Marx and other classical economic thinkers speculatively connected the fall in the rate of profit to increases in inequality and long-run economic cycles .
Essentially, the idea is that since the rate of profit exceeds the rate of growth, rent seekers (capital holders) tend to get richer and richer and own more and more of the wealth. This impoverishes all other parts of the economy and starves it of resources, causing the rate of profit (return on capital) to start declining.
The end result is usually a prolonged crisis of some sort which causes the destruction of large amounts of capital, 'resetting' the economy again so the cycle can repeat anew.
For some reason this idea has been rejected by the mainstream for the last 70 years or so, but I think some people are starting to take it up again.
The standard view of the business cycle is that the capital gets invested somewhere. When all the good places are gone, what's left gets invested in marginal places, and then in bad ones. That capital gets destroyed, because the bad ideas can't pay it back. That can result in a crisis, but more often in merely results in a recession.
So that's somewhat similar to Marx's idea, with two key differences:
1. Capital only grows by getting returns on previous investment. If capital "starves all other parts of the economy of resources", that means that capital is wasting the resources, which means that the capital is not earning a return, which means that it stops growing.
2. The end of the cycle doesn't have to be horrible. Marx hadn't seen much in the way of soft landings, but the Fed has gotten fairly good at them. (1929 and 2008 are exceptions, not the rule.)
>That capital gets destroyed, because the bad ideas can't pay it back
But isn't that the crux of the problem. At some point those with capital accrue enough power that they don't allow capital to be destroyed?
Instead of taking a loss they lobby for laws and institutions that allow them to socialize their losses. For example laws that prevent student loans from being discharged in bankruptcy; Federal guarantees on loans; the asymmetric response of the Federal Reserve with interest rates (slow up, fast down); suspending of mark-to-market accounting rules; inflation targets that paper over bad investments; and rigged markets (i.e. prescription drugs).
The result is a subsidy from labor to capital and from new capital to old capital, increasing wealth inequality and lower social mobility.
For example assume that electric cars are the way of the future and that companies like Tesla will dominate. In that case anyone who invested in internal combustion engines invested wrong and should lose their money. That is capitalism.
Instead what do we see? Thickets of laws to protect the business models of dealers of ICE cars and a market with thinner profit margins because companies were repeatedly bailed out rather then be forced to shrink or die.
> that means that capital is wasting the resources, which means that the capital is not earning a return, _which means that it stops growing_.
What's interesting is that people might not notice for awhile that the capital isn't earning a proper return, and the realization can be in the form of a sudden price adjustment + crash (think tech bubble burst or housing bubble).
I think even standard economics is starting recognize this, even though the serious study of severe crashes has been somewhat neglected between WW2 and 2008. One problem is that data is hard to come by, given the rarity of the event. Another is that it's hard to come up with a good theoretical reason why asset prices can be persistently wrong for so long.
> (1929 and 2008 are exceptions, not the rule.)
What if it turns out that severe crashes to the tune of 1-2 a century are a rule? How many data points would we need to see before economists would be convinced?
> Another is that it's hard to come up with a good theoretical reason why asset prices can be persistently wrong for so long.
The reason is well understood, but not by mainstream economists. I suggest reading about Hyman Minsky and Steve Keen's research. To summarize, increases in total debt (private or public) contribute to demand, while decreases in total debt subtract from demand. This results in a financial instability. More demand => more debt-fueled investment => more demand. Eventually, businesses that could never have survived at the bottom of the cycle can get huge loans; they might not even seem speculative, because demand is so high and keeps growing. However total debt rises too quickly, due to speculation and Ponzi financiers, and it can't rise at such rates indefinitely. Once debt growth begins to slow, businesses financed primarily by debt begin to fail, because demand slows and they can't convince anyone to give them more loans to cover interest. This triggers runaway deleveraging and fall in demand. In such a down-turn, even businesses that could have survived at the bottom of the cycle have trouble because they've taken out loans or sold shares to invest in growth, since they expected demand to continue to rise. Instead, demand shrinks, because much of it was debt-fueled and unsustainable.
Yeah that's a reasonable model that links the debt and business cycles together, but it makes a key assumption: that investors only depend on lagging metrics of credit quality (business defaults), so fail to stop the bubble from inflating.
What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.
> What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.
I think the problem is human nature. People forget. Sure, this has happened many times before, but the most recent time was, say, eight years ago. That's a long time in peoples' memories.
