No more selling mortgages on to servicers and securitizing them for Taiwanese investors. Home owners stayed put and paid off their mortgage, often taking 30 years to do so. You are right about homeowners having to set aside hard-earned down payments before even approaching a bank or savings and loan.

By the way, Volcker killed off this model when he raised short term rates to around 17%. S&Ls were caught in the old trap of borrowing short and lending long: earning 7% and paying 17%.

Commercial banks remained but refused to fall into the S&L trap, so they began selling off and securitizing their mortgages. Which of course got out of hand and led to all the churn of the past 8 years and the recent collapse.

So which is better? Clearly we seem to be going back to the days of 20% down payments and standard mortgages. But if we kill off securitization, which may well happen on its own accord, we will still have to think about avoiding another S&L crisis.

And doesn't that mean that house prices will have to decline even more--much more? How many people can even come up with 10% or even 5% without having to borrow that as well? Sounds like a death spiral to me.

Banks refused to extend a mortgage if they discovered you borrowed the down payment, which was impossible anyway because banks never lent money for down payments on mortgages. This was the practice at least through the 1970s. The only exception was if someone borrowed the money from a relative, like a young couple getting a loan from their parents for a down payment on their first home.

It really is surprising that in 20 years this discipline not only completely disappeared, but banks eagerly lent money for the down payment, thus the mortgage was for 100% of the property value. This type of stupidity flourished because banks didn't care; they sold the mortgage as soon as it was booked. Credit discipline completely collapsed, as everyone bought in to the fiction that property values never declined.

I bought my first house in 1975 for $32,500 with 20% down. I can only imagine what it is going for now.

...if 20% of the purchase price is your own money. Saving up for a down payment means fiscal discipline for most--"doing without" is part of it. It certainly was for me, as well as my parents and their parents.

A harbinger of things to come was made clear when banks began to finance even the loan origination fees. These used to be paid by the borrower up front, in cash. And the "cash-out" on a new mortgage was just beyond the pale.

Home ownership may be the American Dream, but it's not for everyone. Even after the mortgage is paid off, the expenditures don't stop--a house requires regular maintenance and taxes have to be paid. All in all, if viewed as an investment (which it really isn't, because you have to have somewhere to live) and ignoring transient bubbles, it's only mediocre in terms of return.

The idea of a NINJA loan was one of the stupidest to come along in years. How did the lender expect the purchaser to stay current with maintenance and taxes, much less the loan payments? The people who promoted these "instruments" should be doing hard time...

...if 20% of the purchase price is your own money. Saving up for a down payment means fiscal discipline for most--"doing without" is part of it. It certainly was for me, as well as my parents and their parents.

I found a graph of housing prices versus median incomes going back to the 1960's. The graph looks very different today than it did in 1965, a time when I think the economy was more democratic, with less spread between the high and the low.

I also found an Excel spreadsheet at the NY Times showing the ratio between median price & median income. In 1968 a house was 2.9x the median income. Today it is 4.5x the median income.

Also, median income is somewhat misleading because if you look at the charts, the median family income hasn't changed that much since the 1960's, but the families now have two earners instead of just one, and that has driven up family costs such as child care and automobile expenses (not to mention education, since now you need to educate your daughters for a career instead of just being a homemaker).

Fiscal discipline isn't most of the problem. Affordability is the problem. Houses are much more expensive today than they were in the 1960's, you have to save much longer.

In order to return to 1960's order, houses will need to drop in value by at least 55%, possibly 75% when you factor the other increased expenses that families incur.

I suppose that this is as good a time as any for it to happen, as boomers retire and eventually pass on. There's little merit in transferring wealth accumulated in housing to descendants.

House here have already dropped by 33% or more. 55% is absolutly possible.

In terms of real dollars, median home prices actually declined between 1980 and 1995.

Do you see that hump starting around 2000? Things will be back to "normal when that drops back down to the historical level.

