Real Estate bubble bust may be worse than Dot Com bubble bust

Harry Belafonte called; he wants his skin back.

Are there any reliable statistics on how many foreclosures/defaults stem in part from outright fraud or malfeasance on the part of mortgage brokers? This is a part of the equation that I don't hear discussed often enough - usually this just gets turned into a debate over whether or not the borrowers should be "held responsible" for taking loans they couldn't afford, and I'm wondering what percentage of borrowers were literally swindled into taking those loans.

you'll likely never find a valid number on that, unless somebody wants to do a really intricate survey on it for their socioeconomics dissertation or something

and even then of course said research would have its methods excoriated by the banks

agreed with Tombot -- there's no method to quantify mortgage fraud on the part of mortgage brokers of which i am aware (maybe insurance companies have some in-house metrics, but i don't know if that's true at all and even if it is whether they're at all accurate for the market as a whole). it may be something that one would have to make a rough guesstimate based on (a) insurance claims related to such fraud; and (b) revelations from either private law suits or governmental actions related to such fraud.

Is housing in the US getting cheap because of this? In Australia we're long-term rooted if we don't already own something.

FWIW, the lead story in every edition of the South Florida Business Review these days is about the mortgage meltdown. The condominium market is in freefall in Miami, far worse than most other places. I don't think we'll see improvement for another 3 years.

On the other hand, the aggressive overdevelopment will eventually be okay -- maybe good -- for Miami. Foreign investors are already discussing sweeping up built condos (sometimes buying out the few people who have bought units in a given building), renting out all the units until the market turns (so, say 2010), at which point they'll -- slowly -- begin bringing them online as condominiums. It could work if the retail and infrastructure in the downtown community is rapidly developed.

For a good buzz phrase to search for, go for "predatory lending"

"Fog's getting thicker"
"And Leon's getting laaaaaaaarger"

For a good buzz phrase to search for, go for "predatory lending"

Indeed.

Foreign investors

I could see this at first, major US downturn, other countries complacent. But those foreign investors are going to be finding it harder and harder to raise the money themselves as their own countries start running into the same problems

ie, this isn't a US problem..it merely surfaced in the US first

n Australia we're long-term rooted if we don't already own something.

thats what they used to say here as well. they thought that in the UK as well. And Ireland and Spain and Denmark. And Norway. I think they still say it in Finland but not for much longer

already own something.

you might consider this as mere semantics but in all these countries home ownership has increased over the last 100 years...but

1. What about actually owned outright homes as opposed to mortgaged homes. ie who actually owns the home until the last payment is made? This has gone down over the last 100 years. So we own more homes than we used to but we own progressively less of them. Or to put it another way do we really own outright any more homes than before the 'home ownership boom' of the 20th century?

Which means...even if prices never came down...is this statement really true?

long-term rooted if we don't already own something

The way prices are here atm, yes it's very true. The cost of ownership (unless you're way out in the country) is far more than is manageable for most people who don't already own something. This, in contrast to 5-6 years ago when houses were roughly a third the price they are now.

Our problem is partly a shortage of supply, and this is not being addressed.

home ownership rates in nz have been dropping for some time. i think the intuitive thinking on buying a home still holds - for strong economic and social reasons even with the wage/house price gap as it is, tho it looks like a global correction is finally kicking in.

why is it true? if we're not really owning the houses we 'own', and every year we own 'less' than we used to (as a percantage of how much of a house we own compared to what is owed), then why does it make sense to 'own' at all? every year prices go up mortgages go up with them (logically) but percantage wise the percentage of our house that we own goes down and the percentage owned by the banks goes up. the more we buy the less we actually own!

It could work if the retail and infrastructure in the downtown community is rapidly developed.

pffft hahaha

ie, in 1926 or 1964 what percentage of houses were mortgaged? and how much actual 'equity' in each house actually existed? who is really owning the houses here? why are mortgages longer than they used to be? why do we spend the majority of our earning lives not owning them at all?

does it make sense to spend $500,000 on a $250,000 house?

thats what they used to say here as well. they thought that in the UK as well. And Ireland and Spain and Denmark. And Norway. I think they still say it in Finland but not for much longer

Australia's a bit different than these other countries though because it's riding a huge raw materials export boom at the moment, so there is a lot of money washing around in the economy. Of course, if Chinese growth stalls...

tracer OTM

the rest of you could stand to do a little reading because I'm tired of giving other people links to money blogs that have already been linked on these kind of threads five or six times each

in other words, check u refs b4 u ref yourself

but for charity's sake, here you go:

oh wait, you all can look up "calculatedrisk" and "bigpicture" on your own time. god forbid the actual news. g'night

retail is not going to be going up anywhere anytime soon

neither is australia

"It's great in Ireland... for ages it was "OH NOES House Prices are rising, the government must do something", but now suddenly it is "OH NOES House Prices are falling, the government must do something". Which is it, guys?

