Anxiety Strikes $8T Mortgage-Debt Market After SVB Collapse(wsj.com)
wsj.com
Anxiety Strikes $8T Mortgage-Debt Market After SVB Collapse
https://www.wsj.com/articles/anxiety-strikes-8-trillion-mortgage-debt-market-after-svb-collapse-15ef0207
127 comments
> I expect that Wall Street banks would love to discredit the safety of local banks, but for my money I choose to do business with a few local credit unions whose board of directors are local and relatively transparent.
They don't have to discredit them, the Feds are doing that.
Local banks, credit unions, etc are NOT on the "too big to fail" (or "systemic risk") list so therefore they can fail and will be allowed to fail.
It's also interesting that of the Big Four that are "too big to fail" three of them offer savings rates of under 0.25% it's almost as if they don't have to do anything to appeal to customers.
They don't have to discredit them, the Feds are doing that.
Local banks, credit unions, etc are NOT on the "too big to fail" (or "systemic risk") list so therefore they can fail and will be allowed to fail.
It's also interesting that of the Big Four that are "too big to fail" three of them offer savings rates of under 0.25% it's almost as if they don't have to do anything to appeal to customers.
> They don't have to discredit them, the Feds are doing that.
The Fed == the Wall Street banks. The Wall Street banks are the overwhelming shareholders of the Fed.
The Fed == the Wall Street banks. The Wall Street banks are the overwhelming shareholders of the Fed.
> Local banks, credit unions, etc are NOT on the "too big to fail" (or "systemic risk") list so therefore they can fail and will be allowed to fail.
Sorry but isn't this only a problem for those with more than $250k, and that frankly is a lot for an individual. And even then you could just create another account at another local bank and you're golden. If you have a million cash, then handling four bank accounts is really not a bad problem.
Sorry but isn't this only a problem for those with more than $250k, and that frankly is a lot for an individual. And even then you could just create another account at another local bank and you're golden. If you have a million cash, then handling four bank accounts is really not a bad problem.
> only a problem for those with more than $250k,
And lots of local businesses. 100 employees at 48k a year gets you to 200k a month in payroll. Never mind the money it takes to run that business.
Even if you are under the 250k mark, if your bank closes on a pay day your staff is the group that suffers.
And lots of local businesses. 100 employees at 48k a year gets you to 200k a month in payroll. Never mind the money it takes to run that business.
Even if you are under the 250k mark, if your bank closes on a pay day your staff is the group that suffers.
Sounds like a perfect HN startup MVP. Split your operating cash among banks to keep under FDIC limits while presenting a convenient front end ui for payroll
Google for "insured cash sweep". https://www.cbhou.com/Resources/Customer-Corner/entryid/237/...
The specific problem for SVB was that many VCs got their companies to agree not to do this, specifically to keep all the money in SVB.
The specific problem for SVB was that many VCs got their companies to agree not to do this, specifically to keep all the money in SVB.
>Split your operating cash among banks to keep under FDIC limits while presenting a convenient front end ui for payroll
I work for a six-person startup; our CEO landed on Brex after SVB, and one of the reasons he gave was that it does exactly this (up to 9 banks). See https://www.brex.com/product/business-account
I work for a six-person startup; our CEO landed on Brex after SVB, and one of the reasons he gave was that it does exactly this (up to 9 banks). See https://www.brex.com/product/business-account
But if you're a midsized construction firm turning over $10 million a month 40 bank accounts is unwieldy. If you're that and watch SVB collapse with the slow pokes holding the bag then you move to one of the big 4. For a few reasons:
(1) SVB taught you that the feds will let a bank run happen
(2) They won't save the poor saps that were too slow moving their money
(3) The systemically important banks are too big to fail. A bank that can't pay depositors back is failed. Ergo, the SIB are too big to lose customer deposits.
So you flee your regional bank because the single most important thing about a bank is that they don't lose your money.
(1) SVB taught you that the feds will let a bank run happen
(2) They won't save the poor saps that were too slow moving their money
(3) The systemically important banks are too big to fail. A bank that can't pay depositors back is failed. Ergo, the SIB are too big to lose customer deposits.
So you flee your regional bank because the single most important thing about a bank is that they don't lose your money.
> (1) SVB taught you that the feds will let a bank run happen
You can't prevent a bank run if people are going around whatsapp groups of major depositors telling each other to get their money out.
> (2) They won't save the poor saps that were too slow moving their money
They absolutely did, even when the rules didn't say they had to?
You can't prevent a bank run if people are going around whatsapp groups of major depositors telling each other to get their money out.
> (2) They won't save the poor saps that were too slow moving their money
They absolutely did, even when the rules didn't say they had to?
>You can't prevent a bank run if people are going around whatsapp groups of major depositors telling each other to get their money out.
Sure you can. You close the bank when it's insolvent and people are saying to get your money out.
>They absolutely did, even when the rules didn't say they had to?
Yes and my post was to illustrate why. Perhaps that was not as clear as it could be.
Sure you can. You close the bank when it's insolvent and people are saying to get your money out.
>They absolutely did, even when the rules didn't say they had to?
Yes and my post was to illustrate why. Perhaps that was not as clear as it could be.
> You close the bank when it's insolvent and people are saying to get your money out.
How does this materially differ from what happened? Is there a federal power to temporarily close banks? Doesn't the run immediately continue when reopened?
How does this materially differ from what happened? Is there a federal power to temporarily close banks? Doesn't the run immediately continue when reopened?
It doesn't because they made all the depositors whole. If they didn't do that then the last 30% or whatever depositors remained would have taken all the losses.
Regulators have broad power to close banks. They could have done so when SVB failed to raise equity or really before that. Run stops because deposits are transferred to a healthy bank.
Regulators have broad power to close banks. They could have done so when SVB failed to raise equity or really before that. Run stops because deposits are transferred to a healthy bank.
