Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

[jk]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

There is not now and there never was a "housing" problem - it's a credit-gone-wild problem fomented by too low interest rates and too easy money from the Fed and aggressive lending practices designed to profit from it.

markets overshoot on the upside, then overshoot on the downside. it may be my projection, but my guess is that gross is worried that the overshoot on the downside will take down the economy and with it a lot of homeowners who really weren't speculating or overleveraging [compared to practices in more normal times].

[Finster]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

markets overshoot on the upside, then overshoot on the downside. it may be my projection, but my guess is that gross is worried that the overshoot on the downside will take down the economy and with it a lot of homeowners who really weren't speculating or overleveraging [compared to practices in more normal times].

I see. On the other hand, what harm does a homeowner suffer if he was not speculating or overleveraging? Home prices would have to decline by more than 20% to underwater even the maximum traditional 80% LTVer. Otherwise, he doesn't care what home prices do unless he was speculating that he'd profit by selling the home and using the money for something else. This is because even if he sells the house for less than what he paid for, so long as he buys another home with the proceeds he's paying proportionately less so that it's a complete wash. This tendency to omit the buyer's perspective and consider only the seller's is common, but it's completely fallacious since there is never a sale without a purchase. Hence the bias is to uncritically assume that when it comes to prices, higher is better and lower is worse. I have never heard anyone making such an assumption even attempt to justify it, but Gross sure needs to if he wants to make a case that higher house prices ought to be public policy.

And if market overshoot is cause for concern, then shouldn't it work both ways? What was he advocating when the overshoot was to the upside? This apparent asymmetry is what prompted my original question "Only deflation is destructive? Inflation is not?" This is no trifling matter, because the deflation he frets about is the natural result of the inflation that preceded it.

[jk]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

And if market overshoot is cause for concern, then shouldn't it work both ways? What was he advocating when the overshoot was to the upside?

for a long time [years] he's been saying that the system is nuts, that stocks and everything else were way overvalued and that leverage had gone amuck. i have a hunch he's worried about the depth of the recession around the corner.

[Finster]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

for a long time [years] he's been saying that the system is nuts, that stocks and everything else were way overvalued and that leverage had gone amuck. i have a hunch he's worried about the depth of the recession around the corner.

Hmmm ... maybe now that Gross is Greenspan's boss, he can straighten him out on that ... :eek:

[jk]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

Hmmm ... maybe now that Gross is Greenspan's boss, he can straighten him out on that ... :eek:

that was a strange hire. i was shocked by the announcement.

[jimmygu3]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

This public letter reads to me more like the ramblings of a man who just found his wife in bed with his best friend, his best friend's brother, a midget, and a gallon of jello, all at the same time, and now she is going to divorce him and take 50% of his money and property.

Just when I thought I was getting a handle on all this monetary and financial stuff, I feel totally lost again. What were they doing with the jello?

[GRG55]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

...Just for starters, his logic goes something like this: Because millions of Americans have erroneously assumed their houses were a safe "savings nest egg", the rest of us are now obliged to make it come true. Where the heck does an idea like this come from? It used to be you put your savings in the bank. Yet this even pales in comparison to the blunder embedded in his original assumption. If people were only using their homes as a "savings nest egg", they wouldn't be in trouble in the first place. What they did was engage in a risky speculation of shorting dollars and going long housing - that their homes would appreciate faster than the rate they paid on their mortage debt - and in many cases that they'd be able to either pay the escalating mortgage payment or flip before it escalated. Calling buying a house with money you don't even have yet an act of "savings" is preposterous, and a man as smart as Gross either knows it or has been in hanging around in the high finance set too long.

There is not now and there never was a "housing" problem - it's a credit-gone-wild problem fomented by too low interest rates and too easy money from the Fed and aggressive lending practices designed to profit from it. And if a lot people suffered from a misconception about what a home is for and learned that it was wrong, then the rest of the people would be doing them a disservice in "unlearning" them right back to their original state of error...

Bingo. What Finster is astutely pointing out here is that a whole lotta people in the good ol' U.S of eh decided to run their own personal little hedge fund. Use little to none of their own money, secure an asset (house), lever it to the limit, and hope that a "greater fool" arrived on the doorstep to restore their liquidity at a handsome profit. They've just discovered they are no more "hedged" (by constantly rising price) than many of the (formerly) high rolling masters of the universe in Greenwich and Mayfair. That these two cohorts, at completely opposite ends of the personal income spectrum, are siamesed by mortgage backed credit derivatives is ironic. Globalization works in some truly interesting ways.

[EJ]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

that was a strange hire. i was shocked by the announcement.

Why shocked? Greenspan has always been a hired gun.

[zoog]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

Home prices would have to decline by more than 20% to underwater even the maximum traditional 80% LTVer.

Just nitpicking, but because of the typical 6% agent commission the seller would have to pay, prices only have to fall more than 14%. If the seller does FSBO but the buyer has an agent, then maybe it's 17%.

