Our North American Housing Price Index registered a modest 1.67% increase from December, supported by a rise at the bottom of the market. The drop from May - when we started the Index - is now 14.46%, representing a massive fall in the North American housing markets, and likely correlated by a similar drop in the valuation of bank mortgage portfolios. On an annualised basis the Index suggests the market is down 21.69%, a truly stunning loss.
In the United States, IRS requirements have made claiming the house purchase tax credit rather arduous. This will put a damper on the 'no-money-down' schemes that were being used to have the tax credit stand in for a down payment. Apparently government-backed loans are now about 90% of the market in the US and essentially all in Canada (where many borrowers are having the nasty surprise of balloon notes coming due without any means to refinance them).
The cumbersome tax credit, along with the spectre of interest rate hikes in the future - thus influencing the interest rate on mortgages - will likely collude to continue depressing house prices across the continent. Simply put, the North American housing market is now stuck wheezing in the cold, heavy iron-lung of the state. The crash may be very prolonged, with Governments desperately attempted to prop up prices which should be falling.
Showing posts with label mortgage. Show all posts
Showing posts with label mortgage. Show all posts
Friday, January 22, 2010
Wednesday, December 16, 2009
Housing Price Report for December
Our North American Housing Price Index registered a 6.46% drop from November, which likely would have been much deeper if we had not seen a sharp uptick on the top of the housing market. The drop from May - when we started the Index - is now 15.86%, representing a massive fall in the North American housing markets, and likely correlated by a similar drop in the valuation of bank mortgage portfolios. On an annualised basis the Index suggests the market is down 27.18%, a truly staggering loss.
That 27.18% drop strongly suggests the stimulus effect of the US Government's tax credit has worn off. Record low rates for conventional mortgages seem to be little help as few applicants qualify for the new, stringent requirements. All in all, we declare that the housing crash appears to have resumed.
Given the huge shadow inventory of foreclosed houses, the impending wave of Alt-A defaults, high unemployment, and falling income across the board, there is essentially no hope the housing market will find 'a bottom' any time in the foreseeable future. Additionally, the 8.9% rise in housing starts reported by Forbes will only add to the pain of existing housing stock, as new - and difficult to move - houses come into the market and further drive down already distressed property.
We expect the bottom, when it comes, will be shockingly low. We boldly predict a real price decline somewhere in the neighbourhood of 90% on average, peak to trough. In some places, such as Las Vegas, we expect a decline of 100% as the whole urban field there becomes indefensible. Attractive urban centres will fare the best, but it will be grim consolation.
Price declines may be obfuscated by inflation, if that should arrive. Given the devastation banking elites would suffer in a true deflation, we suspect the 'powers-that-be' will attempt to engineer a burst of high inflation to save the banks. On the other hand, such efforts may be unsuccessful, as it would be exceedingly difficult to discern the optimum amount of money-printing. As powerful as banking elites are, they may be sacrificed on the altar of the Almighty Dollar.
That 27.18% drop strongly suggests the stimulus effect of the US Government's tax credit has worn off. Record low rates for conventional mortgages seem to be little help as few applicants qualify for the new, stringent requirements. All in all, we declare that the housing crash appears to have resumed.
Given the huge shadow inventory of foreclosed houses, the impending wave of Alt-A defaults, high unemployment, and falling income across the board, there is essentially no hope the housing market will find 'a bottom' any time in the foreseeable future. Additionally, the 8.9% rise in housing starts reported by Forbes will only add to the pain of existing housing stock, as new - and difficult to move - houses come into the market and further drive down already distressed property.
We expect the bottom, when it comes, will be shockingly low. We boldly predict a real price decline somewhere in the neighbourhood of 90% on average, peak to trough. In some places, such as Las Vegas, we expect a decline of 100% as the whole urban field there becomes indefensible. Attractive urban centres will fare the best, but it will be grim consolation.
Price declines may be obfuscated by inflation, if that should arrive. Given the devastation banking elites would suffer in a true deflation, we suspect the 'powers-that-be' will attempt to engineer a burst of high inflation to save the banks. On the other hand, such efforts may be unsuccessful, as it would be exceedingly difficult to discern the optimum amount of money-printing. As powerful as banking elites are, they may be sacrificed on the altar of the Almighty Dollar.
Tuesday, December 15, 2009
No Silver Lining
A perverse meme is circulating in the news media and blogosphere that some good can come out of house price declines, mortgage defaults, and mortgage restructurings.
Charles Hugh Smith discusses Why a 35% Decline in Housing Values Would Be Good for the Nation. Smith, an otherwise competent commentator, does state the obvious: people have been spending too much on housing and to spend less on that will help households and consequently, the economy in other areas. However he neglects to mention the enormous economic catastrophe that will result from having a huge part of the US National balance sheet permanently wiped out. The US financial sector, as healthy economic agents, cannot survive the permanent impairment of mortgage assets that would result. Bank equity - which forms the basis of banks ability to lend, and even just hold deposits, would be wiped out.
As a matter of fact, it is already wiped out de facto - the FDIC and other regulators just keep banks going in the hopes that a recovery in housing prices will make most of the mortgages legitimate investments again. A further decline to lasting low prices will make that charade simply the legitimisation of a zombie banking system a la Japan.
In a Wall Street Journal editorial on 'walking away' masquerading as an article, the author states:
If "shedding debts" means defaulting (as the article seems to imply), then citizens as taxpayers will feel the suck of money coming out of their wallets as Uncle Sam through the FDIC has to make depositors whole. And, as mentioned above, having a walking-dead banking system is not going to help recovery.
