instead of waiting. There are people that will take the low offer.

The $15K might not be a cure all but it will help. If I could sell my mountain property I would be making the offers and taking the $15K to get a warm place to spend winters.

Investors are a good thing not an evil. People that can make the payment no matter what they plan to do with the property is a good thing….period…

On another note if you were not impressed by the President to night you are just a bitter Republican. He is the first Demi I have every in my life voted for and I am glad I did. Reminds me of Regan. God bless him …. He was a leader….not this mamsi pamsi (sp?) mess we have had ever since.

(This is obviously a great topic because we have never been to 47 posts before).

John, you nailed it. The very fact that Roberto is pondering the entry point and starting to do the math makes the case for the tax credit. To stop the decline in pricing, with price being a psychological phenomena at all times, something has to be done to get people to reconsider when to buy. This idea of continuously declining prices is now locked in. Everyone can come up with a scenario where prices go lower based on this reason or that (and Roberto’s were fine reasons). But to get that vicious circle to stop requires an equally or more than equal positive idea. The tax credit is that idea and so would be a 4%, 30 year fixed rate.

As Roberto acknowledges: “I suppose interest only at zero percent they could manage!” a referemce to a home for free which is a silly notion. But that implies there is a price, an interest rate somewhat higher, that would cause Roberto and others to buy. Bottoms (or tops) don’t happen by themselves. They signal a change in market psychology. Breaking self-feeding loops is the hardest thing to do in economics. But there is a formula that will work. We will see in the next few weeks or months if Obama’s administration finds that formula.

john: but one important point needs to be stated: I was planning on buying at some price point anyways. So, getting me/others in there earlier may SLOW the price decline, but it doesn’t change it. Moving demand forward in time is not the same thing as changing demand.

The only thing that makes a real difference, would be a policy that caused people to buy WHO WOULD NEVER HAVE BOUGHT otherwise.

So lets consider the set of people who could change the near 300k market I’m looking at: they need a job history, they need a downpayment, reasonable credit, and would otherwise not have bought. My contention, that is a very very small number.

Just to chronicle how fast our market is going to hell, lets look at a couple of trends:

median trend: $143K in december, $130K in january. Now that is falling so fast, I kind of expected it to slow down or stabalize. Well, so far, there have been 841 sales in February, median price seems to be $120K.

Number of foreclosures/short sales listed for sale have been increasing by roughly 1000 a month. So, we would need to increase demand by 1000 a month just to stop the deterioration of the mix of homes for sale.

Thus, even with such sudden price drops, distressed properties are still not clearing as fast as they are coming available.

Another important note, is that price drops now are taking out huge swaths of homeowners and putting them underwater. When the median dropped 10K from the peak, only the peak buyers were left upside down. Now, each 15k or so of downward price motion takes out a whole years worth of buyers. As job stresses, normal life events which preceed sales show up, there are few alternatives now for so many buyers other than short sale or foreclosure.

So, I repeat: 15k in tax incentives are not going to change the ultimate supply/demand inequilibrium, or the ultimate bottom price. Maybe perhaps the path we get there, but not the destination. [and yeah, if it drops fast enough anyways, I'll buy at the end of the incentive window, but my decision will be data driven, not emotional]

Roberto, you are missing a very important point here. Earlier, I mentioned the merry-go-round and that there always are people wanting to jump on when they find the right horse. Some of those people (actually a lot of those people) already are sitting on another horse, but maybe it is a pony and they want something bigger and faster. Or maybe (like me!) they are on a big quarter horse, and they want a pony.

$300K houses, never were, or never should have been, for first time homebuyers. You are forgetting that when that $15K incentive is out there, and maybe a low interest rate, many people who want to sell (like John?) will find a willing and able buyer and will be able to sell so they can buy. That is the way RE has always worked. And I am one who is ready to jump into a new house if I can get out of the house I don’t need anymore (as an empty nester).

Roberto I must also disagree with you. If your are right and prices go down another 40% from here then all bets are off. This hurricane will turn into the perfect storm and will rage for at least a decade.

Unfortunatly many people will just walk from a house that is worth 20% less than they paid much less 40 to 60%. Unfortunately most Americans just don’t save. As a result Bankruptcy is viable option.

If prices go down 40% from here you will be more interested in whether you have a good supply of canned food and a shotgun than how much your worthless savings account has in it.

