Flutterby™! : housing busts & equity positions 2007-03-27 14:32:56.8684+00

housing busts & equity positions

2007-03-27 14:32:56.8684+00 by Dan Lyke 3 comments

crasch had a link to a fun little rant which could use a few fact checks: Patrick.net: US Housing Crash Continues. But this is a context on which to hang something I learned last week.

Among the financial instruments being pushed around the Bay Area are "equity positions". Can't keep up with the payments on your house? Lost a few tens of thousands of dollars in equity over the past year and your ARM is now shooting up because you owe more than the house is worth? Sell half of your house to someone willing to take on half the payments.

Looking to get into the real estate market, but have bad credit, can't afford that pesky downpayment, or the fact that buying a place would cost two or three times renting? Just assume a portion of someone else's mortgage, knowing that because housing will continue to skyrocket you'll be locking in today's prices against tomorrow's boom.

And all of this was pitched to me as a good idea, with a straight face.

Just like investing in dot.bombs.. "I know we are in a negative cash flow situation as we build brand and infrastructure, but it'll be worth a lot more someday to someone else..".

Although this whimwham you describe sounds like utter banditry, there are a lot of issues yet to be discussed. Without getting into too much tedious detail, the subprime lenders may simultaneously ruining the market and providing a valuable service. A lot of low-credit people who can't buy a house any other way have gotten a chance to buy one. A certain percentage of then are getting caught under the wheels of a changing market. So, if subprime loans dry up or are regulated out of existence, will we have two simultaneous results: fewer people ruined and even fewer people owning their own homes? Which is the bathwater and which is the baby here?

Since financial markets tend to overcorrect, I see a situation where minorites will be closed out of the market, not by redlining, but by simply demanding that they meet middle-class standards. Is it possible to tighen things up a little, to reduce the problems, or do we wait until pent-up demand for credit initiates some new round of risky loans?

#Comment Re: made: 2007-03-28 15:50:48.039303+00 by: Dan Lyke [edit history]

This feels to me a lot like "The Motley Fool" style of investing in the late 1990s. There was all sorts of historical data showing that this investing pattern worked really well, but running patterns against the historical data ignored the impacts of everyone doing it.

It seems to me that the sub-prime market is solving the micro problem (poor people can't get loans) and failing on the macro problem (if everyone buys houses regardless of if that's a smart economic decision then the cost of a house exceeds the cost of housing, and we have a bubble).