On the whole, the intellectual basis of the perspective of this 'article' is entirely flawed. We suspect it is simply another in a long series of efforts by the Ministry of Truth to put a positive spin on the ongoing havoc caused by the Depression.
Not that this flawed intellectual notion doesn't get the support of some heavy guns. Nobel-prize winning Joseph Stiglitz is quoted in Bloomberg as saying a new kind of bankruptcy needs to be created to let mortgage holders write down their mortgage to a market level and keep it! Either Mr. Stiglitz knows better and is dissembling, or he is the one suffering from bankruptcy - intellectual bankruptcy.
There is a serious moral hazard issue here. Dysfunctional economic units must be allowed to suffer the consequences of poor decisions. Stiglitz's proposal is yet another bailout - this time a bailout for credulous, housing-bubble participants on the borrowing side.
We do not approve of bailouts for housing-bubble participants on the lending side, either. But two wrongs do not make a right. The more poor decision-makers are coddled through bailouts, the more society at large is harmed by resources being diverted to the thieving, hapless and stupid; and the less resources are available to be used by the Intelligent who were wise enough not to get involved in the housing bubble, and who are truly the World's only hope of economic progress.
Charles Hugh Smith discusses Why a 35% Decline in Housing Values Would Be Good for the Nation. Smith, an otherwise competent commentator, does state the obvious: people have been spending too much on housing and to spend less on that will help households and consequently, the economy in other areas. However he neglects to mention the enormous economic catastrophe that will result from having a huge part of the US National balance sheet permanently wiped out. The US financial sector, as healthy economic agents, cannot survive the permanent impairment of mortgage assets that would result. Bank equity - which forms the basis of banks ability to lend, and even just hold deposits, would be wiped out.
As a matter of fact, it is already wiped out de facto - the FDIC and other regulators just keep banks going in the hopes that a recovery in housing prices will make most of the mortgages legitimate investments again. A further decline to lasting low prices will make that charade simply the legitimisation of a zombie banking system a la Japan.
In a Wall Street Journal editorial on 'walking away' masquerading as an article, the author states:
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.and:
Unfortunately, less money flowing out of the pockets of consumers as debtors means less money flowing into the pockets of citizens as creditors (e.g. the proverbial little old ladies who rely on savings income). It is a bogus calculus which could in any way construe the process as 'healing'.For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.
"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
If "shedding debts" means defaulting (as the article seems to imply), then citizens as taxpayers will feel the suck of money coming out of their wallets as Uncle Sam through the FDIC has to make depositors whole. And, as mentioned above, having a walking-dead banking system is not going to help recovery.
On the whole, the intellectual basis of the perspective of this 'article' is entirely flawed. We suspect it is simply another in a long series of efforts by the Ministry of Truth to put a positive spin on the ongoing havoc caused by the Depression.
Not that this flawed intellectual notion doesn't get the support of some heavy guns. Nobel-prize winning Joseph Stiglitz is quoted in Bloomberg as saying a new kind of bankruptcy needs to be created to let mortgage holders write down their mortgage to a market level and keep it! Either Mr. Stiglitz knows better and is dissembling, or he is the one suffering from bankruptcy - intellectual bankruptcy.
There is a serious moral hazard issue here. Dysfunctional economic units must be allowed to suffer the consequences of poor decisions. Stiglitz's proposal is yet another bailout - this time a bailout for credulous, housing-bubble participants on the borrowing side.
We do not approve of bailouts for housing-bubble participants on the lending side, either. But two wrongs do not make a right. The more poor decision-makers are coddled through bailouts, the more society at large is harmed by resources being diverted to the thieving, hapless and stupid; and the less resources are available to be used by the Intelligent who were wise enough not to get involved in the housing bubble, and who are truly the World's only hope of economic progress.
Saturday, December 12, 2009
US Households: Unhappy Speculators
The economist Hyman Minsky divided financing techniques into three categories: Ponzi finance - where principal and interest on debt cannot be paid out of earnings but only ever more borrowing; Speculative finance - where interest on debt can be paid out of earnings but principal must be rolled over; and Hedge finance where both principal and interest on debt can be paid out of earnings.
From 1952 to 2007 the ratio of debt to income for US households rose from about .35 (hedge financing) to about 1.3 (speculative financing). Even two years into the Depression, the ratio has only declined a bit.
In times of economic contraction - especially when a major asset bubble bursts (i.e., housing), speculative financing units run into two significant problems. Routine debt service becomes more burdensome, and more critically, the ability to refinance becomes often impossibly difficult.
Consider the case of otherwise solvent households with exotic interest-only mortgages with impending punitive resets. The reset payments are unsupportable, and yet there is typically no way to roll the mortgage into a conventional mortgage as the value of the collateral is typically less than the mortgage balance. The underwater position also almost always prevents a sale to terminate the mortgage since that will require bringing too much money to the table.
Barring a sudden and extremely improbable surge in house values, these households will be ruined by the trap. Even many households with fixed rate mortgages will find those unsupportable in the face of income loss, and have no non-bankrupting exit strategy due to their underwater position. Another trap is facing households with sudden rate hikes on large credit card balances.
The distribution of the pain of the speculative unwind will not fall evenly on US households. A substantial number - perhaps 1/4 - have little to no debt and at least adequate resources. Another substantial number - also perhaps 1/4 - have no debt because of too-low income and too-few resources.
This puts the burden of the pain squarely on the roughly 1/2 who have substantial debts. We suspect that most of these households' net worth will be wiped out, creating ever more cascading failure throughout the economy. The end state will be a poorer USA, but one where debt revulsion is so strong, households will once again be Hedge financial units.
From 1952 to 2007 the ratio of debt to income for US households rose from about .35 (hedge financing) to about 1.3 (speculative financing). Even two years into the Depression, the ratio has only declined a bit.
