bostonbubble.com

[john p]

If the FED is caught with two different forces: wanting lower rates to support house prices, and higher rates to fight inflation, I'm thinking that this new concept of giving first time homebuyers a tax credit for a certain reasonable amount makes sense in theory.

Think about it, people trading up already have the bubble equity, so the people feeling the toothache are the first time buyers. I think this remedy is like the novicane right on the toothache (first time buyer's pain).

Now they need to make sure they get the right dosage. What I mean is, is if rates go up to say 7 percent, it eats into affordability; If however they offer a certain amount at a low interest rate for first time homebuyers, they can through weighted average drop the interest rate to where the housing stock for first time buyers becomes within their reach and they can clear out some of this inventory.

[Brian C]

[StillRenting]

Sorry John P, but no.

First, we have a trade deficit in this county so every extra dollar our county spends we are borrowing from foreign investments. This is not interest free. Our country (you and I) will be paying for this. Borrowing from foreign investments is fine but only if it is for investments in our growth, not consumption such as housing. In the long run this will reduce the value of the dollar and thus increase our costs of imported goods and thus causes inflation.

Also offering this form of financing (The $7500) will drop the interest rates as demand for funding from the market will be reduced by $7500 for each new home owner. Reducing demand lowers the price, (i.e. lowers interest rates). Again, causes inflation

There is only one good solution to our problems. As a country we need to lower our costs. And right now housing is the highest cost. Rather than borrowing from foreign investors, we need to lower the cost of housing and thus lower the price of houses. Let the market work, it will do it on its own.

“And so, my fellow Americans: ask not what your country can do for you - ask what you can do for your country.” –John F. Kennedy

[john p]

So what you're saying is that it is bad to monkey with the free market.

I would say, we've already done that and the question is whether or not we dampen the impact of this correction and focus any help toward those that were most unfairly hit with government interaction. Hell, we're giving out hand outs to every deadbeat imaginable and we're nation building in Iraq, it's not ok with you to throw the new younger buyers a bone? I get the sitting on the sidelines saying "Burn Baby Burn", that might work, but I think it will just pit poor people against first time buyers and everyone who bought 5 plus years ago is sitting in the cat bird seat.

I was talking about first time buyers, which is one segment of the buyers.

I have no agenda one way or another and I'll have to think through your idea of just riding out the correction and biting the bullet...

[StillRenting]

As a new younger buyer, I would rather prices drop $7500 than for the Government to loan me $7500 (interest free or not). When the house costs $7500 less, I never have to pay that money back. As for biting the bullet, my grandparents bit the bullet and never spent their post WWII food stipends because they where too proud. Whatever happened to those days?

Why not put the $300 billion into local K-12 school systems. Good schools bring up local housing values, right? At least it will help our future rather than prolong our pain.

[john p]

http://money.cnn.com/2008/12/03/news/economy/treasury_mortgage_rates/index.htm?postversion=2008120407

What do you cats think of this idea?

[admin]

[JCK]

admin,

I don't know that we can conclude that the mortgage market is working efficiently. Given the yield on the 10 year treasury right now and historical spreads, I can argue that rates should be closer to 4.5%, and that the market. But I also agree with your concerns.

I think, at least in expensive areas, the effects of mortgage interest deduction and other middle class subsidies have merely driven prices higher, rather than making prices more affordable. I say this as someone who benefits from the deduction. I don't think this is the case in lower price housing markets, where there is typically more supply and ability to bring supply online.

On a separate note, rates on fixed mortgages are really, really low right now. Anyone homeowner who doesn't have a great rate now, really should consider doing a refinance.

[john p]

http://money.cnn.com/2008/12/03/news/economy/treasury_mortgage_rates/index.htm?postversion=2008120407

Actually, now that I think of it, the people that were hurt are people that bought in the last five years. The FED drove up house prices by lowering rates to help dissipate the stock market correction and the Community Reinvestment Act flooded unqualified buyers into the market driving up prices as well. The securitization of subprime loans caused the banking meltdown and our current recessioin/depression. This chart:

http://www.expandmywealth.com/wp-content/uploads/2007/11/mortgage_rate_resets_credit_suisse.jpg

showed the adjustment schedules for subprime and other adjustables, pretty much it was like watching the track of a hurricane on slow motion.

While this was headed ashore, our Government was debating Baseball.

