I do not like the idea of bigger profits for banks, but I also do not like the idea that a large swath of the US population would be forever locked out of home ownership (if they want it) because of the difficulty associated with saving up a down payment while paying rent. Zero/low % down mortgaging makes it easier for people to enter the housing market.
The one thing about places like Patrick.net that really bothers me is the notion that many have that people who can't save up a down payment are deadbeats or spendthrifts and don't deserve a house.
Saving is not easy, especially on lower incomes. One of the benefits of buying a dwelling is that it becomes a forced savings tool. Especially if the total monthly payment for purchasing is similar to what rent was/would be, then purchasing wins. Low barrier for entry combined with proper due diligence by banks means that buying a house can be, for many people, the best way for them to save and prepare for retirement.
But not everyone should buy. Purchasing a house is something to be done only by people who plan on staying there for an extended period of time...the longer the better. A house is not an investment in the same way that stocks are. You can't really cash out (and to the extent that banks allow you to, you shouldn't). The "growth" potential is really limited to inflation only (though this is also the exact reason that people staying a while should buy...no rent increases).
In the end the way we have been purchasing houses on the social side has been bad. It was encouraged by banks that didn't see any downside, and realtors who didn't have any downside. That needs to change, but to raise the barrier for entry will exclude large segments of the population from home ownership...and not the right segments. People that move around shouldn't buy. People who live in one place their whole life should...the latter category is generally lower income.
Friday, March 25, 2011
Thursday, March 24, 2011
20% Down on a House?
I don't know whether or not home ownership should be part of the "American Dream" but there is quite a bit of talk about getting back to the 20% down model for home buying. I don't think it's as neat as it seems. First let's look at this in a market without securitization...
Buyer's putting at least 20% down have more "skin" in the game. That is: if the house purchase goes south they are out a good chunk of their own money, so they are less likely to make a bad buy or to stop payment if house values collapse. Of course, if banks were to do their job properly then those risks should be mitigated anyway. That is: the lender, having lots of skin in the game themselves, should be unlikely to lend to someone who won't be able to pay or to lend for the purchase of a house with an inflated value. The caveat is that if a house goes into foreclosure then the lender gets a better upside (up to the loan balance), and is, in theory, less likely to lose as much as the borrower. So the house purchase is a lower risk to banks...and gets lower still as the buyer makes a larger down payment. In this market banks like buyers with more money down.
When securitizing loans becomes the norm, however, things flip. Now banks make a loan then turn around and sell it off to others. Banks are middle-men (middle-people?) who effectively make money proportional to the size of the loan (and the interest rate). In this market, more money down means smaller loan values, and more money down requirement means fewer potential buyers. Moreover, it is even possible for banks to make extra profits off the foreclosure. In this market banks have very little interest in making sure that the house value is appropriate or that the buyer can afford the loan...they have next to zero downside risk (compared with above). The buyer in this market (which is what we have now) is better off putting as little as possible down, since any investment they put in is risked and banks are not well incentivized to make sure the house is worth the "assessed" value.
Changing the requirements for securitization nominally protects everyone. People putting down 20% are less likely to buy recklessly. Banks loaning to people putting down less, when they cannot securitize them, are more likely to do their due diligence. So securities become safer, house prices come down, and people get mortgages they can afford. Banks don't like this model, and I'm not sure I do either.
Banks don't like it because they will need to do more work and take on more risk for less money.
I'm not sure because, while I like a more stable housing market, and lower priced homes, and safer investment opportunities, I don't like the barrier for entry. Now things could work out well in that low/zero money down options will still be available through mostly huge banks, and at higher interest rates--the latter of which I have no problem with--and the house prices should eventually adjust to the new reality and all would be well. I worry that banks will, instead, pretty much stop lending to 0/low down buyers.
I'm not too worried about this crippling the market (it might, I just don't care), but I am very worried about it pushing the wealthy and everyone else further apart. The median home price is ~$200k. For an average person to save up $40,000 for a down payment (never minding other closing costs) is, to say the least, hard. It is proportionally harder still in "affordable" markets (i.e. markets where the rental rates are about the same as the mortgage+tax+ins payment on the same dwelling). In essence the easiest way to get that type of down payment is to already have a house you can sell that yields enough extra to cover it--getting into the market becomes hard.