In times of economic contraction - especially when a major asset bubble bursts (i.e., housing), speculative financing units run into two significant problems. Routine debt service becomes more burdensome, and more critically, the ability to refinance becomes often impossibly difficult.
Consider the case of otherwise solvent households with exotic interest-only mortgages with impending punitive resets. The reset payments are unsupportable, and yet there is typically no way to roll the mortgage into a conventional mortgage as the value of the collateral is typically less than the mortgage balance. The underwater position also almost always prevents a sale to terminate the mortgage since that will require bringing too much money to the table.
Barring a sudden and extremely improbable surge in house values, these households will be ruined by the trap. Even many households with fixed rate mortgages will find those unsupportable in the face of income loss, and have no non-bankrupting exit strategy due to their underwater position. Another trap is facing households with sudden rate hikes on large credit card balances.
The distribution of the pain of the speculative unwind will not fall evenly on US households. A substantial number - perhaps 1/4 - have little to no debt and at least adequate resources. Another substantial number - also perhaps 1/4 - have no debt because of too-low income and too-few resources.
This puts the burden of the pain squarely on the roughly 1/2 who have substantial debts. We suspect that most of these households' net worth will be wiped out, creating ever more cascading failure throughout the economy. The end state will be a poorer USA, but one where debt revulsion is so strong, households will once again be Hedge financial units.
Tuesday, June 2, 2009
How overhoused is the USA?
The US Census bureau estimates for July 2007, approximately 128 million housing units. The average size is over 2000 square feet per unit. Together these combine to over 256 billion square feet or about 840 square feet per person. Were the US to have an Asian level of space use - about 300 square feet per person - the nation's housing stock could house about 850 million people, almost three times the current population!
Put another way, about 2/3 of the nation's housing stock is redundant. Even more directly put: becoming worthless!
But why should Americans be content with cramming themselves into Asian-sized houses? Because Americans are going to be enjoying Asian-sized incomes in the not too distant future, and even smaller incomes in the more distant future. It is presently a terrible waste of resources to maintain, or even just heat and cool the excess housing. The funds for that waste will be unavailable, and soon.
Which are the houses that will be abandonded? Generally three categories of building will be most likely to go: houses in metropolitan areas or rural counties with poor economic prospects and declining population; dilapitated, older housing or shoddily-made newer housing; houses away from city or town centers. When a building belongs to all three categories, it is a sure loser.
Ironically, at a time when large migrations are in order, many Americans will perceive themselves stuck in collapsing locales: unable to sell a house because it is worth less than the mortgage; unable to convert housing equity in the decling area to housing equity in a stable area because of the price differential. In such a circumstance it would be best to just walk away, but sentiment and inertia will sometimes prevent this.
If you want to avoid loss in the housing collapse, don't buy a house unless it is near a real town centre. Make sure it has a high Walk Score. If you already own a house that may not have much of a future, consider disinvesting yourself of it, pronto.
Put another way, about 2/3 of the nation's housing stock is redundant. Even more directly put: becoming worthless!
But why should Americans be content with cramming themselves into Asian-sized houses? Because Americans are going to be enjoying Asian-sized incomes in the not too distant future, and even smaller incomes in the more distant future. It is presently a terrible waste of resources to maintain, or even just heat and cool the excess housing. The funds for that waste will be unavailable, and soon.
Which are the houses that will be abandonded? Generally three categories of building will be most likely to go: houses in metropolitan areas or rural counties with poor economic prospects and declining population; dilapitated, older housing or shoddily-made newer housing; houses away from city or town centers. When a building belongs to all three categories, it is a sure loser.
Ironically, at a time when large migrations are in order, many Americans will perceive themselves stuck in collapsing locales: unable to sell a house because it is worth less than the mortgage; unable to convert housing equity in the decling area to housing equity in a stable area because of the price differential. In such a circumstance it would be best to just walk away, but sentiment and inertia will sometimes prevent this.
If you want to avoid loss in the housing collapse, don't buy a house unless it is near a real town centre. Make sure it has a high Walk Score. If you already own a house that may not have much of a future, consider disinvesting yourself of it, pronto.
Sunday, May 17, 2009
Correcting a Misconception about Home Equity
Note: We had hoped to deliver a FDIC Bank Closure Report today, but no banks were closed since last Friday.
We have been hammering on the shocking lack of home equity that most owners with mortgages in the USA actually have. This short article explains the situation mostly very well (and has a nifty chart to boot), but overlooks one critical point: about one-third of homeowners own their homes free-and-clear, that is, having no mortgage. We will explain why this is so important.
First, a brief quote from the article (bold added):
"When value falls and debt stays the same, equity gets crushed (See The Problem With Debt). If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater."
This is not correct. If homeowner equity drops more than 70%, virtually every mortgage holder will be underwater. Using figures from the article, at present the value of all houses is about $18 trillion and the amount of mortgages is $11 trillion, which leaves $7 trillion of equity. If you take into account that about one-third of homeowners do not have a mortgage, this means that about $6 trillion of houses is owned free and clear, and $11 trillion of mortgages is on $12 trillion of houses.
All that it would take to put the group of homeowners with a mortgage under water is just another drop of $1 trillion, or a little over 5% of the current value. Of course some would be very underwater, and some not at all, but the overall situation is quite precarious. This is very bad for the homeowners who can't sell if they want to, and can't refinance because there isn't enough equity.