They have to stop housing prices from falling.

Something I don’t here talked about much but I think is a factor. How much per square foot does it cost to build a house in AZ these days. Not how much a builder would charge but if I am a builder how many square feet can I build for myself if I have $300K to spend? What is replacement cost.

Brian you are in the worst spot if you are wanting to trade down as the large homes it seem might be the last to recover.

Roberto currently the % of people that owe more than their house is worth is small. I don’t remember the exact figure but it was not huge. Also the dollar amount that they are upside down is not huge. I assume this is all true because most of us owned our homes before the run up.

Well some of you had a run up. Here in Denver home prices where already expensive and we did not have much of a run up. We becoming California. At least I hope so…lol… I want to sell for huge profit in 10 years and move to were it is warmer.

At any rate not that many people are just going to walk away if they are a little in the hole and have a job. If it all goes down another 40% then tons of people with a job and no savings (this is a huge number of people) will walk. This happened in the 80’s. My brother did this. He had a good job and not savings an all of a sudden his house was worth $15K less than he could sell if for so he just walked.

$15K was a lot in 1981 … when you are talking a $85K house.

My point is right now people that can make the payment are staying with it. If the housing market goes down 40% more then a huge number of people will walk and this will take year and years to work off.

Ok the world will not come to and end but what will happen is housing will keep things depressed for years instead of 12 to 16 months.

Housing prices need to be supported here. At least that is my view and apparently people that know a lot more than I do about macro economic think so as well.

Why feel all that pain if we don’t have to as long as we don’t complete steal the future from the kids of today.

CBass, repay it to whom? You already know the answer because you have told us in the past. The Treasury will have to run its printing presses to finance the deal (otherwise Treasury bonds sold to foreigners to finance the cost will force interest rates through the roof which will be self-defeating). When Treasury runs the printing presses, it will devalue the dollar by increasing the money supply which of course is on the path to inflation.

But inflation is exactly what Treasury and the Fed are trying to create. Everyone needs to stop looking at the Fed and Treasury as they were some business down the street. They aren’t. Wrong or right, they can print money whenever they want to pay their expenses and the public will accept that money (unlike if I were to print my own McMorris bucks). And it does not create anymore national debt to run the presses!!!

The big theoretical question that will get answered shortly (next couple of years) is: can you expand money supply during a deflation without igniting inflation (basically dis-deflating, a double negative). This is what they are trying to do right now and the some of the best economic minds on the planet (I don’t count mine among them) think it can be done. But others think it can’t. We will see.

The worst possible outcome under this scenario is runaway inflation. But right now, I would rather deal with that (that sure would solve the housing crisis) than a deepening deflation led by the downward spiral of housing costs.

There are examples of running the presses hard (expanding money supply) during past deflations that did not result in inflation or even significantly higher interest rates. In the 1930s, FDR did this with good results. They had no track record to fall back on, so the Treasury blinked and shut down the presses early which resulted in a second mini Depression in 1937-39. The Japanese also tried hard to create inflation in the late 1990s into the early 2000s (starting about seven years too late) and were able to nudge the economy back into growth for a few years, to the point the Yen is now the strongest currency in the world (appreciating against everyone else’s currency).

So, I think there is a pretty good chance this will work. It is a whole lot better than doing nothing and watching the entire thing tank ever worse.

More “talk” about homeowner help but still nothing real…..

http://online.wsj.com/article/SB123427167262568141.html

“The administration is still finalizing details of its housing plan, which centers on financial incentives for mortgage companies to modify bad loans. Mr. Geithner said the goal is to “help bring down mortgage payments and to reduce mortgage interest rates.”

The Obama administration has discussed spending $50 billion to create programs to help roughly 2.5 million people avoid foreclosure in the next few years through a number of measures aimed at lowering monthly payments and making it easier for borrowers to modify loans.

Government officials are expected to create national standards for loan modifications that would be adopted by Fannie Mae and Freddie Mac. They are also expected to use tax dollars to incentivize servicers to modify loans and possibly offer a separate incentive to MBS investors who own securities backed by the loans.

A key focus has been on how to determine the “net present value” of homes, and government officials believe if they can agree on a common metric for determining a home’s value, they can rapidly expedite how mortgages are modified.”

–Seems to me that owners of mortgage backed securities incentive to allow loan modifications would be that it’ll cut their losses.

