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America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

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Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#161

Post by ArkyBeagle »

smallnamespace wrote: post #122
John23832 wrote: post #10

The title made me think that this was going to be about subprime auto loans, which are definitely in "crisis" territory. This whole mess (subprime auto, renovation, and home loans) comes from the increasingly rent seeking nature of Wall Street. It used to be that fortunes were both made and lost on Wall Street. Now, for large investors ("whales"), it's 3.5% or I take my money to another fund. If I don't have a consis…

Marx and other classical economic thinkers speculatively connected the fall in the rate of profit to increases in inequality and long-run economic cycles [1]. Essentially, the idea is that since the rate of profit exceeds the rate of growth, rent seekers (capital holders) tend to get richer and richer and own more and more of the wealth. This impoverishes all other parts of the economy and starves it of resources, ca…

The great unanswered question is: what happened to growth?

You've outlined exactly one dimension of why we need it - without it, it's rent-seeking all the way down.

I am concerned that the emerging "Greatest Generation/Silent Generation/Baby Boom used up all the growth and now we're ... messsed up." becomes a self-fullfilling prophecy, aided by the cumulative nature of assets.

I am loath to call rent seekers "capitalists". Perhaps that's an error, but it make sense to me.

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#162

Post by thedufer »

nommm-nommm wrote: post #104
Spellman wrote: post #90

Earlier quoted context omitted.

Because, at least in the US, except for the '08 crash housing has ALWAYS gone up. Historical Graph: http://www.calculatedriskblog.com/2017/01/corelogic-house-pr... Now, it hasn't (and hadn't) gone up as quickly as the stock exchange, but it typically is a safe place to park your equity and let it grow. And especially during the height of the bubble and currently, it's growing in value rather quickly, so people (perha…

Why Your House Is Not An “Investment”... a true investment requires more than the prospect of an increase in value. https://www.moneyunder30.com/why-your-house-is-not-an-invest... * A house has a more important primary purpose * A house can’t be an investment if you never plan to sell it * Thinking of your house as an investment can lead to equity stripping * The carrying costs of a house are too high for it to be an…

> A house has a more important primary purpose

Aren't houses purchased for the intent of renting them out investments? This would argue that they are not. Seems to be proving too much.

Despite the title, this section of the article is actually about how illiquid houses are. Which, again, proves too much - old bonds are also extremely illiquid, but no one says they aren't investments.

> A house can’t be an investment if you never plan to sell it

I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house).

> Thinking of your house as an investment can lead to equity stripping

This says that thinking of your house as an investment leads to poor decisions, not that it is wrong. Sure, maybe it does, but that's a completely different argument.

> The carrying costs of a house are too high for it to be an investment

The carrying costs of a house are typically negative, unless you conveniently forget that a house covers a short position and is thus paying you back (in the form of covering your rent). Which the article does.

> Your house won’t generate cash flow

Again, it is covering a short position. It saves you from paying rent, which is mathematically identical to forcing you to continue paying rent but paying you the same amount.

> Price appreciation is the magic ingredient, but it’s not guaranteed

This is true of all investments.

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#164

Post by FireBeyond »

Spellman wrote: post #90
NikolaNovak wrote: post #84

Earlier quoted context omitted.

Can you elaborate on the homeowners considering their home an investment - and why they shouldn't? I've moved from Europe to Canada 20 years ago, and I'm still coming up against it all the time - I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down. EVERYbody around me thinks I'm crazy and that houses are #1 best investment ever.

Because, at least in the US, except for the '08 crash housing has ALWAYS gone up. Historical Graph: http://www.calculatedriskblog.com/2017/01/corelogic-house-pr... Now, it hasn't (and hadn't) gone up as quickly as the stock exchange, but it typically is a safe place to park your equity and let it grow. And especially during the height of the bubble and currently, it's growing in value rather quickly, so people (perha…

"(perhaps influenced by HGTV)"

Oh, yes. "So before we reno'ed your house, it was worth $300K. We put $50K into renovations and it's now worth $400K!"

Just like ... "magic". Now I know this is simplistic, as the value of an actual improvement which has had the planning, effort and time in does have a premium over the pure investment. But some of this was farcical, and lead many to believe they could do the same.

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#165

Post by FireBeyond »

djrogers wrote: post #75
FireBeyond wrote: post #68

Earlier quoted context omitted.

"blame during the financial crisis of 2007-08 as many consumers took on home loans they had no intention of ever making good on" Citation needed - for the number of consumers who "took a mortgage they never had any intention of paying" (your example), versus "people who took on a mortgage they couldn't keep paying (after the ARM bubble, which, let's not forget, all the banks were promising would be a matter of "refin…

> people who took on a mortgage they couldn't keep paying (after the ARM bubble Citation needed - most of the indexes used for anchoring ARM rates either dropped or stayed steady leading up to and through the sub-prime mortgage crisis. An ARM fixed to LIBOR for example would have dropped in rate when it adjusted. Problems did occur with non-standard loan types - Interest only, balloon payment mortgages, etc. however…

I'll stand corrected, your example is more accurate and more specific than mine - those non-standard (non-conforming?) loan types are more what I had in mind than the simple divide between fixed and ARM.

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#166

Post by Intermernet »

drspacemonkey wrote: post #126
roymurdock wrote: post #39

Earlier quoted context omitted.

