I just realized that the Fed CAN'T raise interest rates

[m1911owner]

It just occurred to me that with the real estate market already in a melt-down over sub-prime mortgages, the Federal Reserve pretty much has its hands tied regarding interest rates, becase any significant increase in rates would lead to a full-scale collapse.  They can't raise rates without destroying the economy.    (Unless, of course, that's their plan, but that's a different thread...)

I suppose this is probably already general knowledge to everybody except me.  I'm a little slow sometimes.   

There is probably a lesson in there somewhere about why we shouldn't have an organization like the Federal Reserve tinkering with the economy...

[The Rabbi]

Of course they can raise rates.  In fact they probably need to as inflation is still a problem.  They wont do it until the current "turmoil" settles down.  But they have other ways of controlling the money supply as well.

[Manedwolf]

I always pictured it as a big dial with warning signs over it, buried in some bunker. And if someone fool ran up and turned the dial to a high rate, all sorts of alarms would go off, steam would come from somewhere (for drama), and investors would tumble, yelling in panic, out of the stock exchange. 

[m1911owner]

Of course they can raise rates.  In fact they probably need to as inflation is still a problem.  They wont do it until the current "turmoil" settles down.  But they have other ways of controlling the money supply as well.

I meant, of course, that they "can't" as a practical matter.  If they are willing to ignore the consequences, they can, of course, do whatever they danged well want to do.

[AJ Dual]

It'll happen one way or another anyway.

All those over extended borrowers who bought more house than they could afford are having the fixed teaser rates on their ARM's ending, balloon paments come due etc. If that weren't true, we wouldn't be in the first stages of the crisis without the Fed even doing anything yet.

A lot of them can't afford the based-on-prime ARM rate as it is. But by trying to leave prime alone as long as they dare, I'm guessing the Fed's hoping at least some of the least irresponsible buyers can re-fi into traditional fixed mortgages and will mitigate some of the worst of the housing/lending collapse.

It's a dangerous "try to please everyone" game they're playing...

[Manedwolf]

As to that ARM thing, the news just had a bit on this morning mentioning a family in CA... they bought a $579,000 home on a zero downpayment ARM that would adjust much higher after two years, they were counting on the value of the house to keep going up exponentially. The guy is a warehouse manager. Surprise! They can't afford it, and have so much other outstanding debt, they can't qualify for a refinance now. Plus the mortgage is upside-down, since the local home prices actually dropped instead.

I really can't feel any sympathy for someone who does that to themselves.  And I want to smack Edwards every time he suggests using taxpayer dollars to bail people like that out! It'd be punishing ME for being responsible and not buying a house I couldn't afford...and using my tax dollars to do it, keeping people in cushy houses they shouldn't have bought in the first place. That's saying "Awwww...too bad, see, you could have bought and be living in an ultra-luxury big house you can't afford, and we'd bail you out, but you kept to a rental condo and saved instead, so too bad, you missed out on the fun!"

 

[m1911owner]

All those over extended borrowers who bought more house than they could afford...

In defense of those "over-extended borrowers" (which they in fact are), many were not irresponsible people who were seeking extravagant living that they hadn't earned.  Instead, they were merely seeking to buy a reasonable, modest home for their families, the price of which had been bid up to far more than what fundamentals will support by artificially-low interest rates combined with speculation.

[m1911owner]

As to that ARM thing, the news just had a bit on this morning mentioning a family in CA... they bought a $579,000 home...

You illustrate my point.  A $579,000 home in California is a two-bedroom shack that's about to collapse from dry rot.  (If fact, I don't think there is anything available around here that's even close to that cheap.)

I agree with you that absolutely they should not be bailed out with our tax money.

What should happen is what is happening--the market is collapsing, which will bring the cost of homes back to some reasonable connection with fundamental values.

"Awwww...too bad, see, you could have bought and be living in an ultra-luxury big house you can't afford...

Again, that was no "ultra-luxury big house" they bought with the $579,000; that much gets you a grotesquely-overpriced shanty that's about to fall down.  (Edit:  Actually, come to think about, around here that won't even get you a shack that has already fallen down.  )

(By the way, I'm with you--I'm in a rental.)

[m1911owner]

This is an excellent demonstration of "The Law of Unintended Consequences"--The Fed wanted to "cool off" what they viewed as an "overheated" stock market.  So they kept raising interest rates until they killed the stock market.  Then, in an attempt to fix that damage, they lowered interest rates to very low levels.  This then had the consequence of vastly increasing what a given "monthly payment" would buy you in housing market, which drove up the cost of housing.  (Greater demand, because there was a greater amount of money available.)  When this drove the cost of housing above what a normal person could afford, lenders started to get creative with things like negatively-amortizing Option ARMs and the like.

