Ethics of Real Estate Investment, NIMYism and the Housing Crisis

aircooled said:

Duke said:

....people pay a lot of money for things a lot of people want.

Just to reinforce your point:

If you make money (financing) easier to get for a item in demand, it will only get more expensive.  You would "think" economists / financial experts would know this.

Borrowing money has been effectively free for a decade, through D and R control. Coupled with decent paying jobs being concentrated into smaller spaces the national median house sale price vs median wage is back at the same level it was in 2008. This is a historically high level at 5x while the historic norm is between 3 and 3.5x. Part of me thinks it's due a correction, but part of me thinks the  general stock market has missed 1-3 bears in the past decade, so what do I know?

The record-high level of second home buying (homeowners acquiring nonprimary residences) was a central feature of the 2000s housing boom.1 Bhutta (2015) shows that second home buyers contributed more to aggregate mortgage debt during the boom years than did all first-time buyers. Second home buyers were typically over-leveraged, and despite having middle to high income and credit scores, experienced higher default rates than average during the recession (Haughwout et al. (2011); Albanesi et al. (2017); Albanesi (2018)). The macroeconomic effects could have been sizable – Chinco and Mayer (2016) find that second home buying significantly contributed to mispricing in housing during the boom years.

Garcia, Daniel (2019). “Second Home Buyers and the Housing Boom and Bust,” Finance and Economics Discussion Series 2019-029. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2019.029.

I still contend that the problem was not with building housing for working class Americans at affordable prices, it was people flush with money speculating in housing markets they didn't live in, or with 2nd homes they occasionally visited. The brunt of the collapse was borne by those in the construction and mortgage industries, the majority of which were forced to pay higher prices for homes they could only afford so long as the boom continued, but whom also were competing with 2nd home buyers that had more capital. 

The same thing is happening today - underpaid lower and middle class workers are buying homes they truly can't afford with prices driven largely by non-local investors and speculators who don't live or work in those housing markets. 

In reply to pheller :

It sounds like a lot of whining to me. 
 

People shouldn't buy stuff they can't afford. 
 

In the 2007 downturn, there were MASSIVE bailouts of residential mortgages, because, you know, people shouldn't have to lose their houses. It pissed me off. Why?  Because I had made careful choices, bought a house I could afford, paid all my bills.  I got penalized for my wise choices- no bailouts for Paul. Then I got to help pay the cost of those bailouts through increases in my taxes, inflation, and more restrictive lending which made money less available to responsible people like me (which contributed to the loss of my business). 
 

People should only buy what they can afford. And personally, I am thankful for people who are wealthier than me buying and developing in my community. It makes my home a better place to live. 
 

It's really ok that some people have more money than others. I don't intend to be jealous of that, or want retaliation in the form of tax penalties for people doing well in life. 
 

Oh, and the racial disparities in those bailouts were heartbreaking. It's part of what set the stage for the anger that lead to the political division we have more recently seen. 

SVreX (Forum Supporter) said:

In reply to pheller :

It sounds like a lot of whining to me. 
 

People shouldn't buy stuff they can't afford. 
 

In the 2007 downturn, there were MASSIVE bailouts of residential mortgages, because, you know, people shouldn't have to lose their houses. It pissed me off. Why?  Because I had made careful choices, bought a house I could afford, paid all my bills.  I got penalized for my wise choices- no bailouts for Paul. Then I got to help pay the cost of those bailouts through increases in my taxes, inflation, and more restrictive lending which made money less available to responsible people like me (which contributed to the loss of my business). 
 

People should only buy what they can afford. And personally, I am thankful for people who are wealthier than me buying and developing in my community. It makes my home a better place to live. 
 

It's really ok that some people have more money than others. I don't intend to be jealous of that, or want retaliation in the form of tax penalties for people doing well in life. 
 

 

Winner winner chicken dinner. 

It seems so simple, yet so many people fall for it. According to what the bank will lend vs gross income, I "should" be living in a $350k+ home, not a $160k one. 

But I realize that would be ridiculous to have a mortgage that large. 

I'm 100% in the camp that people should buy what they can afford.

