Sunday, February 17, 2008

Buyers Paid Too Much for Too Little

The newspapers claim that homeowners are in trouble because they bought too much house. Let’s put that in perspective, they paid too much, for too little! In our area people paid three times what the house was actually worth. There was no concern as to making the astronomical payments. So now they get to give it back to the bank.

If you think carefully about this mess, when it is all over, someone will own each and every house now in foreclosure. It just won't be at today's prices. Who eventually ends up really owning the house, whether it be owner or investor, is not really relative to the issues at hand. Newspapers keep suggesting that this is the loss of the American dream and it really isn't. Many families are not financially prepared for home ownership.

The problem not yet realized by the lenders holding this foreclosed debt is that this problem doesn’t disappear with the exit of the Alt-A loans. The Alt-A got the inventory up to a high level. Now you want to buy a house. Do you have a 20% down payment? Chances are about nil in California right now. Not at these prices!

Financing for a home loan is harder to find. The money pool is contracting. A bank, doesn’t tell a perspective borrower that they have no money to loan. More than likely, they would inform the potential borrower that their credit report wasn't up to the bank’s standards.

The problem is getting worse. As housing prices drop, more people become upside down in their homes; including people who put down a sizable down payment. This is where the lenders have been blindsided. The explosive growth in REO’s has taken them by surprise. The financial infrastructure needed to process all of the defaults isn’t even in place. Deep discounts of REO’s, exacerbates the problem even more, resulting in more home owners becoming upside down.

Last week, Henry Paulson mentioned that the lenders have gotten together to help out the troubled homeowner (no homeowner left behind). It’s kind of like buying a horse and buggy with a two year guarantee. The wheels give out and your horse is exhausted from dragging the buggy with you in it. What’s the solution? They’re going to give you a fresh horse!

The solutions of late, border on incompetence. Why hand out tax rebates when it is very obvious that next year is going to be very bad year for tax revenues? Advising people to keep on paying on a mortgage that they can’t even afford is ill advised. On top of that, there is confusion on who owns some of these housing notes if they're part of a CDO.

We got into this mess because of very lax government supervision. Everyone was making money (don’t rock the boat). Now that we need real leadership, no one will step forward to do what's necessary. Frankly I don’t blame them, they would be crucified one at a time. We are going down the hard way. It’s a little like looking for a gas leak with a Bic lighter. It works, but just not quite the way you imagined.

Copyright 2008 All rights reserved

13 comments:

Anonymous said...

The way to fix the whole problem is to find out what the most Honorable Mr. Paulson is smoking and sell it on the open market with a high sales tax. It obviously makes a person euphoric to thepoint where they lapse their judgment completely. This is the third straight unworkable plan this guy has come up with in a few months. After everyone was euphoric and the government coffers were re-filled and we had paid off the national debt then we could just buy out everyone's mortgage and rent the houses back to them for pennies. All Happy Now!

Jim in San Marcos said...

Hi Anon 6:58

Your right three unworkable plans makes you wonder what is going on.

I think that the real solution is for government keep out of the mess. It will fix itself.

It's an election year and both sides have to appear that they are doing something to show some semblance of control.

IMHO the government is out of the loop. They can make it last longer with interaction but they can't fix it.

Thanks for your comments

Alfred said...

I'm not a conspiracy theorist. But watching "The Money Masters" DVD series is very enlightnening. I suggest you watch them. Shines a light on the international bankers or power elite and documents their activities and impingement on the US government, economy and people. This is not a conspiracy... they are manipulators. Governments are influenced by them. Lord Keynes errant economic views, FDR and all the other socialist bull, central banks, income tax, govt interference in business, disturbance of the free market causing imbalances and rats nests. And the money masters and market manipulators doing their thing just adds gasoline to the bonfire. We're in for a correction, inversely proportional to the boom that we've just had. Gonna be punished. Punished for the last 5 years? 10 years? 20 years?

SACKERSON said...

"Cut and run" seems sensible.

SPECTRE of Deflation said...

It’s a little like looking for a gas leak with a Bic lighter. It works, just not quite the way you imagined.

Perfect for the situation we find ourselves in.

Anonymous said...

Just wait untill elections are over...

Anonymous said...

You can not maintain a healthy economy with counterfeit credit and an impotent workforce of burger flippers, keyboard huggers and paper pushers. Since gutting out and off shoring our manufacturing sector we no longer having anything to sell so we resort to financial cannibalism of our neighbors through credit and loan debauchery to squeeze out the last remnants of profitability. Hail Caesar! The Barbarians are at the gates!

Anonymous said...

thank a clinton for nafta, the rise of the immigrant work force and americans thinking they could all be bill gates, too much bling tv starting with lifestyles of the rich and famous and believing the government when they convinced people that as the greatest nation on earth you deserve whatever your heart desires. The streets are paved in gold and spend spend spend brag about six figure salaries, buy large boats, oversized pick up trucks, private schools, 150 for a pair of sneakers, 130 for blue jeans. spoiled kids, new computer every year, latest electronic toys. Why would anyone think that they overpaid for a 2000 sq house, the more you pay means the better it is right? So I guess this just shows just because you have a 750 credit score doesn't mean you aren't a deadbeat it just means you made sure your bills are paid on time until you get a letter saying your mortgage went up from 2500 a month to 5000 and then we find out what people are really made of.

