bostonbubble.com

[john p]

The sunk cost fallacy is a cool phrase and I'm trying to face up to any potential fallacy I might be holding now. I kind of like BK's description of the $500k home. I bought last year during a slow period because I kind of thought the same way; If home prices stay flat, what was the harm in buying at the beginning of the plateau? I figured that along the course of time, interest rates might lower so I could potentially refinance, but hold a fixed rate to be safe. I'm at the age where I didn't want to be in an apartment for too much longer (I'm older than the average first time buyer). Sure, saving the delta would be great, but I thought that if the economy was surging, how could house prices drop significantly? I saw them staying flat due to affordability issues and the exhuberance buring off, but more slowly adjusting back towards fundamental levels.

I weighed what I felt were "fundamental levels" and found that low interest rates, and lower salary ranges as well as the surcharge of more professional women in the work place had really kept the same equilibrium states at higher marked positions. I thought more of what the state of equilibrium was as opposed to the actual readings of numbers. I know this sounds stupid, but think about what' in the thermometers mercury right? So say you heat up mercury and it rises to say 70 degrees F. Now let's say you don't use 100 percent mercury, you blend it with something will it read 70 degrees? This is what I thought of when "baskets of goods" were changed marking inflation or interest rates lowered to make the end result mortgage payment lower which made the house prices rise. All these contributing factors changed what I felt was the mercury, so I focused on what the state of equilibrium was. Could people swing the prices.

My current feel is that the younger generation with the much higher student loans and without the big down payment don't have a good chance at getting starter homes or condos at current prices or the cash positions to fix the starter housing stock which was most likely post WWII GI stuff and needing of repairs. I think these starter homes will correct first, but how quickly will depend on how desperate buyers and sellers are. The subprime surcharge will loosen lots of stock, but I wonder what types of neighborhoods they will be for the most part.

I have a family member in N.J. who is getting killed with property taxes and is thinking of downsizing and possibly moving to another town with a better school district. Listen to their options: They are considering buying a $550 home now selling for $515 and is empty. They might offer $450k and then put about $100k in upgrades. I showed her another house in the same town originally for $679k now selling at $619. I told her to offer $550k. In the end, this bigger house has a bigger garage, bigger rooms, better neighborhood, etc. I told her in the end the $550k was what she should target for value and it might be better to lowball a higher price strata home than to build sweat equity in a smaller home. Think about these options for folks in the middle, what a range. Think about what alternatives different price ranges offer and you will get a better feel about the nature of the activity. Again, property taxes might make the more expensive home too much, but in the end it will be what it is assessed at. Think about the staircase of value and see if it is better to move higher or lower in a price point to optimize your value.

http://www.businessweek.com/ ...truncated...

I know most think Shiller and Case are Gods, but part of me is holding on to the belief that regular Joe-Six Packs all aren't the dumb cattle that are prone to mob and herd behavior. I think Case and Shiller focus on how the regular guy caused the problems. I see it opposite. I think the elites, the bankers, the FED caused the problems. It was their tinkering and manipulation that caused the problems and the regular folks had to make due with what was available to them. So on the one hand, I believe in educating the regular Joes, but holding the responsible people's feet to the fire. I get mad because our current crop of politicians aren't smart enough or confident enough to say to an Allan Greenspan to stop the FED-speak and talk in plain English. It was their fear of looking stupid which is what Greenspan used as a predator. He knew if he spoke in a way which made them feel small, they would cower to his intelligence and he would avoid them pressing him for real answers. People who are polished and are intelligent often are predators because they know that regular folks fall in line with everyting they say and if they make little sense to them, the regular folks are more inclined to feel inferior and back off.

My belief is that if you don't understand something you need to not feel ashamed, but ask for clarity and work hard to educate yourself. I was a complete meathead partier as a kid, and it was the Stan Milgram experiment at Yale University that got me to start taking my studies more seriously.

http://en.wikipedia.org/wiki/Milgram_experiment

Milgram wanted to see how regular folks would let go of their common sense and compassion in order to be a good follower to an authority figure (an elite) figue like a Yale Scientist). I think his work was aimed at how the Nazi's were able to take a Christian population like the Germans and get regular folks to work at concentration camps.

