Stock Market Losses vs. Home Equity Losses

[stephenandrew]

I just read this on the CNBC website:

"Housing prices are expected to bottom out until mid year at the earliest. Thus far, the median price of a home is down more than 20 percent from $219,000 at the market peak in 2007 to $170,000 in January.
Stock prices, however, have fallen twice as much, some 50 percent, from their October 2007 peak."

I am not trying to be glib here but if stock prices are down 2 1/2 x what the housing market is, how come nobody is promoting or sponsoring a bailout for the millions of people who have lost trillions of dollars in their 401ks? I mean, while the Obama administration is promoting the idea of reducing mortgage debt, stopping foreclosures, etc. how come they are not, for example, allowing people to contirbute more to their 401k than the current $16,500 to make up for lost retirement savings, or giving a tax credit instead of a tax deduction for 401k contributions? Why is the focus exclusively on helping people recover from their real estate losses?

[ziggy29]

Quote:

Originally Posted by stephenandrew I am not trying to be glib here but if stock prices are down 2 1/2 x what the housing market is, how come nobody is promoting or sponsoring a bailout for the millions of people who have lost trillions of dollars in their 401ks?

Want more?

Bloomberg.com: Exclusive

Nothing about 401K bailouts in there, either...

[FinallyRetired]

Quote:

Originally Posted by stephenandrew Why is the focus exclusively on helping people recover from their real estate losses?

Because they're not bailing out homeowners, they're bailing out the banks who made the loans. The homeowners are just convenient political figureheads. If you want a 401k bailout, you need to have the 401k company invest lots of money with you, not vice versa.

[samclem]

I wouldn't worry about this, we're all going to get lots of bailout money. Once the government buys the extra presses to print the money needed to pay off today's debts and when the piles of money already pumped in by the Fed starts going after the smaller pool of goods/services in a new, smaller economy, inflation will be breathtaking. You can expect your stock values to go up 8%+ per year as a result of this inflation due to the government actions. In no time at all your account balance will be just what it used to be. There--you are bailed out by the government! The only small catch is that those dollars will buy only 60% of what they used to buy, and your tax rates will be increased in perpetuity. A small price to pay for this well-focused government program.

[skyline]

Quote:

Originally Posted by stephenandrew "...Stock prices, however, have fallen twice as much, some 50 percent, from their October 2007 peak."

While the statement above may be technically true in terms of price, I think the impact to investments for many homeowners is different because:

1) Stocks are not usually purchased on margin by most folks
2) Homes are usually financed, typically 80% of the value

This means that, if you bought stocks at the market peak, and they drop 50% in value, you've 'only' lost 50% of your investment.

But, if you bought a home at market peak, if the drops 20% in value, you lost 100% of your investment (all your downpayment). Factor in closing costs and commissions, and really, you only need to drop a little more than 10% in home value to lose 100% of your investment.

That doesn't mean I think you bail out the homeowner with govt. money, but I do think home price drops are significantly more painful than equity market drops...

[clifp]

I fear the government pension fund day of reckoning will be the next bubble.

[aaronc879]

Quote:

Originally Posted by stephenandrew I just read this on the CNBC website: "Housing prices are expected to bottom out until mid year at the earliest. Thus far, the median price of a home is down more than 20 percent from $219,000 at the market peak in 2007 to $170,000 in January. Stock prices, however, have fallen twice as much, some 50 percent, from their October 2007 peak." I am not trying to be glib here but if stock prices are down 2 1/2 x what the housing market is, how come nobody is promoting or sponsoring a bailout for the millions of people who have lost trillions of dollars in their 401ks? I mean, while the Obama administration is promoting the idea of reducing mortgage debt, stopping foreclosures, etc. how come they are not, for example, allowing people to contirbute more to their 401k than the current $16,500 to make up for lost retirement savings, or giving a tax credit instead of a tax deduction for 401k contributions? Why is the focus exclusively on helping people recover from their real estate losses?

Maybe because 90% of people can't afford to put in $16,500, let alone more, and those who can are in the least need of a bailout. I've lost more in the market than the total value of my condo but i'm not complaining i'm still better off than the majority of americans and i'm probably worth less than 95% of the people on this forum.

[Frugality_of_Apathy]

Quote:

Originally Posted by clifp I fear the government pension fund day of reckoning will be the next bubble.

Unless government pensions are becoming a speculative industry I can invest in I don't think you can call it a bubble as it can't balloon up and pop. I'd just call it an upcoming pitfall we're walking right toward.

[ERD50]

Most home buyers use leverage. So a 20% dip is "worse" than a 50% dip.

I always remember reading/hearing that one of the causes of the Big D was buying stocks on margin with only 10% down. So they fixed that, and increased margin requirements.

This time around, people bought real estate on margin, often with LESS than 10% down. And now, we are supposed to be surprised that this lead to a bubble/crash. It looks very predictable, unless you can't make the 'incredible' stretch from stocks on margin to real estate on margin.

I'm not surprised. I didn't take part, and I don't want to pay for those who played the game and lost. Garnish part of their wages until it's paid off. Something.

