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September 01, 2004

Comments

(Raised eyebrow) The profanity rules are there for the most selfish of reasons: I like reading this site during the day, and when the webblocking works every profanity inches me closer to a scenario where I can't read it from work. It's not like I Smite people for it.

Besides, I exempted 'damn' and words of that ilk. You have to take some risks in life. :)

von, you know I agree with you at least 90% of the time but this time may be part of the 10%. First, I don't know the details of this particular legislation, do you? Second, I don't know that people who can't make a down-payment are ipso facto bad credit risks, do you? Third, do you know anyone who doesn't buy a house with borrowed money (which Mr. Yglesias apparently thinks is a bad thing)? Fourth, I don't know that we are in an over-heated property market, do you? I suspect that this is a highly localized phenomen.

You quoted all but the last sentence of Mr. Yglesias's post. I may as well quote the rest of it:

How many people's finances will be ruined by even a localized declined in key coastal areas?

I guess I'm dense. The connection between this sentence and the rest of this post is not clear to me. Is Mr. Yglesias concerned about getting competition in an already-competitive local housing market?

To what is Mr. Yglesias opposed? Home-ownership? Government subsidies? Government subsidies with primarily local impact? Letting the riff-raff in?

I don't like political pandering which this proposal seems to be. I don't like federal interference in what are primarily local issues which this proposal seems to be. I don't like pork-barrel spending which this proposal seems to be. I don't like fiscally unsound government which, under present conditions, this proposal seems to be (and that's a major gripe of mine about both Republicans and Democrats, both Bush and Kerry).

But I like elitism even less and I sense at least a little elitism in Mr. Yglesias's post.

Comment links are hosed. Click on the link in the "Recent Posts" list, and it takes you to Wonkette.

'scuse me all to ache-ee-double-toothpicks (profanity filtered for Moe): I meant the "Recent Comments" list.

That's because von put a link in the title of the post. Stylistically imaginative, but pragmatically problematic.

Not to be a pedant (but hey, why deny my essential nature), but don't you mean "aitch-ee-double-toothpicks"? Unless those toothpicks have been fighting off a flu and are feeling some pain in the joints lately.

Good pick-up, kenB. If this were a perfect world, the link would have been removed automatically. But if it were a perfect world, there would be no blogs, nu?

It's not like I Smite people for it.

Smite? I thought you played as a bard, Moe?

I don't totally agree. There are a number of places where the cost of rent exceeds the monthly payments on a mortgage. In such places, lower and lower-middle class workers may very well be able to own a house if they could just get past the down payment and closing costs.

The issue of having good credit and being able to afford a downpayment are independent. Or rather not the identity proposed in the post. (They can't be totally independent since both are related to income on some level).

"How many people's finances will be ruined by even a localized declined in key coastal areas?"

He is talking about the housing market here. Unless you plan to move right away, a decline in housing price after you buy is pretty much irrelevant so long as you afford the payments. You might have been better off renting in that case because you could negotiate a lower rent, but you also wouldn't be buying a house. I don't see what 'finances will be ruined'.

And being laid off so that you can't make your payments is always a danger if you have housepayments. I don't see the downpayment issue being very closely tied to it at all.

don't you mean "aitch-ee-double-toothpicks"?

Probably. It now appears that I've been pronouncing this incorrectly (inside my head) all along.

Also, dunno what "key coastal areas" Matthew thinks might be in danger of declining, but there's a rather large swath of coastal Florida that's about to be rendered uninhabitable, for a while. This is not to say that property values will be declining; beachfront property will continue to be in demand in Florida even if we get nailed by 4 or 5 hurricanes this year.

Just try to find even an open lakefront lot in popular areas of Central Florida. There aren't any.

You buy where you can afford to live; if you've outspent your means, you've got no one to blame but yourself. If you paid a lot for a house and it loses valuation due to a decline in the market, that's a paper loss until you sell. Houses are an investment; you've got to be prepared to take a loss, even if it's one that doesn't show up as cash. Losses are pretty much automatic from the get-go, anyway, because you've got to plop so much money down on a home (in closing coss) that it's immediately (if you bought it near market value) worth less than it cost you to buy it.

Stylistically imaginative, but pragmatically problematic.

If only that could be my epitaph, rather than a epithet.

W/r/t the substance of Dave Schuler's critique:

First, I don't know the details of this particular legislation, do you?

I don't know that the details have been firmed up to any degree -- all that's been presented is an idea.

Second, I don't know that people who can't make a down-payment are ipso facto bad credit risks, do you?

Ipso facto? No. Are folks with high credit loads more likely to default on their loans? Yes. The statistics on this are impressive.

Third, do you know anyone who doesn't buy a house with borrowed money (which Mr. Yglesias apparently thinks is a bad thing)?

