<p>Just cutting interests rates isn’t going to help present Florida mortgagors or new buyers much. On top of everything else, Florida’s property insurance market is a mess. It is common for annual homeowners insurance premiums to exceed real estate taxes. Folks with a $200,000 home might easily have insurance premiums of $5,000-10,000. Too the private insurance companies have basically turned the faucet off writing property insurance and maybe a million homes in Florida are insured through the state operated Citizens Insurance Company and that company’s financial integrity is suspect. If a big hurricance hit Florida, taxpayers could be left holding the bag for a broke Citizens Insurance that wouldn’t be able to pay all its claims.</p>
<p>So savings of 3000 a year or whatever is not going to make a dent in the housing market?</p>
<p>What are the rents of homes that are worth 200,000?</p>
<p>Why isn’t there more competition in the property insurance market?</p>
<p>Would tax cuts make a difference?</p>
<p>“If you want you really help housing then lower mortgage rates to homeowners and homebuyers…instead of helping financial institutions…”</p>
<p>The problem is with the banks and financial institutions scrambling to try and recover from the egg they laid in the real estate/CDO bubble. Basically, banks have huge cracks in their bellies from being deregulated in the late 90’s and getting involved in all kinds of risky ventures, bad mortgages (used to fuel CDO’s, among other things), all kinds of risky proprietary trading, you name it, they also went on a massive gobbling spree, buying banks, so there are a lot less banks out there and a few mega banks like BOA, Wells Fargo and the like concentrating the lending pool into a few institutions. As a result, they don’t want to lend; they basically borrow money at 0% interest and mortgage loan rates are at all time lows, but it still won’t stimulate demand because banks are reluctant to lend. This is true of commercial lending, small businesses that want to expand and perhaps hire people have a hard time getting lending.</p>
<p>Banks basically are afraid of getting burned, the whole real estate bubble has crippled them and will for a while. They are afraid to lend because even with a 20% down payment, they are afraid that house values will continue to decline in most areas (among other things, they know there is a glut of houses in foreclosure or near foreclosure out there, plus houses simply trying to be sold, that will cause prices to decline). </p>
<p>The other thing is, with unemployment probably at well above the published rate, and many people who are working losing ground, it may be hard for people to afford a home. Latest numbers show that the median income level in the US has fallen to 1996 levels in real terms, and that doesn’t bode well for mortgages.</p>
<p>The reason for the empty cities depends. In the case of Detroit, it reflects the fact that the city has died, literally, with the decline of the auto industry and flight from the decaying city, there is no reason to live there. With places like Las Vegas, Orlando and the like, the problem was they overbuilt during the housing bubble, places like Vegas and so forth were supposed to be the place that everyone wanted to live in, they overbuilt, big time…the problem is the local economies in those places didn’t have the jobs or potential jobs to support the housing, they were built on speculation that IMO wasn’t real. Where I live in northern NJ, there was a building boom, but while housing prices have declined off the peaks, we don’t have an overglut in most places, because the areas economy is still large enough to support what we have (there are places that have similar problems to vegas and such in the region, though, but most of them tend to be in the exurb region, not in the core region). The problem is the cart went before the horse, normally housing is built in reaction to the local economy expanding, demand for housing driven by employment and jobs in the region; with the housing bubble, they built houses on spec, believing everyone wanted to move to vegas and Orlando and so forth, but the big migration didn’t happen because the economies there expanded, but way, way less then the growth in housing…the other thing is in places like vegas many of the people who did buy homes did so without the economic resources to afford them (a lot of the housing that was built was upscale, which in a place like Vegas, where jobs don’t pay all that well, doesn’t make sense…)…they were offered insane mortgages that allowed them to buy upscale homes, then when the bubble broke, they ended up losing their houses. When house buying is buoyed, not by economic and income growth but by speculation that house prices will continue to rise, this is what happens.</p>
<p>“If you allow homeowners who are underwater to refinance with lower rates…you will have fewer homes on the market.”</p>
<p>The rate isn’t problem - the fact that the principle owed is way more than the house is worth is the problem.</p>
