Oct162015

Low house prices are important to stable economic growth

Low house prices make for lower debt service payments that benefit the economy as money money is freed up to circulate and buy goods and services.

Low house prices are good for the economy because low house prices make for low loan balances and less debt-service. When borrowers have excessive home debt, the excess comes directly out of disposable income. Since consumer spending is such an important component of the economy, the excess interest payments are a direct financial drain. As long as the debt on real estate is excessive and capital is tied up in non-performing assets, the economy will suffer.

It’s really that simple.

The solution is equally simple: foreclose on delinquent borrowers, wipe out the debt, and extract the remaining capital value. With the excess debt removed, borrowers can use their wage income to buy goods and services rather than giving it to the bank. When the mis-allocated capital is returned to the market, new investment will be spurred in areas where capital is most needed. Right now, we don’t need more real estate.

The California economy in particular was completely dependent upon Ponzi borrowers going to the housing ATM machine to stimulate growth. Lenders ostensibly didn’t have a problem with this practice, despite the fact it was a Ponzi scheme. Apparently, no lender believes they will be the one holding the bag at the end — and with endless can-kicking they may be right.

Sustainability is key

Rapidly rising house prices are not sustainable, and the HELOC dependency it creates provides an unsustainable economic stimulus sure to result in a painful crash. Financial market implosions purge irresponsible and unsustainable habits from the populace. HELOC dependency serves no one, not even the sheeple who got to enjoy it for a time. The unceremonious fall from entitlement is inevitable, and although the fall is emotionally devastating, getting off the HELOC heroin is better for borrowers in the long term.

Falling prices bring affordability to the prudent who understand valuation and their cost of ownership. Many people have put off their purchases because they understand the power of rental parity. Those people will be rewarded with lower debts, and the ability to move without feeding a black hole on their family balance sheet. The lower debt service payments will benefit the economy as money that used to go to a lender is now circulating to buy goods and services.

I want to believe

The promise of ever-increasing house prices and unlimited HELOC spending money is seductive. Everyone wants to get something for nothing, and despite the too-good-to-be-true obviousness of the fallacy of free money from housing, it happens often enough that the sheeple fall for it every time.

Like the gambler in Las Vegas feeding a slot machine, the California loan owner will buy any real estate they can to get their shot at HELOC booty. It’s only a matter of time before we inflate another housing bubble and unjustly enrich another generation of useless Ponzis. I want to believe it won’t happen, but those who want to believe in California housing gold will likely make another run at it.

Good Stoploss Management

The Ponzi Scheme in California went on for too long. There are adults whose entire financial life is an illusion sustained only by lender greed and stupidity. Many California borrowers believe a money-rentership position in real estate can provide them sustainable productive income they can extract through mortgage equity withdrawal.

To them, periodic trips to the housing ATM is simply good cash management, like getting a paycheck. But is also serves one other useful purpose; by periodically extracting all the equity available in real estate, borrowers can shift any risk of loss to lenders and maximize their gains.

One of the most perplexing issues with trading is management of exits and getting back into cash. If you don’t take profits as they accrue, you risk losing them when prices reverse; however, if you sell and take profits, you miss the remainder of the upward price move. Fortunately, lenders make it very easy to manage cash exits with HELOCs.

By periodically removing all profits through mortgage equity withdrawal, very little potential cash profit is left to the market. Also, since this is a loan and not the reduction in an equity position like selling part of a stock holding, the borrower gets to obtain the full cash advantage of owning real estate while prices were rising.

Of course, the best part of the system is getting to pass all losses on to the lender. When prices go south, the lender is holding the bag.

So far the only potential downside is a negative credit report and the potential for a lender to go after other assets. This is probably not a big concern for sophisticated borrowers because the spendthrifts no longer have any assets, and the clever ones probably figured out some tax shelter to hide them.

Lenders are going to get crushed again after the next housing bubble. I hope taxpayers don’t have to backstop that one as well.


Why can’t reporters provide us with the real news?

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