Some of you might remember Robert Reich.

 

He wrote a popular book in 1991, "The Work of Nations", where he talked about employment and human capital, indentifying a group of worker called "symbolic analysts", sort of an earlier label for Richard Floridas' "Creative Class".  Well he is still writing about economics and has some dire words on where we are headed:

 

Face it: The national economy isn’t escaping the gravitational pull of the Great Recession. None of the standard booster rockets are working. Near-zero short-term interest rates from the Fed, almost record-low borrowing costs in the bond market, a giant stimulus package, along with tax credits for small businesses that hire the long-term unemployed have all failed to do enough.

 

That’s because the real problem has to do with the structure of the economy, not the business cycle. No booster rocket can work unless consumers are able, at some point, to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now, their means haven’t kept up with what the growing economy could and should have been able to provide them.

 

The Real Lesson of Labor Day

 

 

...sounds like a good explanation of housing deflation in places like Dayton, which saw the collapse of a industrial middle class over the past 20 years or so.

 

 

I could deal with some of Reich's proposals, but he has far too much faith in government to have better judgment than private actors with respect to what is actually in private actors' best interests.  Just because a lot of people have lost some faith in the private sector right now doesn't mean that they don't have even less faith in government.

 

There also just isn't a whole lot of focus in his laundry list of proposals.  Universal preschool?  This has been a liberal sacred cow for a long time now, but it just doesn't seem to lead directly to increased income for those he wants to have more money to spend.  The same with health care, only moreso.  There is simply no reason to believe that the recently enacted healthcare law will mean *more* money in consumers pockets.  In many cases, it will mean *less.*  He has extraordinary--and extraordinarily ill-founded--faith in the power of government to force the private sector to simultaneously expand coverage, increase quality, and lower prices.

 

Consumer spending is artificially depressed at the moment because people aren't just shifting from spending on credit to not spending on credit; the pendulum has swung to the opposite side, and many people are now focused on paying down debts and living simply.  Consumer spending will rebound when people move back towards the middle, though hopefully not to the highs seen previously, which were unsustainable.  (Also, while this is just my opinion, it was culturally undesirable as well--neither our culture nor our economy should be built on consumers constantly spending beyond their means.)

 

He also doesn't address the possibility that businesses could simply charge less, which is what eventually happens when goods and services can't sell at their existing asking prices.  Would that be painful for many businesses?  Yes, but no one ever said that business was an easy ticket to riches.  Finding ways to expropriate money from "the wealthy" to give more people more spending power would be less necessary in that instance.

Interesting data and survey results.

 

‘Double Dip’ Recession & European Financial

 

"Significant numbers of Americans have experienced hardship as a result of the recession."

 

"- 42% say that they or their spouse has had wages or salary reduced

- 34% say they or their spouse lost their job or has been laid off

- 33% have taken on more hours or another job to try and make ends meet

- 28% dipped into a planned retirement account like an IRA or 401K because they needed the money

- 14% say they have been forced to sell or liquidate a major asset like their car or home

- 9% have had their house foreclosed on

- 8% had their child delay college (or graduate school) or drop out to save money

- In terms of their own personal finances, 2 in 10 expect say they will recover by the end of 2011 (20%), 3 in 10 say after the end of 2011 (27%), and a quarter say their personal finances won’t ever fully recover (24%)."

http://www.strategyoneinsight.com/?p=136

Buffett, Ballmer Predict Bright Economic Future

Buffett says no double-dip, Microsoft's Ballmer enthusiastic about future at Montana summit

By MATT GOURAS

The Associated Press

 

BUTTE, Mont.

 

Some of the biggest names in business said Monday that they see a bright future for the economy, with famed investor Warren Buffett declaring the country and world will not fall back into the grips of the recession.

 

"I am a huge bull on this country. We are not going to have a double-dip recession at all," said Buffett, chairman of Omaha, Neb.-based Berkshire Hathaway Inc. "I see our businesses coming back across the board."

