Are we heading for another potential Financial Crisis?

[bobandsherry]

@bobandsherry, believe what you like. I have no interest in arguing.

There's no "belief" involved and not looking to argue. However you shared article that supposedly confirmed that excessive tax cuts caused bubbles. I didn't see anything that backed that opinion. Sounds more like you now came to same conclusion.

 

[SumDay]

Would it not be inviting trouble giving a 100% mortgage?

A home without equity is just a rental with debt. I could write a book.

 

[Choices]

A home without equity is just a rental with debt. I could write a book.

I think it is called “ having skin in the game”

 

[Senator]

I think it is called “ having skin in the game”

Yep, no problem. There are plenty of organizations that give first time buyers down payment assistance money. And the sellers can give some money to help the buyers with their closing costs.

There will be plenty of "skin in the game"...

 

[clifp]

For me, the book was far better than the movie. But others may differ on that!

I agree. I read a lot of books about the 2008 crisis. "Too big to fail", by Aaron Sorkin, On the Brink , by Hank Paulson, Stress Test by Tim Geithner. The Big Short was by far my favorite because Micheal Lewis has an amazing talent to take complicated subjecst from the analytics of baseball to collateralize debt obligations and make them understandable and dramatic.

 

[bobandsherry]

I think it is called “ having skin in the game”

I'm more concerned that those who buy have the means to pay. Keep the market healthy and they'll have "skin in the game" when their property value increases.

As long as they can make the payment, and with hopes of seeing their home value go up, they'll continue to make payment.

 

[FlaGator]

In the space of about 30 minute I saw 4 advertisements for 100% Mortgages and Home Loans. Using statements like "Your House is your Bank". Some directly targeting Veterans. Not to mention the persistent "Reverse Mortgage" solicitations. Aren't these 100% loans what got us into trouble in the first place? I thought there were rules in place to prevent this from happening again.

Long term real estate prices show a cycle of 15-ish years from peak to peak. Here's a truncated version, couldn't quickly find a data series that began earlier than 1980.
https://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-20.

I've been "in the business" since 1985 and there were different factors contributing to the declines. Oil price declines in TX in the early 80's, reduction in defense spending hit CA and the NE in the early 90's, along with S&L speculation. Several factors contributed to the easy credit leading to 2007-8 debacle.

One factor I believe was present in what I have seen is the easing of lending terms and the belief that it's "different now." Different only in details, the outcome is the same.

As an unpaid prognosticator, I think "the real estate market" is heating up, but hasn't reached the frothy stage yet. I expect that will happen over the next couple of years.

I am seeing substantial increases in construction activity in my corner of the Redneck Riviera, but existing home sales and prices haven't yet gotten silly.

 

[cooch96]

Personally, I think 20% is a reasonable down payment.

I'm expecting a lot of flack for that statement. I know what I think, and why. I'd be interested to hear other perspectives.

I bought my home with 0% down. 20% would’ve been over $60k, which would’ve taken years of renting and scrimping, plus the cost of an additional move in my life. How awful! Perish the thought!

 

[timo2]

Regarding the tax cut / bubble discussion, some economic folks will point to the tax cuts of 1924/26, 1981, and 2001/03 as proof of the bubble /crash scenario. Google it as you wish.

Because economics is so nebulous, it is subject to discussion of course.

 

[HadEnuff]

I bought my home with 0% down. 20% would’ve been over $60k, which would’ve taken years of renting and scrimping, plus the cost of an additional move in my life. How awful! Perish the thought!

However, when mortgages become "easy" ( low-to-zero down, low interest rates, balloon mortgages etc) that boosts the selling prices, by a lot. So it fuels the bubble.

 

[Senator]

I bought my home with 0% down. 20% would’ve been over $60k, which would’ve taken years of renting and scrimping, plus the cost of an additional move in my life. How awful! Perish the thought!

If the requirement was 20%, that down payment amount may have been a lot less. Prices would fall, or not rise as fast.