-- The Real Dirty Vicar, Wednesday, 4 July 2007 17:08 (6 months ago) Link

it's really more-oh, you bought a house since 2002? aha. ahahahaha.

there should be a non-homeowners association, we could all agree not to buy for the next 6 months and watch it crash and burn. because the economy seems to be completely arranged around meeting the needs of homeowners/investors. and mainly the latter.

then maybe people in their twenties could get on the ladder as opposed to needing a 40 year mortgage just to pay for amateur speculator holidays to the bahamas.

ahahahaha

bit bigger than houses this, so I wouldn't get too much schadenfreude

there should be a non-homeowners association, we could all agree not to buy for the next 6 months and watch it crash and burn.

people dont need to agree to anything. they already have less access to credit and large numbers will be losing their jobs (financial, housing, retail first, then spreads from there). jobs are usually the last to go (which shows the fallacy of pointing to employment figures as indicators of economic health, they lag behind other indicators)

people don't buy houses, banks do. i doubt there is a single homeowner on this board

and 6 months? try 5-8 years

because the economy seems to be completely arranged around meeting the needs of homeowners/investors. and mainly the latter.

actually its not. this hasn't met the needs of 'homeowners' at all. they have become more indebted every year over the last few decades (well, over the last 100 years really). they have less and less 'equity' each year, collectively, and the ones that do make good can only spend this money by selling up. it is not arranged around homeowners, it is arranged around increasing the money supply via mortgages, this is how money is created and introduced into economies.

I believe it is called the 'illusion of wealth'.

a 10 billion here, a 10 billion there, pretty soon you're talkin about real money

i take your points, alex, particularly about overall economy being affected (ireland is probably in as bad a position there as any). just having a bit of a gloat.

i don't know anyone my age (mid twenties) who can afford a house, so there's a lot of bitterness towards the people who've been driving the 'boom' of the past ten years here. it's been great for forty-somethings who could get in early and buy three/four properties to rent, i'm sure. i wouldn't mind seeing a few of those get stung.

i'm still fairly confident of being able to get decent mortgage terms in a year or two, when prices will have dropped by at least 100k for a three bed semi where i live since last summer.

if we're not really owning the houses we 'own', and every year we own 'less' than we used to (as a percantage of how much of a house we own compared to what is owed), then why does it make sense to 'own' at all? every year prices go up mortgages go up with them (logically) but percantage wise the percentage of our house that we own goes down and the percentage owned by the banks goes up. the more we buy the less we actually own!

I don't understand this. My house value goes up (long term), the longer I pay my mortgage the less I owe. Surely.

i think it was in the circumstances of interest rates soaring for people on variable rate mortgages, Ned.

otherwise, yeah i don't understand either.

has the bubble bursted yet?

I don't understand this. My house value goes up (long term), the longer I pay my mortgage the less I owe. Surely.

you personally do. there are some winners. but don't forget you pay around double the actual 'cost' of the house, the interest/rent you pay the bank for those years

collectively, we dont. how can this be? how can it be that of the total ownership of houses, so much larger a percentage of each house is mortgaged (owned by the bank) than 20/40/80 years ago? why do the banks own a greater percentage of our houses each year?

mortgages have grown longer and longer, and deposits have got smaller, we owe the banks larger sums of money for longer timeframes, we're not really owning these houses at all, and we (collectively) own smaller percentages of them each year (in the days before ownership mortgages were only ever taken out on property that was already owned, by people fallen on hard times)

like i said before, why are fewer houses OWNED OUTRIGHT than 40 years ago?

Why do mortgages take up larger proportions of wages than 20/40/80 years ago? Why does personal debt take up a larger proportions of wages than before. The last 100 years we have become immeasurably richer....as we have taken on larger and larger debt...to live in houses built in and paid for years ago

My house value goes up (long term)

is this even true?

it goes up in nominal terms but everything goes up in nominal terms. money is introduced into the economy via mortgages and then goes everywhere else from that, therefore EVERYTHING goes up in nominal terms

but it can only go up in real terms by taking larger and larger proportions of salaries. who does this benefit?

unless you think, somehow they will eventually rise to take up 100% of salary?