Elites took this knowledge and instead of being more self regulating and striving to being more down to earth to have better connectivity to those they lead, they learned the power of their elite status and used it to manipulate further. I don't believe that Alan Greenspan should be looked up to like a God because he acts like he had no idea that the lending industry was prone to fraud and manipulation. Mortgage industry professionals dressed the part, and spoke quickly and put on the costume of an elite to prey on the weak. If you look at any great leader from our founding fathers to Jesus Christ, they spoke simply and clearly; it was leaders like Hitler, Mathus who twist technical science to manipulate by speaking down to people. http://en.wikipedia.org/wiki/Thomas_Malthus

When Ireland was going through the potato famine and people were starving, it was theories like Mathus's that made people in England just loose human compassion and let their neighbors starve.

I believe that the individual needs to be Robin Hood and that Government's role is to be Little John. When regular folk look at their leaders like elites they are prone to being manipulated. The housing bubble has more to do with the ongoing natural law that power corrupts, the elite who often hold power corrupting, and the regular joes not feeling confident to hold them in check.

I think that it will take a strong electorate to find quality leaders and put in place policies to prevent things like the subprime mess. I think that this is Wall Street's and the elites doing and I don't care what some Rothschild or foreign aristocracy thinks. We are not that far out of step from the european housing and credit bubble so the LIBOR ought to get their head in gear and not mess with our Nation.

If I were leading this Nation, I would try to negotiate with our creditors for them to write down our debt if we agreed to implement Pay-Go. Although I think our self-governing discipline ought to be in line, I am a bit insulted that foreign banks look at us like drunks that need to be shut off. Who the hell are they, their folks are just as intoxicated.

Editor's Note: This post was edited to abbreviate a URL which was widening the page due to the way that the forum software lays out posts. No other changes have been made, and the URL still points to the original destination - only its display has been shortened.

[admin]

[john p]

[john p]

I'm really trying to be even handed with my assessment of who's responsible for this mess.

Republicans alway try to blame the little guy and Democrats always blame the elites.

What I expect from leadership is to get the rough cut right and not create environments where decency and fundamental values work against you.

If interest rates dropped significantly, what is joe-homeowner supposed to do when he gets a phone call saying "Hey Mr. Smith, we can get you out of that 8% mortgage and into a 5% rate, hand you $40k and you'll have the same monthly payment?" What's Mr. Smith supposed to say? Even if Mr. Smith is prudent and doesn't pocket the $40k and lowers the rate, guess what happens? The extra money Mr. Smith has walking around, he's going to spend. Colleges know how much they can squeeze Mr. Smith so they hike up their tuition. How about parking lots in Boston, they push the limits to see where the market is going to bear, the MBTA does, the Big Dig Contractors do, etc. Pretty soon, even the prudent people need to grab the $40k to just keep up with the rising cost of living due to the available money that the FED manufactured. Further, colleges use home values in their basis for financial aid, so people have to draw equity from their homes.

Two natural economic laws were disabled: first, supply and demand and second, interest rate amount relationship with the value of money.

First, the market value of a house is based on what a person will pay for it today. With the surge of the supply in money and lowering of lending standards, it's like they flooded the players into a musical chairs game. We only had a certain amount of housing stock and now people who would have been renters could now afford to buy so there were more buyers. Along with the extra $40k lift from the cost of capital, the increased buyers in the buyers to sellers ratio levered the home prices higher. This isn't really the bad part. The bad part is that if you only considered the buyers and sellers in the market actually trading or moving into properties that would have kept the magnitude down to a smaller bubble. What really caused the problem was that people REFINANCING, or buying their homes from themselves were basing the appraised values off of the much smaller amount of properties actually changing hands, so this smaller amount of transactions levered the refinancing appraisals higher, which created a much larger reservoir for colleges to eat off of. This is why college tuitions skyrocketted. This is now why the kid coming into the home buying segment can't afford anything, they missed the free lift up from the FED and had to absorb the dramatic price increases of college tuitions and are burried with loans. So the middle class got hit by the financial elites and the academic elites.

