“How does punishing these people do renters or non-foreclosed homeowners any good?”

How is this a punishment? You can’t pay your mortgage you don’t get to keep the house. If I can’t pay my rent I don’t get to keep my apartment and nobody is going to bail me out. Why should I be forced to pay their mortgage. Oh, and not bailing out these irresponsible home owners helps us renters by lowering the cost of homes. Pre-meltdown I had no hopes of being able to afford a home. Now its looking like I’ll be able to afford one pretty soon. I certainly don’t want to pay someone elses mortgage to keep prices so artificaly high that I get priced out of the market.

Cheers, Greg

You’re totally right that homes are overpriced, at least here in California, and I agree that as these overly high prices are falling more people will be able to afford to buy homes. I think perhaps I shouldn’t have said “punish.” But don’t you think home prices are going to continue falling, even if these folks get bailed out?

I think there is no force on earth that can keep the market from bottoming out, and thanks to you and other smart Redfin commenters, I came to realize that this is a good thing.

Tax-payer bailout is a misnomer. Not a single tax payer will see his tax bill increase as a result of this bailout. Instead, reckless government borrowing will continue to expand to cover the costs, which will spur further run-away inflation - the most insidious and regressive tax of all. The real price will be paid by those in the working class who struggle to make ends meet, and retirees who get to watch their savings inflated away. Tragically, the unintended consequences of a bail-out for greedy lenders and equally reckless home buyers will be a regressive tax on those who can afford it least.

Wow, Morgan, that’s a very powerful post. To be honest, I don’t know very much about inflation, because it has been under control for such a long time. Or so it seems to me, hope that’s not just my ignorance. So the idea is that inflation harms poor people because they have to work long hours just to make enough money to pay the rent and buy food, and those things become more expensive but the peoples’ salaries don’t increase?

But why does government borrowing cause inflation?

“But why does government borrowing cause inflation?”

The treasury sells debt to primary dealers at regular intervals. In the end, the big buyers include the foreign central banks and the Fed. So far so good. The problem occurs when the Fed monetizes the debt, which means that it basically prints money to buy the bonds. This printing expands the money supply, which in turn devalues the currency.

Furthermore, because there is so much outstanding debt, there is a need to keep interest rates low to reduce the cost of further borrowing needed to service that debt. Low rates tend to devalue the dollar relative to other higher yielding currencies, which forces investors to protect their wealth by converting that currency into a hard asset such as gold and oil. This is why commodity prices have been surging over the last year. Economists from the Austrian school refer to this as “crack-up boom inflation”.

The bottom line is that we will not be able to borrow our way to prosperity. We need to take our lumps and go back to the business of generating real wealth through innovation and leave the days of “house flipping” behind.

Awesome, I really appreciate the explanation. You must be a teacher!

“…because [inflation] has been under control for such a long time.”

I totally disagree. Have you seen what’s happened to fuel prices lately? Or food? Check recent prices for bulk corn, wheat, and rice. http://www.signonsandiego.com/news/metro/20080510-9999-1n10bread.html And what about housing!

For some reason the government core inflation index only tracks discretionary consumables like computers and cars which, I agree, haven’t moved much. The mandatory stuff, however, has been out of control for the past few years.

And, if the government increases the money supply to bail out the speculators, as Morgan says, non-core inflation will get even worse. It will be a major problem for low-income families within the next two years.

It won’t affect my lifestyle much because I can afford $7.00/gallon and $5.00/loaf. There are a lot of Americans who can’t, though, and it’s becoming a real problem.

Again, the problem is that these houses/loans are not affordable at any reasonable interest rate.

Therefore, either “we” (renters, current homeowners) will subsidize these imprudent borrowers and lenders by either:

1) lowering their interest rates, which the banks will make up on the backs of others (renters, current homeowners), or

2)writing down their principle, which will raise our rates as the banks try to mitigate their losses on the backs of us creditworthy borrowers, or

3) a straight-out nationalization of parts of the mortgage business (seeing it now in Fannie/Freddie expansion), which of course puts taxpayers directly on the hook for defaults or through mechanisms like 1&2 above

Not to be harsh, but squatters & drug dealers are a law enforcement problem, not a housing problem. Yes the REOs add to it, but with stepped up policing, the problems can be mitigated.