What has happened in the housing market in the USA was not only a speculative bubble (as it certainly was) but also a huge surge in inflation for housing costs in general. To some extent the bursting of the bubble will bring house prices down and later rental costs may come down a bit, but what we are beginning to see is the second part of the equation.

Because housing prices are fairly 'sticky' and come down reluctantly, it seems very likely to me that in the next round of inflation the rest of the economy is going to rise rapidly to meet housing costs, even more than housing costs will fall to meet the rest of the economy. The logical next step after the $500,000 house that used to cost $200,000 is the $8 loaf of bread and $6 gallon of gasoline.

Watch this space, as they used to say.

and the fed will help those food/oil prices rise with some generous rate cutting

The logical next step after the $500,000 house that used to cost $200,000 is the $8 loaf of bread and $6 gallon of gasoline.

No it isn't. Housing prices have nothing to do with what drives those things.

Also, the fact that housing prices are "sticky" only means you're going to see a slower deflation of the bubble, imho. It's possible that Americans might get used to paying a larger percentage of their budget for housing, but it defies logic to say that they'll do that while also paying a larger percentage for healthcare, food, and gas while their wages are also stagnating. Not to mention the effects of foreclosures and the increasing difficulty of getting a mortgage.

haha I just realised i misread the post as saying 'the $200,000 house that used to cost $500,000', in which case the higher bread and gasoline makes sense . and the 2nd will exacerbate the first.

Background on Australian (and NZ) housing catastrophe

Australian and New Zealand homes are the least affordable in the world, according to a US-based survey of 227 cities.

The 2008 Demographia study of international housing affordability listed 18 Australian cities in its top 50 of severely unaffordable markets.

And if they cannot be bought

Then they cannot be sold

Yep.

Debt levels here are enormous too.

like i said before, why are fewer houses OWNED OUTRIGHT than 40 years ago?

Is this true (in Britain)? I'm not disputing it, I haven't got a clue, I would just find it surprising. There seems to have been a huge shift over the last few decades, firstly away from privately rented accommodation and then away from council-owned properties towards owner occupied ones. Obviously the vast bulk of these are mortgaged, rather than owned outright, but it's not like many people owned outright in the first place, and presumably over time a lot of the people who bought their council houses have been able to pay off their mortgages.

This is why it's hell dealing with old (and thick) family members. They all had no trouble paying off mortgages, so they put INCREDIBLY heavy pressure on people my age (early 30s) to buy something and just save to pay it off as though it's the easiest thing in the world.

Other catchphrases:
- 'Renting is throwing your money anyway' <-- like we've got a choice
- 'You young people don't know how to save, you blow all your money on plasma TVs' <-- we have an old second-hand CRT, and we bought our first piece of furniture in seven years last week, so get fucked
- Housing isn't that expensive' <-- easy to say when (a) the $70,000 house you bought in 1983 is now worth $550,000 and (b) you've not even looked at the estate market in 20 years
- 'You could afford a house if you moved to the outer suburbs' <-- our lifestyle would suffer, our social life would be obliterated, at least 10 fewer hours of free time per week, petrol would kill us, car costs would escalate, we would want to hang ourselves, etc.

Therefore the housing affordability crisis is only the second most painful aspect of the housing affordability crisis.

^ Not to mention the cost of education here. I only just finished paying for my uni degree ($600/month; ~$25,000 in total).

'Renting is throwing your money anyway' <-- like we've got a choice

And it's also not always true. When things are overpriced, buying is throwing money away. The apartment we rent would probably cost almost double what we pay monthly to buy were it a condo, and I'm sure even after you factor in tax breaks and whatnot it leaves us a lot of money that can be put to other uses, including -- hypothetically -- other investments that perform better than real estate is doing right now.

I guess the caveat is that a home is a good investment for a person who lacks the time and/or knowledge and/or risk tolerance to deal with other kinds of investments - it's relatively safe and you can't live in a stock.

And it's also not always true. When things are overpriced, buying is throwing money away.

^^^^^^^^^^^^^^^^ x infinity

This is the most difficult thing to drum into the heads of our phenomenally stupid relatives. They expect that (a) we can easily find the ~$70,000 deposit we require in order to open a loan and (b) spending $600,000 on a house (on which we would certainly lose money when the bubble bursts) is magically more sensible than paying $1,400/month for a rental.