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

SVreX (Forum Supporter) said:

In reply to pheller :

In the 2007 downturn, there were MASSIVE bailouts of residential mortgages, because, you know, people shouldn't have to lose their houses. It pissed me off. Why?  Because I had made careful choices, bought a house I could afford, paid all my bills.  I got penalized for my wise choices- no bailouts for Paul. Then I got to help pay the cost of those bailouts through increases in my taxes, inflation, and more restrictive lending which made money less available to responsible people like me (which contributed to the loss of my business). 

Were there though? The banks were bailed out, but the consumers were not - unless you argue that the banks/mortgage originators being bailed out is the same thing because it allowed origination through refinancing?

I agree with your overall premise here. See my rants on student loan forgiveness.  I'm just not sure that the example you're using here is as analogous to this situation as it seems. 

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

This should be of little surprise to anyone, but I agree with ProDarwin. 

One thing I'm seeing among friends and family who are buying right now, people aren't really good at looking at the value over time of homes. They'll compare to the market, to what is currently available, but they're not comparing it to itself and inflation. Look at what the home is selling for today - on an annualized basis, how much has it increased from the last time it sold? The time before that? Over the last 30 years? If it is more or less in line with inflation, great, you're probably looking at a reasonably safe "investment". Even if you can't afford it, in theory, you won't get burned. But if it has doubled in price over 10 years, I had better see an addition, or a gut rehab, or 15 F-500 companies that have moved headquarters to that town. 

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

I tend to agree with you. But perhaps a better option would be to educate people on what they can ACTUALLY afford vs trying to take on as much debt as possible so the smallest ripple causes a meltdown. 

We really need to get rid of some of the stupid electives in high school and make all students take a full year of personal finance, or something similar to that. What can you afford, savings, retirement, etc. 

In reply to mtn (Forum Supporter) :

Well, it sort of is. 
 

People continued to stay in houses they could not afford, and we put into place massive bailout systems that enabled it and came at a cost to responsible borrowers. 
 

You can give it a different name if you like. 
 

Plus, I suggest it was worse.  Because it gave lenders a form of revenue stream they never had before. They no longer had to make their money as lenders, so they STOPPED lending. This caused a huge riff in the commercial lending market (which affected jobs, etc)

Its all connected. 

z31maniac said:

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

I tend to agree with you. But perhaps a better option would be to educate people on what they can ACTUALLY afford vs trying to take on as much debt as possible so the smallest ripple causes a meltdown. 

We really need to get rid of some of the stupid electives in high school and make all students take a full year of personal finance, or something similar to that. What can you afford, savings, retirement, etc. 

 

100% with you on the personal finance course.  I have been standing on that soapbox for years.  I educate my friends and coworkers constantly all of whom are adults that should have an understanding of this stuff.  Hell, there are tons of threads on it here.  Not blaming anyone, these are just examples of the lack of education in this area.  I had to gain a true understanding of it myself around age 30... before that I was mislead by adults who clearly did not understand it themselves.

I don't think that will completely eliminate the need for either 1, 2, or 3 above though.

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

I also agree with ProDarwin. 
 

I lean mostly toward option #2, but I am ok with an element of option #3 as well. It's harsh, but it's necessary sometimes. 
 

We chose option #1. It didn't work. 

We will do it again. Many times. And as far as this thread goes, taxing people into "living right" is a terrible idea. 

SVreX (Forum Supporter) said:

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1a) Bail the lenders out

1b) Bail the borrowers out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

I also agree with ProDarwin. 
 

I lean mostly toward option #2, but I am ok with an element of option #3 as well. It's harsh, but it's necessary sometimes. 
 

We chose option #1a. It didn't work. 

We will do it again. Many times. And as far as this thread goes, taxing people into "living right" is a terrible idea. 

FTFY. 

Geitner bailed out the lenders, but 10 million Americans were foreclosed upon. It taught the lenders to be reckless. It taught consumers nothing. 

In reply to mtn (Forum Supporter) :

Exactly. 
 

And it rewarded the lenders for bad business decisions, while enabling them to continue making bad business decisions while they harmed other businesses that were making good business decisions. 
 

Some banks should have been closed permanently. 

z31maniac said:

I tend to agree with you. But perhaps a better option would be to educate people on what they can ACTUALLY afford vs trying to take on as much debt as possible so the smallest ripple causes a meltdown. 

