For the last several years I have written in favor of low prices as the best option for putting the country back of firm economic footing. The argument is simple: Low prices make for a lower cost of ownership which translates to more disposable income for homeowners to use to purchase goods and services to drive the broader economy. Disposable monthly income is a superior economic stimulus because it’s sustainable. The savings each month are consistent and reliable. Contrast that to HELOC money that comes in a lump sum and once spent requires larger payments which reduces disposable income. Lower monthly cost of ownership is a sustainable source of disposable income to stimulate an economy. HELOC money is not.
So that opens the larger question about which is better, lower prices or lower interest rates? Both lower the monthly cost of ownership and result in more disposable income. Obviously, the banks prefer higher prices to recoup their capital from their bad bubble-era loans, so they are offering 3.5% interest rates to prevent prices from going any lower. I think most buyers would prefer lower prices, but since the banks make the rules which determine market prices, low interest rates and high prices are what we get. And as I pointed out last week, the cost of ownership is back to 1980s levels in Orange County.
Ben Bernanke’s Mortgage-Refi Nation
By Karen Weise on October 09, 2012
Well, that didn’t take long. It’s been less than a month since the Federal Reserve announced plans to buy $40 billion of mortgage-backed securities a month for as long as necessary to spur lending and boost employment. Since then, mortgage interest rates have fallen to the lowest level on record—the average 30-year loan stood at 3.53 percent as of Sept. 28—driving refinance applications to jump to their highest level since 2009, according to the Mortgage Bankers Association.
$40 billion a month for as long as necessary. It still shocks me to read that. It’s the ultimate housing market bazooka, and he pulled the trigger.
Borrowers are refinancing at an annualized rate of 22 percent, according to Lender Processing Services (LPS). At this rate, more than one in five borrowers will refinance over the next year. Borrowers who have at least 20 percent equity in their homes are even more likely to refinance. Among those homeowners, one in three will refinance in the next year if the current pace continues.
Even those who overpaid in the false rally of 2009-2010 will end up getting bailed out by the low interest rates. Apparently, Bernanke intends to keep lenders alive with refinance fees until owner-occupant lending comes back.
Refinancing is normally not an option for borrowers who owe more than their home is worth. But they have been getting into the act this year, thanks to the Obama administration’s Home Affordable Refinance Program, which rewards banks for working with underwater homeowners. Since the start of 2012, there’s been a 65 percent increase in refis for borrowers who owe at least 20 percent more than their homes are worth; HARP now accounts for about a quarter of all refis.
This is where the shadow inventory is going. It’s clear that any declines in shadow inventory are not coming from foreclosures since they are processing them so slowly. The big headlines on shadow inventory reduction are from the can-kicking cures from underwater loan modifications. Many if not most of these will fail.
According to the latest data, 31.8% of HAMP loan modifications have failed since the third quarter of 2009. That’s nearly a third in two and a half years. And HAMP is the more successful program. Other loan modifications fail 46.6% of the time. Loan modifications are clearly not the solution, and they are barely passable as can-kicking.
With rates so low, some borrowers are taking out shorter-term loans that let them pay down their debt quicker.
This is a great solution. Perspective, one of the regular astute observers on this blog, recently completed a cash-in refinance, and if rates move lower and prices move high, he may refinance with a 15-year mortgage. This would greatly accelerate how quickly he builds equity in the property.
Gone are the days people take out cash when they refinance. In almost a quarter of all refinancings in the second quarter of 2012, homeowners ponied up cash to reduce the principal on their loans, according to Freddie Mac (FMCC). A further 59 percent kept their loan balance the same—the most ever on record.
I rejoice the lack of HELOC abuse. It will sadden me greatly as this increases over the next several years.
Lower interest rates free up real monthly cash flow for homeowners. In the second quarter—before the Bernanke-induced drop in rates—the average refinancing cut the homeowner’s interest rate by 28 percent, the biggest reduction in the 27 years since Freddie Mac began tracking the data. That means a homeowner with a $200,000 loan would save about $2,900 in their first year, Freddie Mac says.
