Bottom line is this...

 

100% of the housing stock of an area must be affordable to 70% of the buyers of that area. 

 

For most areas, that's the people living and working there (some cities are exceptions).

 

Affordability is determined primarily by income (again, primarily wages) and lending standards.

 

So yes, things do get out of balance from time-to-time.  But in the end, they must come back into balance. 

 

Using the rising value of a house to help pay the mortgage on it is simply not sustainable. Using a future rise in income to pay for a mortgage is a gamble - may work for young lawyers & doctors, probably doesn't work for most others.  (Of course, using any future income to pay for a mortgage is also a gamble, but in most cases it's a pretty good one as most people will have some sort of job with some sort of income.)

 

----------------

edit:  this post was in response to others above, but primarily the statement about 'buy now or be priced out foreever'.

 

I agree.

 

I suggest to people all the time to buy down and build up.  If you really look at your floor plan, dwelling type and design, you find that you can add a bathroom, add a deck/sunroom or create a mastersuite.  In addition, you can probably buy upgraded appliances and or fixtures (that fit into the house and neighboorhood  - as you don't want to over improve or price yourself above the market) and still come out spending less than those that bought a brand new spankin' mcmansion out in nowhereville! 

 

A couple of people here have asked me how I can maintain a condo in Cleveland and the house in NYC.  If I hadn't bought the apartment at bottom of the barrel price and upgraded it over the years I could not have never done both.

 

My apartment was probably the worst unit in the entire complex.  The worst!  A lot of times people think my apartment has been like that all along.  The amount I paid and invested is many times less than what I would have paid for a market rate unit in good condition at the time I bought.  Not knowing a thing about real estate at the time I bought, it's been the best investment I've ever made.

 

Also, folks need to realize we live in an area that is stable.  In Ohio a home purchase is along term investment not a house flipping market.  Right now, house flippers are equal to the "dot.com" boom and bust.

Boreal, even coastal cities and geographically constrained cities have affordable neighborhoods. They may be a little less desirable, but they do exist, and with some legwork most people could have find a safe reasonably nice place. On the off chance that they absolutely couldn't find an affordable home, then there is no good reason that they should be buying a home. Renting isn't something to be ashamed of, and if that's what is best for someone's financial well-being, they should do so. Down the road when they're in a different financial state, home buying might become an option then.

That Hissing Sound

By PAUL KRUGMAN

Published: August 8, 2005

 

...snip...

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

 

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

 

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

 

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

 

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

...read on...

http://www.nytimes.com/2005/08/08/opinion/08krugman.html

Boreal, even coastal cities and geographically constrained cities have affordable neighborhoods. They may be a little less desirable, but they do exist, and with some legwork most people could have find a safe reasonably nice place. On the off chance that they absolutely couldn't find an affordable home, [glow=red,2,300]then there is no good reason that they should be buying a home.[/glow] Renting isn't something to be ashamed of, and if that's what is best for someone's financial well-being, they should do so. Down the road when they're in a different financial state, home buying might become an option then.

 

100% Agree.  Preach on Decaon Grumpy, preach on!

Still, the most important real estate point is:  Location, Location, Location.  Values have not really gone down in my part of greater Cincinnati.  It is still a very desirable middle class, neighborhood (even with me in it).

 

MTS, just curious as to what you thought of the Brownstone Rehab they did on This Old House?

Still, the most important real estate point is:  Location, Location, Location.  Values have not really gone down in my part of greater Cincinnati.  It is still a very desirable middle class, neighborhood (even with me in it).

Lawd, those poor neighbors!

 

I dont know cinci, nor the nabes, but I bet you live in a mature neighborhood which has turned once or twice.

 

MTS, just curious as to what you thought of the Brownstone Rehab they did on This Old House?

 

I only saw the house while it was in the process of being renovated.  I didn't get a chance to see it while it was still a boarding house.  The finished product was "OK", it didn't really move me.  I dont like when a brownstone is renovated into multiple housing units.

affordable and desirable are not the same thing

Absolutely not the same thing, but if you look around at what you can afford and it's not desirable, it's time to either look in a different neighborhood, or lower your standards of desireability.

 

Hence 540+ rejected houses.  I would rather stay where we are and keep renting than move to a neighborhood I don't want to live in and bust my hump to pay for a house I don't love with all my heart.

affordable and desirable are not the same thing

Absolutely not the same thing, but if you look around at what you can afford and it's not desirable, it's time to either look in a different neighborhood, or lower your standards of desireability.

 

Hence 540+ rejected houses.  I would rather stay where we are and keep renting than move to a neighborhood I don't want to live in and bust my hump to pay for a house I don't love with all my heart.