 

Buffett said the same things that worked for the country through a century of two world wars, a depression and more all while increasing the standard of living will work again. He said banks are lending money again, businesses are hiring employees and he expects the economy to come back stronger than ever.

 

"This country works," Buffett said during a question-and-answer session via video at the Montana Economic Development Summit. "The best is yet to come."

 

More at:  http://abcnews.go.com/Business/wireStory?id=11624753

 

 

...Good news from this story for regions like Ohio which have historically relied on manufacturing- looks like people have finally realized that the Services economy just doesn't work.

Jeffrey Immelt is definitely a key player in the manufacturing world, but you'll note that he didn't say that he was about to add a lot more plants with 5,000 blue-collar manufacturing jobs.  The plants he's talking about are likely highly automated centers with lean staffs of people with substantial technological expertise.  Note that Ballmer in that same article noted the rapid (and yet still accelerating) pace of technological innovation; that includes innovation in the manufacturing sector, not just in Ballmer's own world of software development.

 

In terms of output, the death of American manufacturing was always over-hyped.  Employment in the sector has shrunk and won't come back, though, just like agriculture used to consume 70% of the labor force, but will almost certainly never return to those levels.

 

With respect to the "services" sector, my real beef with it is that it's just such an inordinately broad term.  A cardiosurgeon and a cashier are both technically in "service" occupations.

There's a third scenario:

 

Labor force increases and hours worked increase as new technologies open up entirely new sectors (who had heard of "IT" fifty years ago, let alone online retail?) and bring activities that could never have been done cost-effectively in the past into the realm of possibility.

I, for one, distinguish between professional services and services.

That would be a good place to start.

 

I also think that, technically, a lot of skilled trades fall into the services sector (though some might fall into construction, too).  Are mechanics in the services sector?  What about plumbers and electricians?  Is a welder who works on buildings in construction, but one who works on vehicles in services?

 

 

from the artical...

 

Immelt said the country is going to need to adjust, though. The economy since the 1970s has been driven by consumer credit and a misguided notion in building a "lazy" service economy, he said, and manufacturing, with an aim to reduce the trade deficit, is the key.

 

"It was just wrong. It was stupid. It was insane," Immelt said of the push for a service-based economy. "The future of the economy has to be as an exporter."

 

Ok, I agree with him to a point.  However, every country rallying around "let's be an exporter" mantra.  We all can't be net exporters.  So maybe he is saying the US should strive to bet a lot closer to the break-even point.

 

I think he is right on the bigger point, which is that the nature of the US economy is changing rapidly and the types of job that existed 40 years ago are rapidly vanishing.

 

Bring back all those agriculture jobs!!! (lol)

 

When I first heard the term 'service sector', I thought of professional services:  Lawyers, doctors, accountants, etc.  I could not for the life of me figure out how "service jobs" were lower-paying than manufacturing jobs.  I just could not (and still can not) consider a mall store employee a "service" job.  What "service" to me are they providing?

 

 

 

customer service.

As to the double-dip arguement, I think the US will avoid one, if you use the notion that any growth means we are not in a recession.  However, if you figure the economy needs to grow in the 2% minimum range to maintain decent employment levels and account for population growth, then I think the US will have trouble not dipping below 2% in sometime in the next couple of quarters.

 

Remember, one of the main hallmarks of our economy is that it is constantly cannabolizing itself to grow/change.  And as Balmer hinted in the article, that process appears to be accellerating. 

 

So we need a work force today that is more moble than ever. We need to be able to rapidly redeploy workers geographically. So much for the 'home ownership" push.

 

And we need a way to rapidly retrain and redeploy workers in new sectors. Probably need to rethink the educational system of this country.

When I first heard the term 'service sector', I thought of professional services: Lawyers, doctors, accountants, etc. I could not for the life of me figure out how "service jobs" were lower-paying than manufacturing jobs. I just could not (and still can not) consider a mall store employee a "service" job. What "service" to me are they providing?

 

Wouldn't a mall employee be in Sales?