And, while there may be this nagging memory of trouble, right now there's money to be made...
Lenders can't predict the future any better than creditors. There's nothing mysterious about that.
If you want a theory for _why_ the future is unpredictable, read up on chaos theory.
> What if it turns out that severe crashes to the tune of 1-2 a century are a rule?
During the 1800s, it was more like 5-10 severe crashes a century. Add in the crash of 1907, as well.
What changed? The Federal Reserve, created in 1913.
Considering that all developed economies are deep in the liquidity trap and therefore unresponsive to marginal changes in monetary policy, looks like we will be in for some tough times.
> For some reason this idea has been rejected by the mainstream for the last 70 years or so
The reason is obvious: it was Marx's idea. Even today many people in the U.S. have visceral negative reactions to the mere mention of Marx. Marxism is not just viewed as wrong, it is viewed as evil. And not just evil, but the ultimate evil (at least until Islamic extremism stole the limelight), an existential threat to God, motherhood, apple pie and capitalism, all of which have similar moral standing in the hearts and minds of many Americans, facts be damned.
The great unanswered question is: what happened to growth?
You've outlined exactly one dimension of why we need it - without it, it's rent-seeking all the way down.
I am concerned that the emerging "Greatest Generation/Silent Generation/Baby Boom used up all the growth and now we're ... messsed up." becomes a self-fullfilling prophecy, aided by the cumulative nature of assets.
I am loath to call rent seekers "capitalists". Perhaps
that's an error, but it make sense to me.
> The great unanswered question is: what happened to growth?
What I've heard others say is that the internal combustion engine, railroad, electricity, the telephone, indoor lighting, assembly line, the airplane were all huge things. Half of those things our grandparents didn't have growing up. The Internet is more recent and has definitely allowed growth, but not quite has much as the others had and other significant things haven't shown up.
We're still growing just not at the scale as we previously had. Also, there could be some new big discovery that could let us return to previous growth...it's hard to anticipate these things.
Well, the internet is one tremendous piece of infrastructure, but that's not just it. Moore's law and the growth in computing power, the solid state of research universities around the world etc. is all contributing to the growing corpus of knowledge, fueling innovation.
Now, growth like what America saw post WW2 was definetly a one off thing: the rest of the world was in ruins, and there was great demand for manufactured goods and services from Western Europe and the rest of the world. Today, many more countries are stable and have the infrastructure to manufacture and provide goods and services. So its quite unreasonable to expect that kind of growth anymore in the US.
Where the US has excelled is in innovation and first comer advantage. e.g. Advanced computing systems, electronics manufacturing, automation, advanced weapon systems, space exploration etc. So, as the rest of the world catches up, the US economy moves on to create new markets where they have the first mover advantage. The only way to make this happen is through innovation.
Growth in any finite system is inherently unsustainable.
It's sustainable when you keep changing what growth is - and we do. I used to have a TV/stereo cabinet modeled on a 19" rack ( head high, six or eight feet across ) ; now some people substitute for that with a phone.
Example: Can you even build a boat out of mahogany any more?
The only things that got bigger - universities, McMansions, and medical centers - appear to be subsidized. Everything else is smaller.
Exponential growth is unsustainable.
Sounds right... Not sure Marx imagined what that process would look like alongside the emergence of a new species through (autonomous corporations).
I expect the details of solvency for funds, pensioners, etc, will fade away into history as we move away from the large institutions and individual risk that necessitate them.
What happens when every citizen controls thousands of autonomous corporations, each with perfect credit (if limited means)? Many rules of economics will no longer apply.
> We're going to keep going from crisis to crisis because banks can't say no, and the government(s) deems them too big to fail
Consumers can say no, and if they had better financial education and/or financial prospects, maybe they would.
The elderly woman in the article initially refused the $50k renovation to her 5 bedroom home, but then agreed because she thought the government was going to subsidize it for her.
The contractor was able to sell her the loan because she needed to reduce heating/utilities/energy costs in her massive (for one or two people living on SS presumably) home, and she thought the savings from the PACE program would pay for the solar panels, smart lightbulbs, etc.
I don't know the exact details of her situation, but it seems like perhaps the correct decision would have been to sell the house and move to a smaller, more efficient house if the current house is too expensive to maintain given the number of occupants and their age/level of income. I'm 24 and currently rent half a large house in the suburbs from a single guy in his 60s who needs the extra income to maintain the house which he bought when he had a larger family.