 

[dallas27]

The next crisis probably won't be housing-related. Wall Street will have found something new to lose all of their borrowed money on.

We'll probably find out soon that AIG has been insuring trillions of dollars worth of bets on the leveraged VIX products, and is now insolvent again.

Debt, bond debt. Maybe everybody’s, maybe just corporates. Very probably corps + municipals not able to handle a rate rise shock, then the fed backstops everyone and that goes south as china rises economically.

China could darn near end us just by liquidating their bonds in a hurry, maybe with a few other emerging market cooperators. Remember, the west owns all the stock but the emerging markets own all the debt as net lenders.

 

[RobLJ]

I bought my home with 0% down. 20% would’ve been over $60k, which would’ve taken years of renting and scrimping, plus the cost of an additional move in my life. How awful! Perish the thought!

It's anecdote but first house was 10% (5K), 2nd was 5% (7K), 3rd was 10% (11.5K), and last (current) was 85%. We paid it off 8 months later on the Reno house to avoid the bother of paying the monthly.
We climbed the ownership ladder moving from Riverside, CA to Houston and now to Reno. We were lucky to hit Houston two years after the S&L bottom and Reno about 7 years after the crisis, but probably 3-4 years after bottom. First loan was at 9.5% (would have been 16% without a subsidy from the redevelopment district) and the last was. . . . . . . . . 2.95%

I think 5-10% down for starter homes is reasonable. It got us started and we had no interest in defaulting. For 500k-2000k houses, 10-20% is perfectly reasonable. It is telling that at one point jumbo loans had a higher interest rate and higher down than smaller loans, but with the loss of wages by the middle and lower middle class, this has often reversed, in my lifetime.

My youngest only was able to buy in Seattle because he was a computer engineer for Microsoft. God help anyone with lesser income or expenses, if you're looking for a starter home there, with 20% down.

 

[pj.mask]

There are typically a range of house prices in a city depending on commute. I think the risk with lower down payment is people trying to buy a house at the high end of their price rather than buying something more affordable but not in the hip area.
I saved 20% buying just outside the cool area but now prices have mostly caught up due to demand. Could have bought more house (was approved) but there are risks that a layoff or another downturn could put me in a bad spot with an expensive house payment.

 

[joeea]

Anyone who hasn't read "The Big Short" is missing some worthwhile education. And actually the movie based on the book is both educational and entertaining. I saw it on a transpacific flight a couple of weeks ago & recommend it too.

I agree with all of that.

The book was great. And the movie was tops on my "movies based on books that I never thought could be made into a movie" list.

 

[joeea]

I am just concerned that there "May" be a bunch of folks out there that can be convinced to "bite off more than they can chew" with respect to a home loan. Especially Veterans and those that are being offered 100% mortgages. It was the Phrase "Your House/Home is your Bank" That got me concerned. There are a lot of Gullible people out there, and there are plenty more than are looking to take advantage of them.

Yes, there are gullible people out there. Always have been, always will be. You may be noticing ads more now, due to the tight market for homes.

It's not really any different in recent years, although regulations that were put in place since the Great Recession are being systematically undone in the past year or so.

I don't think we are headed for a financial crisis in the near future. Of course we are always heading for a "potential" financial crisis.

 

[ShokWaveRider]

What concerns me more is they are definitely targeting people specifically Veterans that are already up to their neck in debt. Or at least it sounds that way to me. Using phrases like, "Pay off Credit Cards", "Pay Off Heloc" "Buy a new Car" etc..... What may you think once they have paid all their CC cards off that they will not just run them up again. What happens then after they have tapped their so called personal Bank?

 

[OldShooter]

The issue at the original CMO level is whether mortgage defaults are correlated or not. For most of history, they have been uncorrelated and hence amenable to statistical analysis and predictions. The initial sin of the rating agencies was to continue assuming this during the bubble. If that is again the case now, then IMO there is not a lot of systemic risk.