 

Thats exactly how I feel about MC!  It's my baby!

And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

 

I agree that this is what happens.  However, I stand by my statement that this is basically a gamble.

 

The article (the portion posted) describes the inflation of a housing bubble, but does not describe what happens when it deflates.  Buying a house at the bottom of a cycle may be a good thing, financially.  Buying during the rise or near the top is pretty much a gamble that you can get out before the top.

 

When you buy near the bottom of a cycle, it's because house prices have fallen to a point where about 70% of the buyers in the market can buy all the housing that's available.  So, basically, the cycle returns to the long-term trend.  (in reality, it probably over-corrects some).

 

There are several examples of this in the US in the past 30 years:  So Cal in the late 80's, NYC in the late '80s, Houston in the early '80s, Denver in the late '90s, etc.    Buying near the top for investment purposes in any of these markets was a major gamble.  Most lost out.  Buying near the bottom in the mid '90s was a winner financially if you waited 5+ years for the bubble to get going.

 

So I stand by my statement that buying under pressure "before you are priced out" is by-and-large a financial gamble, and you should be preparred to lose on the gamble if you can't time your exit right, because in a 'zoned zone', house prices will eventually fall back to historical norms (my 70% of people being able to aford 100% of housing definition).

 

I think we probably agree by-and-large on the bubble and how to play it.  I'm just agreeing with others that buying 'before you are priced out' is not a valid reason to buy, because unless you are in the bottom 30% of financial strength in your market, you will never be priced out in the long run. And if you are in the bottom 30%, then you should probably rent until you aren't in that category.

 

-------

One thing to add to the 'zoned zone' article posted (maybe this is a question) - in Ohio its real easy for companies to move, as the tax laws and tax abatements actually ecourage this. So land prices are one thing.  Migrating companies are another.  It doesn't help much if land is dirt cheap if its 100 miles from employment.  But if a company leaves a suburb and moves to an exurbe (happens all the time in Ohio), then that land suddenly becomes ripe for housing.

 

I guess the question is.... Does this happen a lot in other states?  I don't think it does in the big coastal cities that are anchored by an ocean.  But does int happen a lot in Georgia?  In Nebraska?  In western PA?

 

In certainly happens in the sprawling areas around Philadelphia and D.C.. Virginia is one gigantic sprawl monster from NOVA to Richmond to North and South Hampton Roads.

In certainly happens in the sprawling areas around Philadelphia and D.C.. Virginia is one gigantic sprawl monster from NOVA to Richmond to North and South Hampton Roads.

 

What certainly happens??

Cincydad referred to the lack of sprawl along the East Coast, but it doesn't hold up especially the southern half of the northern half.

IT happens!!!

Cincydad referred to the lack of sprawl along the East Coast, but it doesn't hold up especially the southern half of the northern half.

 

ummm.....in the future do you think you use quotes to posts you're responding to?  thanks.

ummm.....in the future do you think you could use quotes to posts you're responding to? thanks.

Or at least nouns instead of pronouns

Fine . . . all.

I think this bad bank concept, if approved, will grow to include more and more bad debt from other financial institutions over time. This has already been done to a certain degree with the FEDs accepting bad paper for money. In the end Main Street will be the one either trying to repay all the loses or defaulting on the loses. In my opinion this is really another form of bankrupcy for these companies as well as the government. It just comes down to who will end up holding the bag and taking the big lose (the taxpayer and/or the debters).

 

Feds weigh remake of loan giants

By Zachary A. Goldfarb and David Cho

The Washington Post

Updated: 08/06/2009 03:02:45 AM MDT

 

"WASHINGTON — The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said.

 

The bad debts the firms own would be placed in new government financial institutions — so-called bad banks — that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

 

The moves would represent one of the most dramatic reorderings of the badly shattered housing finance system since Fannie Mae was created by Congress to support mortgage lending during the Great Depression. Both Fannie Mae and Freddie Mac, based in McLean, Va., have government charters to buy home loans from banks, which they then repackage and sell to investors. The banks can then use the proceeds to offer more loans to homebuyers.

 

...

 

http://www.denverpost.com/business/ci_13002357

IF YOU THINK THIS IS OVER, THINK AGAIN. We are only in the eye of the storm, the back half has not even hit yet.

 

About half of U.S. mortgages seen underwater by 2011

 

NEW YORK (Reuters) – The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

 

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

 

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

 

...

 

http://news.yahoo.com/s/nm/20090805/bs_nm/us_usa_housing_deutschebank

IF YOU THINK THIS IS OVER, THINK AGAIN. We are only in the eye of the storm, the back half has not even hit yet.