For every $100,000 in loan balance, the refinance activities are lowering monthly costs by about $100 per month. This seems small compared to the bonanza from mortgage equity withdrawal, but as I pointed out earlier, this is a sustainable stimulus.
All this refinancing activity is fine for the economy—lower monthly costs could help boost consumer spending–but it’s not Bernanke’s real target. He said (PDF) at a press conference last month: “You get more benefit when people buy homes. … It’s the purchases of new homes that generate the construction activity, the furnishing, all those things that help the economy grow.” Though home sales are starting to rebound slowly, it’s still hard for people with less-than-stellar credit to get mortgages. So for now, while low interest rates may be relieving the consumer debt burden for some, their boost to the overall economy is limited.
As someone who used to work in the construction and development industry (and I’m looking for opportunity to work there again), I am happy to see this dormant sector of our economy come back to life. I would feel better about it if it weren’t’ the result of constant market manipulation by lenders and our government, but I have to live in the world we have, not the one I would prefer to live in.
I don’t think low rates are as desirable as low prices, but they do serve as an adequate substitute. Low rates lower monthly costs and stimulate consumer spending. That is what will ultimately make the economy recover.
$772,000 in mortgage equity withdrawal
The closer a property is the ocean, the more potential it had for extreme mortgage equity withdrawal. Today’s featured Ponzis took full advantage. When GMAC mortgage picked up the property at foreclosure in January of 2010, they sat on it for two and one half years until finally listing it recently. What about this property took them nearly three years to figure out? This is shadow inventory coming to light.
- The property records are unclear on the original purchase price, but I think it was about $450,000. The owners used a $382,000 first mortgage and probably a 20% down payment.
- In early 2000 they took out two private-party loans totaling $159,000.
- On 3/23/2000 they refinanced with a $548,000 first mortgage ostensibly to pay off the private-party loans.
- On 9/11/2002 they obtained a $100,000 HELOC.
- On 10/28/2003 they refinanced with a $668,000 Option ARM.
- On 10/4/2004 they obtained a $250,000 HELOC.
- On 7/2/2007 they refinanced with a $1,154,000 Option ARM with a 1.75% teaser rate.
- Total mortgage equity withdrawal was $772,000.
They didn’t pay on the Option ARM long. They were served notice on 5/26/2009 less than two years after origination. They got to squat for about a year.
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35072 Camino Capistrano, Dana Point, CA 92624 (MLS # S714003)
(all data current as of 6/19/2013)
| Price | $934,900 |
|---|---|
| Beds | 4 |
| Baths | 3 full, 1 half |
| Home size | 3,500 sq ft |
| Lot Size | 6,552 sq ft |
| Days on Market | 42; |
Custom-Built Ocean-View Home Across From The Bluff. Extra Large Bedrooms, Master Suite With Ocean View Balcony, Spiral Stairs To Ocean View Private Roof Top Deck. Large Open Kitchen Family Combo - Butlers Panty, Formal Dining Room, Large Loft Perfect For Office Or Library. Big Backyard With Patio. 3-Car Garage, Central Vacuum, Dual Stage Air Conditioning. Walk To Pines Park and Beach! Vacant , Can close Quickly.
Property Type(s): Single Family, Residential
| Last Updated | 11/14/2012 | Tract | Palisades (PS) |
|---|---|---|---|
| Year Built | 1994 | Community | Capistrano Beach |
| Garage Spaces | 3.0 | County | Orange |
| Total Parking | 6 |
Listing information deemed reliable but not guaranteed. Read full disclaimer.