Otherwise I agree with your post.;)

[jk]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

Why shocked? Greenspan has always been a hired gun.

not shocked that greenspan would accept employment from whomever had the bucks. shocked that gross wanted him.

[GRG55]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

not shocked that greenspan would accept employment from whomever had the bucks. shocked that gross wanted him.

jk: I doubt he was hired for his economic prescience; PIMCO probably saw value in his network. Isn't that the reason why most retired Administration officials get snapped up (many in recent years by the PE houses), no matter how abysmal their track record in office?

[jk]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

jk: I doubt he was hired for his economic prescience; PIMCO probably saw value in his network. Isn't that the reason why most retired Administration officials get snapped up (many in recent years by the PE houses), no matter how abysmal their track record in office?

yes. there's no other reason to hire him. i guess i had gross on a pedistal and thought of hiring greenspan as dirtying his hands.

[jimmygu3]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

Home prices would have to decline by more than 20% to underwater even the maximum traditional 80% LTVer. Otherwise, he doesn't care what home prices do unless he was speculating that he'd profit by selling the home and using the money for something else. This is because even if he sells the house for less than what he paid for, so long as he buys another home with the proceeds he's paying proportionately less so that it's a complete wash.

Just nitpicking, but because of the typical 6% agent commission the seller would have to pay, prices only have to fall more than 14%. If the seller does FSBO but the buyer has an agent, then maybe it's 17%.

Actually, even excluding transaction costs, any price decline puts a seller/repurchaser in a negative position. If a person purchases a $250k house (~U.S. median) with $50k down and prices decline 10%, the house sells for $225k with $25k paid to seller at closing. He goes out to buy an equivalent house for $225k and needs a $45k down payment, so he must pay an additional $20k of cash. Of course, most sellers end up paying a 6% commission, leaving our responsible 80% LTVer $33,500 out of pocket just to move to an equivalent home and be back to 20% equity.

It's even worse for a 95% LTVer, requiring $12,500 paid by seller at closing, $11,250 for the new down payment, the same commission as above, for a total of $37,250 cash out of pocket.

Where does a median-income person find that kind of money (nearly a year's salary)? That's right! Cash out the retirement account. Welcome to the stock market crash.

Jimmy

[Finster]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

Actually, even excluding transaction costs, any price decline puts a seller/repurchaser in a negative position. If you purchase a $250k house (U.S. median) with $50k down and prices decline 10%, the house sells for $225k with $25k paid to seller at closing. He goes out to buy an equivalent house for $225k and needs a $45k down payment, so he must pay an additional $20k of cash. Of course, most sellers end up paying a 6% commission, leaving our responsible 20% LTVer $33,500 out of pocket just to move to an equivalent home and be back to 20% equity.

It's even worse for a 5% LTVer, requiring $12,500 paid by seller at closing, $11,250 for the new down payment, the same commission as above, for a total of $37,250 cash out of pocket.

Where does a median-income person find that kind of money? That's right! Cash out the retirement account. Welcome to the stock market crash.

Jimmy

Think about this carefully, Jimmy. What you characterize as a loss on the home isn't that at all. The homeowner who buys a house for its value to him as a home has the same shelter and amenities after the price decline as before. The only way you can arrive at a conclusion of loss is by assuming the existence of and considering a mortgage. Try omitting that from your calculus and you just can't extract the same conclusion. Consider the home and the mortgage separately, and it becomes clear that the loss came not from the home, but from the mortgage.

So if there is no loss on the home, how did we get one when we introduced a mortgage? Simple, if not obvious. The loss incurred is a result of a bad short bet on the currency. The mortgaged homeowner went long a house and short money. His wager was that the value of cash would fall faster against his home than the rate of interest he pays. It's not entirely irrational, given that he's been conditioned by decades of inflation to expect his currency to fall in relation to real assets, but nevertheless that was his bet.

[jk]

Re: Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

The loss incurred is a result of a bad short bet on the currency. The mortgaged homeowner went long a house and short money. His wager was that the value of cash would fall faster against his home than the rate of interest he pays. It's not entirely irrational, given that he's been conditioned by decades of inflation to expect his currency to fall in relation to real assets, but nevertheless that was his bet.

the reality is that the u.s. housing market is built on the institution of mortgages, and that mortgages were embedded in the system by the tax deductibility of the interest. had there never been mortgages, house prices would never have risen the way have even prior to the housing bubble. if people had to save the total price of house before being able to purchase one, we would have much less private housing, but the private housing available would also be cheaper by virtue of the smaller demand. one could easily argue that this would have been preferable economically - the u.s. has overinvested in housing, a consumer durable, which has reduced productive investment.

nonetheless, this is the world we live in, not some ideologically pure fantasy. the argument you make, finster, applies to the fantasy world and also to people who in this world have the choice of buying a house for cash or of borrowing. very few people have that particular choice available to them.