What fueled the price boom, of course, wasn't the lack of any particular resource, such as land, labor or construction materials, but the fact that we put lots of easy money into the hands of those who never would have been judged credit-worthy before. Bingo--an artificially-expanded consumer base, with the result that there result that there were more buyers than builders.

So, yes, homebuilders will shutter their offices, but for a few hardy ones who are able to hang on and the situation will rebalance itself, if the idiots who majored in "creative accounting" keep their fingers out of the pie.

And more people who have the discipline will be able to afford homes.

Watching as the collision unfolds amply describes the Fed's position.

There is an important point you mention about the ratings agencies. They have suggested that any nationalization of the GSEs will likely lead to a loss of the Aaa status for U.S. Treasuries. This is one of those "will never happen" events that will certainly lead to a power shift globally, because for 70 years Treasuries have been the benchmark for the global credit markets. Only the euro is positioned to step in as a replacement, but the EU is hardly ready to play the role of the U.S. militarily to back up the financial system.

Second, the ratings agencies have said nothing about changing GSE ratings, which are still Aaa, even though the bond market and derivatives market is trading them as if they were five notches lower. Where have we seen this before: AMBAC and the mortgage guarantors were for a long time propped up by Moody's and S&P well after the market tanked their securities. If the ratings agencies this time want to get ahead of the game, the entire Aaa status of the United States will have to be reviewed.

This below is a little strong:

"As a result, a huge debt bubble was created to stimulate demand that would otherwise have fallen and forced a rebalancing of profits and wages."

The debt bubble was exacerbated by very low rates in roughly the last 5 years. We created the conditions for this point in the last business cycle.

The loss of manufacturing jobs, the stagnation of wages, from the 70s forward, is a separate phenomenon, ongoing still. The jobs that you speak of would likely have been lost with or without what you think is a financing strategy(i.e., the creation of the debt bubble).

Labor is a very large percentage of the expenses of most companies. Capital and capital expenditures are quite small in relation to the people costs.

Having been a Marxist in my youth, I would then have been tempted to cast things in your way. But I don't think that the numbers will hold up to this interpretation.

I think instead what you have had here is worse: the continued bungling of a corrupt financial class. Labor is an afterthought to these people.

http://mauberly.blogspot.com/

Traditionally, capital has done its best to pay labor as little as possible, and a lot of the time in a lot of places this meant barely a subsistence wage that resulted over time in debt slavery. Coming out of D1 and WWII the US embarked on a new course, with a GI bill delivery eduction to veterans, the New Deal providing a safety net and "old age" insurance in the from of SS and Medicare, as well as a labor with enough bargaining power to secure a cut of the profits that was above the traditional wage. However, labor became a bit greedy and pushed union wage increases and benefits far enough to allow capital to mount a successful campaign to undercut the bargaining power of labor. When labor became fungible through global labor arbitrage and lax immigration standards knocked out the bottom, the bargaining power of many US workers disappeared.

The US stagnant has had stagnant wages since the '70's, along with rising corporate profits and asset valuations. However, an economy cannot grow without sufficient consumer demand, which must be funded. Since wages were relatively stagnant, much of the increased demand was funded by debt rather than income.

The figures are very clear on this. Wages of American workers remained flat nominally and real compensation even declined while consumer debt ballooned beyond the ability of workers to repay based on income alone. More and more debt was needed not only to fund purchases but also to service existing debt. Moreover, lax lending standards over-stimulated consumers to the point that both they and the financial system lost their bearings.

That's when the bubble burst. It was not essentially the "sub-prime crisis." It could have been any of a number of factors. In the end, consumer's credit-ability ran out at the same time that the government's was also under stress.

My contention is that if business had passed a sufficient proportion of rising wealth to workers instead of overly favoring corporate profits, as Wall Street wished, there could have been sufficient demand to propel growth without the need for the unsustainable expansion of consumer credit — or the outlandish lending practices — that led in part to the present reversal of fortune.