<p>People who are underwater now are not the same people who, at the beginning of the housing crash had sub prime loans with teaser rates, etc. They were foreclosed on years ago. Now it’s people who lost their jobs that is causing the problem. Their int. rate is a minor thing. They can’t even move for a job because they can’t sell their homes without taking a huge loss and they can’t pay their mtg. Then there are the people who are just willing to walk away because they bought their home for $x but now it is only worth $y.</p>
<p>Lizard-
Yeah, insurers are basically refusing to do homeowners policies in places like Florida or other areas that can be hit by natural disasters routinely, same with tornado Alley. For whatever reasons, the weather has gone unstable, and insurers are seeing record losses in some areas, so have pulled out. It is kind of like what happened in NJ with auto insurance, the state set up an assigned risk pool for drivers who couldn’t get insurance directly from insurance companies,and more and more people ended up in there, despite being good drivers, as companies left the state and when you have that kind of situation, the costs shoot up. </p>
<p>This is true even with flood insurance. I live in an area that is not a flood plain, there are no rivers or whatever around here that can flood, no dams on a river that can break, etc…yet federal flood insurance costs as much as my main homeowners policy, despite the fact that on a risk model there is pretty close to zero risk of it happening to my house, because the overall risk is based on the pool.</p>
<p>I agree, there is little the federal government is going to be able to do to spur the housing market, they can refinance mortgages, lower rates, etc, and it isn’t going to happen. The problem is, when the economy loses 10 million jobs, whether through layoffs or sending jobs overseas, there just isn’t going to be the demand for housing, to buy a house people need to have a job to pay for it, period. This also is why the concentration of wealth and income figures are troubling, when income is spread down among the middle and working classes, it is used to fuel housing. When income and wealth is concentrated in a small group, hypothetically the infamous 1%, they are a small number of people, whereas if those same dollars are down in the lower brackets, it will spur house buying and such…in the end, the only solution to housing is having an economy that supports home ownership.</p>
<p>One of the big questions with housing is going to be if tax proposals being thrown around, like Cain’s 9-9-9, flat tax proposals, etc, get implemented, almost all of them are talking about getting rid of the deduction for interest on primary home mortgages, what will happen to housing then, since de facto it makes home ownership roughly 20% more expensive on properties with a mortgage?</p>
<p>musicprnt, I agree. Interestingly, Florida is going to have a big push in its next legislative session beginning January to approve Vegas style casinos in Miami. Not sure copying Vegas is going to help depressed Miami that much, but with things in Florida the way they are, casinos are likely to be approved after decades of casino interests trying to get big casinos in Florida. Like pouring gasoline onto a fire!</p>
<p>dstark, My Florida hometown is in a depressed real estate. $200,000 homes might rent for $800-1100/mo. </p>
<p>Many insurance companies pulled out of Florida recent years or drastically cut back their number of policyholders saying they can’t get actuarily sound rates (or maybe rates that Floridians can afford!) approved by state regulatory agency. Politics are involved. If the state operated Citizens Ins. Co. charged actuarily sound premiums the annual rates might jump from $5,000-10,000 to $10,000-20,000! It’s a mess.</p>
<p>The principle owed will not be way more than the house if you change the financing of the house…</p>
<p>Financing is a big factor in the price of the homes…</p>
<p>If homebuyers have to have 20 percent down payments and perfect credit to buy homes millions of people are eliminated from the real estate market…and this lowers demand and lowers home prices.</p>
<p>If homebuyers can put 3% down with imperfect credit and interest rates are lower…you have more demand…home prices will…go down
less…stabilize, or actually go up…</p>
<p>This depends on how aggressive the financing is…</p>
<p>Home prices are cheaper now…home prices throughout the country are not so out of line with incomes…but people can’t get loans…Or can’t get their mortgages refinanced…</p>
<p>And if the housing market is stabilized …financial institutions will be in better shape…</p>
<p>We are not building enough homes anymore so this will help.</p>
<p>Local areas will vary. I don’t think Stockton, Cal will come back…homes that were built in areas where people don’t really want to live are not coming back…</p>
<p>But even some of those areas can be stabilized…</p>
<p>Unemployment is an issue…</p>
<p>You are not going to fix every area…but things would be better…overall…</p>
<p>Lizard…those 200,000 homes are probably not worth 200,000 with those kind of rents…</p>
<p>Why are home values still 200,000?</p>
<p>dstark, you’re right. I’m still thinking of the homes renting for $800-1000 as being worth the $200,000 from a few years back, when today they only have a market value of say $90,000-100,000.</p>
<p>Lizard…ok…:)</p>