Again, you are assuming that I “revere” someone. I don’t. I just wanted to make the point that economics is all about theory and opinion and no one should feel too strongly that they are right while everyone else is wrong.

The problem with economics as a science is that (a) there are many more variables than even the weather, so prediction becomes extremely complex; (b) many of the variables have to do with the human psyche, which is inherently unpredictable; (c) the time frames for testing a thesis are very long, maybe a lifetime, so that it is very hard to prove or disprove a thesis.

For example, you and others like to cite the Japanese experience as what can go wrong with trying to save the banking system by driving interest rates low. Two problems I see with that argument: (1) they waited a very long time (like I said, seven years) to admit and address the problem; that is the Japanese way; they do not like to admit failure because of the dishonor it brings in Japanese society; (2) once they admitted the problem, they did not attack it aggressively; it is against Japanese values to fire employees; so they were very passive in dealing with the issues until America banks were eventually allowed to buy up the broken Japanese banks and do what American companies do in times of crisis, which is to shrink the business by firing lots of people; Even with these errors, as I pointed out, it actually turned out well for Japan as measured by the strenght of their currency, which you must admit, is the strongest in the world right now.

For the above reasons of lengthy time period to test and complex variables, even Nobel Laureates can be wrong, as you point out. I just don’t think anyone here on this blog needs to get overwrought with emotion that he is right and the Govt officials are wrong. I would rather see us discuss the issues calmly and offer up our opinions, for what they are worth, which is not very much.

If anyone still thinks that somehow $15K tax credit will cause the housing bubble to re-inflate, then they are dreaming. Even after you look back and say that was the bottom, the bottom will stay with us for a long while. In fact even after house prices hit bottom I expect them to under perform inflation for years. And given that there are now a huge supply of rental properties that are willing to make huge deals to get tenants (I used to see 1 free months rent but now I’m seeing 2 months and rents continue coming down), I’d say that renting would be the smart choice for years to come IMO. Cash is king as they say, especially in times like these.

BTW, here is a recent article that says that European banks are sitting on almost $25 TRILLION of toxic assets. You have to then wonder how much the U.S. banks are sitting on, which have yet to come clean on as they have yet to open their books or fairly value their assets.

http://blogs.telegraph.co.uk/bruno_waterfield/blog/2009/02/11/eu_faces_toxic_debt_spiral

IMO, we are far away from the bottom of this depression. Cause so far it still feels like a recession. So it could get a lot uglier. BTW, I hope it doesn’t but I don’t see many ways that we can avoid it. Everyone for decades now got into too much debt by buying way more that they could afford or need. At the U.S. rate of consumption we would have needed 2 planets by 2040. And so as the U.S. population adjusts to a much different lifestyle, the world economies will suffer and the U.S. economy that was build on consuming the most, will unfortunately suffer the worst.

…The homebuyer provision, a $15,000 tax credit for the purchase of primary residences, has received substantial attention since it was added last week on a Senate voice vote. But its primary sponsor, Sen. Johnny Isakson (R-Ga.), voted against the Senate bill yesterday, giving Democratic negotiators little incentive to retain the provision, which was estimated to cost nearly $40 billion over 10 years. Democratic negotiators said the tax measure may also be scaled back drastically.
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/10/AR2009021001397.html

Larry, great post. I liked the piece you referenced which was quite intelligent. I did not see any reference, though to “almost $25T of toxic assets” anywhere in the story you linked. Global debt is only something like $50T, so Europe would have to have more than half global debt as “toxic”. Not likely. That number is nothing that I have ever heard. Nouriel Roubini has the record forecast so far, at $3T. Maybe you misread something that said $2.5T, which is more in line with the most pessimistic forecasts I have seen.

Something to consider, though: if we do nothing and let the deflation monster continue to grow, then eventually ALL debt will become toxic, or be in default, because all businesses and households with debt will be broke and unable to service the debt. This is why it is imperative to address the core of the problem, which is housing, and work out from there.

One of the posters (this is obviously followed by Brits based on the commentary) said the following:

” This massive transfer of production, capital and expertise, aided by the substitution of debt & inflated asset price driven consumerism, was always going to end this way.

The banks were merely a willing tool of the corrupt [continental] Europeans. The Europeans, like drunks in a brewery, thinking they could throw away the economics rule book and push ahead with their Utopian Federalist experiments and ignore the fact that they were duty bound to promote a sustainable way for Europe to continue to earn its living.”