A housing market that really benefits cash buyers is a bad market for most people.
Buyer's putting at least 20% down have more "skin" in the game. That is: if the house purchase goes south they are out a good chunk of their own money, so they are less likely to make a bad buy or to stop payment if house values collapse. Of course, if banks were to do their job properly then those risks should be mitigated anyway. That is: the lender, having lots of skin in the game themselves, should be unlikely to lend to someone who won't be able to pay or to lend for the purchase of a house with an inflated value. The caveat is that if a house goes into foreclosure then the lender gets a better upside (up to the loan balance), and is, in theory, less likely to lose as much as the borrower. So the house purchase is a lower risk to banks...and gets lower still as the buyer makes a larger down payment. In this market banks like buyers with more money down.
When securitizing loans becomes the norm, however, things flip. Now banks make a loan then turn around and sell it off to others. Banks are middle-men (middle-people?) who effectively make money proportional to the size of the loan (and the interest rate). In this market, more money down means smaller loan values, and more money down requirement means fewer potential buyers. Moreover, it is even possible for banks to make extra profits off the foreclosure. In this market banks have very little interest in making sure that the house value is appropriate or that the buyer can afford the loan...they have next to zero downside risk (compared with above). The buyer in this market (which is what we have now) is better off putting as little as possible down, since any investment they put in is risked and banks are not well incentivized to make sure the house is worth the "assessed" value.
Changing the requirements for securitization nominally protects everyone. People putting down 20% are less likely to buy recklessly. Banks loaning to people putting down less, when they cannot securitize them, are more likely to do their due diligence. So securities become safer, house prices come down, and people get mortgages they can afford. Banks don't like this model, and I'm not sure I do either.
Banks don't like it because they will need to do more work and take on more risk for less money.
I'm not sure because, while I like a more stable housing market, and lower priced homes, and safer investment opportunities, I don't like the barrier for entry. Now things could work out well in that low/zero money down options will still be available through mostly huge banks, and at higher interest rates--the latter of which I have no problem with--and the house prices should eventually adjust to the new reality and all would be well. I worry that banks will, instead, pretty much stop lending to 0/low down buyers.
I'm not too worried about this crippling the market (it might, I just don't care), but I am very worried about it pushing the wealthy and everyone else further apart. The median home price is ~$200k. For an average person to save up $40,000 for a down payment (never minding other closing costs) is, to say the least, hard. It is proportionally harder still in "affordable" markets (i.e. markets where the rental rates are about the same as the mortgage+tax+ins payment on the same dwelling). In essence the easiest way to get that type of down payment is to already have a house you can sell that yields enough extra to cover it--getting into the market becomes hard.
A housing market that really benefits cash buyers is a bad market for most people.
Wednesday, March 23, 2011
Not a Great Article
Kind of as a follow-up, I was reading this article on how bank and interchange fees are levied against the poor and pay up to the rich. I kind of get it, but there are a couple things that make the argument fall apart.
1. Banks make money by having money. When a well off person has $10k in a checking account then the bank invests that (nominally by loaning it out, though more recently by gambling on Wall Street) earning a return and, possibly, paying a pittance to the account holder. A 5% return generates $500 for the bank on that account. If they pay 0.25% to the account holder (common) then they are out $25 of that and only make $475 on the account--enough to service the account, and still profit. When a lower income person who has an average of $25 in their account, then the investment return to the bank likely doesn't even cover the cost to service the account. Yes, overdraft fees more heavily impact people with less money, but in the balance it is people with lots of $ deposited that pay for people with little...not the other way around.
2. If you really believe that evil banks are robbing the poor to give to the rich then the argument isn't that everyone needs to pay for checking, but that people should get the hell out of the worst offending banks. Might I suggest credit unions?
Banks are for-profit institutions. They profit from wealthier people by investing that money. They can't do that for the poor so they profit from fees. Credit unions are similar, but with the important note: they do not profit! Therefore their fees can be lower, and their returns often higher.