> turning over $10 million a month 40 bank accounts is unwieldy
Perhaps, but does this mean you just leave your cash exposed to almost a complete loss? Surely there are services/software that could manage this for you? Seems like a lazy and incompetent accounting department.
Just ask ChatGPT how to do it <sarcasm>
Perhaps, but does this mean you just leave your cash exposed to almost a complete loss? Surely there are services/software that could manage this for you? Seems like a lazy and incompetent accounting department.
Just ask ChatGPT how to do it <sarcasm>
> won't save the poor saps that were too slow moving their money
This fear is unfounded. Depositors were bailed out. (That said, yes, utilising the bank’s sweep feature would be wise. As would having a second bank account.)
This fear is unfounded. Depositors were bailed out. (That said, yes, utilising the bank’s sweep feature would be wise. As would having a second bank account.)
[deleted]
Thank goodness they’re forced to be a little less reckless with our money so they can still make disproportionate profits off our savings. I am more than happy to help.
What kind of government allows their citizens to bear the brunt of the risk for pitiful gains?
What kind of government allows their citizens to bear the brunt of the risk for pitiful gains?
When a bank complains about the onerous, expensive or excessive costs associated with risk management and compliance, what they're really saying is:
"If it wasn't for that pesky government, we'd more than happily take more risks with -your- money!"
"If it wasn't for that pesky government, we'd more than happily take more risks with -your- money!"
That's both true and not true.
So sure, banks want to take more risks with your money. But if you start to understand the web of banking regulations, you'll see that there are multiple different groups with oversight, each with different goals and different regulatory frameworks. It's extremely difficult to maintain compliance and the complexity is a problem for a number of reasons, including the fact that a lot of the regulations are legacies of a time before interstate banking.
So sure, banks want to take more risks with your money. But if you start to understand the web of banking regulations, you'll see that there are multiple different groups with oversight, each with different goals and different regulatory frameworks. It's extremely difficult to maintain compliance and the complexity is a problem for a number of reasons, including the fact that a lot of the regulations are legacies of a time before interstate banking.
> It's also interesting that of the Big Four that are "too big to fail" three of them offer savings rates of under 0.25% it's almost as if they don't have to do anything to appeal to customers.
This is literally how it's supposed to work: anybody more risky has to offer an incentive to the punters.
But bank deposits are different (as Matt Levine put it: you don't want to evaluate your bank's solvency any more than you want to inspect the factory where your can of beans was packed) -- most people don't even look at the rate their bank is paying when they open an account.
This is literally how it's supposed to work: anybody more risky has to offer an incentive to the punters.
But bank deposits are different (as Matt Levine put it: you don't want to evaluate your bank's solvency any more than you want to inspect the factory where your can of beans was packed) -- most people don't even look at the rate their bank is paying when they open an account.
This is the news doing fear-based marketing. You can't really spot the problem on the big chart: https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us...
The "bubbliness" doesn't match 2008. For one thing, there hasn't been a build boom to try to cash in. My personal opinion is that we've absorbed another systemic shock - the war and sanctioning of the Russian economy, and especially the European gas price shock. That's still propagating through but the effect is diminishing rather than increasing.
(my slightly cynical take is that anything the news tells you to be scared of is probably not a threat, and that the real threats are surrounded by protective clouds of optimistic hype)
> the individuals involved care 100% about their own power and status, and close to 0% about the working public.
The American Way, surely?
It's not necessarily the case that local banks are safer. The US "savings and loan crisis", Spanish "cajas" etc.
> The other elephant in the room is the astronomical amount of money in derivatives, and their lack of transparency.
It does feel like this is where the systemic risk may have gone.
The "bubbliness" doesn't match 2008. For one thing, there hasn't been a build boom to try to cash in. My personal opinion is that we've absorbed another systemic shock - the war and sanctioning of the Russian economy, and especially the European gas price shock. That's still propagating through but the effect is diminishing rather than increasing.
(my slightly cynical take is that anything the news tells you to be scared of is probably not a threat, and that the real threats are surrounded by protective clouds of optimistic hype)
> the individuals involved care 100% about their own power and status, and close to 0% about the working public.
The American Way, surely?
It's not necessarily the case that local banks are safer. The US "savings and loan crisis", Spanish "cajas" etc.
> The other elephant in the room is the astronomical amount of money in derivatives, and their lack of transparency.
It does feel like this is where the systemic risk may have gone.
> > The other elephant in the room is the astronomical amount of money in derivatives, and their lack of transparency.
> It does feel like this is where the systemic risk may have gone.
It's... kind of supposed to?
Take SVB, for instance. What they should have done is use derivatives to hedge their exposure to interest rates rising. They should have transferred the risk to other parties that either had the opposite exposure, or else were willing to take the risk for the right price.
Now, as we saw in 2008, all kinds of eldritch horrors can hide in derivatives, and the lack of transparency makes it very hard to see problems coming. And even in the case of SVB, that would still have left them with the counterparty risk. But the derivative market is where the risk is supposed to go, because it's the place that's supposed to be in the business of handling it.
> It does feel like this is where the systemic risk may have gone.
It's... kind of supposed to?
Take SVB, for instance. What they should have done is use derivatives to hedge their exposure to interest rates rising. They should have transferred the risk to other parties that either had the opposite exposure, or else were willing to take the risk for the right price.
Now, as we saw in 2008, all kinds of eldritch horrors can hide in derivatives, and the lack of transparency makes it very hard to see problems coming. And even in the case of SVB, that would still have left them with the counterparty risk. But the derivative market is where the risk is supposed to go, because it's the place that's supposed to be in the business of handling it.
This is rather nebulous, but I feel like the environmentalist's response of "there is no away" to things being "thrown away" is relevant here. The derivative market is not an "away" into which unlimited amounts of risk can be dumped. Everyone would clearly like the world to be set up so that it's only the richest and least deserving that take losses in a crisis, but that's not how it works and may not even be possible.