I know one person: My wife's stepsister's husband, who insisted on saving for ten years (renting the whole while, of course) so that he could buy a home with cash. But the point here is not that I'm opposed to loans or mortgages or somesuch. The point is that we should not monkey with the market to encourage folks who are less likely to be able to afford a home to overextend themselves. The unintended result of this government interference will be increase rates of bankruptcy and government dependency -- in the form of welfare, etc.

Fourth, I don't know that we are in an over-heated property market, do you?

All signs point to tulips. Of the Dutch variety. But, of course, you don't know you're in a bubble until it bursts.

The point is that we should not monkey with the market to encourage folks who are less likely to be able to afford a home to overextend themselves. The unintended result of this government interference will be increase rates of bankruptcy and government dependency -- in the form of welfare, etc.

Do I take it that you oppose the deductibility of home mortgage interest from federal income taxes? That's the most extensive monkeying with the market that the federal government has ever done. And it's resulted in unprecedented levels of home ownership.

All signs point to tulips. Of the Dutch variety. But, of course, you don't know you're in a bubble until it bursts.

What signs? That prices in certain markets have gone up? Prices in other markets have gone down. When prices go up ten-fold in a short period of time, we'll talk bubble. Nobody talks about a a housing bubble in the late 70's. But prices went up a lot higher a lot faster then.

I think a better explanation of the phenomenon is the collapse of the Internet bubble, low interest rates, and the absence of alternative reasonably secure investments. The only more secure investment than land (even a little land) is gold.

Putting aside all subterfuge I think that home-ownership by everyday people is a good thing. We've got more of it than practically anywhere else. And I'd like to see even more of it. And I'm with G. K. Chesterton as well: "the only problem with capitalism is that there should be more capitalists" (or words to that effect). But, as they say, the devil is in the details. So let's see the details before getting too exercised.

The bourgeoisation of the proletariat doesn't bother me.

von --

Why are you assuming that people's monthly housing expenses would necessarily increase if they were to own instead of rent?

And even if that was the case, shouldn't the bad aspects of this legislation (=increased risk of bankruptcy due to higher monthly housing expenses; contributing to housing bubble) be weighed against the good aspects? After all, home ownership is strongly correlated with associated good social effects.

Dave:

Another factor (at least in those areas most associated with "bubbles", e.g. Metro DC) is, unsurprisingly, government regulation.

There's plenty of undeveloped land around DC, but for political reasons ("slow growth" etc), it's not allowed to be developed.

Also, the county governments around DC systematically create a housing shortage by zoning for more workers than residents. This drives up housing costs (people are willing to pay lots of money to reduce their time spent commuting), forces developers to neighboring counties (as far away as West Virginia and Pennsylvania!) to build housing, and makes traffic congestion worse.

Couple of thoughts:

If there is a housing bubble you will definitely see the market begin to offer more small/no downpayment options to the consumer. Banks don't want to own homes.

My mortgage is less than the rent I paid before I bought. The house has twice the square footage too. I bought over 7 years ago though.

Fannie Mae and Freddie Mac and PMI insurance (all private enterprises intiated by the government but no longer associated with government) already do quite a bit from what I understand to aid low to middle income first time buyers. Though I'm no expert.

If there is a bubble in the majority of the US and it bursts people will be upside down on their loan for a long time and interests rates will be fixed low (because they are being set now) which would indicate to me (I'm no expert) low turnover and banks won't have the volume they need and expect to remain healthy and profitable.

Fredrik
You want to see internal conflict in action? Go to a rich conservative neighborhood and propose building a couple high rises in the middle of the quaint business district. The "too much government regulation" folks will be forming committees and rewriting the zoning code before you're out of the parking lot.

Dave Schuler: Third, do you know anyone who doesn't buy a house with borrowed money (which Mr. Yglesias apparently thinks is a bad thing)?

My parents. Although they've just retired, so it's a slightly different end of the temporal continuum than I think is under consideration here.

von: Ipso facto? No. Are folks with high credit loads more likely to default on their loans? Yes. The statistics on this are impressive.

That didn't really answer the question, though. "folks with high credit loads" != "people unable to make a down-payment" (I should really be using modal symbols here but I'm too damn lazy); you need to argue yourself over that gap.

Good point, Anarch. Although I feel I've got to point out that the down payment isn't nearly all of what it cost to get in a house. A large percentage, to be sure, but if you haven't saved up a few thou to cover points, document stamps, etc, then you're going to have to borrow it.

Not arguing von's points, mind you. Just...this is interesting, to me at least.

"You buy where you can afford to live; if you've outspent your means, you've got no one to blame but yourself."