It is even worse for the banks, and the Federal Government. Once that 5% additional drop happens, even prime mortgage portfolios are truly junk investments since the collateral no longer covers the principal amounts. A peak to trough 40% devaluation as suggested by the quoted article will bring many trillions in losses to the Federal Government, and ultimately the taxpayer. Underwater homeowners - either unable to make mortgage payments, or having little incentive to do so even if they can afford them - will 'walk away' en masse.
We have been hammering on the shocking lack of home equity that most owners with mortgages in the USA actually have. This short article explains the situation mostly very well (and has a nifty chart to boot), but overlooks one critical point: about one-third of homeowners own their homes free-and-clear, that is, having no mortgage. We will explain why this is so important.
First, a brief quote from the article (bold added):
"When value falls and debt stays the same, equity gets crushed (See The Problem With Debt). If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater."
This is not correct. If homeowner equity drops more than 70%, virtually every mortgage holder will be underwater. Using figures from the article, at present the value of all houses is about $18 trillion and the amount of mortgages is $11 trillion, which leaves $7 trillion of equity. If you take into account that about one-third of homeowners do not have a mortgage, this means that about $6 trillion of houses is owned free and clear, and $11 trillion of mortgages is on $12 trillion of houses.
All that it would take to put the group of homeowners with a mortgage under water is just another drop of $1 trillion, or a little over 5% of the current value. Of course some would be very underwater, and some not at all, but the overall situation is quite precarious. This is very bad for the homeowners who can't sell if they want to, and can't refinance because there isn't enough equity.
It is even worse for the banks, and the Federal Government. Once that 5% additional drop happens, even prime mortgage portfolios are truly junk investments since the collateral no longer covers the principal amounts. A peak to trough 40% devaluation as suggested by the quoted article will bring many trillions in losses to the Federal Government, and ultimately the taxpayer. Underwater homeowners - either unable to make mortgage payments, or having little incentive to do so even if they can afford them - will 'walk away' en masse.
Thursday, May 14, 2009
More about Las Vegas
Foreclosures are up just about everywhere, we suppose, but nowhere more than ... you guessed it - Las Vegas, Nevada. Quite recently The Frugal Scotsman discussed Las Vegas as a bellweather of foreclosure catastrophe. In the post, he surmised basically everyone in Las Vegas with a mortgage is 'underwater' - owing more than their property is worth.
Well, we discovered in this CNNMoney.com article that fully one in fifty-six households in Las Vegas suffered foreclosure process last month alone. Unfortunately, the article does not define household precisely. If it did, we would know if that meant households in general - owners and renters alike - or if it meant households that are owners. If it is the former, since about half of households own with a mortgage, the rate would be approximately one in thirty households with a mortgage...in one month!
At that rate, should it continue, it would take but a few years to achieve complete Real Estate Gotterdammerung - wipe out for every mortgage holder: either walking away, or having a date with some deputies. We do not see this being particularly unlikely.
Even if the article were using a non-standard definition of household to mean homeowner, it would be still approximately one in forty homeowners with mortgages facing losing their houses.
Like the apocryphal lemmings going over the cliff, participants in the Great Las Vegas Housing Bubble seem to have experienced herd behaviour at its worst and are paying the price. Las Vegas is the worst in the USA for now, but only because it represents the non plus ultra of how bad things can get.
We have no doubt that many other cities, and indeed even whole regions, will suffer similar fates. As much as one-third of householders will be removing to rentals, friends, relatives, shelters, or the streets (depending on their resources) in the space of a few years. But this is only a portion of what is shaping up to be the greatest economic calamity in the nation's history. Mass unemployment, underemployment and widespread ruin are developing concurrently.
Well, we discovered in this CNNMoney.com article that fully one in fifty-six households in Las Vegas suffered foreclosure process last month alone. Unfortunately, the article does not define household precisely. If it did, we would know if that meant households in general - owners and renters alike - or if it meant households that are owners. If it is the former, since about half of households own with a mortgage, the rate would be approximately one in thirty households with a mortgage...in one month!
At that rate, should it continue, it would take but a few years to achieve complete Real Estate Gotterdammerung - wipe out for every mortgage holder: either walking away, or having a date with some deputies. We do not see this being particularly unlikely.
Even if the article were using a non-standard definition of household to mean homeowner, it would be still approximately one in forty homeowners with mortgages facing losing their houses.
Like the apocryphal lemmings going over the cliff, participants in the Great Las Vegas Housing Bubble seem to have experienced herd behaviour at its worst and are paying the price. Las Vegas is the worst in the USA for now, but only because it represents the non plus ultra of how bad things can get.
We have no doubt that many other cities, and indeed even whole regions, will suffer similar fates. As much as one-third of householders will be removing to rentals, friends, relatives, shelters, or the streets (depending on their resources) in the space of a few years. But this is only a portion of what is shaping up to be the greatest economic calamity in the nation's history. Mass unemployment, underemployment and widespread ruin are developing concurrently.
Wednesday, April 1, 2009
Recovery and Mobility
In order for any kind of recovery to arise out of this Depression, workers must have the mobility to move to where the jobs are. The housing crash in the USA and policy response to it is impeding this necessary step.
In areas where jobs are vanishing, housing prices are falling as well. Many owners, whose houses are worth less than the mortgages, who can still afford their housing payments feel trapped in their houses because to sell would mean bringing cash to the close. They feel unable to move to areas where job prospects are better.
Government efforts to "keep people in their homes" are misguided for this reason as well. It is little benefit to a person to keep him in his house when his long term economic prospects are poor in that locale.
We propose as a better policy and an aid to stuck property owners a system of municipally-owned housing trusts to take title to physically sound, but financially impaired, properties. The former owners would formally lose their equity (the market has already taken the value away) but with out the negative credit event associated with default, and banks would accept conversion of their mortgages into municipal bonds secured by the properties. The former owners would then have the option to continue renting their homes at market rates, or move on to greener pastures.