Unfortunately it seems like the loan was misrepresented to her by the contractor when she agreed to go into debt, and obviously many will do anything to avoid moving out of homes/communities they've been in for a long time. Others have no family to rely on or go to even if they do want to move.
I'm not a huge fan of Wall St. and big bank loan & derivative making and selling culture, but it's not entirely to blame, nor was it entirely to blame during the financial crisis of 2007-08 as many consumers took on home loans they had no intention of ever making good on (maybe there was some fraud/misrepresentation on the part of the contractor in this case, maybe not). People have always been greedy since the beginning of time - we are just struggling overall at the moment to raise financial literacy and strengthen altruism: family/community/country-wide ties (patriotism) due to poor economic conditions for the majority of Americans.
> Consumers can say no, and if they had better financial education and/or financial prospects, maybe they would.
I think that is blaming the victim. As the article says, you have repair people describing the terms of the loan to people. If they don't understand what they're selling (and I'm sure they don't) then how can you expect the average person to? Not to mention the pressure selling that is probably being used on targeted groups (I'm looking at the elderly, minorities and groups that are generally less financially sophisticated).
Most people generally aren't in a position to "vote with their wallet". This is because most people are leveraged to their eyeballs with rents. This is a problem with Wall Street that trickles down, not a problem with the consumer that worked it's way up.
> many consumers took on home loans they had no intention of ever making good on
I disagree with this as well. People generally are not scam artist. On the contrary, most people like paying off their debts. Were people probably overly confident in their ability to repay, sure. Saying that people intended to default however, is not true.
Wall Street (and it's derivatives... I'm looking at you, ad funded Silicon Valley) is full of fraud. The fraud stems from the fact that the only people who can realistically perform checks and balances on this group(s) are the groups themselves. You may be able to blame the consumer when they have full and clear knowledge of how the system works, but that's not the case. Wall Street is full of so many obscurities and 40k ft descriptions that the average consumer really has no chance.
A good example of how the average person thinks financially... how many homeowners do you know that consider their home an "investment". Probably most, if not all.
I'm not blaming the victim, I'm appealing for a more nuanced viewpoint than "fuck Wall St." There are at least 2 sides to every loan - the originator and the borrower - and it helps to examine dynamics on both sides of the table.
Is the book in the US generally stacked towards originators? Certainly, as I argue, with financial literacy being so low, most home-owners wanting to do anything to avoid moving, and family/community ties dissolving. Hell, I went to business school and read 10Ks for a living, and can still barely manage to figure out all the terms and conditions on my credit cards.
I just want to point out that alternatives (usually uncomfortable, but often necessary) do exist to taking on opaque loans.
How does someone get into a situation where they are "leveraged to their eyeballs with rents"? Sometimes it's purely out of necessity (need to be close to sick family, within commuting distance of work, keeping a rent controlled unit) but otherwise most people in the US generally have a choice of where to live and how much to pay in rent. I could live in the city and pay 1.5x what I'm paying now to live in the suburbs in an unorthodox situation, but I don't because then my rent would be >30% of my annual income.
Maybe I'm wrong and I'm one of the lucky, shrinking few who still has this option, the option of mobility than once made the US great? Because I'm young and employable?
Also, if a homeowner considers their home an "investment" that means they should be willing to liquidate that investment at some point when it makes financial sense to do so. People get sentimentally attached to their homes, which is not true of most "good" (read: fungible/liquid) investments.
We're definitely both against fraud, but unfortunately these government programs that make life better for some by subsidizing mortgages, home renovations, tuitions, etc. can and will always be gamed by unscrupulous individuals. Question is - is the payoff to society (higher homeownership, literacy, energy efficiency) worth it?
> I'm not blaming the victim, I'm appealing for a more nuanced viewpoint than "fuck Wall St."
I think we can amicably disagree. I'm not in the "fuck Wall St." camp. I understand what it is supposed to do and the value it is supposed to provide.
> Maybe I'm wrong and I'm one of the lucky, shrinking few who still has this option, the option of mobility than once made the US great? Because I'm young and employable?
Yes. You have the option of mobility because you're young and employable. Probably just because you're employable. The average person has horrible job prospects where they are. Moving into uncertainty of even worse job prospects probably isn't a realistic option. I think most people would try to make it work with the job they have (and get stuck with rents because of it), than leave their job and possibly not be able to find one where they move (and to have spent money moving).