Second, the circut breaker was disabled. Think about it when you drink too much, your body shuts down, you might barf, etc. When too much liquidity hit the market, interest rates should have gone up because we were getting inflation in the cost of living. Unfortunately, wages didn't go up. Republicans see inflation when the minimum wage goes up not when gas prices double. Interest rates never had that direct relationship to the supply of money and the devaluation of the currency.

Now, the FED is torn, they want to calm the inflation because creditors want a dollar paid to them that is worth a dollar, but also have to deal with the fact that the window to act was missed and if rates aren't lower we risk a serious recession starting with the poor.

This is a tug of war between the rich and poor. If the rates go up, creditors and banks are happy because it holds up a stonger dollar and doesn't dillute their cash flows. However, if rates go up, the people that will have high resets on their ARMS are going to be foreclosed on. What do you care if you got the free gift from Greenspan and you're in a mortgage you can swing, it is only the poor, those that overextended, or the younger new buyers that are screwed. If the FED was smart they could come up with a process that would be more even handed to decent creditors and debtors and punish irresponsible creditors and debtors. I am bothered because it seems that what's on the table is a punishment for decent debtors and borrowers, and the medicine they are using will make the whole lending prospect much more risky.

From a generation standpoint, I was always bothered by the one just before mine (mostly because I was jealous). I call them the St. Elmo's Fire Generation. They got green lights all the way. They got so much and it seemed that when it was my time to go through the system the party was over and we had to deal with the fall out from their abuses. Even as a kid in Junior High, prior classes got to go downtown on their free periods. Because they partied so much it wasn't allowed when we were of age. My college used to be ranked as one of the top party colleges, but after a crazy Spring Week Bender where the kids burned all the dorm furniture and everyone was running around naked, they put in a no open container policy on campus. Prior classes had multiple job offers after they presented their thesis projects. When I graduated 40 percent of people in my profession were out of work in Boston. I didn't think it could get worse for anyone, but the kids getting out today are buried with debt. The only thing they have going is business activity. I'm just saying, sometimes don't wish for what you ask for, you might get it. If house prices plunge, we will hit a massive recession and there won't be any jobs for the kids with massive college debt.

[john p]

One other thing, although it is not easy to be compassionate for someone who took out an ARM, I think the resets on ARMS are way too overstated and aren't fair.

The reason why the banks are overcharging folks for the resets is because they UNDERCHARGED everyone else. I'm getting annoyed with the Holier than thou's who pocketted the free FED gift with the lower rates and are enjoying those benefits and have the toys they wouldn't have been able to afford otherwise, so we get inflation and the global market acknowledges this and lowers our Dollar's value so the $350k loan that was an ARM reset was based on US dollars which is losing significant strength so who's going to lend someone US dollars when they think they won't be worth as much in the future when they will be repaid? It's like the guy who loses in musical chairs has to pay the disc jockey and nobody else has to chip in.

It will warm you to know that Dubai is thinking of coming in and gentrifing our elite.

http://www.ibtimes.com/articles/20071119/dubai-mortgage.htm

http://yaleglobal.yale.edu/display.article?id=10019

[john p]

[admin]

[john p]

My compassion for those folks extends just a bit; not much believe me. I do think they were underpaying for their capital before.

My solutions would be for them to be able to refinance with a 35 year or 40 year note as opposed to a 30 year note. The clock would not only reset, but there would be an extension to the term. The amount would end up being calculated based on the prevailing rate when they first signed, and then add a .25 point premium (so not to hurt those who paid the prevailing rate at the time) and extend the note to however long it takes.

This way, they can hold on to their homes, but go to the back of the line and wait a bit longer.

For those that handled their loans, I would say that they would be required to assign a "debt counselor" who would have to submit a report every 6 months until the borrower mde 24 consectuive months on time payments.

If it is clear that the borrower's committed fraud, I would allow them to foreclose on the houses and create an incentive to auction the houses to those families that qualify for "affordable housing".

[BK]

JohnP,

Your Compassionate solutions sound Grand and nice.