Wow, what do you do SB? Are you a renter or a homeowner? Just wondering becuase if you can afford 7.00 a gallon and 5.00 for bread I hope you have not been squndering your money on rent!
I think everything Morgan said is true, however as far as house “flipping” there some people who actually do this for a living, not part time amatures who should never do it in the first place or people into Mortgage fraud. That is part of the problem. When a professional renovator goes into neighborhoods and actually does the job right, it makes it better for everyone there, aesthetically and financially. I can tell you this, if this was a perfect world no-one would make mistakes, there would be no greed, but since we do not live in Nirvana and the “angry renters”
don’t want the government to bail people out, we could always just end up like a third world country where they tax you and the government keeps most of the money and things get really out of hand like the Great Depression. We are on the edge people!

tallison,

I think you have it a bit backward. Maybe he can afford $7/gal and $5/loaf BECAUSE he rents. Why should I bailout people who can’t budget? If you were prudent and bought somewhere (if possible, or kept renting) where your housing cost was less than 30-36% of your income, you’re probably doing fine despite the food/gas inflation. If you assumed that you could spend 50%++ on a house and not get squeezed when inflation goes up or taxes go up, well, again, why should I bail you out?

And one other thing..you know what? We’ve been bailing out homeowners already with the Fed lowering rates–this is what has been stoking the inflation, which is essentially a tax on all of us.

Hahahahahah tallison, I can’t believe I suggested SB might be a teacher when he/she can afford $7/gal and $5/loaf of bread, now that you mention it. D-U-H! (Well, of course, SB could be a professor, I guess.)

David, great to see from you! When you say that the banks will lower the interest rates of the imprudent borrowers and make it up on the backs of others such as renters and current homeowners, how so? They can’t raise the interest rates of prudent buyers because prudent buyers have fixed interest rates, right?

Janis,

If you read the foreclosure bailout bills, you’ll see lots of tax credits for builders and lenders, and so many restrictions on the help for the avg home debtor than few will qualify. This is true pork. Congress wants to appear to be helping joe schmoe who bit off more than he/she could chew, but in reality are mostly helping the businesses that created this mess with no standards in lending.

Also,
Filter out the buyers who were investors/flippers, the folks that could never qualify for a traditional loan, and the total scammers.

Then look at the massive volume of housing that was build in cookie cutter developments, with houses 2 feet away from each other in towns 1-2 hours away from any major job center, and you had a slum in the making before the first shovel of dirt was dug.

Builders, lenders, brokers, appraisers, rating agencies, realtors, individuals… all trying to cash in on the american dream. No foreclosure bill can erase all the bad business decisions made over the past decade which all artificially increased prices and housing supply.

No one wants more slums, but please tell me how the foreclosure bill can stop this train wreck, at the same time as the market returns to historic norms (which it HAS TO).

Wow, menlopark, really appreciate hearing from someone who actually read the bills. I am going to hunt them down online and go through them myself; should have done so already.

For sure, I agree that nothing will shore up the housing market at this point - am I understanding you correctly, that’s what you mean by “this trainwreck,” right?

I just feel sorry for the folks who were misled, those for whom English is not a first language, or who are elderly and not totally compos mentis, or who just failed to comprehend the situation.

There is a sundance movie channel that you-all might be interested in seeing (Janis and Menlo park) called “escape from suburbia”. I know the government has been bailing out the banks, they have been doin it for years and they won’t ever stop. My point is at least we have this as an option. I have traveled to third world countries where there is no government bail out and it is not a nice sight. No, its not good for tax payers right now, but in the long run it may be. For instance how many of those angry renters would like living next to a vacant house, boarded up,who knows what going on inside! Yes it is a Police problem, I guess, but I think SF’s finest have better things to do with their time?? I am by no means the expert, many of my homeowner friends are mad about the gov. bail out. All you renters out there and would be first time homeowners, don’t get mad, get even! USE THE 7500
tax credit the gov. is allowing and buy a home with a FIXED rate. You may have to move out of SF
which would be a hard thing to do. Location, location, location always wins in the end. Sf is high price becuase most people love it. Supply and Demand.

I agree with you about living on a street with boarded-up houses, tallison. Actually, I am lucky enough not to have any on my street, knock wood, but a frequent poster on my neighborhood e-mail list lives on such a street, and it’s ugly, you are right!

Here’s hoping that responsible, solvent renters will be able to get houses and loans they can afford at good interest rates for, as you say, fixed rates, so that someone benefits from this tragedy.

Let the free market rule. Don’t worry - these houses will not be boarded up for long. Once prices drop to a level where it is in line with rental prices, trust me, investors and REAL buyers will be buying up those homes.

[…] dg, menloparkdenizen and other frequent commenters can pat yourselves on the back, as once again your May predictions are coming true: As home prices fall to affordable levels, sales are increasing, just like you said […]