I'd also add that in today's world, services and exports aren't mutually exclusive.  American professionals in the services sector work for international clients all the time, either by flying internationally or by working remotely.  That has been increasing.  "Export" is no longer a term that must mean a physical object put on a ship or cargo plane and flown to somewhere outside the U.S.

 

As to the need to be both physically mobile and professionally adaptable: I agree 100% as an economic matter.  This is a place where American values are in conflict, at least with respect to physical mobility, because we value professional success but we also value the social stability that comes of being able to settle in one location over the long term, particularly for families with children.  We don't like to see kids have to move six times before they turn 18.  It's a long-acknowledged problem with military children, though of course there are broad support networks for them (largely including other military families, since in most places near U.S. military installations, there will be a number of military families).

 

In terms of professional flexibility, I'm not sure that that's necessarily something that can be taught in a formal classroom setting.  In fact, I think that many things that are currently taught in formal classroom settings are going to find their way out; that model is expensive and increasingly unnecessary.  (<a href="http://ocw.mit.edu/index.htm">MIT has put a vast selection of its course materials online for no charge</a>.)  In terms of worker retraining and redeployment, my guess is that within a few years, we'll be able to do a great deal of that online (or through people's iPods) at minimal expense.

 

And, of course, I have to plug my own futurist fascinations here: I think we'll be able to do a lot better than simply watching course material online or even <a href="http://www.nytimes.com/2010/07/11/science/11robots.html">learning from educational robots</a> within a generation.  The precursor technologies that would allow direct downloading of new skill sets into willing minds are already past the proof of concept stage: we have already achieved basic <a href="http://www.sciencedaily.com/releases/2009/10/091006102637.htm">brain to brain communication</a> and <a href="http://www.technologyreview.com/biomedicine/26258/">cybernetic control of machines</a>.  That proves the concept that it is at least technologically possible to move information both into and out of the human brain using information technology.  We're still at least one conceptual generation (the leap from communication to memory) and many generations of refinement away from being able to actually transfer specific concrete pieces of information from memory to memory, but one of the biggest hurdles has already been cleared; we've established that we can transfer information the brain can process across non-biological infrastructure (i.e., circuits).  In addition, technological generations happen faster than biological generations--that was part of Ballmer's point in that article, as this phenomenon has been observed in the IT field for a while now.

 

Even if that never happens (or doesn't happen until all of us are long dead), more and more powerful educational tools are already coming online that can provide a substantial amount of education at much less cost than traditional schools, including self-directed learning packages that may well be better fits for workers that need retraining mid-adulthood.  This is likely to be a growth industry.

from the artical...

 

Immelt said the country is going to need to adjust, though. The economy since the 1970s has been driven by consumer credit and a misguided notion in building a "lazy" service economy, he said, and manufacturing, with an aim to reduce the trade deficit, is the key.

 

"It was just wrong. It was stupid. It was insane," Immelt said of the push for a service-based economy. "The future of the economy has to be as an exporter."

 

Ok, I agree with him to a point. However, every country rallying around "let's be an exporter" mantra. We all can't be net exporters. So maybe he is saying the US should strive to bet a lot closer to the break-even point.

 

I think he is right on the bigger point, which is that the nature of the US economy is changing rapidly and the types of job that existed 40 years ago are rapidly vanishing.

 

Bring back all those agriculture jobs!!! (lol)

 

 

True all countries can't be net exporters, but the ones that are are the ones that will be rich.  That is what we shoudl aim for.

There are some countries that have to import a lot of things and are comfortable with that. Greece for example, doesn't really produce a lot of goods fr export and probably won't anytime soon.

 

    Greece is a big tourism country. While they may not be producing some product in a factory and exporting it by boat, they have a steady stream of customers coming to their shores to spend some time at the beach. These customers buy food and pay for hotel rooms. Again, it's not the traditional definition of export.

When I first heard the term 'service sector', I thought of professional services: Lawyers, doctors, accountants, etc. I could not for the life of me figure out how "service jobs" were lower-paying than manufacturing jobs. I just could not (and still can not) consider a mall store employee a "service" job. What "service" to me are they providing?