We really need to get rid of some of the stupid electives in high school and make all students take a full year of personal finance, or something similar to that. What can you afford, savings, retirement, etc. 

 

It was never easy to get mortgage money here. In fact, getting any money out of Canadian banks has always been difficult. That's changing and I don't think for the better.

A full year? I think it should start in grade 1 and continue through the end of high school. I find it odd (actually I find it disgusting) that one of the most important things we'll ever need is not taught in schools.

mtn (Forum Supporter) said:

 

FTFY. 

Geitner bailed out the lenders, but 10 million Americans were foreclosed upon. It taught the lenders to be reckless. It taught consumers nothing. 

Actual breakdown, for reference:

TARP Funds
The U.S. Department of the Treasury divided TARP funds into five major areas, which included:

$250 billion was dedicated to programs that stabilized banks ($5 billion of this was cancelled)
$82 billion was set aside to bolster the auto industry ($2 billion of this was cancelled)
$70 billion was to be used to support the American International Group (AIG) ($2 billion of this was cancelled)
$46 billion was committed to help Americans avoid foreclosure
$27 billion was dedicated to programs to restart credit markets

https://www.history.com/topics/21st-century/troubled-asset-relief-program

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

The flaw with, "If they can't afford it" argument is the same Flaw Marie Antoinette had when she said let them eat cake.  
  Home ownership is good for society in General. Less crime because,  you don't wish to lose what you have. Better care taken of the property they live in that belongs to them.  
BUT WHEN HOME OWNERSHIP IS PRICED OUT OF RANGE OF THE AVERAGE WORKER. Rent is the only option left. 
  The minimum wage should allow a prudent worker Food, clothing, shelter.  Two incomes legitimately should provide for a typical family.  If not the system is flawed. 

Of note:  The US is not the only country with this "flaw":   

Some specific number for Canada:

https://careers.workopolis.com/advice/how-much-you-need-to-earn-to-buy-a-house-in-every-major-canadian-city/

Two notable cities:

Vancouver

• Average price: $1,007,687
• Monthly mortgage payment: $3,693
• Monthly property tax: $265
• Income required: $152,206
• Median family income: $76,040

Toronto

• Average price: $709,825
• Monthly mortgage payment: $2,927
• Monthly property tax: $406
• Income required: $128,746
• Median family income: $75,270

z31maniac said:

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

I tend to agree with you. But perhaps a better option would be to educate people on what they can ACTUALLY afford vs trying to take on as much debt as possible so the smallest ripple causes a meltdown. 

We really need to get rid of some of the stupid electives in high school and make all students take a full year of personal finance, or something similar to that. What can you afford, savings, retirement, etc. 

 

I'll take exception with the smallest ripple remark.  The Crisis of 2008  wasn't a ripple it was a giant flood.  The worst this nation has had since the Great Depression. Trillions removed from the economy, Massive unemployment.  10 million foreclosures.  Etc.  

      No, not just overextended  risk takers but hard working conservative families. People who saved, were used to getting up early and putting in a full day of honest work.  Laid off because of powers beyond their control.  
Families that lost a lifetime of working, saving, bargain hunting. Who were able to sell items and survive on unemployment benefits until those ran out. Willing to work any job, any hours.    Then lost their home and car. 
Smart, savvy, well educated people.  Who lived within their  means but didn't have enough equity, savings to tide them over for years. 
IT WASNT A RIPPLE
 

He didn't say 2008 was a ripple.

frenchyd said:

ProDarwin said:

I'm 100% in the camp that people should buy what they can afford.

 

From a govt. standpoint I see a few ways of dealing with those that don't do this:

1) Bail them out

2) Restrict lending so that people can't dig themselves into that hole to begin with

3) Let it sort itself out with bankruptcy/etc.

 

Personally I am a fan of #2, but in general this is a pretty divisive issue and each of these options has downsides.

The flaw with, "If they can't afford it" argument is the same Flaw Marie Antoinette had when she said let them eat cake.  
  Home ownership is good for society in General. Less crime because,  you don't wish to lose what you have. Better care taken of the property they live in that belongs to them.  
BUT WHEN HOME OWNERSHIP IS PRICED OUT OF RANGE OF THE AVERAGE WORKER. Rent is the only option left. 
  The minimum wage should allow a prudent worker Food, clothing, shelter.  Two incomes legitimately should provide for a typical family.  If not the system is flawed. 