We'd prefer any derivatives crisis to blow up only some unloved hedge funds, fly by night banks, and dumb sovereign wealth funds, but it turns out they keep selling on risky assets to unsophisticated investors. Like interest rate swaps.
https://www.usnews.com/opinion/blogs/economic-intelligence/2...
https://en.wikipedia.org/wiki/Local_authorities_swaps_litiga...
We'd prefer any derivatives crisis to blow up only some unloved hedge funds, fly by night banks, and dumb sovereign wealth funds, but it turns out they keep selling on risky assets to unsophisticated investors. Like interest rate swaps.
https://www.usnews.com/opinion/blogs/economic-intelligence/2...
https://en.wikipedia.org/wiki/Local_authorities_swaps_litiga...
If you manage your own money you are fine. If you are expecting the manager of a pension fund to have made good decisions then you are probably in bad shape
Here is my uninformed, emotionally loaded take: so the mortgage industry not only makes houses unaffordable to so many people, but also is about to bring down the financial system with it, again?
Central banks make interest rates artificially low which makes asset prices (houses) artificially high.
The mortgage industry isn't really to blame for high prices.
The mortgage industry isn't really to blame for high prices.
The ability to get a loan for some % of income over 30 years also props up housing prices. If the standard mortgage term were shorter, housing prices would arguably have less upwards pressure (but this might make it harder for lower income participants to compete with higher wealth participants.)
This is mostly only true in cities where lot prices are super high - which actually isn't the case in the majority of US cities.
It's hard to imagine commodities being substantially cheaper if we didn't have 30-year mortgages.
Home builder margins aren't impressive.
The cost of a new home is pretty much the cost of the lot, plus the cost to build it, plus a 10-20% margin.
That margin isn't going down a lot, even if you don't have 30-year mortgages. All that's happening is that the size of US homes would be much, much smaller.
And you might have some pressure for smaller lot sizes in places like SoCal and NorCal and Seattle.
It's hard to imagine commodities being substantially cheaper if we didn't have 30-year mortgages.
Home builder margins aren't impressive.
The cost of a new home is pretty much the cost of the lot, plus the cost to build it, plus a 10-20% margin.
That margin isn't going down a lot, even if you don't have 30-year mortgages. All that's happening is that the size of US homes would be much, much smaller.
And you might have some pressure for smaller lot sizes in places like SoCal and NorCal and Seattle.
Is there a “natural” interest rate that currency would have w/o central bank intervention?
Probably by not giving people loans for houses, which would make them equally unaffordable for people, but in a different way.
A 400k house might instead be a 200k house, but you will never have 200k in cash compared to 20k for a down payment on a mortgage.
A 400k house might instead be a 200k house, but you will never have 200k in cash compared to 20k for a down payment on a mortgage.
There would absolutely still be mortgage lenders without artificially low federal funds.
I manage a fund in Canada that does exactly that. We have a pool of investors, and lend out on mortgages only. Primarily in markets larger institutions won’t touch.
I manage a fund in Canada that does exactly that. We have a pool of investors, and lend out on mortgages only. Primarily in markets larger institutions won’t touch.
> would absolutely still be mortgage lenders without artificially low federal funds
30-year fixed-rate mortgages for middle earners are a policy creation, not a natural market creature.
30-year fixed-rate mortgages for middle earners are a policy creation, not a natural market creature.
30 year fixed rate mortgages aren’t available in Canada. Most have the interest rate adjusted every 3-5 years
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Moneylenders have always existed when legal.
Hard to argue that a 50% price reduction is less affordable. Ever heard of owner-financing?
Yes, loans predate central banks by a long shot. They were prevalent in ancient Rome and interest rates were determined by the market based on risk, supply and demand, etc.
Interest rates from lenders are still based on risk/supply/demand etc.
The question is more, how do you introduce money to the money supply (which you must do if for no other reason than physical wear/destruction of currency) without a central issuer who sets an interest rate on that issuance?
The question is more, how do you introduce money to the money supply (which you must do if for no other reason than physical wear/destruction of currency) without a central issuer who sets an interest rate on that issuance?
Banks create money out of thin air when they originate loans. Various regulations and central bank activities are designed to control this process, but they are somewhat indirect - they don't tell a bank 'this is exactly how much money you are allowed to create', instead they enforce things like capital ratios and provide liquidity in various ways, and the money creation is then carried out by the bank rather organically.
And can’t they currently set whatever rate they want for that still?
Indeed. Strongly influenced by the ambient financial and regulatory environment of course.
Yes, that would be the market interest rate based on supply/demand, as any other good. If supply >> demand (a lot of people have a capital they don't know what do to with) then you get a low interest rate, otherwise a high interest rate.
Centrally controlled interest rates are basically price controls. The govt controls the price of money. Even a 5 year old knows price controls don't work, but we can't expect that from the govt.
Centrally controlled interest rates are basically price controls. The govt controls the price of money. Even a 5 year old knows price controls don't work, but we can't expect that from the govt.
Even a 5 year old knows that there's a significant difference between price controls in a supply-constrained market and price controls in a supply-unconstrained market, and that it's intellectually inappropriate to gloss over that difference, and pretend that bank loans that print money up out of thin air are the same thing as, say, automobiles and frozen orange juice.
I’m well over 5 years old and this doesn’t make much sense.
I think it's 10-12%. That's the rate I am able to get money from private investors at.
What rate would you feel comfortable loaning money to friends or colleagues at?
What rate would you feel comfortable loaning money to friends or colleagues at?
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Constrained supply and DINKY households are the two big factors that have driven up house prices in recent decades. Not mortgages in general.