 

About half of U.S. mortgages seen underwater by 2011

 

NEW YORK (Reuters) %u2013 The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

 

I wonder how if we could see the breakdown of location of these homes. 

- city

- suburb

- exurb

 

I bet the majority of those homes are those tacky ass new build tract homes or soulless mcmansions!

NEW YORK (Reuters) The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

 

 

Doesn't it only matter if you have to sell?  Its not like a car that is depreciating in value and has no chance of rising.  For the majority of people, the current value is irrelevant if you don't have to move.

IF YOU THINK THIS IS OVER, THINK AGAIN. We are only in the eye of the storm, the back half has not even hit yet.

 

About half of U.S. mortgages seen underwater by 2011

 

NEW YORK (Reuters) %u2013 The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

 

I wonder how if we could see the breakdown of location of these homes.

- city

- suburb

- exurb

 

I bet the majority of those homes are those tacky ass new build tract homes or soulless mcmansions!

 

I think this next round will hit higher end suburbia and high end urban condo areas the most.

NEW YORK (Reuters) The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

 

 

Doesn't it only matter if you have to sell? Its not like a car that is depreciating in value and has no chance of rising. For the majority of people, the current value is irrelevant if you don't have to move.

 

The big problem is not only will they be upside down on their loan, but they will need to refinance as well. This is going to send foreclosures through the roof again and the price tag will be much higher than subprime (which was mostly loans on lower cost housing). That is why subprime creamed investors and older, inner city neighborhoods. This next round is going to hit the high end suburbs and more expensive urban areas.

They would only need to refinance if they have an adjustable rate.

Doesn't it only matter if you have to sell?  Its not like a car that is depreciating in value and has no chance of rising.

 

You are thinking like a straight-forward Ohioan

 

But that is not how the bubble people think.  Ohioans usually view a house as a place to live, and hopefully down the road it will be worth a little more than you paid for it.  It's like a 'store of wealth', with slow, steady interest build-up.

 

But for many people in the bubble states, the Zoned Zone areas, the thinking is very different.  A house is an investment first, and a place to live secondly.  In fact, you don't have to live in it - you can rent it out at a loss or totally abandon it.  That's because house prices are supposed to rise rapidly during a housing boom.  You reap your profits on the sale, or take them out as you go by refinancing.  A house is a cash cow.  Never mind that it costs more to own the place than it does to rent it, because appreciation makes up the difference, and then some.

 

... until it doesn't. 

 

And that is the popping sound we are hearing coming from the sand states.  Now the cost of owning RE is higher than the revenue generated (thru rents, mortgage extraction).  It's higher than you can rent a similar place for yourself.  You are steadily losing money by owning a place.  And it does not look like your investiment will turn positive for many years now.  But you are losing money every month on the place, and that reallyl hits home each time you make the mortgage payment.

 

So what do people in California and other bubble states do who are underwater in that situation - they walk away from their mortgage and rent a similar house for a bit less than their mortgage payment.  That stops the monthly financial bleeding that was killing them.  They get a similar living arrangement at a significantly lower monthly cost, without the risk of future RE boom/bust.

 

How does this affect a person? 

 

+California is a non-recourse state, meaning the banks cannot come back to the (former) owner for any loan shortfalls.  The person is legally protected from wage garnishments, etc. 

 

+The person loses an asset that they were hoping would make them a lot of money - but so what. Unlike stocks, it was costing them a nice chunk of money each month to hold, and the prospects of future gains are nil right now. 

 

+ The person can go ahead and rent a place for a lot less - their monthly cost of housing drops significantly.

 

+ The person loses their downpayment.  A lot of people had little to no downpayment.  And for those underwater, their downpayment is gone and there are dim prospects of getting it back anytime soon.

 

+ The person takes a negative hit on their credit report - a foreclosure.  So what.  They can still rent (I don't think an applicant's foreclosure is going to stop most landlords in CA from renting their vacant house out).  The housing market isn't going to be a good investment for many years, by which time their foreclosure will be a distant event on the credit report.  Yea, the credit report is used for more things than a mortgage, but the person will take the chance that they can get a car loan in the future by explaining that they were just like everyone else (having a foreclosure in their credit past).

 

+ The person is somewhat liberated to relocate.... unemployment is high in CA and rising. If the person loses their job, there's a good chance they will lose the house anyway.  And with no house to sell/maintain/rent, it becomes a whole lot easier to relocate for a new job.  So, if you feel your job is shaky, you don't have a lot to lose by walking away.

 

----------

This does not apply to everyone in CA or other bubble state, of course.  But from reading enough blogs that include a lot of people from CA, you can see how all of this (and more) has sort of crept into the psychy of the place - that a house is an investment, and that walking away from a mortgage is socially acceptable and considered good financial sense. Its a 'what everyone does' mentality.