<p>You buy one of these homes with a mortgage of 90,000…and your mortgage payments are a little more than 300 a month (4% rate)…and you add insurance if it is possible to get…and prop tax…and upkeep…and the cost of homeownership isn’t much more than renting…if it is more…which is why…cutting rates helps…</p>
<p>That extra 150 a month or whatever it is by cutting rates helps…</p>
<p>dstark-</p>
<p>Your comments are not illogical, the problem the mortgage market is complex. For one thing, the mortgage market over the past 40 years or so has undergone a major change. Once upon a time, as in the film “It’s a wonderful life”, the local savings bank would issue you a mortgage based on deposits in the bank, and the interest and principal you paid back would in turn be there, not just for profits, but to make other loans, etc…</p>
<p>That model has limited truth today. For one thing, when banks lend money, they generally are not using their own funds, they borrow money from the fed (the discount rate) and lend it out at a spread from the discount rate (thus these days banks borrow at 0% from the fed, and lend it out at 4.x% roughly). This is not a bad thing, it prob means they can do more loans then they otherwise would.</p>
<p>The other change is part of the problem. For years now, most mortgages are not held by the bank originating the loan, they sell them off in the secondary market to other banks and financial institutions. So basically, the bank becomes the agent, then collects fees for collecting the payments on the mortgage, but their risk on the mortgage itself is gone.
It is one of the reasons banks were so willing to write balloon and other warped mortgages, they had pretty much zero risk as long as someone was willing to buy them. </p>
<p>The biggest buyer of home mortgages was fannie mae and freddie mac, government corporations.In fact, they large majority of mortgages end up getting bought by these agencies, and have for a long time. It is why mortgages have a max value for a compliant mortgage principal, that is from fannie mae and so forth. </p>
<p>The other big buyer turned out to be a big culprit, and that is mortgages being bought in the secondary market by financial firms, who packaged them into something called a CDO (Collateralized debt obligation), they would take thousands of mortgages and put slices of each into one of these instruments, whose value would be based on the underlying mortgage slices paying interest. These became incredibly popular, their values soared with hedge funds and such looking for big payoffs, and as a result demand to create more became larger and larger. Demand for these led to financial firms in effect telling banks to write as many mortgages as possible, in a sense they created a supply of mortgages to be able to make more and more CDO’s…and they weren’t worried about the standards on those mortgages, a lot of the crap mortgages that exploded were written with the idea that they could be sold to these financial firms, so the bank had no real risk…you get the drift. Basically, in the ‘roaring 00’s’ banks could write mortgages, no matter how crappy, and they could sell them off…kind of like buying a junker car, putting a coat of pain on it, and being assured that someone would buy it as new:). Among the other delusions, those writing and selling the instruments went by the assumption that the risk on these mortgages was the same as traditional 30 year fixed rate mortgages, and of course it wasn’t, there was literally no way to calculate how good these mortgages were, since there was no data on them (the price of financial instruments is based in large part on risk; a 30 year mortgage with 20% down has a lower interest rate then a 4% down variable rate because the risk is lower on the former). </p>
<p>In any event, part of the problem is that fannie mae and freddie mac are not buying mortgages the way they once did, and the CDO market has pretty much collapsed for new issues, so it means that when writing mortgages, a lot of time the bank is faced with actually holding the mortgage…and they are that much more reluctant to give loans because of that. Not all banks did this, the regional banks, s/l’s, credit unions were more traditional; the problem is, their lending pool is relatively small compared to the big banks, so their impact is pretty small, and the big banks that now dominate banking because of concentration all have their problems.</p>
<p>In theory, lessening lending requirements would stimulate the market, but the problem is that that is a lot more risky. One of the reasons for the 20% down is not, as some assume, to show that the person is of good character or show ‘thrift’ (since someone could borrow the 20% down payment and be otherwise a slug), it is to protect the bank. With 20% principal based on current value, if the house value declines the homeowner takes the hit, if for example on a 400,000 house the person put down 80,000 dollars, that 80k amount is a buffer for the bank…and if the value of the house declines, 20% (in prior years, anyway) was a big swing that most houses were not likely to do. If I lend on that 400k house at 3%, or 12k down, there would be little buffer if house prices moved down…</p>