Help me here, but this makes no sense. DINK households have no children and therefore need less housing and have more flexibility when choosing housing. Perhaps it might impact trendy cities like San Francisco where DINK is not by choice (hence more DINKs) since it costs too much to have kids in a non-kid friendly community.
We have a much greater proportion of couples where both members work than before. This means higher bids, and higher prices. The people that did well out of this were the people who already owned property; they've had a lovely transfer of money from those workers.
I still fail to see a clear causal relationship between increased dual income with no kid couples and increased housing prices. The assumption I guess is that having more money from dual income implies that buyers will pay more, but there are several flaws with this:
1. Many modern couples actually have less income available for savings and housing despite having two earners say compared to single earning couples in the 50’s and 60’s when gas station attendants could afford to buy a home for a wife and several kids 2. Extremely low Interest rates have caused a much higher impact on available funds to buy homes than increases in available funds for housing from wages 3. No kid couples require smaller, cheaper houses without regard to school districts, family friendly environments, etc.
1. Many modern couples actually have less income available for savings and housing despite having two earners say compared to single earning couples in the 50’s and 60’s when gas station attendants could afford to buy a home for a wife and several kids 2. Extremely low Interest rates have caused a much higher impact on available funds to buy homes than increases in available funds for housing from wages 3. No kid couples require smaller, cheaper houses without regard to school districts, family friendly environments, etc.
The mortgage “industry” post 2008 largely consists of companies that act as sales or servicers for the federal government.
If you are unhappy with the general shape of residential lending in the US blame falls squarely on the federal government. Not just as regulators but as far far away the largest direct participant.
If you are unhappy with the general shape of residential lending in the US blame falls squarely on the federal government. Not just as regulators but as far far away the largest direct participant.
There’s a great book on this subject.
Lords of East Money by Christopher Leonard
Lords of East Money by Christopher Leonard
How does the mortgage industry "makes houses unaffordable to so many people".
It literally does the opposite.
It literally does the opposite.
It's more a supply / demand issue than anything to do with mortgages. When an essential good's (housing) demand outstrips supply, all surplus goes to $0 to reach the clearing price for that supply.
Ex: In SF there were a lot of good big tech jobs paying $200k-$1m / yr. A vast majority of those wage increases accrued into the hands of landlords. Mortgages allow buyers to borrow against projected future earnings, allowing each buyer an affordable price compared to one who doesn't mortgage, but when everyone does it the benefits get nullified.
Ex: In SF there were a lot of good big tech jobs paying $200k-$1m / yr. A vast majority of those wage increases accrued into the hands of landlords. Mortgages allow buyers to borrow against projected future earnings, allowing each buyer an affordable price compared to one who doesn't mortgage, but when everyone does it the benefits get nullified.
But that's because SF broke their real estate market. In a more functional one the cheap money flows to builders as well and they then build more houses bringing prices down.
The benefits aren't nullified. As a result you have more homeowners and fewer people paying rent.
This is the desired outcome.
This is the desired outcome.
Why do we need the mortgage industry, which charges a premium over the prime interest rate? Why can’t the Fed lend directly to borrowers? Why do we need intermediaries in the provision of mortgages?
Mortgages have higher risk and servicing costs than the lending done at prime, so they are going to be done at a premium to it no matter who does it (unless it is yet another government subsidy to homebuyers at the expense of renters.)
Houses would be a LOT cheaper if people couldn’t take on mortgages, especially not 30 year ones.
And yet you would discover that most people couldn't assemble the necessary funds at once, certainly not near the beginning of their careers.
Low interest rates make it harder to pay cash. So, the mortgage industry has been in this weird loop where you have to use it, even if you could have afforded a house without it.
In two extremes: Imagine a market with 20% interest rates. You could just save money instead of holding the loan for 5 years, and then pay cash. Fewer people would have mortgages.
Imagine 0.1% fixed, interest-only loans. Financing a house with that would cost about 1/200th as much as in the 20% environment, so prices would increase by something like 200x.
We are coming out of ~2% rates. That means houses should cost a bit under 10x more than they would at 20%. If you put 20% down, you could probably have purchased outright in the other environment.
(This ignores the possibility of new construction, since I live in California, and that’s more realistic than saying people will be allowed to build housing to take advantage of low mortgage rate arbitrage).
In two extremes: Imagine a market with 20% interest rates. You could just save money instead of holding the loan for 5 years, and then pay cash. Fewer people would have mortgages.
Imagine 0.1% fixed, interest-only loans. Financing a house with that would cost about 1/200th as much as in the 20% environment, so prices would increase by something like 200x.
We are coming out of ~2% rates. That means houses should cost a bit under 10x more than they would at 20%. If you put 20% down, you could probably have purchased outright in the other environment.
(This ignores the possibility of new construction, since I live in California, and that’s more realistic than saying people will be allowed to build housing to take advantage of low mortgage rate arbitrage).
Instead of a 5 year loan you just save up to buy a house? I suppose this is just a hypothetical?
Because even when interest rates were high, people were not generally buying their homes in cash.
That's like saying instead of renting for years you could just save that rent money and buy a house after a few years.
And with low rates, no one was buying a house with just a 5 year mortgage either.
The only reason you are seeing a lot of cash buyers right now is that you have lots of people who have sold their homes at inflated prices after buying years ago at near nothing and now that prices are falling, they have the cash to buy. But that won't last and it will soon be back to only the small group of people with very big incomes or family money and investment firms that are buying in cash.
Because even when interest rates were high, people were not generally buying their homes in cash.
That's like saying instead of renting for years you could just save that rent money and buy a house after a few years.
And with low rates, no one was buying a house with just a 5 year mortgage either.
The only reason you are seeing a lot of cash buyers right now is that you have lots of people who have sold their homes at inflated prices after buying years ago at near nothing and now that prices are falling, they have the cash to buy. But that won't last and it will soon be back to only the small group of people with very big incomes or family money and investment firms that are buying in cash.