> Also, if a homeowner considers their home an "investment" that means they should be willing to liquidate that investment at some point when it makes financial sense to do so. People get sentimentally attached to their homes, which is not true of most "good" (read: fungible/liquid) investments.
I'll go ahead and say this. Your home is NEVER an investment. A house that you own, maybe. But, I repeat, your home is never an investment.
> We're definitely both against fraud, but unfortunately these government programs that make life better for some by subsidizing mortgages, home renovations, tuitions, etc. can and will always be gamed by unscrupulous individuals. Question is - is the payoff to society (higher homeownership, literacy, energy efficiency) worth it?
I agree here, but I think the better question is, "When the unscrupulous individuals form a large, easily identifiable group, why sit idle and do nothing?"
>Your home is NEVER and investment. A house that you own, maybe. But, I repeat, your home is never an investment.
Can you expand a bit more on this?
Usually it might not directly turn into an investment, but it does act as a 'savings vehicle' in many cases. For example when I moved to US a long time ago, the choice was between a 1200 rent and a 1600 mortgage (assuming I put a down of 25k or so). At that point it felt like a very reasonable investment and the market worked out afterwards where in it turned in a great ROI. If it wasn't for that move, I would've still been pissing off money in rent.
Also the actual investment options today are not as cut and dry as it seems either: There is no real 'assured' gain anywhere even though I do see the 3.5-6% returns number touted in the reddit personal finance circles. In the long term, I would ideally split money between these, not eschew home as an investment vehicle. With the right amount of thought and reasonable location choices, it can indeed turn out into a great investment. This is not to ignore the risks people take by overextending themselves / doing 'home flipping' but to each their own.
Everyone is born short housing. Buying your first house is covering a short position. Renting instead of buying is maintaining a short position. Buying your second house is taking a long position.
(Copied directly from my other post in this thread , though if you do a search I've said the same thing several times.)
Others have elaborated further; here's Felix Salmon and Nick Rowe:
It's an illiquid investment that appreciates at a rate that varies in conjunction with inflation. You might win or lose, but it's tough to predict, varies with geographical area and in relation to inflation and wages.
There are many graphs that show aspects of this, here is one useful one I found: http://lesjones.com/2008/11/25/inflation-adjusted-us-house-p...
You don't typically consume an investment.
If I buy a house and live in it, how quickly can I reasonable divest myself from the house? For the average American, not quickly at all. Why is that? Because I need to a home to live in. If not this one, another. And generally the equity in my current home will be used to secure my future one.
A house that you buy and don't live in (or is easily divested) could be seen as an investment because you don't live in (consume) it. If you need to sell it, that money could easily go to other things. And you can sell in a timely manner.
Edit: I was trying to be layman about it, but chillingeffect did a good job on the technicals.
If you agree with chillingeffect that one's home "is an illiquid investment that appreciates at a rate that varies in conjunction with inflation", then you think it's an investment, albeit one with some drawbacks.
Yes, it's illiquid, absolutely. (Although not much more so than any other home one buys, say an apartment block; I can move on less notice than I can sell a property.) Yes, there are some concerns about the ROR, relative to inflation (although I note that world population, and population in most markets one cares about, is increasing, and they're not making more land, so one should expect real estate to appreciate somewhat, relative to inflation, although perhaps not enough to be interesting).
But why on earth would you say that it's "not an investment"? Why does illiquidity and poor RoR disqualify something from being an investment?
Do you also claim that buying negative-rate bonds is not an investment? What about buying gold against inflation (for those who see gold as an inflation hedge)?
What is the definition of "investment" that you're using? It must be a pretty compelling one, for you to use the phrase "not an investment" so confidently in so many comments. Me, I thought that the nature of investing was allocating capital, the opposite of divesting (selling).
Alright, we can get down to technical definitions and splitting hairs.
In an economic sense, you don't consume an investment. In economics, an investment is the allocation of capital that will essentially be "put away" until some time in the future. You don't touch it.
In finance, an investment is purely about the possibility of appreciation/depreciation (or making money on the buy sell spread). If I buy a candy bar wit hope that it appreciates in value, it's an investment. If I short that candy bar, and the value of the bar depreciates, that's an investment.
I do understand that the two different usages of the term (combined with the fact that a house can be consumed and still be intact enough to sell). However, I stand by the statement that your home is not an investment. It's a bad financial one. It's not an economic one.
