Not only is there nothing Bernanke can do to prevent further meltdown in housing and erosion of the economy, but if there was he wouldn't know what to do. From this
AP article:
One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.
With low or negative equity in their home, a stressed borrower has less ability -- because there is no home equity to tap -- and less financial incentive to try to remain in the home, he said.
You end up with low or negative equity two ways: you bought a house and then took a home equity loan based on the new appraised price or you were unlucky and bought an overvalued home before prices walked off the cliff. If home prices never went down low equity wouldn't be a problem, but they are and they're going down hard. As prices go down people start to owe more than the house is actually worth, still not a problem. The problem comes from not being able to afford the monthly payments on the home which means the borrower should have never gotten the loan in the first place!
So why does Bernanke want people to have equity in their homes? So they can tap it like an ATM and spend it on fancy cars and boats, pumping much needed money into the economy. But that money isn't real and is being conjured from the perceived value of a big wooden box we call a house. Haven't we learned anything from the past 4 years? Lenders have started returning to their senses and are requiring down payments and income documentation. Borrowers are realizing their overpriced McMansions aren't worth holding onto and are walking away. Prices are falling, construction is slowing and inventories are going up. So where will things end up? Right where the market determines they should be. I think we'll see the return of affordable single family homes in late 2009-2010.
Tagged with: economy, government
Posted under: Money Stuff
Stunning jump in foreclosures
The Fed cuts interest rates by 0.75%, markets around the globe take big hits over night and Heath Ledger dies; what else could possibly go wrong? How about a 421.2% increase in the number of foreclosures in California over last year during the 4th quarter. Default notices were up too. Some might argue we have already cannon-balled into the recession swimming pool and haven't realized it, but I think we've got our feet in and are just waiting to jump in all the way. Things might turn around, but looking at the housing situation I'm not optimistic for this year. Mortgage resets peak later this Spring and until the bad loans get cleaned out of the system there's no way to know when and how low the bottom will hit. All I know is I'm going to start saving so I can buy a house when that time arrives.
I might base my Presidential vote on which candidate has the best grasp of what is going on with the economy and what they plan to do about it.
Tagged with: economy
Posted under: Political Stuff
There's always a first for everything so I'm going to link to the New York Times:
Drop Foreseen in Median Price of U.S. Homes
I don't really consider myself a pessimist, but I do pride myself on looking at the facts and coming to my own conclusions. To me the outlook of the housing market and the economy as a whole have some troubling times ahead. Somebody finally realized you can't loan hundreds of thousands of dollars to people who couldn't afford the payment at normal interest rates.
Don't have a down payment? Just take out another loan for it.
Need some easy cash? Turn your house into an ATM and cash out your equity.
Prices went up so quickly because there were lots of people in the market with easy access to credit through risky loans. Would you give half a million dollars to someone without any income documentation? Equity is determined by the appraised value of your home, the only problem is that equity isn't realized until you actually sell your home. That's all fine and dandy in a world were home prices never go down, but without congruent increases in income those prices can't be sustained.
Fast forward a little bit: lenders start tightening up loose standards, foreclosures go up, supply goes up, demand goes down and prices start to follow. Cashing out your equity combined with decreasing prices puts you in the predicament that the outstanding loans on your home could be more than the market price. Hello negative equity. Now what happens when you can't make the monthly payment on a house that is worth less than you owe? You try and sell or end up foreclosing which has the double wammy effect of ruining an individual's finances and if it starts happening enough, effects the lenders, banks, and economy.
Where do I think we are? I think we've just seen the tip of the iceberg, but the iceberg isn't enough to sink the economy. The people that weren't suppose to get loans in the first place will default on their loans, there will be a surplus in inventory and then prices will drop and stagnate for a while until wages can catch up. The bigger issue at hand though is our nation's infatuation with spending money we don't have. If things keep going the way they are we'll probably be in a world of hurt in a few decades.
Thank you reading my somewhat organized and logical rant.
Tagged with: economy, foreclosure, loans, spending
Posted under: Money Stuff
Everyone is talking about gas prices, but why, I don't see anything out of the ordinary happening. Supply is down and demand is at record levels. Pull out your remedial economics thinking cap and figure out what that means, you're right HIGHER PRICES! People who simply believe gas prices are high because the evil oil companies are gouging us and taking food off our plate are narrowminded and ignorant. Here's a list off the top of my head of things that could push up the price of gas:
- Increase of price of crude oil (which is not set by oil companies, thank the commodities market and OPEC for that)
- Decreased refining capacity
- Cost of transporting gasoline to stations (those big trucks run on gas too don't they)
- Current supply interruptions, Nigeria, who supplys the US ~13% of our oil is completely shutdown because of political turmoil
- Futures market is being bid up, caused by anxiety of future supply interruptions
- Switch over from winter to summer blends (know how gas prices go up at the time leading into summer, they have to use a different cleaner burning formula, during transition it kills the productivity of refineries)
- People aren't changing their lifestyles and driving less
- People are still buying big cars (~25% of cars sold last year had a large V8 engine)
- The government has increased excise taxes on gasoline over the past few decades, not reduced them.
That's just off the top of my head using information gained from reading and listening to the radio.
I don't see much changing. Hybrids aren't an attractive alternative yet (unless you mind paying $5000 over sticker which would take a decade to make up with the savings on gas) and their isn't enough ethanol being produced to make a dent (3.4 billion gallons of ethanol produced a year compared to the 131.4 billion gallons of gasoline used per year in the US).
So what do I think? Let the market go where it will and keep the government out of it. If people are willing to pay over a dollar for a 12 oz bottle of water then they have no room to complain about gas.
Tagged with: cars, economy, government, taxes
Posted under: Political Stuff
