People didn't "buy houses they couldn't afford". They bought houses who's value was 40-50% inflated and then had that value disappear, almost overnight.
I love how this 'crisis' is blamed on over-reaching Americans, but only one side of the transaction. It takes two to tango, but don't forget the millions of Americans who made billions selling homes at grossly inflated values.
> People didn't "buy houses they couldn't afford". They bought houses who's value was 40-50% inflated and then had that value disappear, almost overnight.
If they can't pay for their houses, they can't afford said houses, no matter what said houses are worth or how said worth changes.
Mortgages aren't "called" when a house's value changes. Mortgages aren't "called" when the lender goes bankrupt (someone else buys the mortgage). The terms don't change when the house value changes.
They're losing their houses because they can't afford to pay for them.
It is technically true that the terms don't change when the house value changes, but it is misleading to suggest that house value doesn't affect affordability.
The distinguishing feature of most subprime loans is that the interest rate changes after a few years. A typical subprime loan could be 3 years at 8%, then 27 years at 12%. The assumption (made by bankers to justify the subprime model) was that after paying lower prices for a few years, the borrower would have some equity built up in the house, so they would be a better credit risk, and they could refinance at that point for a lower rate.
But, when housing prices dropped, many of these houses were now worth less than the outstanding amount on the mortgage, even after a few years of paying down the loan. So the plan of refinancing after a few years didn't work any more.
Basically, it is easier to afford a house if it maintains its value after you buy it, because the equity gives you more flexibility in refinancing.
Sorry if this is too boring ;-) But if you are curious to read more about the particular characteristics of subprime mortgages I recommend this paper -
> The assumption (made by bankers to justify the subprime model) was that after paying lower prices for a few years, the borrower would have some equity built up in the house, so they would be a better credit risk, and they could refinance at that point for a lower rate.
No, that's not what happened. Folks got loans where they could afford the teaser rate but not the regular rate. Even if they'd put down 20% and the house didn't go down in value, they couldn't afford what they'd bought.
If housing prices had continued to appreciate, they could have done a cash-out refinance and used that money to help them pay for the new loan, but that just delays the inevitable. ($50k doesn't go very far when a payment that you can't afford goes up by $1k/month.)
Or, they could have sold and taken the equity to buy something that they could afford.
The only way that they could have kept those houses (without significantly increasing their income) is if they'd been able to do no-cost refis with teaser rates until they were paid off. Since many/most of those loans were interest-only....
Note that most of the teaser-rate loans had prepayment penalties.
The amount of equity that one has in a house has very little effect on the interest rate. The big driver is interest rates in general.
> But, when housing prices dropped, many of these houses were now worth less than the outstanding amount on the mortgage, even after a few years of paying down the loan.
If you look at the loan amortization table for a 30 year fixed loan, you'll see that there's very little pay-down in the first several years. There's zero pay-down with interest-only loans, which many of the teaser-programs were. There's NEGATIVE pay-down with interest-deferred loans (which many of the teaser-programs were).
> Basically, it is easier to afford a house if it maintains its value after you buy it, because the equity gives you more flexibility in refinancing.
Refinancing makes a house more affordable only if interest rates decline, and then only if you don't take money out.
People didn't "buy houses they couldn't afford". They bought houses who's value was 40-50% inflated
I don't understand the distinction. If you pay half a million bucks for a house, and you can't afford to pay half a million bucks for a house, you're buying something you can't afford.
As for "40-50% inflated", well, there's no "natural" value for a house, and they're worth whatever people are willing to pay for 'em.
Here in the UK there are lots of people complaining that locals are being priced out of their own coastal towns, as city folk are buying up properties as second homes. But when the time comes to sell, those locals are perfectly happy to take the money.
Most of today's problems are caused by people who want to have their cake and eat it.
The people that complain aren't probably the ones taking the money, but the ones that can no longer afford to buy a "first home" in their (increasingly deserted and dehumanized) hometown.
I'm for taxing "nth-homes" exponentially to n. It would only hurt speculators who overall destroy value anyway. If you'll be using a house for two weeks a year, you should rent it.
> I'm for taxing "nth-homes" exponentially to n. It would only hurt speculators who overall destroy value anyway. If you'll be using a house for two weeks a year, you should rent it.
Who are they supposed to rent from?
How much time do I have to spend in a second or third residence to make you happy? Does it matter what I'm doing when I'm there?
BTW - Intel designs processors in the hope that folks will want to buy them and let Intel make a profit. How is housing speculation any different?
Care to elaborate how that works for urbanism, esp. in coastal zones?
"Discovery" is not even an apt word to use here. It connotes there is some "optimal" price towards which supply and demand will converge no matter what, just speculation will help that happen faster. In the real world, urbanistic speculation promotes overdevelopment, which greatly affects quality of landscape and living environment, thus effectively -and, what's worse, irreversibly- changing the value of the land.
It's apparently okay for folks to rent two weeks a year and okay for someone to rent to said folks. Yet it's unacceptable for someone to own and use two weeks a year.
However, a huge fraction of the "stay there two weeks a year" folks try to rent the other weeks. So you distinguishing between folks who try to rent a secondary house all but two weeks a year and folks who try to rent a secondary house all but two weeks a year.
That seems a bit subtle. Perhaps you can elaborate.
It's apparently okay for folks to rent two weeks a year and okay for someone to rent to said folks
a huge fraction of the "stay there two weeks a year" folks try to rent the other weeks
I disagree. Few people maintain a property only to rent it for two weeks a year. Once you bother to rent it, you try to do it for as long as possible. On the other hand, people who buy one, two, ... n houses for vacationing or speculating purposes can often afford to have them empty.
In any event, that's irrelevant to my point. Be them a huge or tiny fraction, I'm not so much against those. A house that gets occupied, by owners or renters, for most of the year, serves a genuine need.
I love how this 'crisis' is blamed on over-reaching Americans, but only one side of the transaction. It takes two to tango, but don't forget the millions of Americans who made billions selling homes at grossly inflated values.