 

 

They're providing a service like anyone else, really. They do have some degree of knowledge capital. I worked at a large clothing store and had to look products up online, know how to ship those products to peoples houses, check inventory from other stores, process credit card applications, etc. on top of having to know about how the store operated, how to unload trucks and read the codes on boxes, know where everything was located, know the ever-changing store policy, know info. about the products themselves, know how to prevent theft, the list goes on. It's kind of offensive that you don't even consider it a service. I've had a manufacturing job at a factory through a temp agency and another temp job through that agency where we shredded tires. I'm guessing that's under manufacturing too, since they recycle the rubber after breaking them down. I came home after every shift with rubber fibre all over my face, hair, body and a sore back. I can definitely see why those jobs pay more, or should pay more than service jobs (though I wasn't paid much through the temp service). If service jobs overall paid less, people would still want them over a manufacturing job. Manufacturing jobs are far from being glamorous work. They're either mind-numbing, break your back, or both.

There are some countries that have to import a lot of things and are comfortable with that. Greece for example, doesn't really produce a lot of goods fr export and probably won't anytime soon.

 

Greece has gone down the tank lol The jobless rate for people 15-24 is 34% and its causing rioting. The only reason Greece is a net importer is because of net exporting neighbors. Countries like Germany are going to do much better in the long term because of this. Ideally, all countries would be in a trade equilibrium but it tends to not happen. Power is made by power being taken and one country's payoff is another country's burden with the exception of certain circumstances like being able to set policy that makes you an offshore tax haven, becoming a tourist destination, making money off of loans through the IMF, etc. etc. The U.S. has it easy because of our abundance of natural resources that other countries would kill to have for economic and geo-political stability. We don't have to rely on skills, technology and innovation as much to be self-sustaining. If any number of countries pisses us off, we can cut off their food supply and metals, then they're screwed.

In response to my comment about questioning if mall workers provided a "service".

 

"They're providing a service like anyone else, really"

"It's kind of offensive that you don't even consider it a service"

 

Didn't mean to offend anyone.  My comment was somewhat retorical, but bascially I was responding to the notion mentioned above that the category of "service worker" was too broadly defined to be usefull these days.

 

There are may different levels of occupations with the "service worker" label slapped on them by the government. Professional service providers (Doctors and accountants), skilled trade/apprenticed/certified providers (plumbers and electricians (I think), hair stylists, car mechanic? etc), and retail store clerks.  I think the statistical category is too all encompassing to be as usefull as we might like.

 

And yes, a well-trained, knowledgable retail assistant does provide a very valuable service when a customer need help deciding which product is best for his/her needs. It's a joy to come across one when shopping, and certainly worth seeking out for additional advice/sales in the future.  I have know several people like this and I repeatedly return to them for sales and advice.

The confusion around retail being a "service" may revolve around the fact that there are goods exchanged. A pure service is one that exchanges labor and knowledge for money, goods or other services with little or no direct product input. I fix Playstation 2s at my store. Much of the time, I don't replace any parts. I disassemble it, clean the internals and laser lenses, sometimes grease the rods, adjust the voltage and tray and put it back together. My inputs are usually one Q-tip and perhaps one tenth of one cent's worth of rubbing alcohol. The rest of the output is my knowledge and labor. That is a pure service. Haircuts are the same way -- only a few cents of supplies are used. So ringing up someone for goods that the customer retrieved themselves is less of a pure service because much of the monetary input went toward the good itself. This ignores rent, advertising and upkeep related costs.

Those 'soup lines' continue to grow.

 

Poverty in the U.S. spikes

 

"NEW YORK (CNNMoney.com) -- The nation's poverty rate jumped to 14.3% in 2009, its highest level since 1994, and the 43.6 million Americans in need is the highest number in 51 years of record-keeping, the government said Thursday."

http://money.cnn.com/2010/09/16/news/economy/Census_poverty_rate/index.htm?hpt=T1&iref=BN1

 

Its good the banks are moving a little fast on foreclosures. But, they have a long ways to go at this rate and its going to continue to put pressure on the housing market for the foreseeable future.