I'm not blaming the victim, I'm appealing for a more nuanced viewpoint than "fuck Wall St." There are at least 2 sides to every loan - the originator and the borrower - and it helps to examine dynamics on both sides of the table. Is the book in the US generally stacked towards originators? Certainly, as I argue, with financial literacy being so low, most home-owners wanting to do anything to avoid moving, and family/…

>There are at least 2 sides to every loan - the originator and the borrower - and it helps to examine dynamics on both sides of the table. You've kind of hit on a huge part of the problem - there's WAY more than 2 sides. Thanks to swaps, derivatives, and bonds, the originator isn't on the hook if the borrower defaults. The originator isn't even holding the loan anymore. They've bundled it up and sold it off to a 3rd…

> The originator isn't even holding the loan anymore. They've bundled it up and sold it off to a 3rd party who never bothers to check if the loans are any good, because THEY bundle it up and sell it off ASAP to a 4th party. Repeat ad nauseum.

"You get a hot potato, you pass it on. I passed it on. Listen, there were a lot of people who are very happy to get things taken care of for me. Hey, you know? It was really funny seeing how far and how fast that particular potato got passed on. That told me a lot about who was bright and who was not."

The Long Dark Tea-Time of the Soul - Douglas Adams

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#167

Post by dvtv75 »

aswanson wrote: post #79
intrasight wrote: post #53

Earlier quoted context omitted.

I think you've hit the nail on the head when it comes to houses - people form irrational sentimental attachments to their real estate.

Buying a home is a massive bet on the local employment market (in your niche) staying fungible over decades. At the rate of creative destruction happening in business these days and the associated deterioration of the employee/employer (implied) social contract since at least the 80s...this just doesn't make sense.

> Buying a home is a massive bet on the local employment market (in your niche) staying fungible over decades.

I've seen "fungible" used to indicate flexibility, and I've seen it used to indicate growth and decay. Are you using it to indicate either of these, or are you attempting to indicate a long-term steady state?

When trying to communicate an idea, you may wish to use a word that has a fixed meaning and a reasonable chance of being understood, because to be brutally honest, I haven't any idea what you're actually intending.

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#168

Post by lisper »

smallnamespace wrote: post #122
John23832 wrote: post #10

The title made me think that this was going to be about subprime auto loans, which are definitely in "crisis" territory. This whole mess (subprime auto, renovation, and home loans) comes from the increasingly rent seeking nature of Wall Street. It used to be that fortunes were both made and lost on Wall Street. Now, for large investors ("whales"), it's 3.5% or I take my money to another fund. If I don't have a consis…

Marx and other classical economic thinkers speculatively connected the fall in the rate of profit to increases in inequality and long-run economic cycles [1]. Essentially, the idea is that since the rate of profit exceeds the rate of growth, rent seekers (capital holders) tend to get richer and richer and own more and more of the wealth. This impoverishes all other parts of the economy and starves it of resources, ca…

> For some reason this idea has been rejected by the mainstream for the last 70 years or so

The reason is obvious: it was Marx's idea. Even today many people in the U.S. have visceral negative reactions to the mere mention of Marx. Marxism is not just viewed as wrong, it is viewed as evil. And not just evil, but the ultimate evil (at least until Islamic extremism stole the limelight), an existential threat to God, motherhood, apple pie and capitalism, all of which have similar moral standing in the hearts and minds of many Americans, facts be damned.

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#169

Post by slededit »

elastic_church wrote: post #150
slededit wrote: post #148

Earlier quoted context omitted.

It would be amazing if you could get leverage at rates below T-Bills. You are most certainly not at lower risk than the US government. It may be possible if you play duration arbitrage taking short term loans to buy long term treasuries. But then your playing a very dangerous game.

Would be amazing right Four child replies deep and someone mentions that leverage could be dangerous, might be a new record folks! Ironic if you are successful then poor people that can't even lock up $1,000 for a few years will say you are a rent seeking mess.

Its not that leverage is dangerous necessarily - if you could get money at a lower rate for a similar time period its in fact nearly risk free. Its just that these opportunities are extremely rare and short circuiting it by using shorter term debt negates the benefits.

Re: America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

#170

Post by nommm-nommm »

thedufer wrote: post #162
nommm-nommm wrote: post #104

Earlier quoted context omitted.

Why Your House Is Not An “Investment”... a true investment requires more than the prospect of an increase in value. https://www.moneyunder30.com/why-your-house-is-not-an-invest... * A house has a more important primary purpose * A house can’t be an investment if you never plan to sell it * Thinking of your house as an investment can lead to equity stripping * The carrying costs of a house are too high for it to be an…

> A house has a more important primary purpose Aren't houses purchased for the intent of renting them out investments? This would argue that they are not. Seems to be proving too much. Despite the title, this section of the article is actually about how illiquid houses are. Which, again, proves too much - old bonds are also extremely illiquid, but no one says they aren't investments. > A house can’t be an investment…

>Aren't houses purchased for the intent of renting them out investments?

Those are investment properties which is a different thing than we are talking about. We are talking about a primary residence bought to live in.

Yes, some investments are illiquid, I have some personally, but its stupid to have your entire portfolio in illiquid assets.

>I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house).

A house doesn't provide dividends. Unless you are talking about investment properties, which, again, isn't what we are talking about here.

>The carrying costs of a house are typically negative

Doubtful. Very, very, few people are going to spend as much on rent as they would a house. Houses have a way of eating away at your money in a way renting does not. The carrying cost of my house is certainly not negative.

Of course, "you have to live somewhere" muddles the water a little bit. But its designed to get you to think about your house as more "somewhere to live" rather than "something to build wealth."

>This is true of all investments.

Which is why we diversify, to minimize risk. The American mindset is "buy a house because your house will make you rich." So people overspend on houses neglecting any other investments or savings in the process. That's the real problem.

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