Both of those definitions are wrongly stated, and that's why you're producing this wrong belief about primary residences.
An an economic sense, an investment is an allocation of capital. Certainly consumer purchases of durable goods are not investments. The most common type of capital to invest is money, but other types might apply. By investing, one becomes the beneficiary of some of the means of production. Real estate is a perfect example. Real estate is always an economic investment, whether one then consumes the output or not. Also, by the way, many investments in this sense are consumable, usually with long rates of depreciation. That applies to a CNC machine, it applies to a fleet of productive vehicles, and it applies to buildings, including primary residences. If the fact that a house degrades with use makes it not-an-investment, you argue yourself into an obviously-silly corner.
Your line about "it's a bad financial one" is almost too foolish to touch. A bad financial investment is still an investment. Telling people that a bad investment is not an investment is not communicating, it's posturing. Financially, if you buy a candy bar, and its value drops, it was still an investment (a poor one).
If you want to make the claim that housing is a poorly-chosen investment, that's a different claim. Although, without knowing more about the life circumstances of the would-be investor, a fairly preposterous one, since it's clearly a good investment for many people, in practice.
We can go back an forth about this (or not, doesn't matter), but my point still stands.
> An an economic sense, an investment is an allocation of capital.
As I said.
> Certainly consumer purchases of durable goods are not investments.
I relate this to the consuming of your primary residence ("home").
> By investing, one becomes the beneficiary of some of the means of production. Real estate is a perfect example. Real estate is always an economic investment, whether one then consumes the output or not. Also, by the way, many investments in this sense are consumable, usually with long rates of depreciation. That applies to a CNC machine, it applies to a fleet of productive vehicles, and it applies to buildings, including primary residences. If the fact that a house degrades with use makes it not-an-investment, you argue yourself into an obviously-silly corner.
Your home is not a mechanism of production. Sure, if you buy your house, you may be able to sell it for a profit down the line. However, you home is a place a residence. A CNC machine, a fleet of vehicles, a building that you will then fill and rent out all are mechanisms of production. The idea of your home as a means of production is based upon the false idea (prevalent in the US, and apparently Canada) that home values will always increase. Non of those other "consumable" investments are based upon the value of the investment themselves... they produce value due to usage, not inflation.
> Your line about "it's a bad financial one" is almost too foolish to touch. A bad financial investment is still an investment. Telling people that a bad investment is not an investment is not communicating, it's posturing.=
I was probably being a little hyperbolic there, but my point was that you should not consider your home an investment.
> Financially, if you buy a candy bar, and its value drops, it was still an investment (a poor one).
Again, didn't I say that?
> If you want to make the claim that housing is a poorly-chosen investment, that's a different claim. Although, without knowing more about the life circumstances of the would-be investor, a fairly preposterous one, since it's clearly a good investment for many people, in practice.
In practice, for many people, it's not. See the 2008 housing crisis.
> (or not, doesn't matter)
I agree with the "didn't I say that?"s, you just appeared to contradict it on later in the respective sentences.
Of course appreciation (assuming it happens) is not production. The good that a home produces is housing. That's why it's an allocation of capital to a means of production. That's why, economically, it's an investment. There's no way around that. The claim that something is economically an investment is completely disconnected from resale value; it's connected to productive capacity.
And you appear to have backed off on the claim that it's not a financial investment, you just think it's a poor one. I disagree, but I think your position on this is, while mistaken, not madness.
I think that, given demographic trends, both in terms of population growth, and in terms of ongoing trends in urbanization, we should expect that the long-term trend of real estate appreciating at 1-2% more than inflation should continue. That alone should defuse your claim that it's an obviously-bad investment (i.e. it's a good hedge against inflation, better than traditional anti-inflation hedges like gold). Whether it's a good investment depends on other factors, like how far you leverage, how easily you can weather things like 2008, how diversified you want your portfolio, how much tax advantage you get from owning your primary residence, how much it would cost in your market to rent an equivalent home, whether it's even possible to rent the home you want, etc etc etc. But it should be credibly on the table for every investor. And you cite 2008... but of the homeowners that I personally know, who were long real estate in 2008, with whom I've discussed the issue (perhaps a dozen), literally zero of them are sad that they were long in 2008 (except of course that if they'd had a crystal ball, some of them would have done differently, right after buying lottery tickets). So what is it you want me to see about the 2008 housing crisis?