 

U.S. Homes Lost to Foreclosure Up 25 Percent

 

"LOS ANGELES -- Lenders took back more homes in August than in any month since the start of the U.S. mortgage crisis."

http://www.foxnews.com/us/2010/09/16/homes-lost-foreclosure-percent/

One would think that would help Toledo more than it seems to. I loved the article a couple days in the Blade reinterpreting Toledo as a great food town. I've long heard it has some of the best dirt in the world.

Connecting to the concept that the 'slow leaking' of the oversupplyed housing inventory will takes years and put pressure on home prices for a long time to come.

 

Going down

Relief is years away: report

 

"The drop in US home prices -- which are already down 28 percent since 2006 -- could languish until 2013 as a massive 12 million homes in a shadow inventory still have to clear through the system.

 

Shadow inventory, which are homes in mortgage default or those already foreclosed upon but not yet on the market, will keep values from recovering as they drip back onto the market, experts said.

 

"Whether it's the sidelines, shadow or current inventory, the issue is there's more supply than demand," Oliver Chang, a US housing strategist with Morgan Stanley told Bloomberg News, which first reported on the data supplied by his firm as well as Moody's Analytics, Fannie Mae and Barclays."

 

Read more: http://www.nypost.com/p/news/business/relief_is_years_away_report_itpiPx5QMLbKyrkHzFMB1L#ixzz0znr7HRQ6

While the housing market is going to be intimately linked in U.S. economic history to the broader U.S. recession/slowdown we've been experiencing for two years now, I think the decline in housing prices has already done all the damage that it's going to do.  In addition, I would actually be skeptical of an apparently broad-based economic recovery being predicated on a resurgence in the housing market.  I say this with some reluctance, because the housing boom was good fuel for urban revitalization--urban construction is often more complex, and therefore more expensive, than greenfield construction.  However, as I think I said earlier on this thread (or maybe it was another one), low housing prices are probably actually good for the rest of the economy, all things considered.  High housing prices in practice yield high debt loads and high mortgage payments siphoned out of people's paychecks, as well as out of businesses' revenue.  A large part of the money that goes into the housing market is quickly buried in illiquid assets.

Right.  The jump in the value of real estate between the late 1990's and right before the crisis is really what got us into this mess IMO.... couple that with the fact that it became monumentally easier for individuals to buy homes they could not afford and disaster struck.  Of the markets I was aware of, the price of real estate nearly doubled in the time period I reference above - i.e. my house in the Heights sold for $79,000 in 1997 and was re-sold in 2005 for $139,000.  Just your basic three bedroom, 1 1/2 bath home in a fairly average neighborhood on the desirability scale.

Idk if this is the right place to post this, but I found this article to be a really interesting look at how the economy is affecting where people are choosing to live.  If people really are flocking towards locations with low cost of living, this could be a huge boon for Ohio.

 

http://www.theatlantic.com/business/archive/2010/09/why-oklahoma-city-could-represent-the-future-of-america/62897/

^ from the article... quote by mayor of Oklahoma City..

 

That's when the mayor offered an fascinating re-casting of the new economy: "The 20th century perspective was that people went where the jobs were," he said. "Today the jobs are going to go where the people are. Highly talented young people are coming to us because of the low cost of living. People want to work here."

 

I think this is kinda going out on a limb.  I suspect more likely the case is that jobs follow 2 things:  1) entepreneurial class of people, and 2) start-up money.

 

Currently OK. City is benefitting from the oil industry and the air base located there (there biggest employer, per the article).  Those 2 industries currently provide a heck of a lot of economic stability. 

 

Whether the 2 factors I postulated above come true in OK.City remains to be seen.

IT'S ALL OVER....

 

The NBER said Monday that the recession which began in December 2007 ended in June 2009, which marked the beginning of an expansion. The announcement rules out the possibility of a so-called “double-dip” recession, because any new downturn would be seen as a brand new recession.