Firstly, it is nice someone in the world is bashing someone besides the USA. Secondly, this goes to the point that the socialist experiments in Europe have some opponents, who see that direction as “unsustainable” and that Europe has ceased to be competitive in today’s global marketplace, based on their high labor costs as a result of “Utopian Experiments”.

If Europe is indeed in such a bad situation, and I have seen such reports elsewhere (with the bad debt in the $3T area), the only way out for Europe may be to sell their bad assets to the American government. Unlike America with the global “Reserve Currency”, other countries don’t have the option to print their way out of the problem. America, right or wrong, does, for now.

This might end up being a modern day “Marshall Plan”. America used what were essentially its printing presses (though backed fractionally by gold at that time) to finance the reconstruction of Europe and Asia post-WW2. In the process, America became the creditor to every other country’s debt creating huge BOT surpluses for America in the process. This is the source of the American prosperity that everyone likes to reminisce about in the 1950s and 60s. It also had the benefit of allowing the American war machine to be retooled for peacetime production and employ tens of thousands of returning soldiers from the war.

The money loaned was not repaid in most cases, but it still benefited both the creditor and debtor!! That is the way with fiat currency: if everyone agrees there is value in it, then there is. It is totally a matter of perception and acceptance. By exchanging fiat currency that conveys perceived value, everyone grows richer as happend during the Marshall Plan.
http://en.wikipedia.org/wiki/Marshall_Plan

So, maybe it is happening all over again: WW3 is being waged in the banking system. America has the only currency valued as indispensable by most of the world and we can loan it out to buy in the world’s bad debt, the way we loaned it out to rebuild global infrastructure for which we were never repaid, but still gained immensely.

Larry, our posts crossed in the ether, so I MUST respond to your latest:

Greed (and its opposite, fear) is the human condition. In fact, not just human condition, but the animal condition. Capitalism harnesses greed and puts it to work. This is why economists talk about “animal spirits” in positive terms when describing how markets work. The desire to get something that someone else wants is what drives ALL markets. Many times, people make bad decisions because they are wired this way by nature (think Bernie Madoff).

It may not always be pretty, but it can hardly be called bad. Every system (communism) that trys to deny Man’s fundamental greed has failed. It is not something new to this generation, either. It has been around as long as mankind, and like I said, as long as any kind of animal roamed the planet driven by “survival of the fittest” genetic programming.

But greed must be HARNESSED. The big mistake made the last few decades has been to gradually remove the harnesses that were put on greed in the 1930s. And yes, it was mostly the free market Republicans pushing for that (though I often consider myself Republican). The “straw that broke the camel’s back” was repealing the Glass-Steagall act which had kept regulated banking and iunregulated nvestment houses separate since the early 1930s. But there were many other deregulation efforts that have added to the problem. Consider Airline deregulation in the late 1970s. We all like those cheap flights, but the airline industry has been a minefield ever since.

The bottom line: utilities, where there is some monopoly power, should ALWAYS be regulated. This includes airlines, but also banking and investing. Fannie and Freddie are examples of companies with monopolistic entities that had no business being deregulated and traded as public companies (with the accompanying oppty for manipulation of performance to take out big financial rewards).

We need to fix the system FIRST, and then put back on the regulations that were removed. Consider this analogy: someone is driving a car way too fast; you think his behaviour is outrageous and disgusting; he runs off the road and rolls his vehicle; you come on the scene and see him lying outside the car with blood spurting from his neck; do you then watch him bleed to death saying to yourself “that jerk deserves to die” or do you run over to him and apply pressure to the wound while frantically calling for the paramedics?

Larry, I think that $50T number probably includes derivatives, which is double or triple counting actual debt and in some cases counts both sides of the transaction, since some derivatives are insurance on other derivatives and those will cancel out. And it doesn’t say they are all toxic, though like I said, if the meltdown isn’t stopped, all debt will eventually become toxic.

But whatever, we both agree the numbers are big. You and I can’t really grasp the difference between $10T and $20T, and probably no one else can either. It all comes down to bookkeeping entries.

The point I made just a bit ago, is that fiat currency and all its bookkeeping entries are totally a figment of our collective imagination. Fiat currency is symbolic of something physical, or it ceases to have any value. And here is the important point: unlike in WW2 where there was very much physical destruction, and we were still able to print our way out of the problem (think about it, did someone go dig up a bunch of gold to pay the trillions for reconstruction?), this time, all the assests around the world are intact. They should have the same value to us today as they did two years ago. What changed? Our attitude, and that is all.