> I'll go ahead and say this. Your home is NEVER and investment. A house that you own, maybe. But, I repeat, your home is never an investment.
I'll go ahead and say this. My home is certainly an investment. I allocated some capital to some real property, and this real property generates value for me every day, which I might have purchased otherwise (indeed, would have been nearly forced to). Because of the ability of my home to generate value in this manner, I expect that others might want to own it, and so it can probably be resold. I also am pretty optimistic about my ability to resell it for more than I bought it for, although perhaps not at such a price such that the purchase was as profitable as, say, buying an Vanguard ETF.
I'm not saying you can't make money by buying and selling houses, but the average person's home is not an investment.
Well, it is if you plan to sell it and move to a cheaper place once you retire, using the profit to fund part of your retirement. That's well inside the definition of retirement saving.
Using a layman's definition, yes. However, strictly speaking, the average person's home is not an investment.
Your home is a durable consumer good. You spend (lots) of money maintaining it and paying insurance, because it's in a constant state of decay. Your home isn't paying you anything, quite the opposite.
Maybe someone will come along later and pay you more than what you've spent on it. Maybe not. On average you're likely to get back what you paid plus inflation. It's a speculative investment at best.
Now, owning a home where someone else is paying you to live there? That's an investment.
Yeah I think we're in agreement in general, just coming at this issue from different perspectives. I'd like to see things changing on the consumer side as well as the gov/regulation side described in the article:
Riverside County, Calif., has opened an investigation into marketing practices for PACE loans, and California Gov. Jerry Brown signed into law in September new requirements establishing uniform disclosures for PACE loans, an effort to make lending terms closer to those for mortgages. Homeowners who get a PACE loan now have three days to back out.
The largest PACE lender, Renovate America Inc., is accused in three lawsuits filed in November by borrowers of double-charging interest and administrative fees and failing to immediately credit loan payments. The suits seek class-action status. The company denies the allegations and says it will “defend PACE, our company and the program vigorously.”
In November, the Energy Department urged administrators of the loan programs to clearly explain loan costs and other terms, allow borrowers to cancel their loan during a short period and deter kickbacks to contractors.
It would be nice to be able to trust financial institutions/loan originators, have them explain things to consumers in easy-to-understand and fair ways, and have some type of more personal relationship than we have now with those who provide us with places to save/borrow money.
> and to have spent money moving
Point that at the ~52k median US income, a long distance move + the inevitable missed weeks without a paycheck is not a trivial decision for a lot of people.
>If a homeowner considers their home an "investment" that means they should be willing to liquidate that investment
This is a point which is missed by so many people. Every empty-nester I know and consider well prepared for retirement has made downsizing a key component of their overall strategy.
I get sentimentality but there's as much sentimental value in retaining financial stability in one's later years. Sure, an empty nest, baby boomer household will usually be able to bear the financial burden well into their retirement. However, seniors find themselves facing large, unplanned healthcare expenses all too often. That's where the $XXX,XXX they gained by downsizing around the time of their retirement would prove invaluable. Not only would they avoid the large tax penalty that comes from withdrawing from a 401K, they'd reduce their fixed expenses while retaining an asset (the smaller home) that can be passed down to the next generation.
I've known far too many seniors who have been forced to sell the home they "plan to pass down to the children as a nest egg" just to cover medical bills and it's a sad sight to see.
Who should be paying their medical bills then?
This maybe doesn't apply for many people in the us currently, but in my age group (late 20s) student loan payments are so high that it's not worth moving to a lower cost of living area. Staying in the city where the jobs are and the higher pay is, nets you more money at the end of the month even if rent is >30% of your pay.
Having a large static payment is making cost of living a much less important part of my cohorts finances
I think you've hit the nail on the head when it comes to houses - people form irrational sentimental attachments to their real estate.
Human irrationality around shelter is a market inefficiency which the banks are happy to take advantage of.
They're also happy to write documents that are incomprehensible to the buyer, providing terms in their favor, as they know they are not working with experts, 99 percent of the time.
When individuals are put in opposition to large institutions, the individuals are going to lose. No amount of financial education is going to change that.
Regulation and good governance are your best bets, though competition sometimes works as well; place another institution in the mix to take the burden off the individuals.
Yes, yes, and yes. I was not trying to shift the blame to the consumer. Information asymmetry is why we need strong consumer financial regulations.