 

The biggest problem is that the lenders did not properly adjust for this in their lending standards.  Mortgage rates should be 2+ percent higher in CA than in many other parts of the country to adjust for all this. Instead, they were actually lower.

 

Remember, a mortgage is a legal contract that spells out conditions and responsibilities during its term, and penalities for getting out of it at any point along the way.  In Ohio, there is a social morality that says you made a promise to pay back a certain amount, so you have to keep your promise.  But legally, you do not.  You only have to live up to the terms of the contract.  Social morals are irrelevant (not literally). If the contract says that if you do not send in your monthly payment on time, the lender CAN take the property back, then that's what is in effect.  If you decide not to send in your payment, you risk the bank repossesing the place. (we are seeing now that the banks are often delaying exercising this repossession clause at the moment.) I think in CA the moral issues of a loan have been removed and only the legal terms of the loan contract are honored.

 

Keep in mind that businesses walk away from mortgages all the time (or renegotiate them by threatening to walk away).  They have removed the moral issues and go strictly by the terms of the lending documents when it suits them.  People in CA are doing this as well.  People in Ohio are a bit more reluctant to let go the moral issues of a loan, at least at this time in history.  But like the stigma of divorce (the breaking of a legal marraige contract), look for the social norms surrounding a legal lending contract to change as well.

(now we tax payers get to make up for the bank's financial loses in all this - so I guess the banks played it well.)

 

 

Things are worsening more slowly

Unemployment is still rising -- but not as fast

 

"Aug. 7, 2009 | The economy is getting worse more slowly. That's just about the only clear reading that's coming from the economic reports, including this morning's important one on employment. The pace of job losses slowed -- payrolls fell by 247,000, after a 443,000 loss in June, and the official jobless rate dropped from 9.5 to 9.4 percent.

 

Be careful with these figures, though. They don't include the increasing numbers of people working part-time who'd rather have full-time jobs. Nor do they include a large number who have given up looking for work. They don't reflect the many millions who have found new jobs that pay less than the old ones they lost. And they don't include one of the shortest typical workweeks on record, for those who still have full-time jobs. (On this score, though, another indication that things are worsening more slowly -- the workweek went up very slightly from 33 hours.) Nor, for that matter, do the numbers reflect the 130,000 people who are coming into the labor force each month ready and willing to work, who can't find jobs.

 

If all these people are included, my estimate is that one out of five Americans who would otherwise be working full-time are now underemployed. We are still experiencing the biggest decline of any post-World War II economic slump."

http://www.salon.com/opinion/feature/2009/08/07/reich_unemployment/

On serious note though, 401(k)'s. Good idea right now, bad idea? How does the recession affect the long-term outlook for them? Under what circumstances should a 20-something college grad with a bachelor of science degree accept his company plan and under what circumstances would it be better to have that money as take-home pay? Any recommendations (yours included, MTS)?

 

For the over 30 crowd, how are your 401(k) plans doing right now and what do you think the future holds for them?

 

Always, always, always put money into your 401k.  People think they cant afford to invest, but they should.

 

I dont even want to talk about my 401k.  ugh.

C-Dawg Njaim - I felt the same way when I was living in Youngstown.  Very depressing.  I moved to Cleveland almost 2 years ago.  It's not nearly as bad as what you describe Toledo and Detroit to be.  I really believe the economy is already getting better here, or maybe not getting any worse. 

On serious note though, 401(k)'s. Good idea right now, bad idea? How does the recession affect the long-term outlook for them? Under what circumstances should a recent 20-something college grad accept his company plan and under what circumstances would it be better to have that money as take-home pay? Any recommendations (yours included, MTS)?

 

For the over 30 crowd, how are your 401(k) plans doing right now and what do you think the future holds for them?

Why would take home pay ever be better than a 401k? Seriously, unless your company requires you to invest with Billy Bob's Bait, Beer and Mutual Fundz, or some other plan that you feel is definitly going to lose money, you're better off investing in the plan. Even if the returns are paltry, the tax benefits plus the fact that it comes out of your check before you get a chance to spend it make a 401k a good deal for almost everyone.

 

On the off chance that you don't trust your employers plan, or you don't plan to stay at your current employer very long, at least make sure you're putting something away. As a 20-something, this is the best possible time to start investing. Do I have to explain the benefits of compounding interest?

 

As for my 401k, it's taken a beating but its a lot better than it was in March.

As a 20-something, this is the best possible time to start investing. Do I have to explain the benefits of compounding interest?