(view all details for MLS #S714003)
Proprietary OC Housing News home purchase analysis
35072 CAMINO CAPISTRANO Dana Point, CA 92624
$949,900 …….. Asking Price
$169,000 ………. Purchase Price
8/13/1998 ………. Purchase Date
$780,900 ………. Gross Gain (Loss)
($13,520) ………… Commissions and Costs at 8%
============================================
$767,380 ………. Net Gain (Loss)
============================================
462.1% ………. Gross Percent Change
454.1% ………. Net Percent Change
12.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$949,900 …….. Asking Price
$189,980 ………… 20% Down Conventional
3.93% …………. Mortgage Interest Rate
30 ……………… Number of Years
$759,920 …….. Mortgage
$180,313 ………. Income Requirement
$3,597 ………… Monthly Mortgage Payment
$823 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$237 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$4,658 ………. Monthly Cash Outlays
($828) ………. Tax Savings
($1,109) ………. Equity Hidden in Payment
$256 ………….. Lost Income to Down Payment
$257 ………….. Maintenance and Replacement Reserves
============================================
$3,235 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,999 ………… Furnishing and Move In at 1% + $1,500
$10,999 ………… Closing Costs at 1% + $1,500
$7,599 ………… Interest Points
$189,980 ………… Down Payment
============================================
$219,577 ………. Total Cash Costs
$49,500 ………. Emergency Cash Reserves
============================================
$269,077 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."
44 Responses to “Are low rates an adequate substitute for low prices?”
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US households do not delever unless they actually file for bankruptcy
”instead of actual responsible behavior of paying down debt, the primary if not only reason there has been any “deleveraging” at all at the US household level, is because of excess debt which became insurmountable, not because it was being paid down. The result of which is that more and more Americans are simply handing their keys in to the bank and walking away, and also explains why the US banking system is now practicing Foreclosure Stuffing, as the banks know too well, if all the housing inventory which is currently in the default pipeline were unleashed, it would rip off any floor below the US housing “recovery” which is not a recovery at all, but merely a subsidized bounce, as millions of units are held on the banks’ books in hopes that what limited inventory there is gets bid up so high the second housing bubble can be inflated before the first one has even fully burst
http://www.zerohedge.com/news/2012-10-15/us-households-are-not-deleveraing-they-are-simply-defaulting-bulk
The fact that so few are actually paying down their debts demonstrates the pervasiveness of the Ponzi borrowing. Ponzis can’t pay off the debts without more borrowing. If this debt binge were anchored in real incomes, when everyone tightened their belts, they could have paid down the debt. Instead, the belt tightening was forced on people because lenders cut off the Ponzi lending. In that circumstance, only debt discharge leads to deleveraging.
His comments on artificial stabilization and reflation of another bubble are right on. Unfortunately, that’s the direction we are heading in. Bernanke is committed to reflating a bubble to cure the last one. I think the results could be disastrous, but we must react to the market we have, not the market we want.
The fact that so few are actually paying down their debts demonstrates the the consumers cant handle the debt load. The Fed and banks will hold every last house unoccupied even if majority of people will never be able to afford them. Thomas Jefferson warned about this.
The Fed doesn’t give a damn if Americans are too poor to play their game. They let people starve during the depression, they will burn the homes before they let the values go down.
We do not have capitalism or free markets. What we have is creditism and fascism- where the 2B2F private banks and our govt have vested interest to keep the music playing.
What i want to know is how much will people take? Can iphones and cable tv pacify the masses while the banks take their homes, education and freedom away from the land our forefathers built?
The occupy movement was as loud as the protests got, and it was unfocused and ultimately taken over by the political left. The Romans proved that as long as the populace is entertained, they can be exploited by the elites.
ebt and iphone, the modern bread & circus
U.S. families’ debt loads decline to pre-recession levels
By Don Lee, Los Angeles Times
October 15, 2012, 5:00 a.m.
WASHINGTON — After a long period of consumer retrenchment, U.S. families have cut their once-out-of-control debt loads down to pre-recession levels, largely removing one major obstacle to a faster economic recovery.
The amount of home mortgages, credit card debt and most other consumer liabilities now stands on par with 2006 or earlier, according to calculations by Moody’s Analytics. The notable exception is student loans, which have skyrocketed in recent years, with people flooding into schools and college costs soaring.