 

http://www.msnbc.msn.com/id/39269753/ns/business-eye_on_the_economy/?GT1=43001

It should be interesting to see were we go from here. I still think 'another' recession within the next 12 months is not out of the cards. But, we may simply be in a prolonged no growth mode. This would fall in line with all the comments about us being the next Japan.

 

On a side note: It appears 10% unemployment and U6 at around 16% no long is part of the recession formula. Many on Wall Street and Washington told us we could have a recovery without jobs. I guess they were right. Maybe this will be a nice boost for those that are trying to retain their political seats.

 

U.S. recession ended June 2009, NBER finds

18-month downturn was longest since end of World War Two

 

"WASHINGTON (MarketWatch) -- The U.S. recession that started in December 2007 ended in June 2009, making it the longest slump since World War Two, according to the National Bureau of Economic Research."

http://www.marketwatch.com/story/us-recession-ended-june-2009-nber-says-2010-09-20

The issue isn't whether the recession technically ended; the issue is the pace of post-recession growth.  It would be better to have two quarters of -1% growth followed by two quarters of 5% growth than to have four quarters of 0.5% growth.

 

I think the economy is strong enough at the moment to withstand the stress of a string of looming commercial property defaults.  That damage can be contained.  It may make credit harder to come by again, as banks have to set aside capital for loan loss reserves.  However, America's private sector, writ large, has had enough time to stockpile some cash for a while now, and has done so; companies have significant amounts of liquid capital on hand, which is important to have when credit is tight.

 

We're no longer stuck in reverse.  Now we're stuck in neutral.  Better than where we've been, but not good enough yet.

^agree on all accounts.

 

Just listened to a great speaker last week discussing the upcoming wave of commercial foreclosures.

Now that the recession has been officially over for a year, I hope we see some noticable changes in how the FEDs act.

 

I would think we should no longer need the following since the recession is over:

- 0% interest rates (time to start raising rates)

- No more Quantitative Easing (QE) - the taxypayer did their part

- Restore Mark to Market - Its over, accounting at the big banks and financials should revert back to normal practices.

 

Once we see these things happen along with a noticable improvement in unemployment rate and the 50 year high poverty level rate, then I think we can say things are really improving. But for now their actions are the opposite from their words.

Rates only need to rise when inflation starts to inch upward.  Honestly, I'd rather see rates stay low and inflation tamed by reducing the federal deficit (the reduction of which is anti-inflationary).

 

Mark to market is an interesting beast.  The central flaw in mark to market accounting is this: it deals only with the value of a given asset if sold, not held.  Yet the very fact that any given asset is not being sold at that moment implies, at least as a matter of economic logic, that the person who values it the most already owns it.  Insert all the caveats about economics here, but the general rule is that if I own a widget, you offer me $100 for it, and I refuse to sell it, it means that I value it at more than $100.  Apply this logic to mortgage-backed securities and other CDOs: If I'm a bank with $1 billion in face value in mortgage-backed securities and someone offers me $600m for the portfolio, but I think I'll actually make at least $700m by holding the securities to maturity and eating the losses over time, then "mark-to-market" is actually forcing me to undervalue my asset, at least assuming I'm right about the net present value of the income stream from the portfolio.

 

On the other hand, because of borrowing and capital covenants, I may have special incentive to say that I think the portfolio is worth $700m even if it would fetch only $600m on the open market and even if $600m was an accurate reflection of the real net present value of the income stream from the portfolio.

 

Consider this, though: Inflation is very low at the moment.  That means that you don't need to subtract a great deal from the interest rates on your bonds or other fixed-income securities to get to the real present yield.  So the real question is short- and medium-term future losses.  If you believe we're headed for a double-dip recession and another wave of lost jobs, residential foreclosures, and so on, then maybe discounts to liquidation value really are appropriate.  If you don't, though, then it might be economically rational for the firms stuck with mortgage-backed securities to just sit tight and collect what they can over time--the bet being that more people would actually be able to make their mortgage payments than the current market price reflects.