 

I fully understand. I am just looking for some perspectives from people who've been the real world longer than I have and what, if anything has changed in their 401k as a result of the recession.

 

When your employer is matching, this is better than not saving anything.

 

A 401k is a long term investment. 

Some gloom and doom to contradict the positive media spin on the recent unemployment numbers.

 

From "The Street"The Real Unemloyment Rate is 14.3%

 

 

And this one makes me thing of Dmkrows comments about the economy locking into a higher rate of structural unemployment:

 

 

(ok, I really dont understand the second one, but it looks good)

 

 

Is this the "US Recession - How deep and how long" thread or the "Where C-Dawg Njaim should live" thread? (before anyone answers, that was rhetorical)

 

Back on topic!

As long as you realize that the 401k should be considered a success as long as it matches the rate of inflation over the course of your investments and anything above that within in a 1-2% range would be considered well run.

what, if anything has changed in their 401k as a result of the recession

 

I think the recession will prove to be the tippling point of the US Economic engine.  US Growth will probably slow noticable over the next decade.  Meanwhile, economies outside the US will continue to grow much faster than the US, and many of these countries have reached a point where their political, financial, and legal structures will provide much more economic security than in the past.

 

AS a result of the above thinking, I'm making a number of changes in my 401k/IRAs.

 

1) start diversifying into bonds (due strictly to my age, not the economic situation - . I was 100% equities until 18 months ago, when I shifted 40% of my holding to cash)

 

2) start diversifying into international stocks - previously concentrated in US companies due to strong volitility of international stocks that tended to cancel out the gains over time.  I'm not a 'month trader', and you pretty much needed to be such to win at foreign stocks until now.

 

3) Concentrate US holdings in those companies that do a lot of business oversees - the big US companies.  I do not think small caps will do well in the next few years.

 

4) Minimize maintenance fees - when I do come out of my cash holdings, it will go into a indexed fund that has very low maintenance fees.  Since I don't have insider information and I don't monitor the stocks constantly, I have to have others invest for me (via mutual funds).  Mutual funds generally return slightly less than the overall market, so the only thing you can control are the maintenace fees.

They would only need to refinance if they have an adjustable rate.

 

Not as easy at it sounds if what you need to refinance is worth less than what you owe on it. (Which will cover a lot of these adjustable rate loans.)

But, the wall street economist and talking heads on CNBC are telling use the recession is over because, the country is gaining jobs (NO), retail sales and spending are up (NO), foreclosure numbers are dropping (NO), personal income is on the rise (NO), company inventories are growing in anticipation of an increase in demand (NO), the commercial real estate market has avoided massive forthcoming foreclosures (NO), the stock market is up on happy talk (YES).

 

US retail sales take surprise dip in July

 

"WASHINGTON (AFP) - - US retail sales unexpectedly dipped 0.1 percent in July, government data showed Thursday in a report highlighting weakness in consumer demand that is crucial for recovery from recession.

 

The Commerce Department's headline figure surprised most analysts who had expected a monthly sales increase of 0.7 percent in July after two months in a row of gains, and dented those looking for "green shoots" of recovery.

 

"This is awful -- a reality check for the green shooters," said Ian Shepherdson of High Frequency Economics.

 

The monthly retail sales data signal the direction of consumer spending, which accounts for roughly two-thirds of output in the world's largest economy.

 

In a grim sign of weakening consumer demand that could restrain economic recovery, core retail sales -- excluding automobiles and gasoline, whose price is often volatile -- fell for the fifth consecutive month, by 0.4 percent, after a 0.1 decline in June.

 

"The big story is the core ... the trend is still clearly downwards," Shepherdson said."

 

For the full article.

http://sg.news.yahoo.com/afp/20090813/tts-us-economy-retail-sales-972e412.html

:wink:  from curbed blog:

 

 

 

:wink:  from curbed blog:

 

 

 

tho' that mattress doesn't appear to be signed, I'm guessing by the fish that it's an "authentic" De La Vega--lol (he regularly tags produces original artwork :roll: on debris on the street in the East Vill.)

I guess things are not as stable as the talking heads are trying to get the masses to believe. What I find most distasteful out of everything that is going on is the massive effort to manipulate public preception contrary to reality. Note: The red underlined sentence is my addition.

 

Expect banks to be hit with major fees for deposit insurance

FDIC considers another $5.6 billion fee on banks; 77 insolvencies for 2009 so far

 

"WASHINGTON (MarketWatch) -- The manner in which five banks collapsed on Friday, costing the resource-stretched Federal Deposit Insurance Corp. roughly $3.7 billion, is raising concerns about the agency's depleted insurance fund used to protect depositors.