Overall, households today are paying less than 16% of after-tax income to cover debt payments and lease obligations, the smallest share since 1984, Federal Reserve data show.
Few experts are expecting a big ramp up in people’s spending any time soon: Consumers remain cautious because of what they’ve been through over the last five years and because of uncertainty about what lies ahead.
“It’s sort of a new reality that you have,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “We’re going to try to live within our means because living beyond it didn’t work out.”
A massive number of foreclosures and a new frugality on the part of many households have helped reduce liabilities. Now the long process of shedding debt seems about over, and that alone should benefit the economy.
With less debt weighing them down, consumers are feeling more upbeat today than they have in five years, according to the Thomson Reuters/University of Michigan survey of consumers this month. And that could translate into a little more spending and risk-taking.
Many economists, though, remain wary about the economic outlook.
“…I don’t think low rates are as desirable as low prices…”
Absolutely.
Especially if those low rates are manufactured [by the Fed] , as is currently the case.
Low prices, of course, are of great benefit to cash buyers.
I have often thought that beside the lending cartel, local governments are willing co-conspirators to keep prices high in that artificially high prices generate more tax revenue, particularly property tax.
Can you imagine the impact on property tax revenue if interest rates were to suddenly rise to market levels, and mean prices dropping 20-30%?
Yes, local governments are a big beneficiary of higher prices. As I demonstrated last week, all the appreciation over the last 23 years was entirely due to lower interest rates. This doubled state and municipal operating budgets by artificially doubling prices. Taxing authorities that rely on property taxes will do nothing to inhibit higher prices.
Lower prices aren’t just beneficial to cash buyers, but all buyers as it lowers the actual dollar amount of a standard 20% down. This would increase the number of qualified buyers. But the elites will not allow any type of currency appreciation, that would weaken their position and that’s not about to happen as long as they are in charge.
The 20% down requirement is the biggest barrier caused by artificially high prices. Lower prices would make putting 20% down much less of a barrier. This requirement will be fought hard by lenders and realtors because if it becomes part of the new qualified residential mortgage requirements, it will serve to dampen demand for quite a while.
The industry is fighting QM hard – the 20% down factor and the safe harbor vs. rebutable presumption issue. Keep in mind, that FHA and the GSE loans are exempt from QM. So if QM is implemented as proposed, it keeps the private market a 10% niche market.
The private market won’t remain a niche market even if the FHA and GSEs are exempt. The government doesn’t want to control or insure the entire housing market, so eventually the GSE standards will be too tight, and private lenders will be more aggressive and take their place. When they do this, they will have to keep 5% of the loans on their books to make sure they don’t get too stupid. I think that’s a good feature. It may be the only thing that prevents the next housing bubble because originators will not be able to pass off 100% of the risk to those who might misprice it.
lower rates = higher cost basis
higher rates = lower cost basis
Too bad, but one of the main reasons so many sheeple lose their azz in RE is because they think the money is made when you sell. Reality is… the money is always made when you buy.
That’ll be $500 please
“Are low rates an adequate substitute for low prices?”
I think only if plan to own your home 10 years or more. Probably closer to 15 years. If not, then you might find yourself upside down again when rates increase again. And if you move within 10 years you probably can’t trade up.
This situation only works if:
Put down 20%
Get a 15 year loan
Plan to live more than 10 years
IR is correct in looking at it from an affordability index (montly payment).
The drawback of low rates is substantially larger principal.
I’m dealing with that right now, the larger down payment.
The report echos the industry belief that they can resolve their bad loans through short sales. It won’t work. There are too many committed squatters who won’t participate.
Ratings Agency Forecasts a Stronger Year for Short Sales in 2013
Even though the number of foreclosure filings has risen dramatically in recent months in some parts of the country—specifically in judicial states—the ratings agency DBRS expects total foreclosure filings to show evidence of a steady decline in 2013 when compared to 2012.
This is due to “the record number of servicers that are using short sales as their primary loss mitigation tool to prevent delinquent loans from entering foreclosure,” the agency’s analysts said in a research note issued Monday.