In areas where jobs are vanishing, housing prices are falling as well. Many owners, whose houses are worth less than the mortgages, who can still afford their housing payments feel trapped in their houses because to sell would mean bringing cash to the close. They feel unable to move to areas where job prospects are better.
Government efforts to "keep people in their homes" are misguided for this reason as well. It is little benefit to a person to keep him in his house when his long term economic prospects are poor in that locale.
We propose as a better policy and an aid to stuck property owners a system of municipally-owned housing trusts to take title to physically sound, but financially impaired, properties. The former owners would formally lose their equity (the market has already taken the value away) but with out the negative credit event associated with default, and banks would accept conversion of their mortgages into municipal bonds secured by the properties. The former owners would then have the option to continue renting their homes at market rates, or move on to greener pastures.
Sunday, March 22, 2009
The Government is Flailing
It looks like an increasing possibility that Mr. Timothy Geithner, U.S. Treasury Secretary, may be the first major sacrifice on the Obama Administration's altar of Grand, Empty Gestures. The more President Obama has to say he fully supports Secretary Geithner, and that a resignation of the latter would not be accepted by the former, the more we wonder what is really going on. To put it simply, me thinks he protests too much.
Admittedly, Secretary Geithner's track record has not been stellar. The last time he announced a "sweeping regulatory change," the stock market promptly went into a nose-dive. The destructive qualities of what the Secretary is planning now is breathtaking: who knows what sort of vague, wishy-washy claptrap he might release? Who knows how badly the stock market may crash this time?
"Fix the markets!" the rabble cries. "Stop the corporate bonuses!"
We don't quite understand why, with all this free money bandied about, anyone is getting upset over such a little thing like bonuses. The amount of money concerned is pitifully small, compared to the trillions which the Government and the Federal Reserve is pouring out.
Still, the Government is putting on such a show over corporate bonuses. The U.S. House of Representatives has approved a 90% tax on that sort of thing, applying to "high-income employees by companies getting big government bailouts." The furor over the AIG bonuses is frothing royally, even as it becomes clear that the Treasury approved these bonuses. The solemn ritual of lip-service to oversight, Government thrift, and responsible bailout-ing continues...
It seems clear to us that both the pointless furor over bonuses, and the ongoing loss of confidence in the Treasury Secretary, is part of a larger problem in the U.S. Government: a complete, utter lack of planning and foresight. It's painfully obvious that the Obama Administration is simply throwing money around in bailout after bailout, on a completely ad hoc basis. For instance, the $9.7 trillion pledged to bailouts (and the like) would have paid off 90% of all mortgages in the United States.
But alas, such a simple, child-like solution is apparently beyond the Government's collective mental capacity. Instead, Uncle Sam stands out on the street-corners like a prostitute, hawking his wares to hedge fund managers and bank CEOs. "Hey, you! Yeah, you. You need money? Here, take as much as you want," he shrieks...
Admittedly, Secretary Geithner's track record has not been stellar. The last time he announced a "sweeping regulatory change," the stock market promptly went into a nose-dive. The destructive qualities of what the Secretary is planning now is breathtaking: who knows what sort of vague, wishy-washy claptrap he might release? Who knows how badly the stock market may crash this time?
"Fix the markets!" the rabble cries. "Stop the corporate bonuses!"
We don't quite understand why, with all this free money bandied about, anyone is getting upset over such a little thing like bonuses. The amount of money concerned is pitifully small, compared to the trillions which the Government and the Federal Reserve is pouring out.
Still, the Government is putting on such a show over corporate bonuses. The U.S. House of Representatives has approved a 90% tax on that sort of thing, applying to "high-income employees by companies getting big government bailouts." The furor over the AIG bonuses is frothing royally, even as it becomes clear that the Treasury approved these bonuses. The solemn ritual of lip-service to oversight, Government thrift, and responsible bailout-ing continues...
It seems clear to us that both the pointless furor over bonuses, and the ongoing loss of confidence in the Treasury Secretary, is part of a larger problem in the U.S. Government: a complete, utter lack of planning and foresight. It's painfully obvious that the Obama Administration is simply throwing money around in bailout after bailout, on a completely ad hoc basis. For instance, the $9.7 trillion pledged to bailouts (and the like) would have paid off 90% of all mortgages in the United States.
But alas, such a simple, child-like solution is apparently beyond the Government's collective mental capacity. Instead, Uncle Sam stands out on the street-corners like a prostitute, hawking his wares to hedge fund managers and bank CEOs. "Hey, you! Yeah, you. You need money? Here, take as much as you want," he shrieks...
Saturday, March 21, 2009
Your Single Best Investment
The notion that housing is an investment certainly has a lot of egg on its face these days. But behind every bubble, is a grain of truth. The truth behind the housing bubble is that affordable, paid-for, owner-occupied housing in reasonable repair is an excellent investment for many reasons.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
Friday, March 13, 2009
Growth in Household Debt: Paused or Ended?
In the United States, the last 60 years have been marked by the continuous expansion of household debt: mortgages, car loans, student loans, credit cards, and so forth. In the fourth quarter of last year, this party came to an end. In spite of Federal Government and Federal Reserve efforts to expand lending, more loans were paid off than taken on.
We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.
If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.
We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.
So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.
We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.
If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.
We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.
So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.