 

That's driving expectations the agency will look in the short-term to cover losses by slapping large additional special fees on banks, with larger financial institutions taking on the brunt of the costs.

 

The bank collapses and the FDIC's depleted deposit insurance fund -- $13 billion on hand as of May -- are leading observers to speculate that the agency will hit banks with two large special fees it said it would consider in September and December that could each roughly match a $5.6 billion one-time fee it charged banks in May. That fee is payable by Sept. 30.

 

...

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aV1OhnG3_bhI

 

It isn't that stable, but I do think there are good reasons to tamp down talk of continued crisis and despair. Granted they tried that during the Great Depression and 1931 happened, but nonetheless, we need people to make rational decisions which includes paying down debt and buying stuff rather than hording cash or walking away from debt that they can actually pay.

It isn't that stable, but I do think there are good reasons to tamp down talk of continued crisis and despair. Granted they tried that during the Great Depression and 1931 happened, but nonetheless, we need people to make rational decisions which includes paying down debt and buying stuff rather than hording cash or walking away from debt that they can actually pay.

 

I think there is a difference between 'tamp down talk' and telling people the recession is over. Wall Street, the FEDs, IMF, etc. are trying to convince people it over and all is well. Their is to much bad debt, insolvent banks, an imploding commercial market to tell people it over.

we need people to make rational decisions which includes paying down debt and buying stuff rather than hording cash or walking away from debt that they can actually pay

 

Remember your economics classes? The simple formula: "I=S"?  (Invenstment = savings).  Some people need to hoard cash (savings) so that others can make invenstments.  So hoarding cash is a good thing for the economy!!!!!!!!!! (at least that's what my econ professors always said.  CNBC and others seem to disagree)

 

As to the issue of walking away from debt...

 

I've thought about this issue a lot over the past 2 years.  My conclussion is that the moral issues surrounding personal borrowing have finally disappeared and we are down to only the basic legal issues of borrowing - what the contract says.

 

I was taught that laws set a floor for standards of interactions in a given area.  Moral values, on the other hand, set a societal standard that was (usually) higher than the legal standard.  Society typically operates at the moral standard level, not the legal standard level.  The societal standard is always fluctuating as each individual, each group, and each generation search for a common standard.

 

But over time, it seems, the moral standards get watered down by each generation, until we they are down to the level of the legal standards.  At that point, the legal standard becomes the norm.  It has happened in the case of divorce, which while legal, the social moral values of marraige were set much higher in that you did not get divorced unless extreme situation, an there was a social stigma assigned to it.  Over time, the moral standards for divorce have withered away and we are pretty close to the legal standard of marriage law only.

 

Similar thing with personal borrowing.  There has always been a legal standard (the contract), but there has always been a societal moral standard that is much higher.  From a societal standard. your personal reputation was on the line when you borrowed.  Your ability to be trusted as a person, and your willingness to be responsible to your fellow citizens and community were all judged by your willingness to pay back your debts.  People went to great lengths to pay back their debts knowing that the societal standard was set pretty high.  And it was the societal standard, not the legal standard, that determined whether you could borrow in the future, and probably whether people would even do business of any kind with you in the future.

 

But like the societal norms on divorce, the societal norms on borrowing are steadily giving way.  We are rapidly approaching the point where only the legal standard of borrowing is in place.  This has been true for commercial borrowing for many, many years, but for personal borrowing, we are only now reaching that level.

 

What this means is that the only thing that matters is what the contract says.  The moral issues of debt no longer (or soon no longer) will be an issue. 

 

Every debt contract has a section on what happens if you do not pay.  The penalty for non-repayment are spelled out.  Traditionally, the societal penalties were much higher than the contract ones, and those were the terms by which the borrower lived.  But I think we are reaching the point where only the legal terms will matter any more.  The process has been going on for 50+ years, but I think this crises is driving the remaining nails into the coffin.

 

So in the future, lending contracts will have to be more tightly written when it comes to non-payment penalties.  And risk premiums will have to be adjusted upward.  The 'moral standards' cushion that lendors could rely on to buffer defaults is rapidly disappearing.

 

It's probably neither good nor bad.  It's just a change.  But like so many things in life, the rules (societal and legal) keep changing on you. 

we need people to make rational decisions which includes paying down debt and buying stuff rather than hording cash or walking away from debt that they can actually pay

 

Remember your economics classes? The simple formula: "I=S"?  (Invenstment = savings).  Some people need to hoard cash (savings) so that others can make invenstments.  So hoarding cash is a good thing for the economy!!!!!!!!!! (at least that's what my econ professors always said.  CNBC and others seem to disagree)

 

As to the issue of walking away from debt...