<p>Would that stimulate demand for housing? maybe, but the other problem is with a 97% mortgage the mortgage payments would be much higher then if they put 20% down, and given the economic situation, while a 3% DP is easier to swing then a 20, what about the payments? In the bubble years, people did 3% down and also got a really low interest rate they could afford for let’s say a year, but when the interest rate hit real levels they couldn’t afford the payments (in a rapidly rising market, the thought was the value of the house would go up so much, that the owner would now have 20% or more in equity, and could arrange a real mortgage at a rate they could afford).</p>
<p>We may be able to stabilize housing to a certain extent, help those underwater to refinance, etc, but that is a band aid. For housing to rise again, the economy has to create jobs that allow people to buy homes, all the gimmicks in the world aren’t going to do that, house prices are based in the end on supply and demand, and demand is driven by economics of the area, otherwise you have a bubble, not real growth.</p>
<p>dstark, I’ll buy your scenario for buying instead of renting. Too, in our area a qualified buyer can get say a USDA loan, do prepays for insurance, taxes etc. with next to nothing out of pocket up front. Gotta have a job or income though!</p>
<p>“The principle owed will not be way more than the house if you change the financing of the house…”</p>
<p>???</p>
<p>if I borrow $x I still owe $x regardless of my interest rate. All an interest rate change does is change your monthly mortgage payment - you still owe the same amount of money you borrowed - (minus any money you’ve paid towards your principle in your monthly mortgage.) An interest rate change only changes the amount of interest you are paying on the amount of money you borrowed. </p>
<p>Refinancing to a lower int. rate is a great tool if you want to lower your monthly payment but it does nothing to change the principle amount one owes. If you are underwater you will still be underwater, regardless of interest rate. </p>
<p>Interest rates are now at historic lows and homes are still not selling.</p>
<p>“If homebuyers can put 3% down with imperfect credit and interest rates are lower…you have more demand…home prices will…go down
less…stabilize, or actually go up…”</p>
<p>This is how we got into this mess in the first place and no bank wants to go down that road again because this time there is no one to buy the loans from them. </p>
<p>I suggest your read All The Devils are Here by Bethany McLean and Joe Nocera.</p>
<p>We do not have to go down that road again…</p>
<p>There are people that can afford to stay in their homes if rates are cut…
There are more buyers if the qualifications are less…</p>
<p>We don’t have to allow liar loans…and pick a payment loans… making up incomes… Synthetic cdos and cds…</p>
<p>We do not have to go back to the inflated days of a few years ago…</p>
<p>Emilybee…lowering the interest rate does not change the principle of the loan…it raises the value of the asset the loan is based on…</p>
<p>Emilybee…rates are down…but people can’t borrow…so it doesn’t help…</p>
<p>Looks like an excellent book.</p>
<p>Lizard…I am not telling you to buy…:).
And yes…people need jobs.</p>
<p>Musicprnt, I understand what you are saying.</p>
<p>I know it is complicated.
The lenders …well…that is why…
I mentioned that banks would have to have access to cheap long term money to participate. Or the government is going to have to do it. </p>
<p>With the rates that government can borrow…the government can afford low cost mortgages.</p>
<p>Also…there may be a market in the private sector for these loans. So the private sector may still be able to sell these loans. Of course, the loans will have to be government guaranteed. </p>
<p>There are losers in this…the holders of the bonds…when they are repaid…are going to have to reinvest at lower interest rates…</p>
<p>But it comes down to a couple of things…financial institutions will be helped because their assets will increase in value…</p>
<p>But more importantly…the economy will do better…the mulitiplier effect is higher among homeowners than the investors of the bonds. Homeowners are more likely to spend the money saved. The multiplier effect won’t be too high…but it will be higher…</p>
<p>And supply of homes on the market will be lower.</p>
<p>If we have 5 million homes too much in this country because of the costs of home ownership and we are not building enough homes by 500,000 a year…it is going to take 10 years to clear this out.</p>
<p>If we can cut the 5 million figure to 4 million or 3 million…we can cut the time for things to recover…</p>
<p>dstark-
Lowering the rate on a loan the homeowner already has won’t raise the value of the asset (the house price). Interest rates are at historic lows and house prices are not going up, because even with low rates and lowered house prices, people either can’t buy a house or are afraid to, and likewise banks are afraid to lend. As I noted in my post about, the 20% down is designed to protect the lender, the problem with the 3% rate is with house prices still going down, they are likely to end up with an underwater mortgage. </p>