The point of my original post is that the Fed is now pretty much stuck with current interest rates, unless they want to further exacerbate the problem that they've created in the real estate market.  (Which, from my point of view as a renter, just might be a good thing, because it would bring the cost of buying a house back to a sane level.  But, on the other hand, it would result in a huge loss of net-worth in the country, which would have many serious ripple effects.)

[The Rabbi]

The Fed has already pumped money into the system for "liquidity".  They did this during the currency meltdown in the '90s, before Y2K, and after 9/11.
But the problem has been there is too much liquidity (read: money chasing assets).  So if the Fed bails out the banks and mortgage companies they will be setting an awful precedent and things will get worse.
I'd rather see a bunch of people suffer for their bad decisions and shake out the bond and housing market now.

[m1911owner]

... So if the Fed bails out the banks and mortgage companies they will be setting an awful precedent and things will get worse.

I'd rather see a bunch of people suffer for their bad decisions and shake out the bond and housing market now.

Agreed.

[Manedwolf]

When a starter house that cost $100,000 in 1998 now costs $350,000 for the same model and construction, but the sort of career position that paid $60,000 in 1998 still pays $60,, which is very much the case, then yes, there's a problem.

[m1911owner]

A starter house for $350,000??  What fanatsy world are you living in?  That will maybe get you a starter studio condo in a drug-infested neighborhood.

Which of course just makes your point even more strongly than you already did.

[Manedwolf]

That's what a starter house in Northern New England generally goes for. And I mean a starter. Less than 1200sq/ft mostly prefab in a close-lotline subdivision with no trees. Or one of the awful things built in the 1950's that are now just basically layers of glopped paint over paint, air-leaking windows and an outdated oil furnace.

If you go closer to the commuter distance to Boston, even southern NH, it goes up exponentially from there.

[Len Budney]

That's what a starter house in Northern New England generally goes for.

Yep, I can testify. You can get a reasonable home in central Connecticut for about $300K, if you don't care about your commute. It's all about location. For example, my five-bedroom starter home in Pittsburgh set me back almost $60K. (now where's that "neener" emoticon when you need it? )

--Len.

[The Rabbi]

A starter house for $350,000??  What fanatsy world are you living in?  That will maybe get you a starter studio condo in a drug-infested neighborhood.

Which of course just makes your point even more strongly than you already did.

And that point would be, what exactly?  That CA real estate is expensive?  Monaco is expensive too.  Paris is expensive.  Tokyo is expensive.  So what??

[m1911owner]

A starter house for $350,000??  What fanatsy world are you living in?  That will maybe get you a starter studio condo in a drug-infested neighborhood.

Which of course just makes your point even more strongly than you already did.

And that point would be, what exactly?  That CA real estate is expensive?  Monaco is expensive too.  Paris is expensive.  Tokyo is expensive.  So what??

OK, I'll acknowledge that comment of mine as over-the-top.  In reality, I'm the one living in a fantasy world--the fantasy world known as "California."

[The Rabbi]

It isn't called "La La Land" for nothing.
I understand some people's frustration at not being able to buy a house where they want, or struggling to pay for it.  But so what?  There is no right to live in CA.  If it's too expensive, move.
My oldest brother was going to take a job at Stanford (this was over 20 years ago).  He could afford about $250k, which was a lot then.  He found himself looking at fixer uppers in bad neighborhoods. So he went to Portland instead and bought some huge house with a view of Mt Hood.  Moral of the story, if you don't have the stakes, don't play the game.

[roo_ster]

...But the problem has been there is too much liquidity (read: money chasing assets).  So if the Fed bails out the banks and mortgage companies they will be setting an awful precedent and things will get worse...

It is called "moral hazard," IIRC.

http://en.wikipedia.org/wiki/Moral_hazard#Moral_hazard_in_economics

[SomeKid]

Gotta love living in the South I guess. for 100k you can buy the land and build your own very nice home. Starter houses in bad neighborhoods with virtually no commute time to the downtown I have seen go for under 10k.

[The Rabbi]

Gotta love living in the South I guess. for 100k you can buy the land and build your own very nice home. Starter houses in bad neighborhoods with virtually no commute time to the downtown I have seen go for under 10k.

Hey, squelch that talk, Kid.  We got enough Californicators here already.