What does inflation look like in your hypothetical with 20% interest? Do house prices not inflate?
Higher interest rates (for subsidized loans) should lead to lower inflation, since it is analogous to the government printing less money.
Edit: Think of the 0.1% case from a home builders perspective. They build a house for $500K (say), so a rational homebuilder wouldn’t pay more than about that to buy a house for themselves (in the absence of market distortions).
However, the buyer could take their $500K, and put it into investments that yield a few percent a year. Say they are conservative, and assume a minimum 1% annual yield. Now, they can pay the builder $4,999,999 for the house, giving the builder ~$4.5M of disposable income. The builder then spends the money, driving up prices for everyone else. (Of course, they would be wise if they used some of the money to build 5 or 6 more houses, since that leads to exponential income growth for them over time.)
Edit: Think of the 0.1% case from a home builders perspective. They build a house for $500K (say), so a rational homebuilder wouldn’t pay more than about that to buy a house for themselves (in the absence of market distortions).
However, the buyer could take their $500K, and put it into investments that yield a few percent a year. Say they are conservative, and assume a minimum 1% annual yield. Now, they can pay the builder $4,999,999 for the house, giving the builder ~$4.5M of disposable income. The builder then spends the money, driving up prices for everyone else. (Of course, they would be wise if they used some of the money to build 5 or 6 more houses, since that leads to exponential income growth for them over time.)
Nor can they save for the downpayments, which are not far from where the prices used to be before the explosion that I attribute to cheap loans.
First time homebuyers can get a FHA mortgage for 3% down. I think most people thinking about buying a house could put together $7,500 on a quarter million dollar home. And if you're looking to spend more than a quarter million on your first home, well then maybe that's the issue. Starter homes exist in all but a handful of cities.
If no one can afford even a down payment it's because supply is too low. It's not like there are tons of empty houses that mortgages are preventing buyers from acquiring.
Also first time home buyers qualify for very low down payments, like 5%, fwiw.
Also first time home buyers qualify for very low down payments, like 5%, fwiw.
Supply isn't too low, supply has being diverted to investors who often don't reside in the home, or who short term rent it. If there was a big tax on non-owner-occupied single family homes that made it unprofitable to buy and hold or vacation rent, housing prices for single family homes would drop hard.
> housing prices for single family homes would drop hard.
No, they wouldn't. as evidenced anywhere this is tried
No, they wouldn't. as evidenced anywhere this is tried
I'm going to need you to back that up with a fair amount of data, because this seems like an easy place for someone with an agenda to strawman.
Let's say cheap debt isn't available and house prices drop to 30% of their current value. According to the first google result I find, average house price in the US is slightly over 400k, so 30% of that would be 120k. How many people do you reckon have 120k in savings available? I'm willing to bet it would be a lot less than the amount of people that can currently get a mortgage.
Owner financing
Borrowing money to buy a house is still getting a mortgage, whether you borrow the money from a bank or from the previous owner of the house.
You said “How many people do you reckon have 120k in savings available?” to pay cash for houses with no financing available within a thread regarding the collapse of the banking mortgage industry.
Owner financing is a very different instrument from a traditional mortgage. Most importantly, the terms are completely negotiable, meaning that buyers can obtain low interest owner financing even when general interest rates are high, especially when owners are desperate to sell. Owner finance instruments can also be obtained by less qualified borrowers, are not backed by government agencies, servicing costs are negligible, and many do not report to credit bureaus, which has significant implications to borrowers.
Owner financing is a very different instrument from a traditional mortgage. Most importantly, the terms are completely negotiable, meaning that buyers can obtain low interest owner financing even when general interest rates are high, especially when owners are desperate to sell. Owner finance instruments can also be obtained by less qualified borrowers, are not backed by government agencies, servicing costs are negligible, and many do not report to credit bureaus, which has significant implications to borrowers.
Owner financing rates may be lower than general interest rates, and can be when the seller is family of the buyer or is otherwise related. That will not generally be the case if owner financing becomes the norm though, why would anyone charge lower rates than general rates to some random stranger, especially if it is a borrower who is "less qualified"??? Let's not forget that the previous owner now has to rely on this "less qualified" borrower to honor their commitment for (potentially) several decades. Large financial institutions can amortize this risk over many loans and can afford to have entire departments to assess and manage the risk. Individuals would not be able to do so nearly as well.
If anything, the 2008 financial crisis should have taught us that lending more money to people than they can responsibly bear is not a wise idea, neither for the lenders but also not for the borrowers.
If anything, the 2008 financial crisis should have taught us that lending more money to people than they can responsibly bear is not a wise idea, neither for the lenders but also not for the borrowers.
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There would also be very few houses. Or do you think economies of building become infinitely cheaper when all demand is removed?
While offering mortgages might (like a traditional bank), the "mortgage-debt industry" profits from transacting on debt (the subprime mortgage crisis was a better example of this, and while the industry was bailed out the homeowners were not) which ties in with increasing housing costs (for instance, allegations about certain companies buying up housing stock and overpaying strategically to increase valuations) and foments disparities in housing.
Yes. Housing is a human need just like breathing air or eating food so if you can create artificial scarcity there you create value out of nothing. The average home cost around $50k in materials to construct, but after it’s assembled it magically worth 250k? Lol the math doesn’t make sense.
The land has some value. Also, home construction seems very inefficient - every home is a snowflake even if identical to the one next door. Drywall finishing as an example is very time consuming and hard to do correctly . You need a lot of experience to be good at it (if you don’t believe me, just try it and weep at your results). Then, once this is done even painting is an entirely manual process costing $4K+.
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Try to build your house for 50K and you will see where the extra cost come from. Land and labor
You can barely get a framed in tiny home (no sheetrock, insulation, electrical, plumbing) for that price. And that doesn't even include land.