The Office of the Comptroller of the Currency (OCC) found evidence of such a shift as early as 2012’s first quarter. With the release of its Q1 mortgage performance report, the federal regulator noted that the number of home retention actions implemented over the January-to-March timeframe was down 36.7 percent from a year earlier, while the number of short sales increased 19.7 percent.
New short sale actions completed during the first quarter of this year totaled 59,996, according to the OCC’s latest report covering about 60 percent of all first-lien mortgages in the United States. Over the second-quarter period, another 63,403 short sale actions were completed by the 60-percent subject population.
While it will be another two-and-a-half months before the OCC releases its third-quarter mortgage performance data and mitigation numbers, anecdotal evidence from those in the field suggests the increase in short sales is likely to carry forward.
Rudimentary projections based on the quarter-to-quarter increase seen earlier this year would mean another 138,000 completed short sales during the second half of 2012 among the 60-percent first-lien population analyzed by the OCC.
DBRS believes short sales will be an effective loss mitigation tool for curbing the industry’s shadow inventory backlog of unsold REO properties. Short sales are an effective way to get the home sold without having to incur the cost of foreclosure, preparing the home for sale, paying a listing agent, and maintaining the property, therefore lowering loss severity, the agency’s analysts noted.
As a result, DBRS expects short sales to be one of the key loss mitigation techniques used in 2013 with more servicers delegating or automating their acceptance and counter offer process in order to be more responsive to short sale bids on properties.
Recent data shows that 1/3 to 1/2 of loan modifications still fail in the first three years. With nearly 6 million loan modifications completed since 2007, we should see 2 to 3 million more distressed sales than what’s currently reported in shadow inventory.
HOPE NOW: 5.75M Loan Mods Since 2007, Short Sales Up in August
August data from HOPE NOW revealed mortgage servicers gave an estimated 75,968 homeowners permanent loan modifications during the month.
In July, total loan modifications was higher at 82,679.
The August modifications include the Home Affordable Modification Program (HAMP), which totaled 16,509 in August, and proprietary programs or non-government programs, which accounted for the remaining 59,459 mods for the month.
HOPE NOW, which is the voluntary, private sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors, also revealed that since 2007, the industry has seen 5.75 million loan modifications.
“The cumulative efforts of many different parties have made a significant difference in preventing foreclosures where possible,” said Faith Schwartz, HOPE NOW executive director, in a statement. “Without the collaboration of industry, non-profits and our government, we would not have 5.75 million loan modifications for homeowners…”
Of those modifications, about 4.68 million were proprietary loan modifications, while more than 1 million were from HAMP.
From January to August 2012, about 543,705 homeowners have received loan modifications.
Proprietary loan mods that included reduced principal and interest on monthly payments accounted for 82 percent of August’s total, while proprietary mods with reduced principal and interest payments of more than 10 percent accounted for 71 percent of the monthly total.
Short sales continued to help prevent foreclosures, with August seeing nearly 40,000 short sales. In July, there were 36,260 short sales. Since December 2009, short sales numbered 1,013,565.
“The increase of short sales has been significant and, for the first month since reporting on short sales, we estimate a high of 39,559. Short sales provide another tool to avoid the high cost of foreclosure for families, communities and investors,” added Schwartz.
Together, short sales and loan modifications have accounted for 6.77 million non-foreclosure solutions.
HOPE NOW also reported foreclosure sales in August increased 12 percent to 71,149, up from 63,527 in July.
August foreclosure starts were also up, rising 14 percent to 187,941, compared to 164,593 the month before.
Mortgages 60 days or more past due slid down to 2.42 million, falling from 2.47 million the previous month. Delinquency data is based on data from the Mortgage Bankers Association for the second quarter of 2012.
Mod defaults are affected by perceptions about whether prices are rising or falling. Don’t expect past results to be an indicator of future performance. Rising prices will lower defaults and dropping prices will increase defaults.