But, these Arm/and other Mortgages aren't sitting with a Bank. When you re-do a Adjustable Rate Mortgage some where in the World there is a corresponding Mortgage Backed Bond. This Bond is backing a Money Market fund, or a Pension Plan, or its the source of Money for some Financial Institution.

By forgiving the Mortgage or reducing the Mortgage obligation the Value of the corresponding Mortgage Backed Bond tanks. The person who put their life saving in a Money Market discovers that their original investment of $20,000 is now only worth $18,000 or $15,000.

Somewhere in the financial system some one is going to lose money - if the Politicians save lots of Home Owners they will ultimately disrupt the Bond Market.

The results could be insolvent pension funds, increased rates for borrowing money, or insolvent Money Market Accounts.

Things are never as simple as they appear.

[john p]

Is it possible to require the original bank who gave out the note to pay the bond back at full value and originate a new longer term loan with the borrower? Essentially, require the originator of the loan to buy the house at the original amount and then sell it back to the borrower for the original amount and then extend the terms to the monthly hurdle that the borrower could swing?

This way, the bond holders get their money back.

You know, bonds in money market funds and pension plans don't always succeed. There is risk and the fund manager needs to understand those risks just as well as the borrower of the house and person who underwrote the mortgage.

The flip side is that although people's investments might go down, the truth is that they were artificial numbers to begin with; without all that liquidity the values of equities and such would have never been that high.

My concern is that the profits, the fees, the bonuses shot right to the top and a huge part of the problem is if we make it so rewarding for people to draw commissions and profits by bending the rules, we'll just do it again in the next asset bubble and the same folks that underwrote the tech equity start up bubble might be the same sleazebags that did the housing bubble and what's next?

[john p]

How about a CameraGate solution like they gave the Patriots or like University of Georgia got by cheating with recruits?

I mean it doesn't seem like there is a justice enforcement to the FED. Does the SEC handle any of this, or where is the Justice Dept.?

I think there was just too much money out there. The FED argues that the Government spends like drunken sailors and you can't have guns and butter at the same time. I am not willing to sit and watch Europe not have to pay for guns because we are and see them enjoy their butter. Where are all those red meat eating right wingers who didn't want to wait for a real coalition. How do they feel now that we've had to pick up the tab while everyone else benefits as well? Nothing better than a little USA resentment while they sit safely under the blanket of protection our Military provides.

Bottom line, is that if these Alfred E. Newmans in the financial industry and the Rambo right wingers who got us into this money pit of a War/ Nation Building exercise, never get punished we'll face this nonsense again.

If not, it is buyer beware all around. I was careful, but when it is completly prison rules out there it even hurts the good guys.

Maybe the solution is to focus on getting it right the next time and not making any rules and let the people get hurt who were careless or honest victims.

I wonder if there are actually rules on the books already that are never traditionally enforced. I just honestly can't believe that our society pumps so friggin much money into these financial institutions that we can't expect any level of professionalism and massive amounts can crash down; what kind of industry and people are leading this industry?

[john p]

Oh, it was Auburn...

[admin]

[john p]

You know the culture of Big Dig contractors was polluted, and they just expected that the population would pick up the tab. Now the financial industry is totally unregulated and that might be another shock for us to absorb.

This capitalist/democracy balance takes a little work. If Republicans don't want regulated industries they need their corporate cronies not to rape us. If we end up with some socialist, populist cracker they deserve it; but it will hurt all of us. I mean think about how many politicians got whacked in the 60's. We look at Pakistan like they're a 3rd World Nation, but our people were whacking the politicians we didn't like. I mean Russia has former KGB guys as leaders and we've got CIA guys as Presidents and running the inner government. Think about the crazies in Pakistan; think about what they must think of Democracy. Hey, this Democracy is easy, the person running needs to get out there and press the flesh and give speeches so they are easy targets to whack. They just off the ones they don't want and get the crazy they want. I mean think about it, there must be a better than 50% chance that JFK was whacked by black-ops guys in our government who most likely screwed up the Bay of Pigs, gave Saddam Hussein weapons, dealt with drug dealers in Central America, etc. We lost one of our greatest Presidents and leaders; when the hell are we going to wake up. And it was just 60 years ago that the world was almost taken over by a street thug in Germany with a pseudoscience and nationalistic propaganda plan. If Germany was the best and brightest, they at the biggest line of bullshit in human history. I mean we've been lied to about this Iraq War and we reelect this guy; one of the opposition party candidate leaders who claims he's had the judgment to stay out of the war and then he votes to approve the prime person who sold the War on us- Condelzza Rice. So if this idiot has judgment and says we were lied to, why does he promote one of the prime liars.