[jnojr]

In defense of those "over-extended borrowers" (which they in fact are), many were not irresponsible people who were seeking extravagant living that they hadn't earned.  Instead, they were merely seeking to buy a reasonable, modest home for their families, the price of which had been bid up to far more than what fundamentals will support by artificially-low interest rates combined with speculation.

Doesn't matter.  If you can't afford it, you can't afford it.  There is no "right" to home ownership.  All of those people should be renting.

[m1911owner]

Doesn't matter.  If you can't afford it, you can't afford it.  There is no "right" to home ownership.  All of those people should be renting.

I'm not suggesting that there is any right to home ownership.  I'm merely objecting to the assertion that those with failing mortgages are all irresponsible people seeking a lifestyle of grandeur and luxury, when it is very likely that many of them were relatively responsible people trying to buy a very modest home.  And further, I understand that in many cases we are talking about people who were defrauded by mortgage brokers who concealed from them the nature of the negative amortization and "teaser" rates of their mortgages.

I'm in no way suggesting that we should bail them out.  I'm only pointing out that much (not all) of the blame for this situation lays at the feet of the Federal Reserve.  I'm not inclined to heap a lot of guilt on those who were indeed victimized by the market created by the Federal Reserve.  These people still are responsible for the consequences of their actions, but I don't see that the "blame" for this situation is totally theirs.


And BTW, renting is getting awfully expensive, too.

[The Rabbi]

Doesn't matter.  If you can't afford it, you can't afford it.  There is no "right" to home ownership.  All of those people should be renting.

I'm not suggesting that there is any right to home ownership.  I'm merely objecting to the assertion that those with failing mortgages are all irresponsible people seeking a lifestyle of grandeur and luxury, when it is very likely that many of them were relatively responsible people trying to buy a very modest home.  And further, I understand that in many cases we are talking about people who were defrauded by mortgage brokers who concealed from them the nature of the negative amortization and "teaser" rates of their mortgages.

I'm in no way suggesting that we should bail them out.  I'm only pointing out that much (not all) of the blame for this situation lays at the feet of the Federal Reserve.  I'm not inclined to heap a lot of guilt on those who were indeed victimized by the market created by the Federal Reserve.  These people still are responsible for the consequences of their actions, but I don't see that the "blame" for this situation is totally theirs.


And BTW, renting is getting awfully expensive, too.

Why is it there has to be "victims" and "defrauders"??
The people with mortgages they cannot pay are not victims.  I worked in the mortgage business for 9 years.  It is one of the most regulated supervised businesses there are.  I know of no other business where you have to tell the customer how much money you are making on the transaction.
Some of the borrowers were trying to live in luxury.  Some of them just wanted a starter home.  All of them had the opportunity to read the contract before they signed, ask questions, have attorneys review it, etc.  They signed the papers betting things would continue as they were.
They bet wrong.
The lenders loaned money betting on higher wages and higher home prices.
The bet wrong too.
That's too bad but there are no guarantees in life.  Buying a house (like writing mortgages) is an investment and all investment involves risk.  Sometimes risk means you lose money.  Welcome to the real world.

[jnojr]

I'm not suggesting that there is any right to home ownership.  I'm merely objecting to the assertion that those with failing mortgages are all irresponsible people seeking a lifestyle of grandeur and luxury, when it is very likely that many of them were relatively responsible people trying to buy a very modest home.

Who cares how they're characterized?  They bought houses they can't afford.  It doesn't matter if they bought them to provide shelter to starving orphans.  Their intentions matter exactly nothing... only their ability to pay.

And further, I understand that in many cases we are talking about people who were defrauded by mortgage brokers who concealed from them the nature of the negative amortization and "teaser" rates of their mortgages.

They were not "defrauded".  They may very well have signed paperwork they didn't understand.  Doubtless, in many cases, they allowed themselves to be misled.  But, seriously, who ever expected that someone making $40K per year could afford a $600K house?

I'm in no way suggesting that we should bail them out.  I'm only pointing out that much (not all) of the blame for this situation lays at the feet of the Federal Reserve.

And I would agree with that.  But the point remains... they should have rented, not rushed out to buy houses they couldn't afford just because the prices dictated by the market weren't "fair".

I'm not inclined to heap a lot of guilt on those who were indeed victimized by the market created by the Federal Reserve.  These people still are responsible for the consequences of their actions, but I don't see that the "blame" for this situation is totally theirs.

Where does "blame" come into this?  The owe money they cannot pay.  Looking for "reasons" is the first step towards excuses and then "bailouts".

And BTW, renting is getting awfully expensive, too.

That'll happen.  What's your point?  If rent becomes "too much", like house prices are currently "too much", then the market corrects that situation.