That will be true to some degree, but the real reason people are defaulting is because they have too much debt. The back-end DTIs these people carry are enormous. I think you put too much faith in these loan mods working out. I think they will continue to fail at abysmal rates — perhaps not as bad as in the past, but still very bad.
Uh oh…..
Strategic defaulters, beware. The feds are coming for you. And they are not happy.
Not the FBI. The Office of the Inspector General at the Federal Housing Finance Agency.
http://www.chicagotribune.com/classified/realestate/foreclosure/sc-cons-0913-strategic-default-20120913,0,4134066.story
“And if you think the mortgage cops won’t find you, think again. The OIG’s investigative office alone has a 45-person staff, “all experienced people with 15 to 20 years as investigators and prosecutors,” according to Peter Emerzian, deputy inspector general in the Office of Investigations.
They work out of 11 field offices, soon to be 14, nationwide, and they’re looking for you.”
Is this for real? Its seems like it took them years to get organized.
do the math. how many defaulters and how many inspectors? the defaults have “abusers” that are within the law and those outside the law. have fun sorting the illegal ones from the legal abusers. possible a computer programs that show the same ssn on multiple defaults loan to raise to the top of the list to investigate or reward for turning them in — bankers will not like the latter one especially if the loan officer has a high percentage of defaults. It might be redlining people who handler loans in high risk area. Possible a plan the allows high defaults in improvised area and low default rates in higher income areas.
There was a retraction to that article printed shortly thereafter. The heavy-handedness of the scare tactics did not sit well with a lot of people.
Scare tactics worked for support for the 4 trillion dollar bailout QE1, QE2 and QE3, so why not try scare tactics for getting people to paying back the RE loans? It not going to work against the banksters, because they know the laws will apply only to those that don’t make the right contributions.
You know they are getting desperate to get people to pay their mortgages when they resort to such obvious scare tactics.
National Housing Recovery? Not Everybody’s Seeing It
Though it’s now commonplace to see media references to housing being in recovery mode – with sales, new construction and prices all topping last year’s levels – a closer look at recent real estate statistics yields a more nuanced conclusion.
Yes, the majority of major local real estate markets are seeing price appreciation, and yes, inventories of houses for sale generally are much lower than they were a year ago. But there are still substantial numbers of areas where the recovery is minimal at best and where prices are still deflating, not improving. They deserve a little attention.
Consider this: Although 77 of the 146 markets covered in the latest monthly survey of multiple listing services by Realtor.com showed gains in median list prices compared with September 2011, 40 other areas showed declines and 29 were flat for the year. Put another way, just under half of major market areas across the country did not see price gains.
Most of these 69 cities and metropolitan areas are in the Northeast, Mid-Atlantic Midwest, with a few in the South. Most of them are struggling with legacy problems of job outflows and local economies that are out of sync with global demands. They include places like Charleston, West Virginia (median list prices down by 11 percent year over year), Peoria, Illinois (-10.4 percent), Trenton, New Jersey, and Milwaukee, Wisconsin (both -5.7 percent), and Jersey City, New Jersey (-4.5 percent). But they also include some of the country’s largest cities such as Chicago, where list prices are down 5 percent, and Philadelphia and its Pennsylvania and New Jersey suburbs, down by 4.8 percent. Among the 29 metro areas that have seen no movement in median list prices during the past year: New Orleans; Hartford, Connecticut; and Syracuse, New York.
Big news day today…
Changes to MID seen as increasingly likely
SAN FRANCISCO — The burgeoning federal debt makes it unlikely that the mortgage interest tax deduction will survive in its present form, but any proposed changes to the tax break for homeowners will likely spark a fierce debate over the fundamentals of the U.S. housing market, the value of homeonwership, and consumer behavior.
That’s according to panelists at a housing forum hosted Friday by real estate search and valuation company Zillow Inc. and the University of Southern California’s Lusk Center for Real Estate.
“I think its entirely likely that something big is going to happen (with the MID) starting next year with either administration,” said Jason Gold, director and senior fellow at the Washington, D.C.-based Progressive Policy Institute, an independent think tank.
