. . .
K “We are back in the 2005 – 2007 housing bubble.”
J “We are careening toward the 2008 bubble burst.”
. . .
K “The current nearly zero interest rates are a sign of a severely broken economy. The time value of money should not be zero.”
J “An irreparably broken economy. They may drive them negative. That should be inconceivable and anathema in a market economy. Free money is not free.”
. . .
K “Last year it was $49.99 and further reduced with the $10 off coupon for my birthday. This year it was $59.99 and only reduced with the new $5 off coupon for my birthday. $39.99 to $54.99 in one year.”
. . .
J “$7.98 last month to $9.98 this week. And because of limited supply, I had to drive across city to two stores to find what I needed.”
K “The cost of the sticks to build a house has gone through the roof. The cost of roofing materials has gone through the roof.”
. . .
K “So many folks are skipping their mortgage payments and using the money and the enhanced and very temporary government financial assistance to buy vehicles and other personal property on credit they may not be able to afford in the coming year.”
J “Skip one month, look around and discover no immediate consequences. Skip a second month, look around and discover no immediate consequences. Skip a third month, look around and discover no immediate consequences. Then it becomes habit. Each month they get further and further and further in the hole. And they forget that when you are in a hole, quit digging.”
. . .
K “The state foreclosure moratoriums have largely expired yet the federal foreclosure moratoriums are still in place. The surprise in the market is that the title companies are so busy refinancing loans they cannot get around to handling foreclosures.”
J “Many present refinancings are future foreclosures in wait. When you are in a hole, I say, quit digging.”
. . .
K “Debt may not be repaid but it is always paid.”
J “Anything that cannot go on forever will not go on forever.”
. . .
K “Remember when the Queen of England asked some e-con-omists at the LSE why no one had predicted the credit crisis. She asked the right question to the wrong gang. What was coming was clear as gin in 2005 and then unfolded predictably over the next few years.”
J “Do you have her number?”
. . .
[See the e-commentary at “Housing Again (October 8, 2007)” that discusses the anatomy of a house, “America the Bankrupt: Economics 210 in the Land of the Freeway and the Home of the Wave (January 17, 2005)” discussing the looming “Hyperdive“ decline in the economy, “When the Bubbles Burst (December 4, 2006)” discussing the macroeconomic and microeconomic consequences of the housing market collapse, and “The Dow Jones (the Murdoch ?) Hits 14 K In A Hollow Economy (July 23, 2007)“ discussing the coming decline in the stock market that can only be delayed not avoided.]
Bumper stickers of the week:
“History does not repeat itself, but it rhymes.” Mark Twain?
Housing Again (October 8, 2007)
A house is a bundle of 1) sticks, 2) dirt, and 3) money/interest obligation. The Truth In Lending Act requires the lender to provide basic information about the terms of a loan. A $100,000 house subject to a 30 year mortgage at 10 percent requires the borrower to pay a total of over $316,000 during the life of the loan. Thus, more than 2/3rds of the money ($216,000) pays for the money; less than 1/3rd ($100,000) pays for the sticks and the dirt.
When interest rate drops to 5 percent, the borrower pays a total of over $192,000 during the life of the 30 year loan. Thus, less than 1/2 of the money ($92,000) pays for the money; more than 1/2 ($100,000) pays for the sticks and the dirt.
Reducing the interest rate reduces the total purchase price of the sticks, dirt and money/interest obligation needed to acquire the house. When Greenspan reduced the Federal Funds Rates in 2001 and mortgage interest rates dropped, the price of the money/interest obligation dropped correspondingly. Those who had the sticks and the dirt at the time were in the money. Others were able to acquire a house (sticks, dirt, and money/interest obligation), for at least a few years. Those who obtained a house in the early days of the run-up with a fixed rate mortgage of 5 to 6 percent have a “bird’s nest on the ground” if they keep a cool head.
The interest rate in a typical adjustable rate mortgage (ARM) adjusts upward in the next months and years even if other interest rates do not rise. When the interest rate rises to 15 percent, the borrower pays a total of over $455,198 during the life of the 30 year loan. Thus, almost 4/5ths of the money ($355,198) pays for the money; little more than 1/5th ($100,000) pays for the sticks and the dirt.
Many of the ARMs are more difficult to refinance because they include “pre-payment penalties” if the notes are paid early. A borrower could pay off all but the last month’s obligation and then pay off the last month according to the terms of the note. Some judges might allow it; some would not. The pre-payment penalty provisions should be stricken because they are 1) against public policy, 2) unconscionable, 3) fraudulently obtained, 4) buried in adhesion contracts, and/or 5) _________. There will still be an economic impact because so many investors were fooled and/or fooled themselves into believing that they would receive the substantial returns from the ARMs and other bogus instruments.
The “wealth effect” now has been supplanted by the “poverty effect.” The “multiplier effect” is being supplanted by the “divider effect.” And there is not a whole lot that the Fed can do to improve our lot.
However, Al Greenspan recently announced unambiguously that the credit crunch is behind us. In the near future, no one will even remember this latest pronouncement and hold him to it.
Bumper sticker of the week:
“Time is money, money is time, that is all ye know on earth, and all ye need to know.” John Maynard Keats
e-commentary 