Moreover, without a reversal in this trend of wages in relation to profits, the US will not be able to turn its economy around in the same way it did in previous business cycles, simply by clearing out the bloat. As a result, we are looking at an "L" shaped recession, which could become a depression with the added strain of widespread financial meltdown owing to the over-extension of both the financial system and the government.

The goose died in the first oil shock of the 70s when oil production peaked in the lower 48 states. Oil, the life-blood of the economy had to be more and more imported. Everything since then, including the abandonment of Breton-Woods and the creation of new credit generation institutions, has been an effort to stick a finger in a dike that must eventually burst.

Flat-earther blind to oil facts by Henry C K Liu

Regardless of whether one agrees with Liu, he does marshall a bevy of relevant facts.

Essentially, his point is that the US is still twelfth in oil resources; hence, the increased price of oil benefits the US with respect to generic wealth. The problem is that this wealth is concentrated, while the vast majority of the US populace is forced to purchase petro-based energy and absorb the pass-through without sharing in the profits. According to Liu, as long as economic inequality continues to increase, the US will be forced to fund consumption and speculation with debt, starving itself of productive investment and consumer demand based on income from production. This will result in further dislocations and bubbles until the process becomes unsustainable.

as little as possible"

That is its job: to pay as little as possible for everything. That point does not get your thesis accepted.

Over the last 20 + years household net worth has risen at roughly the same rate as consumer credit, about 7+%.

It's the recent improper lending by Wall Street with the Fed covering its back that has led to the current problems. It's not a problem inherent in capitalism. It's just bad management, bad risk assessment, too much modeling from the business schools, etc.

It's bad business as opposed to good business.

http://mauberly.blogspot.com/

I agree that the sources you cite are responsible for much of the problem that we have faced since tail end of the Clinton administration and the bubbles that emerged. However, the problem began way before this with the stagnation of wages in favor of profits. One thing that happened is that CEO were no longer chosen on their ability to run a company well for the long term but to manage it to the satisfaction of Wall Street quarter to quarter so that equity would appreciate in value.

Investors realized that gains came not so much from profits (dividends, building asset base) but from equity appreciation. Moreover, CEO's were rewarded with stock options that incentivized impressing Wall Street rather than attending to Main Street. As a result, many companies were hollowed out through debt-funded maneuvers such as LBO's, investment lagged since opportunities were not perceived in hum-drum production, and workers were disadvantaged in bargaining power wherever and however possible.

However, I disagree that it is capital's job to pay as little as possible for everything. Unless wages are sufficient to fund demand, paying as little as possible, i.e., susbistence wages, is counterproductive for capital as well.

Over the last 20 + years household net worth has risen at roughly the same rate as consumer credit, about 7+%.

However, savings are at an all-time low — in negative territory. Most of the net worth is in inflated housing prices that are in the process of coming back to earth. Moreover, that 7% is nominal. In real terms, it's a net loss even before the housing decline.

Savings is weird. You have 401k's and other ways to save in a complex economy. But looking at it the old way, it is negative.

Let's watch the net worth shake out in the coming months and draw a conclusion then.

"Unless wages are sufficient to fund demand, paying as little as possible, i.e., susbistence wages, is counterproductive for capital as well."

Of course. This does not prove anything, however. It's just part of a leftist homily.

$18/hour may or may not be a mere subsistence. That's the average hourly wage. Poverty is considerably below that by government guidelines.

http://mauberly.blogspot.com/

is already shaking out.

EPA: Value of American life drops to $6.9 Million
Associated Press
Published: Friday July 11, 2008

WASHINGTON — It's not just the American dollar that's losing value. A government agency has decided that an American life isn't worth what it used to be.

The "value of a statistical life" is $6.9 million in today's dollars, the Environmental Protection Agency reckoned in May — a drop of nearly $1 million from just five years ago...

( ... Link ... )

Derivatives amount to over half a quadrillion dollars. Even a small percentage going south would lead to the unthinkable. And its a house of cards.