Land and labor are not free.
Land is actually valuable because its scarce. And as for building costs I highly doubt it cost 100k for the labor.
These days even pouring a driveway can cost in the tens of thousands of dollars.
Constructing a house is rather expensive, here’s just a random link from google:
https://www.ramseysolutions.com/real-estate/how-much-does-it...
Another random link claims 30-50% of the cost is labor:
https://www.bankrate.com/real-estate/cost-to-build-house/
Constructing a house is rather expensive, here’s just a random link from google:
https://www.ramseysolutions.com/real-estate/how-much-does-it...
Another random link claims 30-50% of the cost is labor:
https://www.bankrate.com/real-estate/cost-to-build-house/
housing doesn't need to be unaffordable. 200 years ago people paid of their houses in 10 years or less! this issue isn't mortgages. the issue is houses are way too big and land is too costly and regulation drives up the cost to build, oh and property taxes of course. address those 3-4 issues and everyone can afford housing with ease.
The yield premium, or spread, over U.S. Treasury yields that investors demand to own an index of agency MBS bonds jumped as much as 27%, or 0.20 percentage point, after the run began on SVB, according to data from FactSet.
This is a nothingburger of a story.
This is a nothingburger of a story.
Cue the "this time is different" comments around housing supply and how high housing prices and low unemployment are here to stay. This is typically pure cognitive dissonance from people with a ton of equity in their homes.
Housing is at record low levels of affordability.[0]
The last time we saw something like this wasn't too long ago. And we can recall that it ended with affordability eventually reverting back to the mean after some nasty price action.
Even if we don't yet know the trigger, it is very likely that housing prices will fall and defaults will rise.
[0] https://nationalmortgageprofessional.com/news/goldman-sachs-...
Housing is at record low levels of affordability.[0]
The last time we saw something like this wasn't too long ago. And we can recall that it ended with affordability eventually reverting back to the mean after some nasty price action.
Even if we don't yet know the trigger, it is very likely that housing prices will fall and defaults will rise.
[0] https://nationalmortgageprofessional.com/news/goldman-sachs-...
That index measures the affordability for buyers. If the houses are very affordable for their current owners (due to low rates locked in), what's the mechanism for them to default? Mass unemployment, I suppose. But that doesn't seem causally linked to the affordability index.
Falling home prices and default rates are absolutely correlated.
Again, just because we don't yet know the trigger which will cause this doesn't really matter.
Home affordability is mean-reverting and the only way for it to revert is waaay higher incomes or lower home prices. I'll bet on lower home prices.
Again, just because we don't yet know the trigger which will cause this doesn't really matter.
Home affordability is mean-reverting and the only way for it to revert is waaay higher incomes or lower home prices. I'll bet on lower home prices.
> Home affordability is mean-reverting and the only way for it to revert is waaay higher incomes or lower home prices. I'll bet on lower home prices.
Yes and no. It is or can be mean-reverting in the short term but not in the long-term else we have a deflationary economy which would be a disaster and we'd do anything to prevent it.
> Again, just because we don't yet know the trigger which will cause this doesn't really matter.
I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around.
BTW I see arguments for and against the general claim about mortgage defaults and it blowing up again.
For - housing prices are way to high, banks bought mortgage-backed securities with rates that are too low, layoffs mean defaults, etc.
Against - ongoing supply chain issues, housing supply is severely constrained everywhere in the country, low interest loans from those who keep their homes prevent them from moving, etc.
but this is all surface level. Need specifics to draw meaningful conclusions.
Yes and no. It is or can be mean-reverting in the short term but not in the long-term else we have a deflationary economy which would be a disaster and we'd do anything to prevent it.
> Again, just because we don't yet know the trigger which will cause this doesn't really matter.
I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around.
BTW I see arguments for and against the general claim about mortgage defaults and it blowing up again.
For - housing prices are way to high, banks bought mortgage-backed securities with rates that are too low, layoffs mean defaults, etc.
Against - ongoing supply chain issues, housing supply is severely constrained everywhere in the country, low interest loans from those who keep their homes prevent them from moving, etc.
but this is all surface level. Need specifics to draw meaningful conclusions.
> Yes and no. It is or can be mean-reverting in the short term but not in the long-term else we have a deflationary economy which would be a disaster and we'd do anything to prevent it.
This doesn't make sense.
If affordability is always trending lower it means that housing is always getting more expensive in real terms. We know this isn't true.
> I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around.
Interestingly, we can do that with many mean-reverting processes. Many, many people called the housing crisis on 2008 based solely on extreme valuations. Same with the market correction of the past year. Same with crypto correction.
You can count on extreme valuations eventually mean-reverting.
This doesn't make sense.
If affordability is always trending lower it means that housing is always getting more expensive in real terms. We know this isn't true.
> I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around.
Interestingly, we can do that with many mean-reverting processes. Many, many people called the housing crisis on 2008 based solely on extreme valuations. Same with the market correction of the past year. Same with crypto correction.
You can count on extreme valuations eventually mean-reverting.
[edit]I think they are saying that housing prices may revert to a shorter term mean and not say a 50-100 year mean because if it did the latter it would mean that there was serious deflation in the economy.
Anyone that called the housing crisis in 2008 SOLELY on extreme valuations got very, very lucky.
Housing prices are not mean-reverting in and of themselves. None of this happens in a vacuum.
Anyone that called the housing crisis in 2008 SOLELY on extreme valuations got very, very lucky.
Housing prices are not mean-reverting in and of themselves. None of this happens in a vacuum.
> None of this happens in a vacuum.
Doesn’t this hurt your case as well?
Every housing chart I’ve seen for metro areas shows a distinct boom/bust cycle in housing that is indicative of mean reversion to around 25-30% of payment to earnings ratio. Many metro areas in US are over 40% now.