Some members of Congress have proposed eliminating or changing the mortgage interest deduction as one way to help address the nation’s $15 trillion debt and a $1.1 trillion federal budget deficit.
At the end of this year, a series of tax increases and spending cuts to address that deficit are scheduled to go into effect automatically, unless Congress acts to prevent or alter them. Revamping the mortgage interest deduction is one of the solutions proposed to head off that “fiscal cliff” scenario.
Boy and it’s relevant to today’s article too. Pozni borrowers hardest hit.
I say phase it out. It never achieved it’s goal, so phase it out. Besides, I don’t like to give homeowners a break (I’m one of them) and not renters. Renters and owners should be taxed the same.
I’ve supported a gradual phase-out, even as I am a huge beneficiary of the MID. However, now that I’ll have a 15Y 3% mortgage within a couple weeks, I’m more open to a jarring elimination! You would think any change lowering the MID’s benefits would hurt prices in high-end areas…
Yes, that 15-year mortgage will change your point of view. In a few years, your interest will be so small you will not get much benefit to the deduction — unless you make a big move up.
Would you still move up to a $1M house if you couldn’t deduct a huge portion of the mortgage debt? (assuming it’s still a $1M home and prices don’t crater).
(assuming it’s still a $1M home and prices don’t crater).
If this passes do you think the $1M to $2M market is trouble? Do you think they would also lower the conforming limits on GSE and FHA loans too?
One million should stretch further if MID is eliminated. So, in that case, I would welcome its elimination and it would not affect my plans greatly.
Its elimination will affect most higher-earners purchasing decisions, but not foreign cash buyers (however many there are?).
The FHA limit of $729,759 is extended through 2013. The GSE conforming loan limit and high balance conforming loan limits will be announced soon (Nov?).
“If this passes do you think the $1M to $2M market is trouble?”
The $800,000 to $1,500,000 market would be most impacted. People in those price ranges are borrowing more than $500,000 and in many cases more than $1,000,000. The cost of money to those borrowers goes up considerably if they don’t get a write off on the debt. Any increase in borrowing costs is going to negatively impact prices.
“Do you think they would also lower the conforming limits on GSE and FHA loans too?”
Not until they believe housing has stabilized. At some point, they will want to reduce the footprint of the government, but they need to know private money will flow in its place.
Good news.
I am for anything that keeps the governments paws out of the housing markets.
The MID is just one of many of it’s fingers in a giant pie.
If they cut all subsidy, we would have a nation of cheap housing and owning property outright would be possible for many.
IR states: “Low rates lower monthly costs and stimulate consumer spending. That is what will ultimately make the economy recover.”
This is fallacy. IR would not expect himself to improve his financial standing (neither balance sheet nor income statement) by going on a Nordstrom spending spree. IR, why do you expect it to be different for other individuals comprising the USA?
An entity must overproduce and underconsume, thus saving, in order to grow its economy. This entity can be an individual, a company, a nation. Living below your means, sacrificing current consumption for future growth, etc. Savings are one of the two essential ingredients of job creation.
0% fed funds and QE is the death knell of an economy. We are simultaneously reflating the housing bubble and inflating the bond bubble. Does this sound like doom? Good. Because I am sufficiently emphasizing and accurately explaining the future result of current policy.
How An Economy Grows and Why It Doesn’t:
http://www.youtube.com/watch?v=bFxvy9XyUtg
In addition, credit markets operate as a pendulum. Monetizing debt (printing money) to artificially suppress interest rates HAS FUTURE CONSEQUENCES on interest rates.
The further they swing low, so must they swing high, to create balance or equilibrium.
At what interest rate does debt service consume 100% of US tax revenue?
What consequences does this have on our subsidies, economy, and currency?
Historically speaking, does runaway inflation and economic prosperity go hand in hand?
This is what concerns me the most about Bernanke’s policies. Eventually, interest rates have to go back up, but in all likelihood, Bernanke will hold interest rates too low for too long and create a lot of inflation. This will hurt those whose incomes do not keep pace — which will be a lot of people.
