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Chicken Little Economics

I have learned a simple lesson in handling MSM news; don't trust them. So I wondered a bit about the whole subprime mortgage mess and all the recession talk (by the way, I seem to recall recession being suggested by the media every election cycle since Clinton left office. Interesting coincidence, that). So I looked up the basic facts:

There were 2.2 million foreclosures in 2007, compared to 1.2 million in 2006, and 0.85 million in 2005.

So there has been a rise in foreclosures for some time now. But what does it mean on the strategic level? Not as much as you might think. 67.8% of American households owned their own home at the end of 2007, compared to 68.9% at the end of 2006. While news reporters get hysterical in front of the camera, the actual ratio of homes foreclosed is about 1 in 50. That is, 49 out of 50 homeowners, or more, will make their payments and pay off their mortgage.

Not to ignore the problems that some homeowners are facing, but it means that the housing crunch we are seeing just now is actually not much more than a correction, as overpriced homes drop in value and people who cannot afford their hoems lose them. I would say that whose fault it is, that a particular home is foreclosed upon, is a case-by-case matter, as has always been the case.

My point is that while foreclosures are up, as well as delinquencies in paying for them, it's not as if the home mortgage industry is about to collapse or we are headed for a genuine crisis as a nation. That is, as long as we do not overreact. Some moves may be defended on the basis that they are meant to restore consumer confidence, which actually creates most recessions when it falls significantly, but to some degree it becomes circular logic, and in any case someone has to pay for the bailout. Guess who that would be?


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Comments (15)

You're on to something. Pre... (Below threshold)
Baggi:

You're on to something. Pretty much the same cycle has been occuring for awhile now. Just go to bigcharts.com and look up the DOW for the past decade.

In 1999, year before the election cycle, the market was up really big. During the election cycle when things were uncertain, the market went sideways.

In 2003, year befor the election cycle, the market was again up big. In 2004 it was flat again because of uncertainty.

This year was slightly different, but only because the election cycle started earlier than it's ever started before. In 2006 and a big chunk of 2007 the market shot up. But as soon as the election cycle started and all the politicians started making news and getting their mugs on the camera as often as possible, suddenly, the market is all over the place.

So, what is the verdict?

I'd say, stick your money into the market again once the election is over and let it ride for the next three years, then before the next election cycle, yank your money out.

You may recall a few years ... (Below threshold)

You may recall a few years ago lenders were routinely excoriated by Democrats and poverty activists for "redlining" (refusing to lend in deteriorating areas) and otherwise failing to finance home mortgages for people with weak credit.

Enter the "subprime" market, which uses market realities like higher interest and other "creative financing" to make home ownership possible for people who had little hope in the very recent past. Millions of people are in homes right now - and not defaulting on their loans, either - because of this new market.

Lenders grew careless with the extended housing boom, and failed to scrutinize the activities of many of the brokers who were making the loans in the first place (but because of the changes in the market, no longer had any affiliation with the eventual owner of the paper, and therefore no particular interest in whether it was paid off or not - their compensation came up front through "origination fees"), as well as keep a realistic view of collateral.

Too much restriction will mean the number of people who can be helped by this type of loan in the future will be sharply reduced. The foolish mistakes made by a few companies and some borrowers should not poison the pool for everyone.

some additional points: </p... (Below threshold)

some additional points:

1 - The number of foreclosures does not (necessarily) correlate with homeowners losing their homes, at least as most people define homeowner, as many of the foreclosures result from speculators walking away from houses they never occupied. while I have little sympathy for those who bought houses they can't afford, I have none for the speculators who ended up guessing wrong.

2 - furthermore, the foreclosures tend to be concentrated in areas that experienced the highest run ups and the higher percentage of no-ask mortgages. In areas and neighborhoods where that didn't happen, foreclosures are few and far between.

3 - while dropping house values may keep some people from refinancing into more affordable mortgages, dropping values don't by themselves result in foreclosures, a lack of income with which to pay the mortgage leads to defaults and foreclosures.

4 - If I read the stats correctly, it is 1 of 50 mortgages that are in foreclosure, not 1 out of 50 homeowners who are in that situation. Given that a not-insignificant number of homeowners have no mortgage, the number of homeowners facing foreclosure would be well under 1 in 50, even more of a reason to not get bent out of shape.