Doesn’t this hurt your case as well?
Every housing chart I’ve seen for metro areas shows a distinct boom/bust cycle in housing that is indicative of mean reversion to around 25-30% of payment to earnings ratio. Many metro areas in US are over 40% now.
I don't know how it would hurt my argument - I'm saying it's more complicated than 'prices are high so there must be a bubble'
Over what period? Have there been any fundamental changes in the financing or supply of housing? How about the people purchasing homes - are there any differences between cycles? It's also possible that income rises without housing prices falling at all. That hasn't happened since the 60's, but it's possible.
Also, I don't think there are distinct boom/bust cycles in housing generally, because the charts lack the necessary trough. Look at the House Price Index for New York, for example; it is not representative of a distinct boom/bust cycle at all; price retractions are a fraction of the previous growth and last for shorter periods over the last 47 years.
Further, I don't think it's indicative of mean reversion to around 25%-30% because the house price growth rate has outpaced the income growth rate by 2-3X for over 50 years.
Are you saying that this only applies to metro areas?
Could you share some examples of this data? Mine mostly comes from the St. Louis Fed: https://fred.stlouisfed.org/
Over what period? Have there been any fundamental changes in the financing or supply of housing? How about the people purchasing homes - are there any differences between cycles? It's also possible that income rises without housing prices falling at all. That hasn't happened since the 60's, but it's possible.
Also, I don't think there are distinct boom/bust cycles in housing generally, because the charts lack the necessary trough. Look at the House Price Index for New York, for example; it is not representative of a distinct boom/bust cycle at all; price retractions are a fraction of the previous growth and last for shorter periods over the last 47 years.
Further, I don't think it's indicative of mean reversion to around 25%-30% because the house price growth rate has outpaced the income growth rate by 2-3X for over 50 years.
Are you saying that this only applies to metro areas?
Could you share some examples of this data? Mine mostly comes from the St. Louis Fed: https://fred.stlouisfed.org/
The following chart shows clearly the boom and bust cycles since 1960 of US and UK markets and how the price/income ratio reverts to around 4.5 to 5. The current statistic is near an all time high of 7.5, 50% higher than it should be.
https://www.longtermtrends.net/home-price-median-annual-inco...
https://www.longtermtrends.net/home-price-median-annual-inco...
So what you refer to as the bust is when it reverts from boom to the mean, and your evidence is that this has happened...once?
This isn't really a chart showing a cycle, at least not a multi-year cycle. You have 40 years of between 4 and 5, then a 5 year bubble and a retrenchment that bottoms out at about 5 before rising again.
There's no consistent cycle, though. If, for example, every 20 years you had it cross 5 and go to 6 then go back to 4 for a few years before repeating, that would be a cycle.
This isn't really a chart showing a cycle, at least not a multi-year cycle. You have 40 years of between 4 and 5, then a 5 year bubble and a retrenchment that bottoms out at about 5 before rising again.
There's no consistent cycle, though. If, for example, every 20 years you had it cross 5 and go to 6 then go back to 4 for a few years before repeating, that would be a cycle.
Cycles are clearly shown in the chart. They do not have to be consistent in gap as no economic business cycles present that way. Of course, these numbers are aggregate across all housing in 2 countries so the cycles are muted versus local min/max demonstrated in specific metro areas.
Even small swings from 5 to 4 demonstrate a 25% swing in aggregate housing prices, which is still significant. The whipsawing recently since 2000 represent two swings of around 75% in aggregate housing prices relative to incomes.
Even small swings from 5 to 4 demonstrate a 25% swing in aggregate housing prices, which is still significant. The whipsawing recently since 2000 represent two swings of around 75% in aggregate housing prices relative to incomes.
> If the houses are very affordable for their current owners (due to low rates locked in), what's the mechanism for them to default?
Here’s one scenario …
1. Forced to move or choose to move, but keep house and rent it out 2. Housing prices drop along with rents that do not cover mortgage 3. Owner tires of losing money, but cannot sell house because underwater on low interest rate mortgage 4. Default
Here’s one scenario …
1. Forced to move or choose to move, but keep house and rent it out 2. Housing prices drop along with rents that do not cover mortgage 3. Owner tires of losing money, but cannot sell house because underwater on low interest rate mortgage 4. Default
Hmm.. don't people tend to borrow against their houses? If housing prices fall 10-20%, people with poor risk management might get effectively margin called, forcing them to liquidate, which becomes a contagion event.
Mortgages are typically issued as non-recourse loans. This may not be true for HELOCs or other risky equity loans, but usually your lender can’t seize your home unless you haven’t been paying monthly.
I'm pretty sure HELOCs can be called any, iirc, but I'm not sure if fail to pay the call means they put a lien on your house or force you into foreclosure.
When people say "you should buy real estate as an investment because you can't live in your brokerage account" and then do crazy stuff with their equity that they wouldn't even dream of when investing (e.g. Boglehead investors who HELOC for some net negative remodel) it really blows my mind...
When people say "you should buy real estate as an investment because you can't live in your brokerage account" and then do crazy stuff with their equity that they wouldn't even dream of when investing (e.g. Boglehead investors who HELOC for some net negative remodel) it really blows my mind...
HELOCS cannot be called, but they can be frozen, preventing further borrowing, or have their borrowing limits reduced.
Foreclosure takes many months.
You're on the right track. There won't be a margin call, but deflating/stagnant values and high interest rates prevent these lines of credit from being established. This is what causes the overall economic slowdown in the US. People use these HELOCs for all sorts of spending they can't afford otherwise.
You'd need to somehow get people in the US to understand that a 30-year fixed rate mortgage (where the interest rate is anywhere close to current fed rate) is not a real thing. It only exists because USG distorts the market such that it can exist.
As the Fed has stopped purchasing MBS and mortgage rates jumped to 7-8%, people are in denial and prices have been stubbornly high.
