Bubble Popping
http://www.nytimes.com/2007
/03/11/business/11mortgage.html
Help me, readers, find that quote where Dr. Greenspan recommended that everyone take more risks in the mortgages they assumed. At least as to the information technology bubble, he could point to the "exuberance" warning, although he neglected to repeat the caution when it was warranted three years later, and instead supported the New Economy thesis.
Many things are new about the current economy, especially the phenomenon of increasing returns to technology firms that enjoy network effects (most recently, Google). But owing more money then you can pay is as old as money itself.
Some financial firms, their relatively well-paid investors and their well-heeled investors are losers as the "free money" mortgage bubble collapses. Congress will think about applying more regulation to the sector, although principally the Fed and the Administration are to blame for depending so strongly on consumption instead of investment and savings to drive growth from 2001 to the present. Meanwhile, the Fed and Treasury should worry about whether the bubble's pop triggers the much-discussed "hard landing" for the precariously imbalanced American economy.
The other class of losers are those forclosed upon, those whose lives are utterly disrupted by the failure of money to match obligations. Many moralists will blame the people who undertook the mortgages. But a closer look at individual situations will reveal the hard balances to be struck in the problem set of finding affordable housing, paying for transportation, avoiding hours of commuting, trying to build up equity in a house when there's a paucity of attractive savings plans offered to the middle class. It will be a challenge for Congress to rise to the occasion of this severe and unprecedented financial problem.
Comments (13)
Here, is this it?
from here
(h/t Mumon at dKos )
March 11, 2007 9:24 AM | Reply | Permalink
I certainly hope the moralists don't have the largest voice as this shakes out.
For generations, Americans have been told that home ownership should be their highest priority. The tax code prefers home owners to home renters. Everyone who rents, like me, sometimes wakes up in the middle of the night to realize that they're kind of throwing money away every month for which there will be no realizable return.
Then, the financial institutions jumped into the subprime business, playing on what Americans have been told and knowing full well they were taking an enormous risk. If the moralists are going to blame the borrowers, they'd better have some choice words for the lenders, too.
thosethingswesay.blogspot.com
March 11, 2007 11:07 AM | Reply | Permalink
Destor has the right of it!
A colleague of mine used to call the deductibility of mortgage interest "white collar welfare", and with qualifications, I'm prone to agree with him. There was a day, in the early days of credit cards, when interest on balances carried was also deductible. I don't remember whose touted tax reform changed that, though I suppose I could look it up.
Renters do get the short end of the stick. Some states have policies which provide some relief to renters. My mother spent a number of years in an assisted living apartment complex in Minnesota. The complex began as a not-for-profit venture, but got into financial trouble because it didn't fill as quickly as the sponsoring organization had planned. Shortly after it was sold (to a MD as I remember it) the state passed a law something to the fact that the proportion of property tax embedded in the rent of each unit would be deductible by the renter, and not the owner...the proportion attributable to common areas (dining room, etc., he could deduct). I think it would be equitable to do that for all rental property, and not only include property taxes, but mortgage interest as well. If my renters support my mortgage, they should be able to deduct a portion of the interest from their taxes. (I'm not holding my breath).
All of this is tied into the myth of the "ownership society" through which Bush wants to destroy the idea of the common good and persuade us to abolish programs to support the common good...Social Security, and the like.
aMike
March 11, 2007 4:42 PM | Reply | Permalink
Renters do get the short end of the stick.
Perhaps, but not because landlords enjoy real estate tax and mortgage interest deductions.
Adjusted for risk, all investments should have the identical after-tax rate of return. Increase the landlord's federal income taxes by denying him tax deductions and he will raise the rent (and if the market won't allow him to do so, immediately, he will lower the level of maintenance and services he provides his tenants).
It may take some time, but for a while little rental housing will be built and older rental housing will deteriorate until finally, the market finds itself able to support the higher rental rates investors, their tax deductions having been eliminated, will require.
Let's not forget that the world is chockfull of alternative investments.
March 12, 2007 3:47 AM | Reply | Permalink
Oddly enough, this may still wind up to the renter's benefit. If the renter can deduct a portion of his/her rent then he/she may reach the point where he/she can itemize deductions and get off the short form 1040a income tax. Clearly there is a narrow range of renters for whom this would be true, but I think this is probably precisely the range of persons for whom purchase isn't an option.