Friday, March 6, 2009
A Brief Lesson in Debt
Hyman Minsky (1919-1996) was a rather obscure economist who came up with an excellent theory of debt which seems especially appropriate to current events. In brief, he divided borrowers into three categories: the hedge borrower, who can make loan payments easily out of income and extinguish the principal; the speculative borrower who can make interest payments more or less easily out of income, but cannot repay the principal except by rolling over the debt; and finally the Ponzi borrower whose income does not cover even the interest on debts, and therefore needs an ever expanding supply of credit to service loan payments.
A clear example of the hedge borrower is the homeowner who takes on a traditional fixed mortgage, the payments of which are a fairly small part of his or her income. An example of the speculative borrower is the house buyer who takes out the interest-only mortgage hoping to sell the house at a profit. The ponzi mortgage borrower takes out the reverse amortisation mortgage, hoping the house will appreciate fast enough that he or she can refinance at a higher amount.
In the housing bubble bust of the last two years or so, most of the borrowers in the Ponzi category have already lost their houses. Most of the borrowers in the speculative category are 'underwater', and many have 'walked away'. An increasing number of mortgages in the hedge category are going delinquent due to falling incomes and rising unemployment. It is not pretty, and the situation will probably get worse. We expect, on the other side of this Depression, that hardly anyone will ever want to buy a house with a mortgage again.
Of course Minsky's model applies not only to mortgage borrowers, but to the banks that lend to them. Banks are completely dependent on continuously rolling over their entire debt structure. This is why they are the first to feel the strain of a credit crisis.
As things are currently unfolding, central banks and governments are stepping up to fund banks who need their debts rolled over. Banks are not as generous to their borrowers, and are mostly calling in risky loans, and mostly not expanding safe loans. This is hurting a great many businesses who rely on speculative finance, and will cause a great many to go under. We suspect a lot of individual borrowers who are getting their credit cards cancelled will also be forced into bankruptcy.
If the Depression continues to unfold along these lines, most speculative finance units (as Minsky would call them) will be euthanised. Exceptions will be made for banks, insurance companies, and public utilities. The consequences will be very dramatic: tens of millions of failed businesses and hundreds of millions, if not billions of downwardly mobile citizens.
We doubt this this process can be arrested until it is spent. If you are a borrower and you cannot pay your debts out of your income (and these days incomes are not so reliable), you will need to liquidate assets or default. The end result is that you will become poorer. So-called 'rescue plans' will be of little help. If you are able to service your debts - congratulations! - you will be fortunate enough to experience the down-not-so-much that is the new up.
A clear example of the hedge borrower is the homeowner who takes on a traditional fixed mortgage, the payments of which are a fairly small part of his or her income. An example of the speculative borrower is the house buyer who takes out the interest-only mortgage hoping to sell the house at a profit. The ponzi mortgage borrower takes out the reverse amortisation mortgage, hoping the house will appreciate fast enough that he or she can refinance at a higher amount.
In the housing bubble bust of the last two years or so, most of the borrowers in the Ponzi category have already lost their houses. Most of the borrowers in the speculative category are 'underwater', and many have 'walked away'. An increasing number of mortgages in the hedge category are going delinquent due to falling incomes and rising unemployment. It is not pretty, and the situation will probably get worse. We expect, on the other side of this Depression, that hardly anyone will ever want to buy a house with a mortgage again.
Of course Minsky's model applies not only to mortgage borrowers, but to the banks that lend to them. Banks are completely dependent on continuously rolling over their entire debt structure. This is why they are the first to feel the strain of a credit crisis.
As things are currently unfolding, central banks and governments are stepping up to fund banks who need their debts rolled over. Banks are not as generous to their borrowers, and are mostly calling in risky loans, and mostly not expanding safe loans. This is hurting a great many businesses who rely on speculative finance, and will cause a great many to go under. We suspect a lot of individual borrowers who are getting their credit cards cancelled will also be forced into bankruptcy.
If the Depression continues to unfold along these lines, most speculative finance units (as Minsky would call them) will be euthanised. Exceptions will be made for banks, insurance companies, and public utilities. The consequences will be very dramatic: tens of millions of failed businesses and hundreds of millions, if not billions of downwardly mobile citizens.
We doubt this this process can be arrested until it is spent. If you are a borrower and you cannot pay your debts out of your income (and these days incomes are not so reliable), you will need to liquidate assets or default. The end result is that you will become poorer. So-called 'rescue plans' will be of little help. If you are able to service your debts - congratulations! - you will be fortunate enough to experience the down-not-so-much that is the new up.
Saturday, February 21, 2009
Rhetoric and Logic
During the election process, President Obama established a reputation as a rhetorician. The strength of his words and convictions were considered his strengths; such attributes appeared attractive as a President. However, it seems that the quality of his so-called rhetoric is not as clear-cut as previously believed: the "pick yourself up, dust yourself off" part of President Obama's inauguration speech did not scale to new rhetorical heights.
But there is more bothering us than simply a pop-culture reference to a film from the 1929 Depression. This is an Administration which claimed to be based on hope and clarity; President Obama was taken by the majority of citizens to be a clear-headed, forthright man. At the same time, he represented a visible minority taking a high elected office for the first time.
President Obama was, and apparently still is, on the golden pedestal. Even political cartoonists, ever the vicious bunch, are feeling squeamish about their caricatures of the new President. If this Administration is intent on bringing 'change' to the Government, the President leading this change should not be beyond reproach.
Our thoughts came to a head with this article from the Asssociated Press. Mr. Rick Santelli, CNBC, called President Obama's mortgage bailout onto the carpet. He said, and we fully agree, that the bailout will "promote bad behavior." Forcing responsible citizens to pay for the excesses of the irresponsible is madness, to say the least.
The response from the White House was certainly not the best: Mr. Robert Gibbs, press secretary, said "...People [ranting] on cable television [should] be responsible and understand what it is they’re talking about [I]... feel assured that Mr. Santelli doesn't know what he's talking about."