Everyone I speak with seems to think this is "temporary", however, the current rates are much closer to reality and may be here for longer.
Everyone I speak with seems to think this is "temporary", however, the current rates are much closer to reality and may be here for longer.
> Everyone I speak with seems to think this is "temporary", however, the current rates are much closer to reality and may be here for longer.
IMO, it depends on how the war in Ukraine proceeds and if there will be signals of relaxing from China... in the end, interest rates represent systemic as well as individual risk and uncertainty, and the Russian invasion as well as the threat of a Chinese invasion into Taiwan (and a subsequent China-US or worldwide war) are the largest geopolitical risk factor by far.
IMO, it depends on how the war in Ukraine proceeds and if there will be signals of relaxing from China... in the end, interest rates represent systemic as well as individual risk and uncertainty, and the Russian invasion as well as the threat of a Chinese invasion into Taiwan (and a subsequent China-US or worldwide war) are the largest geopolitical risk factor by far.
Mortgage rates are still under 7%.
https://www.fund.com/top/mortgage-purchase/rates/mob/
https://www.fund.com/top/mortgage-purchase/rates/mob/
30-year fixed rate mortgages would still exist without federal government support, just like 30-year fixed rate corporate bonds. But interest rates would be higher, and there might be stricter limits on LTV ratio or PMI.
I don't think you can get a 30-year fixed mortgage in the UK. Or many other European countries.
Yeah, this time actually is different.
The problem last time was the housing prices were driven by high-risk individuals getting large loans and then the crash was due to them defaulting on said loans. There was a system of incentives for Mortgage Backed Securities where the swap was based on the value of the properties in question as well as the potential interest rate, so the prices continued to go up.
That's not happening right now.
The problem last time was the housing prices were driven by high-risk individuals getting large loans and then the crash was due to them defaulting on said loans. There was a system of incentives for Mortgage Backed Securities where the swap was based on the value of the properties in question as well as the potential interest rate, so the prices continued to go up.
That's not happening right now.
"High risk individuals"?
The "risk level of the individual" is totally wrapped up in how well the economy is able to provide people with adequate amounts of income to pay off debt, and that's not something any individual can determine. If there are systematic shifts that make it much more difficult for individuals to keep paying their debt, those individuals will become "high risk individuals".
The "risk level of the individual" is totally wrapped up in how well the economy is able to provide people with adequate amounts of income to pay off debt, and that's not something any individual can determine. If there are systematic shifts that make it much more difficult for individuals to keep paying their debt, those individuals will become "high risk individuals".
Sure, if the entire economy collapses people will start to default on their loans.
What happened in 2005-2008, though, was people defaulting on their loans caused the economy to collapse.
So while a low-risk loan can become higher risk depending on circumstances, classifying an existing high-risk loan as low-risk to improve your bottom line is never a good idea.
What happened in 2005-2008, though, was people defaulting on their loans caused the economy to collapse.
So while a low-risk loan can become higher risk depending on circumstances, classifying an existing high-risk loan as low-risk to improve your bottom line is never a good idea.
Why does the cause need to be the same?
Every stock market bubble has somewhat different causes but always ends the same.
Every stock market bubble has somewhat different causes but always ends the same.
For a few reasons.
First, you can't predict when or how things will happen if you don't know why they are happening or what is actually going on. Second, you can't consistently solve problems you don't understand. Third, this might not actually be a bubble. You seem to be saying 'of course it is a bubble, high prices == bubble,' but that's just not true.
First, you can't predict when or how things will happen if you don't know why they are happening or what is actually going on. Second, you can't consistently solve problems you don't understand. Third, this might not actually be a bubble. You seem to be saying 'of course it is a bubble, high prices == bubble,' but that's just not true.
What’s quickly unraveling shows how little has changed, primarily from a regulatory standpoint. Credit Suisse was deemed an internationally structural bank, one which could threaten global markets. The regulations to avoid further moral hazard called banks of this scale to easily separate their investment business from their retail bank. The theory was a “too big to fail” bank would be broken into the toxic casino side (which would be allowed to go bankrupt) and a healthy deposits business. Did this happen? Of course not!
Banks have taken the past 10 years and found even more novel ways to gamble with money. And a decade of zero or near-zero interest rates led to a bubble in even dumber assets, once deemed safer than cash. Now we will live through yet another massive global wealth transfer upward, giving even more power to the banks who cannot lose.
Banks have taken the past 10 years and found even more novel ways to gamble with money. And a decade of zero or near-zero interest rates led to a bubble in even dumber assets, once deemed safer than cash. Now we will live through yet another massive global wealth transfer upward, giving even more power to the banks who cannot lose.
> Now that the Federal Deposit Insurance Corp. has taken over SVB, investors expect the bonds to be sold off in coming months, adding supply to the weakened market and pushing prices lower.
Do the rules say that FDIC has to sell these right away? I imagine they have discretion on timing the sales so that it doesn't dislocate the market. The FDIC is all about stability, after all...
Do the rules say that FDIC has to sell these right away? I imagine they have discretion on timing the sales so that it doesn't dislocate the market. The FDIC is all about stability, after all...
Is it really anxiety? Seems more like pulling a bandaid off. These mortgages pay out below the fed rate and there are way too many of them.
just cancel the debt ;)
Whats going on? HN told me that if depositors were bailed out then nothing bad would happen.
I feel more confident in my belief that Wall Street (as opposed to good banks, like local credit unions who stimulate local economies) are corrupt, and the individuals involved care 100% about their own power and status, and close to 0% about the working public.
I expect that Wall Street banks would love to discredit the safety of local banks, but for my money I choose to do business with a few local credit unions whose board of directors are local and relatively transparent.
The other elephant in the room is the astronomical amount of money in derivatives, and their lack of transparency.