Good one, given the topic.

Reuters, July 11

HONG KONG - The U.S. government is considering taking over mortgage finance companies Fannie Mae and Freddie Mac if their funding problems worsen, in a plan that could leave shareholders nothing, the New York Times reported, citing people briefed on the matter.

Fannie and Freddie , government-sponsored entities that have an implicit backing of Washington, have been under fire this week as investors questioned the companies' ability to raise enough capital to stay afloat, knocking their shares to the lowest since 1991 on Thursday.

Under a conservatorship, the shares of the companies would be worth little or nothing, and the losses on the home loans they own or guarantee -- what amounts to half of all U.S. mortgages -- would be paid by U.S. taxpayers, the paper said late Thursday on its Web site.

The dollar gained on the report, government bonds fell and stock markets climbed as investors breathed a sigh of relief, having fretted all week about the fate of the mortgage lenders. That optimism was misplaced, analysts said.

Also NYT: Loan-Agency Woes Swell From a Trickle to a Torrent

By Charles Duhigg, July 11

The word began spreading across Wall Street trading desks on Monday morning: Fannie Mae and Freddie Mac, the giant companies at the heart of the nation’s housing market, might be in trouble.

The tumult, which continued on Thursday, started with a cautionary analyst’s report, one that might have caused few ripples in normal times. But these are not normal times. Within minutes, the price of the companies’ shares was plunging, sending shock waves through the financial markets, the economy and Washington.

But with no mortgage or any other debt, achieved over several decades of prepaying the mortgage as fast as possible and buying anything of substance with cash. I can't tell you how many phone calls I received up to 2005 trying to get me to take out a mortgage, and some of them outright ridiculing me for not "putting my home to work" by leveraging up. It really was the mantra of the entire mortgage industry that your home was some sort of investment tool to be used for improving your returns as well as "taking a little cash out" for vacations, etc.

A bit before things got really crazy. Luckily, I did not listen to all the people who were advising me to go with a variable mortgage and to buy a much bigger house, just because I could get a mortgage for it. I've been pretty happy so far. Much better then anything I've rented before and the monthly payments are pretty much what I'd pay to rent something around here (at least when I take into account the tax break on mortgage interest). We'll see how it ends.

Government bailouts have to be paid for eventually either through taxes or debt ("deferred taxation"). Since raising taxes is a no-no, especially in hard times, a bailout would be put on the tab by issuing more debt (US Treasuries). At some point, the credit-ability of the US will weaken and rates will rise. When rates rise, the bond market will go down correspondingly as existing bonds fall in price to reflect the rising market rate. If rates rise, it's going to cost everyone more to borrow, even Uncle Sam. And if the bond market tanks, we're talking some deep doo-doo.

If the government chooses this option the market is faced with another massive issuance of new Treasuries, and all of things being equal, this would drive the price of Treasuries down and yields up, probably sharply.

The other option is no more palatable. Let the GSEs default. There would be no new issuance of Treasuries, but trillions of dollars of U.S. debt that people assumed were equal to Treasuries would be in default. The knock-on effect on all U.S. securities would be severe, with the possible exception of the Treasuries themselves, and the economic ramifications would be dire. Hence the spectacle today of so many politicians saying it would be unthinkable to allow a default.

If yields suddenly soar, it is possible that the dollar would gain in value on the exchange markets. But this doesn't always happen, and would be uncertain if the U.S. lost its Aaa rating at the same time. Argentina for example could find no one willing to buy its currently during its debt crisis, despite sky-high yields.

If there are a few scenarios,

1) We do bail out the GSEs, the market is flooded with treasuries, yields go up, commodities go up, and the dollar tanks

OR

1) b) yields go up but the dollar soars

OR

2) We do not bail out the GSEs, everyone flees the US securities market, and the dollar tanks

THEN

It would stand to reason that the best short-term bet would be European Government Bonds. Witness:

1. )Despite signs of deflation, Jean Claude Trichet has been raising ECB interest rates to 4.25%.