 

I've thought about this issue a lot over the past 2 years.  My conclussion is that the moral issues surrounding personal borrowing have finally disappeared and we are down to only the basic legal issues of borrowing - what the contract says.

 

I was taught that laws set a floor for standards of interactions in a given area.  Moral values, on the other hand, set a societal standard that was (usually) higher than the legal standard.  Society typically operates at the moral standard level, not the legal standard level.  The societal standard is always fluctuating as each individual, each group, and each generation search for a common standard.

 

But over time, it seems, the moral standards get watered down by each generation, until we they are down to the level of the legal standards.  At that point, the legal standard becomes the norm.  It has happened in the case of divorce, which while legal, the social moral values of marraige were set much higher in that you did not get divorced unless extreme situation, an there was a social stigma assigned to it.  Over time, the moral standards for divorce have withered away and we are pretty close to the legal standard of marriage law only.

 

Similar thing with personal borrowing.  There has always been a legal standard (the contract), but there has always been a societal moral standard that is much higher.  From a societal standard. your personal reputation was on the line when you borrowed.  Your ability to be trusted as a person, and your willingness to be responsible to your fellow citizens and community were all judged by your willingness to pay back your debts.  People went to great lengths to pay back their debts knowing that the societal standard was set pretty high.  And it was the societal standard, not the legal standard, that determined whether you could borrow in the future, and probably whether people would even do business of any kind with you in the future.

 

But like the societal norms on divorce, the societal norms on borrowing are steadily giving way.  We are rapidly approaching the point where only the legal standard of borrowing is in place.  This has been true for commercial borrowing for many, many years, but for personal borrowing, we are only now reaching that level.

 

What this means is that the only thing that matters is what the contract says.  The moral issues of debt no longer (or soon no longer) will be an issue. 

 

Every debt contract has a section on what happens if you do not pay.  The penalty for non-repayment are spelled out.  Traditionally, the societal penalties were much higher than the contract ones, and those were the terms by which the borrower lived.  But I think we are reaching the point where only the legal terms will matter any more.  The process has been going on for 50+ years, but I think this crises is driving the remaining nails into the coffin.

 

So in the future, lending contracts will have to be more tightly written when it comes to non-payment penalties.  And risk premiums will have to be adjusted upward.  The 'moral standards' cushion that lendors could rely on to buffer defaults is rapidly disappearing.

 

It's probably neither good nor bad.  It's just a change.  But like so many things in life, the rules (societal and legal) keep changing on you. 

 

Thanks CincyDad for those comments.

 

I think this 'moral' change is happening on both ends of debt, lender and borrower. I think what is happening is the debter is starting to respond to the situation in a manner that is more in line with the actions of the lender. That is, what does the legal document and law say. The lender (banks, etc.) have gotten to the point that they have removed the moral discussion on their end and so the borrower is removing the moral discussion on their part.

 

I can remember as a young man in the 80s when my dad lost his job the local banker (who knew my parents and had been doing business with them for years) sat down with my dad and worked out a solution to help my parents until my dad was able to find new employment (he didn't just start the foreclosure and repo process). When more businesses were local it seemed their was more of a 'moral' decision in those economic actions. Today this local connection and local control over business is becoming more and more scarce.

 

The moral issues should run both ways, I just think main street has decide (in general) they no long want this item to be a one way street. (Not saying it right or wrong.)

When more businesses were local it seemed their was more of a 'moral' decision in those economic actions.

 

Good point!  I had not considered that angle, but it certainly applies.

 

Lots of things lead to a change in the moral standards.  Just look at what the average citizen has seen in the past 20 years.... Companies turning their backs on employees, buisiness execs getting huge pay increases, while the workers see little.  Federal gov't bailing out companies, commercial RE owners renegotiating their mortgages all the time (Donald Trump the most public of these), local public employees getting much better benefits and job security these days, etc, etc.

 

It's no wonder average citizens are viewing borrowing very differently these days. Especially in non-recourse states like California.  The banks screwed up their lending standards, assuming the average mortgage holder would continue to support the traditional moral standards when it comes to borrowing.

 

As this housing bust started, I had no sympathy for homeowners who bailed on their debts.  I was thinking the banks should have been more careful, but the homeowners had their responsibility to pay back the loan. 

 

But as the bust continued, I began to see mortgages in a different light.  I began to see them as simple contracts with a clause spelling out non-performance.  I still think people should pay back their loans, but I no longer critize people who look at the borrowing contract, look at the non-performance clause(s), and decide to exersize them. Companies do it all the time.  Lenders do it all the time.  Why shouldn't the homeowner? The banks are in the lending business and basically write the contracts.  They should have known what they put in them. 