That, Mr. Gibbs, is argumentum ad hominem, a logical fallacy, and not a counter to the very valid point of the recklessness of the mortgage bailout. To have such horrible rhetoric used in the defence of President Obama -- a man who prides himself on his rhetoric -- is not the high road, to say the least.
But there is more bothering us than simply a pop-culture reference to a film from the 1929 Depression. This is an Administration which claimed to be based on hope and clarity; President Obama was taken by the majority of citizens to be a clear-headed, forthright man. At the same time, he represented a visible minority taking a high elected office for the first time.
President Obama was, and apparently still is, on the golden pedestal. Even political cartoonists, ever the vicious bunch, are feeling squeamish about their caricatures of the new President. If this Administration is intent on bringing 'change' to the Government, the President leading this change should not be beyond reproach.
Our thoughts came to a head with this article from the Asssociated Press. Mr. Rick Santelli, CNBC, called President Obama's mortgage bailout onto the carpet. He said, and we fully agree, that the bailout will "promote bad behavior." Forcing responsible citizens to pay for the excesses of the irresponsible is madness, to say the least.
The response from the White House was certainly not the best: Mr. Robert Gibbs, press secretary, said "...People [ranting] on cable television [should] be responsible and understand what it is they’re talking about [I]... feel assured that Mr. Santelli doesn't know what he's talking about."
That, Mr. Gibbs, is argumentum ad hominem, a logical fallacy, and not a counter to the very valid point of the recklessness of the mortgage bailout. To have such horrible rhetoric used in the defence of President Obama -- a man who prides himself on his rhetoric -- is not the high road, to say the least.
Saturday, February 14, 2009
Don't Take the Bait
The bait we are referring to is the 'improved' tax credit for house buyers that was included as part of the USA stimulus program. Look at it like a different shade of lipstick on a pig. Almost everyone who used previous versions of this credit is underwater on their mortgages, or at least looking at some pretty serious depreciation on their house value - much greater than the value of the tax credit. As a rule, taxpayers who attempt to take advantage of this credit will suffer the same fate.
Apparently a lot of people are buying houses - though not nearly so many as a couple years ago. They must think they are getting a good price. While a few of them may be, most are not. Housing prices in general have a long way to fall yet. The only thing that will arrest the decline will be runaway inflation.
Even after the inflation hits, house prices will probably not rise as fast as most goods and services. If you can find a house you like that is priced to be cheaper than renting after you factor in all the costs, then go for it, if you can pay cash or lock in a long-term fixed rate mortgage. That should be your only criteria, tax credits notwithstanding.
Apparently a lot of people are buying houses - though not nearly so many as a couple years ago. They must think they are getting a good price. While a few of them may be, most are not. Housing prices in general have a long way to fall yet. The only thing that will arrest the decline will be runaway inflation.
Even after the inflation hits, house prices will probably not rise as fast as most goods and services. If you can find a house you like that is priced to be cheaper than renting after you factor in all the costs, then go for it, if you can pay cash or lock in a long-term fixed rate mortgage. That should be your only criteria, tax credits notwithstanding.
Monday, January 26, 2009
Are Big Banks Committing Suicide?
We were chatting with a friend the other day, who holds a middling commercial loan from a major bank. He's a very good client of this major bank, and he has been with this bank for quite some time. He told us this bank was going to charge him a fee equal to about 5% of the value of his loan. Apparently, this 'fee' was do to an error on the bank's part, but they were going to charge him, anyway!
Another friend has held a line of credit from another major bank for over a decade. Just recently his interest rate on his card's balance was doubled to 20%. He, too, had been a good client, and always paid his bills on time.
Earlier we wrote about Citigroup backing mortgage cram-downs, and how we felt there was something fishy about the whole thing. Then we saw articles like this one from Bloomberg, or human-interest pieces like this from WiseBread.com... and we really started to wonder. Are these major banks actually queuing up on a roof, waiting for the opportune moment to jump to their death?
Lending is the bread and butter of these major banks. They are alienating their borrowers, but they can't make money without lending... so they must have something else up their sleeve. Personally, we think it's our beloved Synthetic CDOs. Bear with us for a moment, dear Reader.
With AIG, Fannie Mae, Freddie Mac and the Big Three on the government dole, their collapse has been pushed off into the future. That means the SCDOs won't be triggered by the deaths of those companies. However, SCDOs typically have money center banks as a default trigger on the trillions waiting offshore.
The management of these major banks know they can't kill the car companies... but they can destroy their own banks. Then, the SCDO dollars will flow bank into the United States. Where to, you wonder? Well, with the big banks presumably shut down, where else can the money go but into the pockets of the management? We would wager the managers have set up private investment vehicles which have taken the benefit of the SCDO payout off of the banks' books. Think of it as the ultimate golden parachute.
Another friend has held a line of credit from another major bank for over a decade. Just recently his interest rate on his card's balance was doubled to 20%. He, too, had been a good client, and always paid his bills on time.
Earlier we wrote about Citigroup backing mortgage cram-downs, and how we felt there was something fishy about the whole thing. Then we saw articles like this one from Bloomberg, or human-interest pieces like this from WiseBread.com... and we really started to wonder. Are these major banks actually queuing up on a roof, waiting for the opportune moment to jump to their death?
Lending is the bread and butter of these major banks. They are alienating their borrowers, but they can't make money without lending... so they must have something else up their sleeve. Personally, we think it's our beloved Synthetic CDOs. Bear with us for a moment, dear Reader.