2.) Since China, Indochina, Russia, and parts of Europe have inflationary economies (8 - 29%), their currencies won't hold up as well as the Euro, which may be pushed up in value anyway as the other currencies, including the dollar, stumble.

3.) In the face of deflation, the ECB will have to cut rates, which will raise bond prices. From the perspective of a US investor, boost in Euro (and/or tanking dollar) + rising bond prices = relative safety + calculated, qualified risk for returns.

The event of 1)b) occurring seem remote; there would have to be underlying weakness across the board for the dollar to come back any time soon. But if everything in the US economy deflates and cash is king, it could. But it's unlikely since commodities are traded globally, and it would take time for a US economic collapse to shake down the other economies.

N'est-ce pas?

I suspect that Paulson is in conference with major creditors of the US right now trying to figure out a strategy that will be palatable at home and placate them. I don't think that the US can afford to leave them holding bags of worthless paper, not that Wall Street wouldn't be alright with this if they didn't have the clout. But they do. If they dump dollars, we are screwed.

Some kind of deal is being worked out to save the creditors as well as Wall Street, and about the only way to do this is to shaft the taxpayers — unless the US government is willing to approve the sale of US crown jewels.

..... But Canada's turn may come soon, or, ..... But even if there isn't a housing market crisis here

_{"While not a Playboy reader, she invites a male acquaintance in for a quiet discussion of Chagall, Nietzsche, jazz, sex." - not a Hugh Hefner quote}

One reason for Britain suffering a deeper recession than the US is that its house prices got more out of line. Whereas in the United States, the house price to income ratio peaked at 4.5 times, against a long-term average of about 3.2, in Britain in 2006 that ratio peaked at around 5.5 times. Housing is more tax-advantaged in the United States, since mortgage interest payments are tax deductible, unlike in Britain. Hence the equilibrium British house price to income ratio would appear to be about three times, marginally above the 2.7 times level of 1970, when the British housing market was close to equilibrium. That implies that an average fall in real British house pieces of 45% is needed to bring the market back into equilibrium, considerably larger than the 29% drop needed to bring the US market into equilibrium.

Those figures may seem startlingly high but remember: the average Tokyo house price dropped by no less than 70% between 1990 and 2005, as Japan's 1980s stock and real estate bubble deflated. Thus a 45% drop is perfectly within the bounds of possibility. The US housing market appears well on its way to the necessary 29% correction, with the Case-Shiller house price index already down 18% since late 2006. Conversely, the British market has only just begun to drop in price, with current national average prices down by no more than 5%. Hence the future economic effect of the housing downturn is likely to be considerably more pronounced in Britain than in the US.

A tale of two downturns by Martin Hutchinson

My brother-in-law states his house (worth about $475 Can), is dropping at $10k (Can) per month.

That's about as close to free fall as you can get.

He also states, Alberta, home of the oil sands, is in recession.

The issue with government spokespeople is one has to factor in what they could say, and decide if they can say anything close to reality.

but in Vancouver there are a number of factors that will help to cushion a real estate sag.

1) Vancouver is truly is one of the more desirable locations in Canada. The combined accidents of benign climate and spectacular scenery mean that even high prices and the poorest prospects for employment don't automatically dissuade people from coming here. *Nobody* cites the climate and scenery of Toronto as a reason for moving there.

2) Vancouver's positioning as Canada's major (practically sole) gateway to Asian trade guarantees expansion with that expanding trade, and that trade takes a lot of servicing and support.

3) Vancouver's real estate development is rigidly constrained at three of the four points of the compass - west by the ocean, north by the mountains, south by the US border. It's constrained eastwards by an inadequate highway system and a lack of large-scale commuter options. The only large-scale option besides development east is increasing density. It's possible we'll see a slump in the sprawling and too-rapidly developing Fraser Valley, but when we're talking about communities that are over an hour east (and that's in the rapidly shrinking windows of clear traffic conditions) we're no longer really talking about Vancouver anyway; the bulk of people I know that live that far east orient their lives around the Valley and get into Vancouver proper maybe once or twice a year - if that often.