Federal Reserve flirting with higher inflation
(Reuters) – Will the U.S. Federal Reserve look the other way if inflation overruns its target?
Risking the wrath of politicians and the central bank’s hard-won reputation for keeping prices stable, three top Fed officials are touting plans for boosting employment that explicitly allow for inflation to run above the Fed’s 2.0-percent goal.
Investors are wondering just how high – and for how long – the Fed may allow inflation to rise to encourage borrowing, investment and hiring. In theory, more people working means higher output, which should narrow the gap between what American workers are currently producing and their potential.
“The Fed’s body language clearly says they think the output gap is huge and that they’re willing to take risks on inflation,” said Bluford Putnam, chief economist at futures exchange operator CME Group.
The Fed reduced official interest rates to near zero almost four years ago and has since then bought some $2.3 trillion in securities to boost the economy, taking the central bank deeper into uncharted policy territory.
With the U.S. economy still recovering only slowly, last month the Fed said it would keep buying bonds until the labor market outlook improves “substantially,” a move that many investors expect will boost inflation, currently running below the 2.0 percent target.
Since the announcement, the central bank’s top policymakers have been busy drawing their lines in the sand.
Minneapolis Fed President Narayana Kocherlakota says he would tolerate inflation of 2.25 percent, and John Williams of the San Francisco Fed says he’s OK with 2.5 percent. The Chicago Fed’s Charles Evans, considered one of the central bank’s most pro-growth “doves,” says he’d hold fast to low rates as long as the outlook for inflation stayed below 3 percent.
Volatility in bond markets suggests investors are adjusting their bets as to the true intentions of Fed Chairman Ben Bernanke and his core of policymakers, and whether they will be able to control inflation when the time comes.
“I wouldn’t be surprised if they let it run to 3.0 percent for a quarter or two and still rationalize that by saying they still haven’t seen unemployment go down like they want it to,” said Mike Knebel, portfolio manager specializing in fixed income at Ferguson Wellman Capital Management in Portland, Oregon.
“Three percent still seems to be a fairly reasonable number in most people’s minds – at least those of us who are old enough to remember when six percent was considered the norm,” he said.
You make very good points.
My point on the reduced cost of ownership is an income statement effect. If someone was making ends meet prior to a refinance, then they suddenly have an extra $500 per month coming in, they can save or spend it. Either way, it benefits the economy. Most will chose to spend it which creates demand for goods and services. Some will chose to save it which creates investment capital for the producers of goods and services to create more products. Anything that reduces the cost of living for workers will have a sustainable positive impact on the economy.
IR your are correct for the increase disposable income with lower interest rates. However, it cut two ways with lower interest income for the retired.
HELOC abuser in CA can give more disposable income. For those that did a refinance in 2006 or before the crash and when into negative equality, they essentially have more income (cash) by squatting and waiting for the non-judicial foreclosure. Thus having more walk away money (non-taxed income) than a real sale or by working. Truly part of the new service economy.
Yes, for each party the benefits from lower interest rates, there is a counter-party not obtaining the returns they were in the past.
Took me a while, but I see the plan now. It looks like policy is directed towards new home sales. Builder confidence is way up, undoubtedly due to the fact that inventory is way, way down. So new homes have fewer distressed homes to compete for sales. With higher prices for used homes, the price points of new homes starts to look more attractive to qualified buyers. Of course, new homes result in more net consumption than used homes as IR pointed out.
I don’t know about this though, are there really enough qualified buyers to actually move the economy forward? It doesn’t seem like it given the total number of transactions, but maybe I’m off on that point. In theory, if they let those who defaulted back in to the market early and continue to make new homes look more competitive maybe that might work.
This could also help address the bank solvency issue. If the banks can get higher prices then it will minimize their losses too.
This seems like needle threading with that aforementioned bazooka and I think it also assumes that the banks aren’t totally evil…which they are.