<p>Your scenario might work if there was pent up demand out there to buy houses, that people were dying to buy a house but couldn’t get a mortgage to do so, and I think that simply isn’t true. While banks refusing to lend might be part of the problem, now the real problem is despite low rates and house prices down significantly, there isn’t the economic activity to justify it. If we had low unemployment and people’s wages were rising, instead of deflating, and the problem was banks wouldn’t lend because many people don’t have enough for a dp, that would work great, but the reality is that besides banks not wanting to lend, people simply have seen their personal economics plunder to where they couldn’t afford to have a house. Actually, in many places the housing bubble was lending to people who shouldn’t have been able to afford the house, to get people into houses (and originate mortgages) people with working class wages were able to buy houses they otherwise couldn’t afford with balloon mortgages, that initially had very low interest rates, so their mortgage payment might be 1k a month hypothetically, which with their income they could swing. However, the mortgage interest was scheduled to go up to X percent in a year or so, and the mortgage could go to 2000 or more a month…which they couldn’t afford. The reality was in many places, like Orlando and Vegas and such, that the wages in such places were not able to allow homeownership and that gimmick mortgages allowed them to buy, which wasn’t good as we can see… the real issue is with or without a 20% DP, the mortgage payments on the house is beyond a lot of people, hence depressed house prices. The only reason house prices haven’t fallen further in many markets is the people that currently own the homes are hanging on (or haven’t been foreclosed), housing is supply/demand curve, and right now prices are based in supply being at a certain level of houses for sale…it is an equilibrium point. The steadiness of house prices in many markets is because of supply not increasing, rather then demand being there to buy IMO.</p>
<p>Musicprnt, I disagree with your last post. Had to happen sometime.</p>
<p>There is pent up demand. Is it going to absorb all the inventory? No.</p>
<p>Well…if you cut rates to 2 percent…it might.</p>
<p>I can buy a million dollar home with interest costs of 20,000 a year and the same place rents for 50,000… Hmmmmmmmm</p>
<p>The downpayment required should be changed as circumstances change. You have a market that is accelerating at a very fast clip…debt<br>
is increasing…increase the down payments required…like the CME occasionally does.</p>
<p>If it s as cheap to rent as to buy…lower down payment requirements…</p>
<p>If the fed was a little more active in doing this several years ago…the economic mess would be smaller…</p>
<p>Edit: I want to decrease supply too…I have already seen the lowering of
interest rates work to keep people in their homes. I didn’t make this crap up. I’m not that creative. :)</p>
<p>Edit2…home prices are higher today than they would be if interest rates were higher.</p>
<p>dstark-
Banks do have access to cheap lending, they are borrowing money at 0%, so it isn’t access to low cost borrowing that is doing this.</p>
<p>I understand about the multiplier effect with housing, but the problem is that housing as a multiplier only works when the housing market itself is healthy…what you are saying, if I read you right, is if we stimulate housing that will improve the economy, which in turn will drive further buying, and so forth. It isn’t an illogical argument, the problem is with the housing market so messed up, the amount of stimulous needed to get housing to where it will stimulate the macro economy is so large it isn’t likely to work. The other thing is housing is often oversold as a stimulous. Yes, if you own a home, the bank makes money, the guy who cleans out the drain does, the painter, the utility company, etc, the town collects property taxes that in turn stimulates demand, etc…</p>
<p>However, people also are overselling what housing can do, and they are using figures that are dubious to prove it. They basically use figures from the housing bubble period, that shows how housing helped drive the economy (and it did…). The problem is the housing bubble was make believe, and its stimulous to the economy was like comparing drinking a bottle of coke vs eating a piece of fruit, nutrtionally…during the bubble, housing was artificially inflated, and this stimulated the economy through people ‘cashing in’ on their house value, taking out second mortgages, refinancing and taking out cash from the rapidly growing equity, and the like…it created the illusion that housing was stimulating the economy, but what was driving the economy was borrowing based on the speculation that house prices would keep soaring. The GDP didn’t claim because Bob and Suzy Q hired Irv the plumber and so forth, it soared because they borrowed money against their house’s equity, to buy a second house, to buy a fancy car, to expand their kitchen (which is partially real stimulous, of course), but it was based on borrowing on an asset that was way overvalued…and even assuming people start buying houses, they won’t have the equity to do this kind of spending, if they could even get as loan…</p>