4) the 2010 Winter games are approaching and that's contributing to development right now too. I've predicted a post-event slump in 2011 for a long time (I've lived through the aftermath of several such events both here and elsewhere, and basically that's just night following day). But that's 2011, still three years off.

I don't know if those factors weigh heavily enough for Vancouver to completely shrug off the broader trends but they will certainly provide cushions that other locations may not have.

Is Asian. So is her brother (duh), and they are very aware of the white flight to the east. He lives in Vancouver, the city.

And I met all the city planners in the Vancouver area in 1997, and though their regional plans very interesting, with a complete focus on "densification" as one can see in downtown Vancouver, in Metrotown, the interesting of the Lougheed Highway and Wilmington, and on the new skytrain route east.

Much better city planning than the US.

I really like the lakefront in Toronto, very livable in one of those highrises.

Canadians were (fortunately) never offered those seductive 80 to 100 percent mortgage loans on iffy terms, that have prompted the US sub-prime fiasco. Our banks have always been far too conservative for that. In a worst case scenario, one might choose to sell a devalued home and replace it with another devalued home - but still remain a home owner able to comfortably survive the slump. Additionally, our health care system pretty much insures that health related expenses are not going to impact a person's ability to keep up with mortgage payments. Job loss certainly does and, I think, it's primarily in that area that Canadian those home owners who have mortgages face the greatest risk to their economic well-being. The brutal cutbacks on US manufacturing in Canada is probably taking a toll on Ontario, the province that persists in believing its issues and concerns are national, not regional. For the rest of the country, it's pretty much just a matter of riding out a very minor squall.

Ontario hardest hit as full-time jobs tumble in Canada, unemployment rate rises

_{"While not a Playboy reader, she invites a male acquaintance in for a quiet discussion of Chagall, Nietzsche, jazz, sex." - not a Hugh Hefner quote}

My husband says mortgages for up to 100% values have been quietly available to a select few Canadians - mostly land developers - for a couple of years now. Hot on the heels of the US mortgage crisis the government has just closed down that access. I think you can still purchase a house in Canada for 5% less that the standard 25% down payment requirement, but you have to purchase very expensive mortgage insurance in that case.

the population in minneapolis, st. paul and bloomington is coming back now, finally rebounding in no small part because of the $4 gas and a general demographic shift. If it's a real city with real amenities, it won't crater.

Core cities find that populations are on the rise
http://www.startribune.com/local/24283434.html

--
Hongpong.com

I can't imagine there'd be much demand for Republican values outside America.

America's the last remaining market amongst the planet's industrialized nations where you can sell, for example, the idea that society is better served when individual citizens can own crew-served infantry weapons, or that the free market is society's best hope for the distribution of medical care, or that if not particularly excessive or immoderate a person's religious beliefs (or lack thereof) have anything to do with their fitness for public office.

These ways of thinking are essentially becoming extinct in more modern societies; I doubt that tiny developing nations where these ideas might still be tenable would have sufficient budget to offer you much in exchange for them.

I can't imagine today's GOP doing better in the export market than, say, kimchee. I suspect it would probably do much worse; once you get past the smell of aging, rotting organic matter hanging over both, there's actually quite a bit of flavor and nutritional value in kimchee.

"These ways of thinking are essentially becoming extinct in more modern societies"

I don't remember any time in my life where they were acceptable in any place I lived or visited in Europe...

Zuid Afrika was different...

Kimchee is great for clearing out the sinuses, and tastes good once you get used to it.

Republicans have nothing on it.

http://www.businessweek.com/magazine/content/05_02/b3915646.htm

http://mauberly.blogspot.com/