Maggie said...

The government exacerbates the problem, and their cheap money program of currency devaluation is the impetus of the problem.

The government needs to get out of the way and let the market correct. Money supply needs to stop being little more than toilet paper for a spending congress with the runs.

Jim in San Marcos said...

Hi All

"The Barbarians are at the gates" kind of suggests that the end may be near. They may want to take back the "streets paved with gold."

As for "wait until elections are over." I don't think they have that much time with this house of cards.

Sackersons suggestion of an old nautical escape procedure of "Cut and run," might be apropos. You cut the anchor line and sail with the wind. Anchors were expensive back then, but sometimes a small loss could save your ship.

Thank you all for your posts

Anonymous said...

There are lots of micro things we could look at but the larger picture is that in the long run we're in for a paradigm shift. Multinational Corporations have no loyalty to any one Nation. They only desire the fruits of their capital. Thus, they invest where the capital bears the most return. Today that is not America, but China and India and the far east. Cheap labor, lax regulation, rampant bribery and easily corrupted public officials...it is like the free wheelin' days of yore here in the US of A (think Captains of Industry, Oil Barrons, Rail Barrons, Stock Market manipulators of 100 plus years ago.). Ironically, many of our top corporate leaders of today likely envy the China and India. "If only America were more like...." WTF?

China doesn't even officially acknowledge the Tianenmen Square Massacre. It's still a communist country...A COMMUNIST COUNTRY. Where are the right wing nutz on that issue??

Bottom line is that American (read: American Business) no longer needs Americans. In order to maintain the oligopolies and monopolies they have created here, they need to expand (and quickly) into the new markets. This leaves "average" Americans left to hold the bag (read: disillusionment, unfulfilled expectations). Today the "bag" is homeownership.

How did this happen and why? Was is purely greedy people buying up too much home? No. It was people anticipating better times ahead...more pay and better work conditions. Expectations that never came. Instead, prices rose, wages fell and we headed into a nasty war costing us untold billions each year.

American business doesn't need Americans anymore. There are geographical boundaries which require them to locate their production or operations here. They can go anywhere. It doesn't even make sense to be incorporated in the USA. Too many regulations and taxes. Better to incorporate offshore in a tax haven. Pay no taxes on your income earned outside the U.S....including capital gains.

Two Thirds of the U.S. economy is based on consumer spending. But consumers are out of money and worse, they are bored with most of the crap coming from overseas. Add the chilling effect of bankruptcy laws on the use of credit and we have a full blown consumer freeze out. Better to save and do without. Maybe you can put enough away to pay for one semester of insanely expensive college tuition...or maybe just some books.

There are fundamental macro economic changes taking place. Think England at the end of the last century. The sun never sets on British soil. They had it all and watched it slip from their fingers into nothing. Only their close association with the U.S and their pernicious bankers have kept the country from falling into economic second class.

Is that what lies ahead here? The only jobs available to the masses will be working at WalMart selling each other Chinese made "goods".

They came for the industrial jobs and Ii didn't say anything: those jobs were dirty, besides, we had a "new economy" of computers.

They came for the manufacturing jobs and I said nothing. Cheap electronics were good and I liked my huge tv.

They came for the tech jobs and I was quiet. I liked a cheap computer. Tech support was a joke, but who cared?

They came for the managerial jobs and I didn't speak up. They can retrain...I agreed with George.

They came for my job...and there was no one left to speak up...they were all in foreclosure court or too busy working three jobs to just scratch by...

It's a new paradigm...one of diminished importance of the American citizen. Wall Street has nothing to do with Main Street. Yet Wall Street needs to be careful...it is certainly a target of envy and despise. Remember, the sun never sets.....UNTIL THE SUN SETS. I'm sure the Chinese can do it better and cheaper...just watch.

AR

Jim in San Marcos said...

Hi Anon 8:38

I agree with what you say but I would like to offer everyone a few pointers. When I published today's missive my wife mentioned that she read it. I asked her what she thought of the joke at the end and she said “I didn’t read the whole thing.” That didn’t make my day!

If you’ll notice all my articles are about 250 words, they don’t start out that way, but they will be edited until they get there. So even being short and to the point doesn’t guarantee that you still have someone who reads the whole comment. I literally lost my wife on the third paragraph. What everyone needs to realize, is that you have one shot the first paragraph and that’s it. The mistake most posters make is to assume that the viewer will read the whole article, that isn’t going to happen.

If you scroll down to the bottom of my website you will see a sitemeter. Click on it and you can see how long people read and other things.

Another thing to take into consideration is have a little humor included; it gives the reader a chance to “breathe.” Profanity accomplishes the same thing; it’s just less taxing on the writer’s creativity.

I edited your comments and published it with a credit to anonymous. Today’s post is your post. You might want to start your own blog. Hope you like the edit. My email is in the blog list if you need help.

james said...

Dont you think annonymous that one should ereally go for eBay.I mean,we can find the exact price and then look out for our budget...This will save time and money both..
james