Minimum wage workers account for roughly 1.2% of all wage earners in the US, and the vast majority of those are in tipped, service industry positions. "Minimum wage" is a red herring. Then you have the cost of living issues between different locations, etc. 

You aren't paid for how hard you work, you are paid for how hard you are to replace. 

In reply to z31maniac :

Yes I did overly simplify my comment in an attempt at brevity. 
  Would I have been better off saying low wages?  
      My point is at what point does working equal home ownership?  In many locations two people can work hard more than 80 hours a week and still never be in a position to buy a house. 

I have owned multiple residential income properties over the years. From single family homes to large apartment buildings. I have recently sold all of my properties except for my primary residence and my shop.

My 46 years of being a landlord have  lead me to believe:

- Rent control is the primary disincentive for developers to build more housing. IMO, this is the number one factor in demand outstripping supply. 

- Never purchase or develop property in an area subject to rent control.

- Never rent to anyone that can't afford the rent. No Section 8 or other government dependent assistance. 

- Always get first, last and one month rents worth of security in advance.

- Raise rents as little as financially possible. Turnovers are EXPENSIVE. Good tenants are worth their weight in gold. If your tenant leaves unhappy, you failed as a landlord.

- Maintain your rental properties as well or better than your own home. It's less expensive in the long run, you'll attract much better tenants that will stay longer and you'll sell for a much better return when it's time.

- Be physically at the property often. Get to know your tenants. Know where they work, what they drive, their kids names.

- Being a landlord is not easy.

- I believe a property bubble is rapidly inflating and will pop in the next 6-12 months.

I'm not a cold hearted person, I'm a business man. I've never made a ton of money on rents. They are just to pay the bills, ie, taxes, insurance, mortgage, utilities, maintenance, upkeep, etc. I've have made money via appreciation over long term ownership.

I did try participating in Section 8 housing assistance programs in the beginning. I lost a LOT of money. I believe the programs could be revamped to better protect landlords against the high cost of bad tenants. Not higher rents, just protection against loss. This could open a lot of rental stock to tenants that need assistance. 

And there we have it - A landlord who will not be a landlord where there is too much government intervention. 

Lets fix it by more government intervention!

To clarify, I'm not in favor of bailing anyone out. It's a dangerous precedent. I would not call myself "Left Libertarian", but I certainly believe in some instances the market needs to fail in order to rebalance. Unfortunately, we tend to bail out those at the top in the hopes those at the bottom will feel relief. I'm not sure it always happens like that.  

What I'm advocating for is ways we might be able to keep the bubble from happening altogether. 

People buying 2nd homes, leveraging themselves into rental corporations, sitting on vacant lots riding appreciation curves charging top dollar for land in areas with little of it, and existing residents resisting development and zoning changes because of NIMBYism - these also create a bubble. That's exactly what "false scarcity" is. It's creating scarcity where there is none in order to drive up prices and profits. 

I can't tell you how many over-leveraged rental owners I heard complain about the eviction moratorium in many states. "How are we supposed to pay our loans?!?" That tells me that they too were on shaky ground in terms of their debt. 

Anyone who knows investing  knows that if something is in limited supply (commodities), you buy it when its cheap, and you sell when its high. Land shouldn't be a commodity, but it most definitely is, and its used as a highly profitable investment - one that is largely concentrated in the hands of the most wealthy. 

I have no problems with wealthy people. People who have built their own success. I have major problems with predatory investments in sectors that people depend on for their daily lives. Water. Food. Healthcare. Medicine. Housing.

Curious what people think of Martin Shkreli, the guy who skyrocketed prices on Daraprim? He had cornered the market and intended to profit from it. The same thing happened with Insulin, EpiPens, and quite a few other unique drugs that pharmaceuticals had exclusive rights to. 

How is that any different from land speculators? 

Let me clear: We need land investment. We need developers. People should be able to own 2nd homes. But we need to weigh the profits and liquidity from those investments against the common good, and I don't think we are. People are tying up land that needs developed today because it might be worth more tomorrow and it's hurting our economy.