Underwater mortgages and the economy
Interesting perspective in the LA Times. http://www.latimes.com/business/la-fi-economy-mortgages-20101101,0,7338975.story By Don Lee, Los Angeles Times November 1, 2010 Reporting from Washington — For almost two years, home foreclosures have swept the nation, spreading misery among once-buoyant families, spattering lenders with red ink and undermining efforts to restart the economy. But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. It's not that these homeowners will stop making their payments. It's just the opposite — that they will keep doing it. Nick ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
RE: Underwater mortgages and the economy
Interesting perspective in the LA Times. But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. It's not that these homeowners will stop making their payments. It's just the opposite that they will keep doing it. I thought about this, and I think the article misses the real problemthat the rise in home values fueled the '00-'08 economy. There is ample reason to argue that folks didn't save, because they saw their net worth going up every year, as their home appreciated. Folks who sold their homes for bubble prices spent the money; it's gone. Some people took out second mortgages on their houses and spent the money...with their house value rising, they spent the value. I understand it might be better for the national economy if we took the big hit now, and lots of folks would start over with no credit rating, and banks took big hits on their books now, and the government spent what it had to now instead of later so we didn't have the slow drip drip drip of expected foreclosures putting deflationary pressures on the economy. In an unrelated note on the economy, we're now in an age where the economy has to grow 5%/year to put a dent in unemployment. If we forget the last decade, when GDP grew sub-par and jobs barely grew, and focused on the '80s and '90s, we'd find that the average GDP growth in that period would be enough to lower the jobless rate to 7.5% in about 20 years or so. The numbers are rough because real 3%/year GDP growth is what's required to keep employment growth matching worker growth, and I'm calculating a 0.1% variation above this, so your numbers might be a bit different. But, that's a scary thought. Dan M. ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
Re: Underwater mortgages and the economy
On Mon, Nov 1, 2010 at 8:40 AM, Dan Minette danmine...@att.net wrote: Interesting perspective in the LA Times. But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. It's not that these homeowners will stop making their payments. It's just the opposite — that they will keep doing it. I thought about this, and I think the article misses the real problemthat the rise in home values fueled the '00-'08 economy. There is ample reason to argue that folks didn't save, because they saw their net worth going up every year, as their home appreciated. Folks who sold their homes for bubble prices spent the money; it's gone. Some people took out second mortgages on their houses and spent the money...with their house value rising, they spent the value. No question, either extreme is bad. But how to manage the volatility is the billion - or is that trillion? - dollar question. Nick ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
RE: Underwater mortgages and the economy
No question, either extreme is bad. But how to manage the volatility is the billion - or is that trillion? - dollar question. There are several things to consider here. First is the obvious. We require real truth in selling, and for the sellers to know what they are selling. Along with this we have hard reserve requirements, like we had for decades (with a kinda exception in Houston in the mid-80s that fueled the SL crisis. All financial institutions can be leveraged no more than 10-13 to 1. Then, we need to recall that this is the first gigantic, nation wide housing bubble we've seen in 150 years. There are several causes for it. First, the balance of trade deficit, kept by foreign governments and other investors as cash meant there was cash looking for a place to roost. The inherent trust in the US dollar helped fuel this. So did the lack of the US actually producing much of anything. The US is, by far, the most flexible economy, so it handles disruptive innovations better than any other economy in the world. The last significant one was the mass use of the PC, which Japan missed out on when they spent tens, maybe hundreds of billions on worthless fifth generation computers in the '80s. This lead to their lost decades. But, the internet bubble of the late '90s showed that the 'net didn't have earth shattering profitable changes inherent in it. It allowed consultants like me to get drawings and email results, had some nice multi-billion dollar companies, but didn't change the economy the way fast cheap computers did. For example, the trillion dollars of wealth created by geosteering would have existed without the internet, but not without cheap computing. So, we had a US economy that was really doing nothing, but lots of money looking for a US home...thus real estate, which the Risk Assessment Model said couldn't go down more than a couple %. Third, to get out of this, the US needs a positive black swan to change all the rules again. This will soak up investment capitol, with a real return on investment, because wealth will be created. Until it comes, we're treading water. Dan M. ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
RE: Underwater mortgages and the economy (Dan Minette)
On Mon, Nov 1, 2010 at 11:00 AM, Dan Minette danmine...@att.net wrote: snip Third, to get out of this, the US needs a positive black swan to change all the rules again. This will soak up investment capitol, with a real return on investment, because wealth will be created. Until it comes, we're treading water. I know about two positive black swans. However the first one (power satellites through cheap lift to GEO) is only being discussed in China, and the second one (StartoSolar) will probably go that way as well. It looks like StratoSolar could sell electric power at 1-2 cents per kWh and (under the current price for renewable solar power) pay back the expense of building one in as little as two years. Unfortunately I have no ideas about how to get this going, at least not in the US. I think a rule change favoring longer term investments in physical plant will be needed before anyone will consider any such ideas. Keith ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
Re: Underwater mortgages and the economy
Dan wrote: So, we had a US economy that was really doing nothing, but lots of money looking for a US home...thus real estate, which the Risk Assessment Model said couldn't go down more than a couple %. Add to that the (hundreds of?) billions of dollars of tax cuts Bush gave to the wealthiest people in the nation who already had more money than they knew what to do with. Third, to get out of this, the US needs a positive black swan to change all the rules again. This will soak up investment capitol, with a real return on investment, because wealth will be created. Until it comes, we're treading water. Or a negative black swan, pardon me for pointing out what might happen. The blackest of black swans. Doug ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
Re: Underwater mortgages and the economy (Dan Minette)
Keith wrote: Unfortunately I have no ideas about how to get this going, at least not in the US. I think a rule change favoring longer term investments in physical plant will be needed before anyone will consider any such ideas. It needs to be recognized as a matter of national security. Unfortunately, it seems like the right wing would rather see the country go down in flames than give Obama any kind of victory. Doug Sanity and/or Fear ___ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