 

If you think about it, there is really no such thing as 'walking away from your debt' and 'stiffing the lendor'.  A person is just exercizing the 'non-performance' clause.

 

 

That is very good discussion of the problems related to debt and repayment. When I mentioned hording cash, I actually meant it literally - as in sticking it in your mattress or buying gold bullion or similar end of the world kinds of things. Even just saving more in a bank or getting a CD is good, but pulling one's money out of the bank and hiding is not good for the economy and this time last year it really seemed like a lot people might do that.

pulling one's money out of the bank and hiding is not good for the economy and this time last year it really seemed like a lot people might do that.

 

Just curious.... do you know anyone who went that far?  I don't.  (But then again, I probably would not know if they did - still no one I know was even discussing it in a joking manor)

 

As for me, I'm hoarding money in case of layoff or a leaky roof.  But the money is going into a bank. (note - I still buy from my company using the employee discount!)

I know a couple people who emptied their accounts. They talked like they expected their ATM's to stop working.

Luxury Hotel Chains Dropping Five-Star Ratings to Conserve Cash

Aug. 25 (Bloomberg) -- Luxury-hotel chains, the biggest losers in the lodging industry’s decline, are giving up some of their hard-won stars to save money.

 

Starwood Hotels & Resorts Worldwide Inc., the U.S. owner of luxury brands including St. Regis and W Hotels, will let some of its properties reduce their level of service -- and number of stars -- until the industry begins to recover, spokeswoman K.C. Kavanagh said. Hilton Hotels Corp. and InterContinental Hotels Group Plc have already cut the ratings for some locations.

 

“Maintaining stars requires enormous capital investment,” said Stephen Bollenbach, who retired as Hilton’s chief executive officer when Blackstone Group LP bought the company in 2007. “Ratings aren’t based on making good returns on your investment.”

 

Luxury-hotel operators have struggled to attract customers as the recession deters vacationers and forces companies to slash their travel budgets. That should mean lower rates for high-end business and vacation travelers. It may also mean the loss of some amenities, such as welcome gifts, flowers in your room, complimentary newspapers or 24-hour room service.

 

...

 

To contact the reporter on this story: Nadja Brandt in Los Angeles at [email protected].

 

http://www.bloomberg.com/apps/news?pid=20601103&sid=a0Jx2BsWXajo#

Meh.  When I've traveled, I've generally thought anything above three stars is overkill anyway, and I'm generally fine in two-star rooms.  A comfy bed, a shower with decent hot water and water pressure, and an Internet connection are all I need in a hotel room.

 

Come to think of it ... I don't need much more than that in an apartment ... but that's another topic. :angel:

Meh.  When I've traveled, I've generally thought anything above three stars is overkill anyway, and I'm generally fine in two-star rooms.  A comfy bed, a shower with decent hot water and water pressure, and an Internet connection are all I need in a hotel room.

 

Come to think of it ... I don't need much more than that in an apartment ... but that's another topic. :angel:

 

Oh lawd.  You people set the bar so low.

I think people have a right to know were their taxpayer dollars are going. Especially when some of the big boys are reporting some nice profits and big bonuses coming in a few months. Also, if a financial institution was 'financially sound' then why did it need to tap into taxpayer money to continue to function? Then we have the FDIC requesting a massive increase in funds that it can tap into to cover a significant increase in bank failures. Makes you wonder how big the elephant is under the living room rug? Maybe main street has a right to take a peek.

 

Federal Reserve Seeks Delay in Disclosure of Emergency Lending

 

"Aug. 27 (Bloomberg) -- The Federal Reserve asked a judge yesterday to delay enforcement of her decision requiring the central bank to identify companies in its emergency lending programs.

 

Chief U.S. District Judge Loretta Preska in Manhattan said on Aug. 24 that the Fed had until Aug. 31 to disclose daily reports on borrowing by banks and other financial institutions. The central bank wants Preska to stay her order, made in a Freedom of Information Act lawsuit, until the U.S. Court of Appeals in New York can act on an appeal that the Fed said it intends to file.

 

The Fed and U.S. banks would suffer irreparable harm if details of the loan programs were made public, according to the central bank’s senior counsel, Yvonne Mizusawa.

 

The Clearing House Association LLC, an industry-owned group in New York that processes payments between banks, filed a declaration that accompanied the request for a stay.

 

“There are numerous examples of financially sound institutions collapsing or suffering further financial deterioration from the loss of public confidence,” Norman Nelson, vice president and general counsel for the group, said in the document."

http://www.bloomberg.com/apps/news?pid=20601103&sid=a5bjqcBdkB48