Prestidigitation
A short break from catalogs.
Good article by Thomas Friedman yesterday: "So many people were in on it:
People who had no business buying a home, with nothing down and nothing to pay
for two years; people who had no business pushing such mortgages, but made
fortunes doing so; people who had no business bundling those loans into
securities and selling them to third parties, as if they were AAA bonds, but
made fortunes doing so; people who had no business rating those loans as AAA,
but made a fortunes doing so; and people who had no business buying those bonds
and putting them on their balance sheets so they could earn a little better
yield, but made fortunes doing so."
At another point in the article, he mentions this amazing bit of history:
"In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000
and no English was lent every penny he needed to buy a house for $720,000.”
I was using the search engine on this blog to remember the amazement I had
expressed at the outrageous rise in home values in many parts of the country,
the creation of so many new millionaires.
Nov 28, 2005: "Lots of average Joes have seen the
value of their house double and triple, making them more money in a few years
than their 30 years of retirement savings. Just as a rough estimate, I figure
there are about 36 million people in California (I'm not sure that's counting
the undocumented aliens), and let's say 10 million separate residences. Whether
they are owned or rented, somebody owns them, and it's probably a person,
not a corporation. Let's say the average appreciation in the past 5 years has
been $250,000. That would mean the wealth creation for California alone has
been 2.5 trillion dollars. For the entire nation, the number is probably
$10 trillion, or about the size of the U.S. GDP. "
Jan 30, 2006: "Large national builders are putting up houses in quantities
that may exacerbate the housing bubble implosion. "
Oct 26, 2006: "I've been thinking about that amazing statistic regarding
housing prices and median income. In many places on both coasts, the median
home price is 12 to 15 times the median income. That means that a 6% mortgage,
together with PMI and property taxes, would consume the entire paycheck of the
average homeowner (well, OK, the median homeowner). How in the hell
could that be? It's not like the houses are owned only by the very rich — 70%
of all American families own their home. The answer is a) ARM loans with
artificially low payments that are going to explode in the next couple of years,
and b) home ownership isn't 70% in the highest-priced areas (more like 20% in
some pricey locales where speculators account for most of the housing sales),
and c) many Americans have traded in the gains in the last house to invest in
their next house. "
Dec 6, 2006: "Speaking of property values: No one has explained to me why there is so much new housing. After all, houses aren't like cars . . . they last the better part of a century in most cases (Junie's house was built in 1936). Even in this construction slowdown, the forecasts are for another 1.5 million homes to be built. This includes both apartments, townhouses, and houses. The population of the US is roughly 295 million and the average household size is 2.6 persons. That means there's about 115 million households (with roughly one-third renting and two-thirds owning). The population grows by about 2.3 million people per year, or about about 900,000 households. So we must be building 600,000 more homes a year than there are new people to live in them. Presumably, that's because 600,000 existing homes per year either disappear (think Katrina) or become undesirable for some reason. I wonder where they go?"
June 6, 2007: "I'm trying to get my mind around this
statistic: the size of
the average new home in Boulder County is now 6,300 square feet. That must mean
that the average house is selling for $600K to a million dollars or more. Where
are these people coming from? My house is an absurdly large 3,000+ and has 4
bedrooms, 3 baths, a large living room, great room, and built-out basement. In
any event, the Boulder County commissioners want to limit new homes to 2,600
square feet in unincorporated areas and 4,000 on "the plains". Now that I'm
getting the paper, I've just started to notice the amazing rise in Boulder home
prices recently. The classified section is filled with page after page of
houses that run a million bucks or more. Keep in mind that this isn't
California – there are dozens of towns in Greater Denver with affordable housing
and when you get away from the Front Range, prices start to drop to levels that
Midwesterners are familiar with. There are a reasonable number of high-paying
jobs in Denver, but it's hard to imagine the same is true for Boulder. There is
a smattering of high-tech and a few big players, like Pfizer, but the majority
of these "good jobs" are still paying wages below 6 figures. So how do you
afford an $8,000 mortgage? Maybe these are all trust fund babies or
Californians trading in their West Coast equity, but I doubt it. Anyway, I
don't get it. But then, I don't understand how New Yorkers survive their real
estate and rent market."
Sep 21, 2008: "Another question is: what about Main Street (as opposed to
Wall Street)? Why not spend the time and resources to mitigate our enormous
new-found ocean of mortgage debt by figuring out how to help millions of people
keep their homes? The housing price crisis is due in large part to the glut of
homes on the market, some new builder homes, but many that are up for sale
because homeowners can't make the mortgage, and many more because they've been
foreclosed on and add to the glut of homes on the market. With many fewer
people selling or walking away from their homes, four things would happen:
1. Supply and demand would realign home prices upward.
2. The stock of homes on the market would shrink.
3. Builders could start thinking about building again, with attendant gains in
construction-related employment.
4. Current homeowners would see their home values rise, yielding more of the
feel-good sentiment that drove the economy for years."
Oct 28, 2008: "This is also hurting a lot of
middle-class people that used to work in construction. Most of the home builder
stock prices fell 20% today, after Pulte Homes announced quarterly losses, and
the CEO of Pulte said "it appears that a bottom in the housing market may
not come for some time". Getting the foreclosures off the
market would help a lot, since it's difficult to compete with fire-sale prices.
It would be much less expensive to the government (and the tax-payers) to
subsidize house payments than to outright buy mortgages. I would guess that
many of the families in foreclosure are not that far from being able to keep
their homes. And I don't think people leave their homes, just because the
current price is under water, mortgage-wise, any more than they abandon their
car in the first year when its resale value is exceeded by their auto loan."
~~~
So, I guess the doubling and tripling of housing prices was an illusion.
While it's good to find out that, yet again, magic only exists among the
prestidigitators, it appears the country has discovered perhaps the most painful
way imaginable to find that out.