5 - leave it to the Democrats to moan about a situation in which the cost of a necessity has actually dropped, making housing that much more affordable for many more people (at least those with decent credit ratings and provable income). Sure, dropping house prices has cost me some paper profit, but since when did the Democrats start caring about me?

Say, wasn't there a lot of ... (Below threshold)
brainy435:

Say, wasn't there a lot of talk before the 2000 election that Bush was "talking down the economy" by suggesting that the .com bubble was bursting?

Funny how things change.

DJI would suggest yo... (Below threshold)

DJ
I would suggest you use some metrics from the Texas housing bust in 1988-1991 to emphasize this point. What happened in Texas during the S&L crisis was, on a smaller scale, much worse than the situation we see now nationwide.

In 1987 three of the ten largest commercial banks in the nation were domiciled in Texas. They all failed. Today, nationally, we have the failure of many hedge funds and one major investment bank (Bear Stearns). The hedge funds took their chances and lost. Tough luck. ( BTW, does anyone notice these hedge funds looking for a federal bailout?....yeah, that's what I thought. The hedge funds knew what poker table they were playing in.)


I bumped into a guy the oth... (Below threshold)
cirby:

I bumped into a guy the other day who was griping about the subprime mess, and how he was losing two of his houses, but was keeping up payments on his other two and had already paid off his actual home...

It's starting to remind me ... (Below threshold)

It's starting to remind me of 'pilot-induced oscillation'. Plane noses down a bit, pilot jerks the stick back and plane's nose goes up - and the pilot shoves the stick forward to put the nose down - overcorrects, and gets into a positive feedback loop where the excursions up and down get worse and worse and the pilot's actions keep feeding the problem.

http://www.dfrc.nasa.gov/Gallery/Movie/F-8DFBW/HTML/EM-0044-03.html has a video of it with an F-8 - right upon landing.

Seems to me like too many people are expecting the real world to react to events with the speed of the internet. The fed makes a change - and when the desired result doesn't happen IMMEDIATELY, then it's obvious a larger change is needed... when what's not so obvious is that LESS change would allow the problem to solve itself.

But it's an election year, and politicians have this massive need to be visibly doing something to solve our problems. I'm just worried they're gonna solve 'em into a real depression.

JLawson That may be ... (Below threshold)

JLawson
That may be the best description of the problem I have heard to date. No kidding.

EXCELLENT.

DJ, great post, I learned a... (Below threshold)

DJ, great post, I learned a few things I didn't know about this issue. The comments are super too. It confirms what I've thought about the "crisis", and I really wish I had some insight to add to the conversation, but I don't. It looks like all the bases are covered.

JLawson, I agree with HughS, excellent analogy. I think President Bush said something similar a week or two back with an analogy to automobile overcorrection.

Heard that Hillary was advo... (Below threshold)
COgirl:

Heard that Hillary was advocating another stimulus package. For goodness sakes, shouldn't we let the current one hit the streets first.

And btw, did anyone notice that the economy was in good shape before the Dems took over Congress?

yes and no, CO girl. The e... (Below threshold)
SPQR:

yes and no, CO girl. The expiration of the tax cuts are part of the problem, but only a small part. Largely the recession that we may see this year has little to do with politics other than the fact that Wall Street is not happy with the electoral chances of a Democratic controlled White House and Congress making business conditions worse. With good reason, given the lunatic proposals that the Democrats are pushing this election season.

I agree, SPQR.I am... (Below threshold)
COgirl:

I agree, SPQR.

I am wondering if anyone has looked at the jobs being lost to determine whether or not it's the illegals who are losing the jobs. I know in my neck of the woods, MANY of the construction workers spoke no English. (So I surmise that they were illegal.) If the construction industry is taking a lot of hits, wouldn't it make sense that it's the illegal immigrants who have lost their jobs.

Also, if there are no jobs for these people AND many states and city are cracking down on tax payer financed benefits, don't you think some have gone back home?

Largely the recession th... (Below threshold)
Brian:

Largely the recession that we may see this year has little to do with politics other than the fact that Wall Street is not happy with the electoral chances of a Democratic controlled White House and Congress making business conditions worse.

Wow, you're getting started early with the spin of how you might need to defend a potential "Bush recession".

Well, Brian - he inherited ... (Below threshold)

Well, Brian - he inherited one from Clinton, so I guess it's only fair he return one!

That's fine. I'll hold you ... (Below threshold)
Brian:

That's fine. I'll hold you to that concession once a Democrat wins in November and the opposite becomes the meme of the right.




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