I just can't believe how friggin stupid we are some times. I mean if 20 freaking percent of recent mortgages don't have records? WTF. Think about a doctor hearing this, think about the years of dedication and the hundreds of thousands of dollars they spent to learn the ocean of information they need to know and then think about the friggin meatheads that never thought that home prices wouldn't go down and didn't have a plan for thousands of friggin mortgages. This is like having the majority of doctors amputating the wrong leg all at the same time. Think about how bad of an insult this is to all those who are breaking their asses to be good citizens and to be top tier in their industry. To think that we could have a massive recession based on the most galactically stupid and irresponsible assumption that house prices would never go down so why would we ever need the records of the mortgages. what on earth was going to happen when these mortgages were paid off? What did they seal the records like the JFK files so that the responsible parties were long gone? So isn't Bush's plan to just let the low rates ride for 5 years?

This is so surreal. We're supposed to be a Government of the people not a Government of the Morons.

[john p]

I think the messages behind my rants is really to throw out some unfiltered reaction to the context surrounding the numbers that Admin posts. I mean, six months from now we might have forgotten the assasination in Pakistan, the tug-o-war with interest rates and the stakeholders, that this was the time we were being bombarded with political commercials and we're choosing leaders, and we're just finally starting to unveil the incompetence and fraud that seems so mind numbing, kind of like when we heard that they glued concrete slabs overhead in the tunnels. It was like, oh my God, please tell me that they are not that stupid and then trying to ground the stupidity and the more research you do, the deeper and deeper it goes and you almost feel powerless to stop it like it is the tide coming in.

These mosaic rants are a form of politics. Realtors use their time with you to put you in a state of mind and plant and sprinkle a mosaic of information in your minds. Often times they play the wife and the husband off eachother. It is important to stay current with events because the realtors will try to cloud and create a local rain storm in your mind and throw you off your game. It is often done in a very polished and friendly manner so it gets past your guard. Most importantly, when confronted do not mentally move in the direction they push you. Push back and say, where is the data to support that, can you have that ready for the next time I see you. My family member was thinking of buying a smaller home and I said why don't you low ball on a much nicer place? The guy selling a $680k home might be moving to a $1.25M home and he might be getting it at $875k so he might drop the $680 to $575k. The guy stepping into the real nice house isn't afraid of what the realtor is going to say nor should you. We need people who have the ability to move upward to do it aggressivly because if the guy sells the $680k house for $650k and gets his $1.25M home for $875k we'll get a split of winners and losers in the market, he pockets the smaller guys money and the smaller guy is now competing with another smaller guy so the price strata will drift apart. The majority of people are afraid and sit on the sidelines and if aggressive people don't make some statistics in the market everyone will just sit and watch the slow moving trends. I guess what I'm talking about is like the controlled blasts to prevent an avalance...

When you go to buy, when you do, the period between the offer to the closing while you'r packing etc. is a very heightened state so you need to amp up your thinking like a work-out and discipline yourself to not let the overwhelming information fatigue you. Lots of this relates to filtering disinformation or diversions meant to distract you. For instance, my closing lawyer didn't know the time or location of the closing the day before the closing. He heard it from me. It was funny when I first saw him there he told me I needed to relax. I told him if he was on top of things I would be relaxed. I say this because when you do go into this heightened state you need to understand the amounts your paying to people and how much service that gets you and to align your expectations accordingly. If you focus on the house price and not line up a bunch of mortgage brokers to compete, you might lose the research time to find the good deal because you got hit with excessive closing costs or a less competitive mortgage rate.