This problem won’t be over until people stop worrying so much about it. That is all there is to it. We talked ourselves into this crash (with lots of help from the media and American politicial process) and the only way out is to convince ourselves it will get better. Is there something else you are waiting for? Larry, if you are representative of popular opinion, and if you think it will get much worse before it gets better, then you are correct, it probably won’t get any better.

One way or the other, the imbalance will be corrected. Some economists think we should mark down all debt to equal credit (which is the process we are now in and is called deflation by another name). Other economists think we should mark up all credits until it equals debt (another way of saying reflating).

As I said, the bookkeeping aside, the physical assets underlying both sides of the balance sheet remain the same. And, for that matter, so does the “shareholder equity” which in this case, is the equity we hold collectively in our economies. This is called “savings” on the books and becomes a bigger percentage of total assets if those assets are written down alongside the debt (somthing a lot of people want to see for some reason).

All this rest is an illusion. Most people find it much more gratifying to mark up credit (inflate) than to mark down debt (deflate). That is the big difference between the two.

Again, I ask the qustion, do you see another way to balance the global books?

To Brian:
I actually wrote before what I think will get us out of this mess. I said jobs and higher salaries. Or jobs and lower asset prices. And I definitely know that re-inflating already overpriced assets ain’t it.

To Brian:
What you just described is a pyramid scheme. The “find someone to pay a higher price than you” scheme. And as we all now the last bagholders get burned.

Sorry but I’ve seen that movie before and has ended in disaster every time. This time assets will have to be driven down to the ground till they become irresistible for people to buy them. It’s how free markets work. It is not free markets when the fed prints super cheap money and gives it to greedy people/bankers to screw our economy with.

So we’ll have to take our medicine and wait till assets go low enough as to become irresistible for buyers to step in. Period. That’s what free markets are all about.

81

To Bean12:
How is the middle class ignored?? The buyer tax credit is only when you buy a new home and can be used mainly by rich people (people who already have money). So it would have done nothing for all the people who already have a home or who don’t have the money to buy a home (ie. out of work middle class people with no savings). Secondly the stimulus is full of tax cuts for 95% of Americans, the middle class, and job creation for the middle class. So how exactly is the middle class ignored again?? Compared to the tax cuts for the rich and the huge tax credits for oil companies and corporations to move jobs oversees that republicans have been giving for years and got us into this mess, I’d say this is truly a bill for the middle class.

On the issue of housing I’d prefer to see them find ways to fix the poor and middle class people behind in their mortgages, especially the ones without a job. The 15K tax credit for a new home would have done nothing for the people who already have a home and are in trouble because they lost their job. And that is where the majority of middle class people are right now.

To ken:
I was talking about people who already have a home or have a home and are behind on their mortgage or have lost their job or have no savings. The majority of middle class people are in one of the above categories. And for those people the $15K tax credit for a new home would have done nothing.

Maybe so but the $8000 may yet help get those people thinking of buying off the fence. My feeling is there are many potential buyers in the AZ metro waiting to jump in.

It would be a lot cheaper than giving more money to the banks….

I know like I have said before it make too much sense so it will never happen

I’ll believe it when it actually happens….

White House may move to buy bad mortgages
http://www.msnbc.msn.com/id/29146768

—Again I say that the proposed 15K tax break was not going to do much as it’s only helping those who are employed, have good credit, have a downpayment and are in the market for house.—

Right and imo there are a lot of such people on the Phx metro sidelines waiting to jump in. The $8000 will help. Not as much at the $15,000 for the year but it should help push sales in the coming months.

—Those people are already “lucking out” because they can go foreclosure hunting and pay decade ago prices if they so choose—

Great and they’ll luck out even more with the $8000 credit.

—And again I say they need to force the banks to start doing loan modifications ASAP to stop the carnage.—

http://www.msnbc.msn.com/id/29146768/

—What ever ends up passing (if anything) might help during the final months before it expires but won’t do a damn thing now. If people are on the fence it is because home prices are dropping and they think we have not bottomed. If they get the same tax break in December that they get now they will wait until December—

They`ll have until August of 09 (assuming what I read doesn`t change)

—It’s stupid and not fair at all. Why would the new buyers who obviously didn’t get crushed by this be the ones who get the help while the rest of us burn.—

Because the market is so bad and nobody can be sure when it will start picking up. So if $8000 gets some people off the fence great. Is it fair? Perhaps not but life isn`t always fair.