-ERD50

[newporttony]

Quote:

Originally Posted by ERD50 Most home buyers use leverage. So a 20% dip is "worse" than a 50% dip. I always remember reading/hearing that one of the causes of the Big D was buying stocks on margin with only 10% down. So they fixed that, and increased margin requirements. This time around, people bought real estate on margin, often with LESS than 10% down. And now, we are supposed to be surprised that this lead to a bubble/crash. It looks very predictable, unless you can't make the 'incredible' stretch from stocks on margin to real estate on margin. I'm not surprised. I didn't take part, and I don't want to pay for those who played the game and lost. Garnish part of their wages until it's paid off. Something. -ERD50

Or lock them up. Debtors' prison - Wikipedia, the free encyclopedia

[ERD50]

Quote:

Originally Posted by skyline While the statement above may be technically true in terms of price, I think the impact to investments for many homeowners is different because: 1) Stocks are not usually purchased on margin by most folks 2) Homes are usually financed, typically 80% of the value This means that, if you bought stocks at the market peak, and they drop 50% in value, you've 'only' lost 50% of your investment. But, if you bought a home at market peak, if the drops 20% in value, you lost 100% of your investment (all your downpayment). Factor in closing costs and commissions, and really, you only need to drop a little more than 10% in home value to lose 100% of your investment. That doesn't mean I think you bail out the homeowner with govt. money, but I do think home price drops are significantly more painful than equity market drops...

sorry, I posted before doing a refresh - you had already covered my points (w/o the emotional rant ).

I'll just add that a drop in home value doesn't necessarily hurt you that much. Other homes have dropped as much, so it is a wash in most ways. It's a paper loss, but if you realize that loss, you can get something else at the same down price. We don't live *in* our portfolios, we only use them to buy other things, and not too many things I purchase have dropped as much as my portfolio

-ERD50

[FIREd]

Quote:

Originally Posted by ERD50 This time around, people bought real estate on margin, often with LESS than 10% down. And now, we are supposed to be surprised that this lead to a bubble/crash. It looks very predictable, unless you can't make the 'incredible' stretch from stocks on margin to real estate on margin.

A lot of people, and even worse, a lot of banks didn't make that stretch... I don't know if you guys watch "house of cards" on CNBC but, clearly, some financial institutions were using astonishing hypotheses in their models, such as "home prices can never go down" (despite evidence of the contrary throughout the past century). Clearly they regarded real estate as a much safer bet than stocks. And I know plenty of ordinary folks who regard stocks as speculative, yet wouldn't think twice about buying a house with 0-10% down.

[ERD50]

Quote:

Originally Posted by newporttony Or lock them up. Debtors' prison - Wikipedia, the free encyclopedia

Only if we could be assured that they could work off their debt after paying their "room & board". I don't want to pay it.

-ERD50

[clifp]

Quote:

Originally Posted by Frugality_of_Apathy Unless government pensions are becoming a speculative industry I can invest in I don't think you can call it a bubble as it can't balloon up and pop. I'd just call it an upcoming pitfall we're walking right toward.

You are probably right bubble isn't the best term. Although perhaps one can figure out some way of shorting the bonds the pension funds issued, or short muni bond etf, or write CDS on state obligations.

Still I think there is a bubble like quality to government pension funds because there is high degree of faith among government employees that can depend on them, just like homeowners on the equity in their houses, and us stock market investors on the value of our equity portfolios.

I'm not sure what the split is but a very high proportion of visiting the board planning on an early retirement are government employees. Many (perhaps even most) have multiple source of income, savings, pension, maybe even real estate or a side business. However, quite a few are planning on early retirement with modest savings and generous pension.

Since states unlike Uncle Sam, can't print money, I didn't think these were sustainable even back in 2006. I remember one guy (he may even still be on the board) was retiring in Texas in his late 40 after years of being a cop in a major city (IIRC Dallas). His pension has some amazing features including a 9-10% guaranteed savings plan. He was on the oversight committee, the funding of the plan, was required by law and union contract etc. In short the guy knew what was going on, and my advice after taking a look at his options, was hell ya take advantage of all the great deals his pension plan offered.

But the reality is despite all of the assurance I don't see how Texas taxpayers can afford to be this generous, even to high risk jobs like cops or fireman. As society I don't think we can let people start work at 18, work for 30 years, contribute a modest portion of their salary (say 5-8%) let them retire and collect a full salary for another 30 years.

[Bimmerbill]

Quote:

Originally Posted by clifp I fear the government pension fund day of reckoning will be the next bubble.

Me too... 14-18 years of gov't work left before I can retire. Hope the rules don't get changed on me.

[Westernskies]

Quote:

Originally Posted by clifp I fear the government pension fund day of reckoning will be the next bubble.

Why should government-sponsored pension accounts be protected in this mess when private sector 401K pension accounts are being decimated in the government-sponsored marketplace?

This could turn into class warfare.

[Htown Harry]

The 2005 census:
the proportion of owner households to the total number of occupied households is 68.9%

2002 Investment Company Institute study:
49.5% of US Households owned equities in some way shape or form. Only 21 million (less than 20%) owned individual stocks outside an employee sponsored plan.

[crazy connie]

Quote:

Originally Posted by clifp I fear the government pension fund day of reckoning will be the next bubble.

That is for sure. States and municipalities will raise taxes to meet the obligations there was a story on that today. Some city bought a pig in a poke and sold bonds in 07 paying 6.75% intrest so they could invest capital in the markets. Now they pay the intrest and raise taxes to cover the pensions. Currently pensions are underfunded by about 60%. I just found the article in Bloomberg: http://www.bloomberg.com/apps/news?p...1EA&refer=home

Private pensions are frequently off-loaded to annuities in insurance companies. AIG may be paying a very large % of the private pensions of the current retirees. Washington and AIG do not want to talk about that a whole lot though. That may well be why AIG is classed as too big to fail. What have you been hearing about this? The PBGC can totally bankrupt us.

It may be time to move to a rural area in a fiscally conservative state. North Dakota and Alaska are looking better and better! Or, perhaps reverse immigration will take hold. Some of this is tongue in cheek but it truly is getting dire.

OP sorry to have hijacked your thread. In my mind so many of these twists and turns go together.