Err, except that the mortgager will eat the loss (unless they've securized the mortgage portfolio, in which case I guess the purchasers of said securities eat the loss; not familiar enough with how Fannie Mae and Freddie Mac bear into this).

There's also the add to the house price volatility: sales from foreclosures tend to go for below the value of non-foreclosure sales, because the banks want to get rid of the illiquid assets ASAP. So lots of foreclosures tend to depress house values.

So a large number of foreclosures might lead to that mysterious animal, the downward-sloping supply curve (decline in prices lead to not-enough collaterol to cover the loans, leading to either foreclosures from loans being called in or the lender walking away from the property), as was seen in the Tokyo real estate market in the early 1990s.

A good reference point here would be the decline in the London housing property market post-1987, which was the result of a price spike when the Tory government decided to change the tax laws for dual-income mortgageholders to reduce deductability, but gave six months notice before it was to do it. IIRC, prices dropped about 10%. (Also note that UK uses adjustable-rate mortgages much more than is common in the US.)

"After all, home ownership is strongly correlated with associated good social effects."

Not so sure about how that shakes out cross-borderwise: the Netherlands has the lowest rate of home ownership, but is more prosperous and socially cohesive than the UK with a much higher rate of home ownership. The highest rate of home ownership in Europe used to be the Former State of Yugoslavia. From a purely economic point of view, wouldn't high home ownership create a friction in the labor market, anyway?

What home ownership *does* allow is using leverage to build wealth on a small down payment. But this is a bit Pyramid-scheme-ish when you think about it - the increased wealth is dependent on someone else picking up your house, your house doesn't increase in it's productivity [if anything, it's value decreases as it's structure ages and facilities become outdated] and part of the price increase is the *expectation* of further price increases in the future. It also means that there's little productivity gain in housing costs; they'll track personal income levels and interest rates, rather than the marginal cost of constructing new housing.

Err, except that the mortgager will eat the loss

How's that?

"Err, except that the mortgager will eat the loss

How's that?"

If you've got negative equity and are foreclosed on, then the mortgager will have to eat the negative equity.

Anarch's logical point, and the points of Schuler et al., are well taken. I believe I can answer Anarach's point if I can dig up the relevant data (a start is here -- http://www.msb.edu/prog/crc/order/monograph33.pdf; and, yes, I'm related to one of the authors). The other points, I think, depend on what the bill actually says, which means, perhaps, that my critique is premature. And, if I were a bigger man, I'd acknowledge that Schuler made that very point at the beginning of the thread. But I'm not a bigger man, so:

Nyah, nyah, nyah. Matthew Effing Yglesias and I are right, and y'all are wrong. Nyah, nyah, nyah.

Anarch's logical point, and the points of Schuler et al. are well taken. I believe I can answer Anarach's point if I can dig up the relevant data (a start is here -- http://www.msb.edu/prog/crc/order/monograph33.pdf; and, yes, I'm related to one of the authors). The other points, I think, depend on what the bill actually says, which means, perhaps, that my critique is premature. And, if I were a bigger man, I'd acknowledge that Schuler made this very point at the beginning of the thread. But I'm not a bigger man, so:

Nyah, nyah, nyah. Matthew Effing Yglesias and I are right, and y'all are wrong. Nyah, nyah, nyah.

IF you've got negative equity AND you're foreclosed on AND you don't have PMI, then the mortgager MAY have to eat it, provided he's unable to come after you for the balance. I'd just like to point out that this hypothetical isn't going to hold for the person who can't cough up 10 or 15 percent down. At least not for several years, until PMI can be removed.

Slarti's points are also well taken, for the record.

"IF you've got negative equity AND you're foreclosed on AND you don't have PMI,"

Ah, sorry, forgot about PMI. My mistake. Was thinking more of the UK mortgage market.

von:

"Third, do you know anyone who doesn't buy a house with borrowed money (which Mr. Yglesias apparently thinks is a bad thing)?

I know one person: My wife's stepsister's husband, who insisted on saving for ten years (renting the whole while, of course) so that he could buy a home with cash."

Can I just step in here and say this is a really, really, dumb thing to do. With mortgage interest tax relief plus a securitized loan, a mortgage is *really cheap money*. Even if you can pay cash, why not shove your money into a higher-yielding asset than the effective rate of your mortgage after tax relief. Plus, as I've noted above, you have the advantage of leveraging your down payment with debt, so your return on equity is magnified.

Not to say that I'd buy more real estate now, though.

Was thinking more of the UK mortgage market.

Understandable. As we've said in Florida during an ill-considered ad campaign: "The rules are different here."

Can I just step in here and say this is a really, really, dumb thing to do.

Hey, I'm not endorsing the philosophy -- just reporting the facts.

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