The 2007/8 problem at its root was triggered by speculative buying and all the mortgage origination sins that have already been mentioned. Then, when the defaults started they were not statistically independent; defaults were high enough to smash home values, which triggered more defaults, smashing more home values, etc.

That said, if the "financial engineers" had not created the incredible leverage, the result would have been much less far-reaching. But 100,000 years of evolution have bred for greed and optimism, so here we are. Greedy and optimistic (self-important, too) little mammals constantly getting ourselves into trouble.

 

[gerntz]

"Are we heading for another potential Financial Crisis?"

No doubt. Only variable is time.

 

[joeea]

What concerns me more is they are definitely targeting people specifically Veterans that are already up to their neck in debt. Or at least it sounds that way to me. Using phrases like, "Pay off Credit Cards", "Pay Off Heloc" "Buy a new Car" etc.....

The vulnerable are always targeted.

What may you think once they have paid all their CC cards off that they will not just run them up again. What happens then after they have tapped their so called personal Bank?

They default on their loans and lose their house.

As I said, protections put in place in the past have been steadily eroded for the past year or so. That erosion will continue.

 

[CaptTom]

However, when mortgages become "easy" ( low-to-zero down, low interest rates, balloon mortgages etc) that boosts the selling prices, by a lot. So it fuels the bubble.

If the requirement was 20%, that down payment amount may have been a lot less. Prices would fall, or not rise as fast.

The 2007/8 problem at its root was triggered by speculative buying and all the mortgage origination sins that have already been mentioned.

These are the factors that make me think higher down payments would be beneficial. Specifically, they would lead to lower prices and cool the over-heated market, which would reduce opportunities for runaway speculation.

I happen to believe prices are unsustainable now, as they were in 2006-7. I'm actually surprised prices didn't fall farther and stay there longer back then. When working stiffs can't afford a home, something has to give. The best way to make homes affordable is through lower prices, not by making it easier to borrow enough money for higher prices.

Obviously, there are a vested interests in keeping prices up, keeping buyers borrowing beyond their means, and keeping speculators speculating.

 

[dallas27]

These are the factors that make me think higher down payments would be beneficial. Specifically, they would lead to lower prices and cool the over-heated market, which would reduce opportunities for runaway speculation.

I happen to believe prices are unsustainable now, as they were in 2006-7. I'm actually surprised prices didn't fall farther and stay there longer back then. When working stiffs can't afford a home, something has to give. The best way to make homes affordable is through lower prices, not by making it easier to borrow enough money for higher prices.

Obviously, there are a vested interests in keeping prices up, keeping buyers borrowing beyond their means, and keeping speculators speculating.

Where I am at near raleigh, prices really haven’t changed all that much from before the crash and now. Sure it dipped, but not horrible, and now ten years later you could say most of the gain is just mild inflation.

 

[Winemaker]

A good friend and retired co w@rker has been jumping through hoops to get a loan for a piece of lakefront property where he already has some lakefront property. It's been 3 months already, the bank was even questioning a monthly debit of $22.23, an amount levied to build the sewage line that was recently constructed. He is 62, and they wanted 2 letters from financial institutions each whether he had access to his assets in retirement accounts. Did they read that he was over 59.5?

 

[bobandsherry]

The vulnerable are always targeted.



They default on their loans and lose their house.

As I said, protections put in place in the past have been steadily eroded for the past year or so. That erosion will continue.

They may have eased, i wouldn't call it eroded. The underwriting pendulum had just swung to far to the left. Now getting better centered, no where near what they were in the last mortgage bubble.

 

[bobandsherry]

A good friend and retired co w@rker has been jumping through hoops to get a loan for a piece of lakefront property where he already has some lakefront property. It's been 3 months already, the bank was even questioning a monthly debit of $22.23, an amount levied to build the sewage line that was recently constructed. He is 62, and they wanted 2 letters from financial institutions each whether he had access to his assets in retirement accounts. Did they read that he was over 59.5?

And yet some people think underwriting standards have "eroded".