1. Banks make money by having money. When a well off person has $10k in a checking account then the bank invests that (nominally by loaning it out, though more recently by gambling on Wall Street) earning a return and, possibly, paying a pittance to the account holder. A 5% return generates $500 for the bank on that account. If they pay 0.25% to the account holder (common) then they are out $25 of that and only make $475 on the account--enough to service the account, and still profit. When a lower income person who has an average of $25 in their account, then the investment return to the bank likely doesn't even cover the cost to service the account. Yes, overdraft fees more heavily impact people with less money, but in the balance it is people with lots of $ deposited that pay for people with little...not the other way around.
2. If you really believe that evil banks are robbing the poor to give to the rich then the argument isn't that everyone needs to pay for checking, but that people should get the hell out of the worst offending banks. Might I suggest credit unions?
Banks are for-profit institutions. They profit from wealthier people by investing that money. They can't do that for the poor so they profit from fees. Credit unions are similar, but with the important note: they do not profit! Therefore their fees can be lower, and their returns often higher.
Tuesday, March 22, 2011
Interchange Fees
I know I repeatedly post here about banks being evil. I don't have as strong an opinion on the interchange fees charged for use of credit/debit cards though.
In general it seems that the duopoly of Visa/MC is a problem, and that AmEx/Novus (Discover) aren't really angling to beat them, but to ride their dominance...maybe because they don't service banks that stamp their network logo onto cards. But a federal limit to how much they can charge has the potential to damage the business in an unfair manner...one that will lead to my credit/debit cards being less useful in the future.
Maybe I feel this way, because I see a lot of cash only places around me. They are notably cheaper than places that take credit/debit. Now, they don't get as much of my business because I am less likely to have cash than I once was, but when I do, and when I need to get [food] then I certainly appreciate the lower cost.
Honestly I wish that a credit union like group would figure out how to push into the market as a non-profit competitor to Visa/MC, which I think could have a real impact on competitiveness.
In general it seems that the duopoly of Visa/MC is a problem, and that AmEx/Novus (Discover) aren't really angling to beat them, but to ride their dominance...maybe because they don't service banks that stamp their network logo onto cards. But a federal limit to how much they can charge has the potential to damage the business in an unfair manner...one that will lead to my credit/debit cards being less useful in the future.
Maybe I feel this way, because I see a lot of cash only places around me. They are notably cheaper than places that take credit/debit. Now, they don't get as much of my business because I am less likely to have cash than I once was, but when I do, and when I need to get [food] then I certainly appreciate the lower cost.
Honestly I wish that a credit union like group would figure out how to push into the market as a non-profit competitor to Visa/MC, which I think could have a real impact on competitiveness.
Wednesday, March 09, 2011
NPR Thang
It would be far less frustrating if NPR was actually a liberal media outlet, but they spend so much time and effort going above and beyond to "balance" any actual liberal voice that shows up that it's laughable to consider them as a liberal outlet.
I know that when compared to the right wing crazies at Fox or the right of center CNN or the still slightly right of center MSNBC, NPR does seem liberal. Just like when compared with most of the GOP, the right of center Obama looks like a liberal. NPR isn't liberal. In fact, "Marketplace" is so overfull of right-of-center economic perspective that it tends to be a bit infuriating.
NPR is the closest thing we have in this country to real journalism available to the masses.
On the other hand, whether or not they are financed by tax dollars doesn't really get me either way. I think they need to be on the air, and I've no problem with tax dollars going to them, but if the tax dollars were to stop then maybe they would be able to focus more on the merits of a story rather than aiming for some false balance to keep a majority in Congress happy. (Note: I don't actually believe this will be the case.)
I know that when compared to the right wing crazies at Fox or the right of center CNN or the still slightly right of center MSNBC, NPR does seem liberal. Just like when compared with most of the GOP, the right of center Obama looks like a liberal. NPR isn't liberal. In fact, "Marketplace" is so overfull of right-of-center economic perspective that it tends to be a bit infuriating.
NPR is the closest thing we have in this country to real journalism available to the masses.
On the other hand, whether or not they are financed by tax dollars doesn't really get me either way. I think they need to be on the air, and I've no problem with tax dollars going to them, but if the tax dollars were to stop then maybe they would be able to focus more on the merits of a story rather than aiming for some false balance to keep a majority in Congress happy. (Note: I don't actually believe this will be the case.)