People that waited on the sidelines for their best interest have created deflation in house prices (they were good capitalists), but if the government interaction of the past ten years has hurt anyone it has hurt those that played by the rules and bought houses within their means and had to overpay as a result of the government interaction. If people who played by the rules and bought houses that they fundamentally qualified for now start to lose their jobs because of this recession, they are the real victims of the failed government interaction. If new buyers are getting an incentive to buy, I think people that recently bought who fundamentally qualified for their loans should be allowed to refinance at the proposed lower rate as well. Someone who bought well before the bubble has a smaller mortgage so it makes no sense to have to bail them out.

I think if you're going to consider class action you need to consider what the source of the problem is, and who was harmed. If the principle here is fairness, those sitting on the sidelines haven't been hurt so why give them anything for being good capitalists? If you want to just have naked captitalism, don't give the incentive to the new buyers at all. The current president is concerned about fixing the problem mechanically and the macine is the capitalistic model and fairness doesn't matter. That is fine, but the next president will be talking about "fairness" as a principle for decisions.

I would have entertained more openly incentives for first time buyers before this huge wave of layoffs and deepening of the recession. If they implemented this stuff when I said and they caught the Spring Selling Season, there would have been a lot less foreclosures and it was those foreclosures that caused the mortgage back securities to plummet which sunk the banks, which made them less open to lending money which dried up the lending and even those with good business models and captial structure suffered because of the lack of working capital. Not doing what I said was a major strategic blunder. At the time, I thought, hey these banks are run by Ivy League geniuses and seeing these subprime adjustables coming due would be obvious, kind of like seeing a Hurricane Katrina track coming in at 1 mile per hour, wouldn't these guys have some idea about protecting themselves?

Guess what guys, they did protect themselves. They made money on the way up screwing us and they switched teams and bought off Obama to make money on the bailout and the fall out on the way down. Investors know how to make money on the uptick and the downside. Check out how they switched their donations from Republicans to Democrats. Now are you surprised that they are getting bailouts from Democrats? It's kind of like everyone thinking the Iraq War was going to end when they ousted Republicans from Congress back in 2006. They felt four years was way too long. Well, it is going to be at least 2010 until Obama pulls the troops. Was that what you expected when you voted for Obama? Didn't he say that our CURRENT Crisis would be helped by ending the Iraq War? If he say's we're going to be there for another 16 months and we need to amp up our presence in Afghanistan, you do the math; is this what you thought you were buying when you cast your vote?

http://latimesblogs.latimes.com/washington/2008/11/obama-money.html

http://articles.latimes.com/2008/mar/21/nation/na-wallstdems21

http://www.opensecrets.org/news/2008/06/wall-street-bets-on-obama-for.html

[admin]

[JCK]

admin,

Maybe you can explain this to me: I've been under the impression that the 10 year Treasury sets the price for the 30 year mortgages, and that the spread between the two historically has been pretty consistent, until the last year or so. My understanding is that this based on the expectation that people generally don't stay in their mortgages for all 30 years, without moving or refinancing.

So would it make sense that, even though a 30 year mortgage is on a different point on the yield curve vs. a ten year treasury, that the expectation that a 30 yr mortgage will last, say 7 years, makes the 10 year Treasury the benchmark for 30 yr mortgages?

[JCK]

john p,

Question for you. I see the Community Reinvestment act as being blamed for the current problems. But the Act was passed in 1977. If the CRA is to blame, why did it take 25 years for these problems to emerge?

[admin]

[JCK]

john p,

I generally enjoy your posts, but the Obama-bashing is getting a little out of control, in my opinion. I think you've call him a turd in one post, and now it seems to be a list of right-wing talking points.

So you're being critical of him for getting out of Iraq by 2010? Isn't that what he's said he'd do all along (16 month timetable or something like thaT)? Is someone reasonably suggesting a way of getting out even faster?

The draw-down in Iraq is going to dwarf whatever increased resources are put into Afghanistan. That's an exchange I'll take any day of the week.

That LA times article is just awful. All I have to say is 4 MILLION DONORS. If that's not game-changing, I don't know what is. Donors giving under $1000 made up 53% of his funds, which is pretty unbelievable when you think about it. I don't think people giving, for example, $250 over the primary and general election period are really fat cats.

http://www.nationaljournal.com/njonline/rg_20081205_6424.php

[JCK]