Let’s say you take all the people who claim to be in trouble on their mortgages. Take those mortgages away, lower the value of the house to the current market price, and calculate the monthly payment based on the current interest rate on the 30-year fixed (and I mean conforming, not jumbo) which is around 6.35 percent. Oh, and by the way the historical average on the 30-year fixed over the last 25 years happens to be 7.89 percent, so I’m offering a deal. How many of those folks could still afford the home? My guess is that some could, but many more could not.
What I’m getting at here is that no matter how far we go in modifying, restructuring, writing down principal on loans in order to stop foreclosures, the bottom line is that most of the borrowers in trouble had no business being in the homes they bought in the first place. You can modify their loans for five years, but they will probably lose the home anyway.
Is that mean? It’s not meant to be. I just think that in order to set the market right we need to let prices fall to where they must and start over again with mortgages, buyers and homes that make sense. We’re all losing money here, but that’s because so many people took advantage of free money during the housing boom (and don’t get me started on how those who didn’t take advantage of that free money still get screwed).
I understand the need to restore the credit markets and stop the crash in housing, but keeping folks in homes that are way beyond their means is just prolonging the pain of the inevitable.
Friday, October 31, 2008
Let home prices fall
CNBC's Diana Olick says let home prices fall and start over again:
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Basically we need to reboot the Matrix.
ReplyDeleteWhat I’m getting at here is that no matter how far we go in modifying, restructuring, writing down principal on loans in order to stop foreclosures
ReplyDeleteOn a macro level where should the median home price fall? At the early 2003 level? Obviously it will differ by region as some regions didn't have the run-up like Miami, and Las Vegas did. Greenspan started to lower rates in middle 2000 and 30 year mortgage rates came down from 7% to around 5.25%. But if you try to compare this market to past markets, then you'll see that the price drop in the late 1980's and early 90's was spread out a lot longer than this one. Regardless of this, can we expect the same prolonged recovery as the last housing bust?
ReplyDeleteUltimately the answer has to do with affordability. When people can afford to buy a house with a 30-yr fixed is when you will be closer to a bottom.
ReplyDeleteBut with the economy weakening, and many people's incomes dropping, affordability is also going down.
I think it is necessary to reward those people who did live within their means in proportion to whatever assistance is given to help the people who overextended themselves.
ReplyDeleteI wrote about the need to return the cost of homeownership to historical levels on my blog www.lifeinperu.com.
Ward
www.lifeinperu.com
...the bottom line is that most of the borrowers in trouble had no business being in the homes they bought in the first place. Close, but not quite right. They had no business agreeing to the PRICES on the homes that they bought. Yes, there are stories of window washers in McMansions that they should never have bought. But in bubbly California there is simply NO WAY that somebody with median income could afford a median value house. The same is true across income/house values: 90th percentile income couldn't afford a 90th percentile house, etc. Across income levels, only crazy financing fueled the illusion of affordability. At the end of the day, house prices will fall until people can afford them. But many of these people paid too much, not bought too much.
ReplyDeleteJim A.