Tuesday, March 08, 2011
Follow Up...
If the hope for the future that was Barak Obama continues what were some of the worst things that the previous administration did, then I don't see much hope in his second term. Never mind the aquiescing to GOP talking points on issue after issue. Never mind that he has been at best a barely left of center president but all we hear about is "liberal overreach" when discussing the (barely left of center to just right of center to actually quite right of center) policies that he has signed into law. Never mind that a constitutional law professor has done a horrendous job of educating the public with respect to the duties of office, the responsibility of the legislature, the miserably broken failure that is the Senate (maybe because he was a member).
Most of those things can be discounted as politics and public ignorance. The treatment of detainees--including the not actually accused of anything terror suspects at Guantanamo as well as Bradley Manning and the pursuit of whistle blowers in general--is completely within the scope of "things Obama can do better" which is also true of Afghanistan. He needs little to nothing in the way of Congressional approval or support.
If Obama can't get this right (and based on my reading there isn't exactly a lot of fuzziness regarding habeas corpus, and the president--any president--suspending it is engaged in illegal activities) when there is nothing to stop him, when there is little to be gained by doing it wrong, then what hope is there for the future of a nation of laws?
If Obama can't get this right then we deserve whatever hell a GOP president would unleash upon us. Don't mistake my understanding of things. The present and recent past of the GOP demonstrates exactly what we would look forward to: economic stagnation for 90%+ of the population and the country, worse education, less preparation for the future, and a healthy dose of anti-science crap to fill it out. Humanity in this country and the world will be worse off with republicans in charge. No doubt. As things stand with Obama and Democrats right now, however, a faster death of the present means a closer rebirth to a new future.
Of course, I don't really believe that will happen in my lifetime, but as I've said about climate change in the past: if we are headed for a cliff, and one person wants to speed up and the other to slow but not stop, we are doomed either way, so go for the spectacle.
The other side note would be that this doesn't translate down ballot. As things stand, I can't vote for Obama...only Obama.
Most of those things can be discounted as politics and public ignorance. The treatment of detainees--including the not actually accused of anything terror suspects at Guantanamo as well as Bradley Manning and the pursuit of whistle blowers in general--is completely within the scope of "things Obama can do better" which is also true of Afghanistan. He needs little to nothing in the way of Congressional approval or support.
If Obama can't get this right (and based on my reading there isn't exactly a lot of fuzziness regarding habeas corpus, and the president--any president--suspending it is engaged in illegal activities) when there is nothing to stop him, when there is little to be gained by doing it wrong, then what hope is there for the future of a nation of laws?
If Obama can't get this right then we deserve whatever hell a GOP president would unleash upon us. Don't mistake my understanding of things. The present and recent past of the GOP demonstrates exactly what we would look forward to: economic stagnation for 90%+ of the population and the country, worse education, less preparation for the future, and a healthy dose of anti-science crap to fill it out. Humanity in this country and the world will be worse off with republicans in charge. No doubt. As things stand with Obama and Democrats right now, however, a faster death of the present means a closer rebirth to a new future.
Of course, I don't really believe that will happen in my lifetime, but as I've said about climate change in the past: if we are headed for a cliff, and one person wants to speed up and the other to slow but not stop, we are doomed either way, so go for the spectacle.
The other side note would be that this doesn't translate down ballot. As things stand, I can't vote for Obama...only Obama.
Disappointing
Considering his behavior since being inaugurated I'm not exactly surprised, but this is, frankly, despicable. One of the things I hated most about the Bush/Cheney administration was their treatment of terror suspects, including indefinite detention and torture.
I can't vote for Obama. I can't. I don't care who runs against him. He's lost me. This is more important than health care. This is more important than the economy. If we can't be a nation of laws, if people count so little, then all else is lost, so bring on Sarah Palin.
I can't vote for Obama. I can't. I don't care who runs against him. He's lost me. This is more important than health care. This is more important than the economy. If we can't be a nation of laws, if people count so little, then all else is lost, so bring on Sarah Palin.
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