The question of maintenance and services is another issue. Where real estate markets are tight and renters have few options, there is no great pressure on landlords to provide more than minimum services anyway. Where rental properties are in excess of demand, there are some pressures to keep services/maintenance at least at an acceptable level. Tenants can move to more desirable properties, and allowing the property to deteriorate hurts the value of the investment.
Perhaps the most equitable solution is for local government to provide support for renters' rights. The problem is that the real estate industry is well organized, well heeled, and a major contributor to political campaigns at all levels.
aMike
March 12, 2007 4:35 AM | Reply | Permalink
Tenants can move to more desirable properties . . . .
And rents will go up in those properties due to the increased demand -- and the lost tax deduction will be recouped in the form of higher rents.
. . . he/she may reach the point where he/she can itemize deductions and get off the short form 1040a income tax.
For the average renter a Schedule A $12,000 interest and real estate tax deduction is worth $500 (25% x $12,000-10,000). For the landlord, around $4000 (33 1/3% x $12,000).
If you're a renter you want to leave the deduction with the landlord. You don't want to trade a $500 tax savings for a $4000 rent increase.
March 12, 2007 4:55 AM | Reply | Permalink
The only state program I know about it detail is Minnesota. Here's a link to the Renter's Property Tax Refund Program there. It has been around for quite some time (at least since the mid 1990s) and seems to work. Granted the state "pays" the refund, but the source of payment is the general revenue fund, so the tax burden must ultimately be a burden shift from the more wealthy to the less so.
aMike
March 12, 2007 6:25 AM | Reply | Permalink
We were told by the Fed, INFLATION,INFLATION, INFLATION. How the economy was heating up. Finally the workers could see the light at the end of the tunnel.
President Bush running around the country, telling everyone about how good tax cuts were and the stimulaing effect, the economy was good.
How to play the inflation game: You purchase a home at yesterdays dollars or pricing, knowing that tommorrow with inflation, will make yesterdays pricing look good. Purchasing power.
Besides they've got to live somewhere, don't they?
OOPS! I guess some were fooled again.
As long as the FED solves inflation problems, by employment/unemployment tools, there will be losers. The problem is some lose so much more than others.
March 12, 2007 8:13 AM | Reply | Permalink
BTW, it's the display of the URL that has ruined the display on the home page. Best avoided or, if possible now, edited. Such as display also has the drawback compared to inserting a link that one can't click on it.
John
http://www.haberarts.com/
March 12, 2007 8:31 AM | Reply | Permalink
Does the bubble pop, or does it just slowly deflate? One fact that does cushion the real estate slow-down is the fact with (with exteremly rare exceptions) the value of a piece of real estate never sinks all the way to $0. There is no equivalent of a "junk bond" or a "worthless stock" in real estate because, unless utterly destroyed in a disaster, a piece of real estate will always retain some positive value. Moreover, unlike stocks and bonds, there is always demand for housing. So, IMO, what we will see is more of a correction-- an unpleasnt one for people who made or took out risky loans, but not a full scale meltdown like the tech bust. And the silver lining will be that a fall in housing prices will make home ownership more not less affordable, and that's a good thing in the long run.
March 12, 2007 9:46 AM | Reply | Permalink
California also has a Nonrefundable Renter's Credit (see http://www.ftb.ca.gov/individuals/faq/ivr/203.html My apologies for the lack of formatting. My text editor has gone goofy on me.)
The hardest thing about any political campaign is how to win without proving that you are unworthy of winning. ~~Adlai E. Stevenson
March 12, 2007 3:30 PM | Reply | Permalink
It's the Mother Of All Red-ink B.S. stories, nat'l debt's at 9 trillion, they say the whole mortgage thing is worth 6.5 trillion in red ink,
smart time to rent, bad time to try and buy, I think...
March 13, 2007 3:39 PM | Reply | Permalink
I just finished watching MAD MONEY - MSBC I think Kramer The Host said it best. So a few financials suffer because of the SUB-Prime Problem. Despite the pullback today, theres a bull market somewhere. MO- Altria, Smokers will contiue to smoke. Private equity companies, are salivating to buy these stocks at these low prices, and don't put it past some to convince you that the sky is falling. Watch the Federal reserve drop rates and housing may become affordable. 30 year mortgage around 6% now.
As to your question of buying or renting, I guess it depends on where you live. I live in the South West.
March 13, 2007 4:35 PM | Reply | Permalink