—-It’s stupid and not fair at all. Why would the new buyers who obviously didn’t get crushed by this be the ones who get the help while the rest of us burn.—

I agree. Just think, this could have been avoided 2 years ago if the idiots in Washington were not all himming and hawing about “moral hazard” with helping homeowners. Consider this analogy - There is a 747 with 300 passengers over the Atlantic. It is found out that there are two dangerous international terrorists on board. The Government does not want to allow the terrorists to possibly escape capture by allowing the plane to land, but if they don’t allow the plane to land, all 258 passengers will be killed. What would you do? My answer would be to fortify the terminal and then let the plane land. There may be some chance of the terrorists escaping, but it would save 258 passengers from death through no fault of their own. Now, imagine you are the government. In this analogy, they were willing to let all 258 passengers die, because they don’t want even the chance of 2 terrorists to “slip through”. We - the responsible homeowners that did not lever up 30x and buy with no money down, and have (had) jobs, the small businesses that just were trying to make an honest living, and companies that did not live off the cash cow of Wall Street are the 258 passengers dying right now. The irresponsible home buyers are the 2 terrorists. All so the “moral hazard” “sanctity of a contract” crowd and government right wing free market nuts (and I am not insulting the normal free market business moderate folks here, just the nuts), and the doom and gloomers, Gold bugs etc. that had been “telling us for 30 years that we all overconsumed, and now must pay pay pay” can make sure that the 2 terrorists have no chance of escape. Add to that the change of FASB 157 (Mark to Market accounting) at EXACTLY the WRONG TIME. Now fast forward to today….

The facts are that the “easy money” of low interest rates was not to blame for this, it was the terms of the mortgages that were issued and Wall Street greed. The solution to the problem FROM DAY ONE, was not punishment for the unfortunate souls that just wanted the American Dream, it was immediate correction of the mistake - IE the badly written mortgages. MODIFY them to well written mortgages - write down the principal so that the bad actors NOT the homeowners suffer the IMMEDIATE loss of their capital, not tax payers - them. That would have solved the problem quickly, and kept it contained. Their still would have been a recession, but not to even close to this scale. Because the banks and mortgage investors would have had to recognize those losses in real terms, they would have cut back on credit and thus greed, but since people would not be losing their homes, and they would have equity or at least be even, they would not be so quick to walk, therefore keeping good assets from turning toxic as well. The markets would have adjusted to the CASH FLOW of the assets, not the value. The cash flow of a paying mortgage has value. A lot of good 30 year, fixed rate mortgages are toxic now because of JOB LOSS, NOT OVER LEVERAGE or living beyond ones means. 2 years ago, the momentum was not so pervasive. Now it is too late, the stupidity has already taken it’s toll. And the idiots in Washington are STILL waiting for the mortgage industry to give them PERMISSION to modify loans. Since when is the Government required to ask permission of the mortgage investment community? If you read your uniform mortgage note, the ONLY thing that can reliably modify a mortgage note, is LEGISLATION of LAW, which would not cost the taxpayers 1 DIME. We can send astronauts to the moon, but not “figure out how to modify a mortgage”. The same crooked nuts that let the financial system get out of control, now are the same ones talking “Bailout” “help the banks” blah blah blah. Really what they are saying is “Our masters elected us, we enriched them, and now we will NOT make them face the consequences of THEIR actions. I have heard that they are looking at SUBSIDIZING mortgage payments so Mortgage Investors are more WILLING to modify mortgages so THEY don’t take a loss. HUH? So, if Caterpiller’s business falls off, the CEO must ask PERMISSION from ME to cut the dividend of the stock? Give me a break. These mortgage “investors” need to understand that reduced cash flow, with reduced principal, in the long term is more valuable than NO principal and NO cash flow. THAT is the ultimate conclusion for these “investors” if they don’t wake the hell up. By making the Real Estate market stable, only then will the CDO’s CDS’s MBS’s etc. be stablized, since the economy itself is what is making the underlying collateral more toxic by the day.