 

Mark to market make sense in most cases.  If I want to know the value of my car, the issue is not what I feel it's worth, but what someone else will pay me for it.  If every owner of a Nissan (my car) were suddenly forced to sell their cars by some contract (~capital covenant) at the same time, however, the flood of Nissans on the market with sellers motivated by contractual obligations to sell would drive the price of such cars through the floor, even if they're just as good as the neighbor's Honda that's subject to no such contract.  That's not a very efficient market outcome.

I didn't even know that mark-to-market went away.

I didn't even know that mark-to-market went away.

 

Removing mark to market has been one of the biggest tools that the banks and financial companies have been using to show 'improving' balance sheets along with taxpayer money.

Rates only need to rise when inflation starts to inch upward.  Honestly, I'd rather see rates stay low and inflation tamed by reducing the federal deficit (the reduction of which is anti-inflationary).

 

I think raising rates is very valuable. It will reward savers and incentivized more people to save. It can also increase the desire to buy American debt, which we need and it would show confidence in our recovery by the Feds. I also believe that by the time they decided inflation is a problem, it will already be a problem.

 

Mark to Market: I think the debt (real estate) that banks are holding has clearly shown its value. We are not talking about a one year event. We now have several years to show their true value. If the banks thought their debt was going to be worth it original paper price, then they would not continue to unload this onto the FED, sallie, and freddie balance sheets (taxpayer), which they continue to do at significant pace even today. They know the value will never return any place near what they had bookmarked it for or are currently bookmarking it. This is why they continue to dump it as fast as possible.

 

So mark to market should be restored, its value has clearly been set and the banks know it.

I always thought the market value of a house should not be listed as the price a person is willing (and able) to pay for it.  Instead, the value should be what the 2nd highest bid is on the place.

 

Let's say a house is on the market and I'm willing to pay $200k for it.  The owner agrees to this price.  But if I'm the lender, I want to know what the 2nd highest bidder will be willing to pay for it since I will have to sell the place to the 2nd highest bidder if the highest bidder defaults.  Let's say the 2nd highest bidder would bid $195k.  As a bank, I would require a regular down-payment from the highest bidder (me) plus another $5k to make up the difference.  I realize that the old 20% down rule had this buffer built in.  I think the buffer needs to come back in one way or another.

Was there ever actually a 20% down rule, even in practice, let alone in law?

The banks have always, in practice, wanted 20% down or they will charge a higher interest rate until you have 20% equity in the house.... at least that is how I understood it to be.

The banks have always, in practice, wanted 20% down or they will charge a higher interest rate until you have 20% equity in the house.... at least that is how I understood it to be.

 

They have always wanted it, definitely.  I interpreted "the old 20% down rule" to mean something that was actually binding, not just something that was preferred and that would get you a better deal if you could do it, so I was wondering if we ever actually had a binding rule requiring 20% down.

 

In the interests of regulatory simplification (and of my general aversion to debt, especially at ridiculous leverage ratios), I'd be willing to consider substituting a hard 10% (20% might be a little much) minimum down payment requirement for residential real estate for a lot of the required laundry list of disclosures (that no one really reads) and other minor thou-shalt-nots that make up the current fair lending apparatus.

Man... I combed through my disclosures with a magnifying glass.  There were two houses that I was ready to buy and then passed on simply due to digging through the disclosures and demanding supplements to the more vague parts.

Not sure if the old 20% down rule was law or not.  I don't think it was.

 

But it sure was an industry standard, even up until I bought my first house in 1999.  There were exceptions, of course. 

 

The main exceptions were:

 

1) you could show substantual financial reserves such that you could cover the difference if called upon to do so.  Essentually, you were playing a cash-flow management angle on your financials.

 

2) you bought PMI - Private Mortgage Insurance.  PMI was/is insurance that you pay for each month as part of your mortgage payment that covers the bank in case you default.  This was all anyone talked about back in the '80s and '90s, as most people had it, most people hated it, and congress passed laws to regulate it due to consumer complaints.  Then sudden with the 90-10-10 and 80-20 mortgage it virtually disappeared.