With AIG, Fannie Mae, Freddie Mac and the Big Three on the government dole, their collapse has been pushed off into the future. That means the SCDOs won't be triggered by the deaths of those companies. However, SCDOs typically have money center banks as a default trigger on the trillions waiting offshore.
The management of these major banks know they can't kill the car companies... but they can destroy their own banks. Then, the SCDO dollars will flow bank into the United States. Where to, you wonder? Well, with the big banks presumably shut down, where else can the money go but into the pockets of the management? We would wager the managers have set up private investment vehicles which have taken the benefit of the SCDO payout off of the banks' books. Think of it as the ultimate golden parachute.
Sunday, January 11, 2009
We Smell Trouble...
In a previous post we wrote about the looming tidal wave of mind-numbing horror and destruction known as synthetic collateralised debt obligations (SCDO). In that post, we pointed our bony finger at JP Morgan and screeched, "it's them! THEM!"
We still stand by that statement, but this article from CNNMoney.com got us thinking. Citigroup has announced that it will back legislation allowing bankruptcy judges to unilaterally rewrite mortgage terms. This, in effect, means that judges can 'cram-down' the principle of the mortgage, or lower the interest rate on the loan... or both, presumably.
It makes sense, in a way: with house prices on a one-way trip to purgatory, banks' balance sheets will be obliterated as the value of their foreclosed properties approach zero. Citigroup, realising this, decided to cheerfully volunteer itself to be violated by bankruptcy judges, since it seems like the less painful option.
We wonder about that, though. There are trillions of SCDO's floating around in the aether, just waiting for the right company, or companies, to collapse. We're confident JP Morgan has a pretty big piece of the pie... but maybe Citigroup has its own trillion or so, waiting in the wings.
Honestly, dear Reader, we don't know. Perhaps Citigroup is simply making a last-ditch effort to bail itself out. We just have to wonder what the hell it's doing, as this move smells fishy.
We still stand by that statement, but this article from CNNMoney.com got us thinking. Citigroup has announced that it will back legislation allowing bankruptcy judges to unilaterally rewrite mortgage terms. This, in effect, means that judges can 'cram-down' the principle of the mortgage, or lower the interest rate on the loan... or both, presumably.
It makes sense, in a way: with house prices on a one-way trip to purgatory, banks' balance sheets will be obliterated as the value of their foreclosed properties approach zero. Citigroup, realising this, decided to cheerfully volunteer itself to be violated by bankruptcy judges, since it seems like the less painful option.
We wonder about that, though. There are trillions of SCDO's floating around in the aether, just waiting for the right company, or companies, to collapse. We're confident JP Morgan has a pretty big piece of the pie... but maybe Citigroup has its own trillion or so, waiting in the wings.
Honestly, dear Reader, we don't know. Perhaps Citigroup is simply making a last-ditch effort to bail itself out. We just have to wonder what the hell it's doing, as this move smells fishy.
Wednesday, January 7, 2009
Pay Now or Forever Hold Your Peace
In previous posts, we and our co-writer have argued that housing values will make a serious face-plant on the road ahead (see this article, and this one as well). Put concisely, just about any mortgaged house in the United States, and indeed the world, will end up 'under water' in the near term (i.e. the mortgage is for more than the house is 'worth').
We turn at this point to the Washington Post, which has an article about Ms. Elizabeth Small. Although the article does not make it clear, she's probably worth around $1.5 million or so... until recently, that is. Now, she has lost $1 million since 2000, including $200,000 since April 2008. She can no longer afford to pay her mortgage payments and living expenses off of her investment income, and Social Security -- surprise! -- doesn't provide all that much security, after all.
To defend her dwindling capital base, she reported she was looking into certificates of deposit, or bonds. Last we checked, both those 'investments' were paying 0%... Her course of action -- which quoted professional money managers didn't even think to recommend -- should be to either pay off her mortgage, or walk away from her house. Ms. Small, we think, is in a situation similar to other people: she's not taking the best step of all, which is to pay off debt, or default.
We suspect the monetary powers-that-be will attempt to rescue people like Ms. Small with hyperinflation. Hyperinflation will reduce the value of the mortgage payments (or perhaps even the mortgage itself) to meaninglessness; say, a caramel macchiato, with an extra shot of espresso. However, the benefits of the debauch of the currency will only accrue to those who can maintain their income, and have it go up roughly in lockstep with the rate of inflation. Needless to say, it would be a Pyrrhic victory to those few who pull it off. We regret to inform Ms. Small that she will not be one of them.
We turn at this point to the Washington Post, which has an article about Ms. Elizabeth Small. Although the article does not make it clear, she's probably worth around $1.5 million or so... until recently, that is. Now, she has lost $1 million since 2000, including $200,000 since April 2008. She can no longer afford to pay her mortgage payments and living expenses off of her investment income, and Social Security -- surprise! -- doesn't provide all that much security, after all.
To defend her dwindling capital base, she reported she was looking into certificates of deposit, or bonds. Last we checked, both those 'investments' were paying 0%... Her course of action -- which quoted professional money managers didn't even think to recommend -- should be to either pay off her mortgage, or walk away from her house. Ms. Small, we think, is in a situation similar to other people: she's not taking the best step of all, which is to pay off debt, or default.
We suspect the monetary powers-that-be will attempt to rescue people like Ms. Small with hyperinflation. Hyperinflation will reduce the value of the mortgage payments (or perhaps even the mortgage itself) to meaninglessness; say, a caramel macchiato, with an extra shot of espresso. However, the benefits of the debauch of the currency will only accrue to those who can maintain their income, and have it go up roughly in lockstep with the rate of inflation. Needless to say, it would be a Pyrrhic victory to those few who pull it off. We regret to inform Ms. Small that she will not be one of them.
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