They want the public to pay them for the loss, and have the same public suffer joblessness, homelessness, and depression. Until that ridiculous attitude shifts, NOTHING will fix this.

—I have heard that they are looking at SUBSIDIZING mortgage payments so Mortgage Investors are more WILLING to modify mortgages so THEY don’t take a loss.—-

Yep, that`s what it sure looks like.

RE Investor…you get it! The investors don’t want to step up and realize their unavoidable losses. The’ve chosen to sink the whole ship so they can stand dry up on the pilot house holding the plugs as it goes down. The irony of it is that everyone is already counting their assets as worthless because they can’t pin a value to them because they are sinking the ship.

Ken, this is not “whining”. I’m saying what needs to be done to help EVERYONE. Modify mortgages NOW! They’ve been talking about it for years and made a couple idiotic programs that failed miserably. I don’t think it’s too late but it’s getting near there real quick. They MUST ACT NOW! There’s 100 ways to do it and all will work fine. Pick one and roll with it.

What could we do? Everyone underwater stop paying their mortgages at once. That would send a loud and clear statement. I’ll be offically late come the 16th. I’m calling countrywide and telling them that they can have it when they get someone to force me to move out or they can modify my loan and I’m not even talking about principle reduction.

The people who got crashed by this are people who bought:
a) more than they can afford
b) more than they can afford with no savings for a rainy day
c) more than they can afford and took out equity loans
d) more than they can afford and buying multiple properties
e) more than they can afford with 100% financing or negative amortization loans
f) more than they can afford without reading the fine line before signing

So I’d like to know why am I the one getting stuck with the bill… ANY bill… the buyers or the sellers bill…. everybody is crying… should I start crying too?… I lost a sh*t load in the stock market… does anyone know who do I go to to get my money back??

So let’s cut the hypocrisy and the BS. This mess is of our own creation. It’s called human GREED. Greed from homeowners, greed from real estate agents, greed from mortgage originators, greed from bankers, greed from wall street investors, greed from politicians. WE ARE ALL TO BLAME. So stop blaming anyone else but yourselves first and start taking responsibility. So stop asking for handouts. This is going to be ugly no matter what. It is best to spend the tax payers money, ALL THE tax payers money, by help creating jobs and start manufacturing stuff again. If people can’t afford something they should not buy it. Stop living beyond your means. Downsize and start saving. Americans lived for too long on fantasy land. Time to wake up to reality and stop asking for someone else to bailout our own irresponsible behavior. We can get through this but only if we are honest with ourselves and start changing our bad behaviors.

To MPS:
Please send me your address so I can send you the bill for my stock losses. Thanks.

–So I’d like to know why am I the one getting stuck with the bill… ANY bill… the buyers or the sellers bill…. everybody is crying… should I start crying too?… I lost a sh*t load in the stock market… does anyone know who do I go to to get my money back??

Larry - and to answer your question above - because you are, like the rest of us, part of the 258 going down to save the 2 terrorists….or as MPS stated - your not in the pilot house holding the plugs. Welcome to the real world.

MPS writes:
—But yeah, loosing my job, taking a pay cut, having my savings wiped out and being left with two properties worth far less than what I owe on them is because I was greedy…….

So what? Shit happens. Stop whinning.

—I have the guns and ammo ready if the shit hits the fan.—

I`m sure you do.

All you’re doing is whinning. We get it. You’re screwed. Tough. Deal with it

Less blue pills and more red pills. You will feel better in another couple of days.

MUST READ: U.S. Federal obligations exceed world’s GDP
Does $65.5 trillion terrify anyone yet?
Posted: February 13, 2009
11:35 pm Eastern
By Jerome R. Corsi
http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=88851

To RE investor:
Did you read the article that I posted??? I suggest you do. The housing bubble was just the end result of more than 2.5 decades of not willing to face up to our debt problems and having republicans say “deficits don’t matter”. Well hell they don’t. Now the debt problems are to the point that are not fixable without extreme major pain. And there is no avoiding that pain. You can scream all you want, blame whomever you want but the fact is that the pain we are in and the more pain that’s coming is of our own creating for not dealing with our debt problems when our debt was much smaller than it is now. Now we are having such a massive debt problem that is sucking up everything down a black hole. The $65.5 TRILLION U.S debt obligations equals the whole world’s GDP COMBINED. And the stupid criminal traitor republicans kept saying “deficits don’t matter”. Yeah right… sheesh…