 

So, in practice, lenders all followed the industry standard, which was the ability to cover at least 20% of the purchase price, whether thru 20% down-payment, PMI insurance for any shortfalls, or financial reserves available to cover shortfalls.

I'd be willing to consider substituting a hard 10% (20% might be a little much) minimum down payment requirement for residential real estate for a lot of the required laundry list of disclosures

 

I would agree with this, and bring back PMI for wide-scale usage.  No insurance company is going to write a PMI policy at acceptable rates these days, but once prices stabilize, I suspect we will see it a lot more.

 

As to 10% down, I personally like it.  It forces a buyer to save up money, which means they have to learn to live on less than they make for some time.  It really is a wonderful rule for instilling financial discipline.  And if you have to spend 3 years living well below your means to save up money, you will most likely be a lot wiser when finally spending it.  No more buying a house without really checking it out for expected future expenses.

 

Of course, if you were to require a 10% downpayment on a house (one the buyer save up, not one that was a gift or raided from the retirement account), then you would effectively freeze the housing market for 3 years while buyers are forced to sit on the bench and save money.

Man... I combed through my disclosures with a magnifying glass.  There were two houses that I was ready to buy and then passed on simply due to digging through the disclosures and demanding supplements to the more vague parts.

 

Are you referring to the seller's disclosure documents on the condition of the house/property (which do need to be gone thru with a magnifying glass and questioned thoroughly), or to the Lender's mortgage paper disclosure documents that you get at closing (well, often before closing but you sign them at closing) ? 

 

I think the poster was referring to the later.  But good for you if you were referring to the former.

Man... I combed through my disclosures with a magnifying glass.  There were two houses that I was ready to buy and then passed on simply due to digging through the disclosures and demanding supplements to the more vague parts.

 

Are you referring to the Seller's disclosure documents on the condition of the house and property, or to the Lender's disclosure documents on the details of the mortgage that you sign at the closing table?

 

I suspect the poster was referring to the former, but good for you if you were referring to the later.

(sorry for the double post - the system ate each of them the first time I posted them)

Of course, if you were to require a 10% downpayment on a house (one the buyer save up, not one that was a gift or raided from the retirement account), then you would effectively freeze the housing market for 3 years while buyers are forced to sit on the bench and save money.

 

You'd crimp the first-time homebuyer market, that's for certain.  I don't know about everyone else because (with the exception of the last few years, when so many mortgages went underwater), many existing homeowners have equity cushions in their homes; those proceeds could form all or part the 10% to roll into a new house.  Granted, many people bought with 0% down and the value of the home has deteriorated since then both in market-value terms and in real terms (since many people in such circumstances also don't take the greatest care of the property), but those people are the kind that we shouldn't cry over if they get forced back into rental living.  (Not to mention that that's happening to a lot of them anyway, whether or not we consider it a good thing or bad thing.)

With lending standards tightening up, this is sort of happening already.

 

I you really want to implement the standard, though, I think you could phase in the 10% requirement over a length of time. to give potential homebuyers time to plan.

Idk if this is the right place to post this, but I found this article to be a really interesting look at how the economy is affecting where people are choosing to live. If people really are flocking towards locations with low cost of living, this could be a huge boon for Ohio.

 

It is. It is certainly why Ohio and Cincinnati in particular have been on the center of our relocation radar screen now for a couple of years. Housing is afforable and the old houses I love are abundant there; summers are far cooler than in Texas (where my wife and I now reside) and winters, at least in the Cincinnati area, are comparatively moderate. People are relatively friendly in Ohio and politically more middle of the road and pragmatic, generally speaking.  Ohio seems to be relatively safe from earthquakes, floods (outside of river basins) and multi-year severe droughts. The transition from a manufacturing economy has been well underway long before the recession arrived but I expect some highly skilled, high value manufacturing to always remain even as the economy gradually heads towards a post petroleum era. New technologies may create new opportunities. Anyhow, I'm bullish on the future and feel Ohio has great potential. Better than Oklahoma, IMHO.