Buying a home is a massive bet on the local employment market (in your niche) staying fungible over decades. At the rate of creative destruction happening in business these days and the associated deterioration of the employee/employer (implied) social contract since at least the 80s...this just doesn't make sense.
> Buying a home is a massive bet on the local employment market (in your niche) staying fungible over decades.
I've seen "fungible" used to indicate flexibility, and I've seen it used to indicate growth and decay. Are you using it to indicate either of these, or are you attempting to indicate a long-term steady state?
When trying to communicate an idea, you may wish to use a word that has a fixed meaning and a reasonable chance of being understood, because to be brutally honest, I haven't any idea what you're actually intending.
It's not necessarily irrational to want to stay in the same home after 40 years. Money is only indirectly beneficial. If you enjoy where you live that can be worth quite a bit.
>There are at least 2 sides to every loan - the originator and the borrower - and it helps to examine dynamics on both sides of the table.
You've kind of hit on a huge part of the problem - there's WAY more than 2 sides. Thanks to swaps, derivatives, and bonds, the originator isn't on the hook if the borrower defaults. The originator isn't even holding the loan anymore. They've bundled it up and sold it off to a 3rd party who never bothers to check if the loans are any good, because THEY bundle it up and sell it off ASAP to a 4th party. Repeat ad nauseum.
End result is that nobody in the chain is ever incentivized to actually check if the borrower can afford the loan they've been given. On one side, you've got a giant billion-dollar industry who whose best interests are served by issuing as many loans issued as without concern for the long-term consequences. On the other, you have the borrower. As we learned from the 2008 crisis, putting all the pressure solely on the borrower to think of the long-term consequences is not only unfair, it's dangerous to everyone.
> The originator isn't even holding the loan anymore. They've bundled it up and sold it off to a 3rd party who never bothers to check if the loans are any good, because THEY bundle it up and sell it off ASAP to a 4th party. Repeat ad nauseum.
"You get a hot potato, you pass it on. I passed it on. Listen, there were a lot of people who are very happy to get things taken care of for me. Hey, you know? It was really funny seeing how far and how fast that particular potato got passed on. That told me a lot about who was bright and who was not."
The Long Dark Tea-Time of the Soul - Douglas Adams
> Saying that people intended to default however, is not true.
I'm not sure if it's what roymurdock meant, but there's a nugget of truth to what he said. People did take on loans that they never planned to pay off personally. They saw the relentlessly upward trajectory of home prices and wanted to benefit. They took on loans with the intention of refinancing or selling the home a few years down the road. It wasn't an intention to defraud anyone, but it was definitely an attempt to get something for nothing. Just because they were trying to copy others who'd made large profits buying and then later selling their homes doesn't make it not greedy behavior.
You can just as easily say that banks were giving out loans they expected to refinance in the coming years.
That is, I find it misguided to fault people for defaulting on loan without faulting people for aggressively pushing people to refinance.
The cost of the system failure is being pushed to the people with the least control over it. I'm not looking for punishment. But responsible stewardship of the system controls would be nice.
> You can just as easily say that banks were giving out loans they expected to refinance in the coming years.
Can't it be both? There's enough blame to go around. My only point was that the narrative of victimized homeowners preyed upon by evil lenders, put forth by a surprisingly large number of people, is misguided.
It can be both.
However, the blast radius is different. For every lender that was irresponsible, you hit many lendees. For each lendee, you likely did not increase the number of lenders touched.
That is, you fix one lender, and you likely fixed many more lendees.
Except that's not what he said (or perhaps he just said poorly). He didn't mention anything about "personally", he said "making good on".
Someone flipping, re-financing or selling the home is inherently going to be making good on their mortgage. He is claiming there were swathes of people who had "no intention of making good" on mortgages.
> If they don't understand what they're selling (and I'm sure they don't)
Moreover, why would they even want to understand? The loan disbursement will be going directly into to their pockets. The incentives are shockingly perverse all around.
If you're selling someone financing, it's your responsibility--more than the borrower's, in my opinion--to understand the product.
Disturbingly, PACE financing appears to have been structured as a tax assessment instead of a loan. That means it sidesteps the "disclosures about the financing costs that traditional lenders must provide" borrowers .
> A good example of how the average person thinks financially... how many homeowners do you know that consider their home an "investment". Probably most, if not all.
Homeowners are often legally required to sign a document agreeing that their home is not an investment.
It not being an investment is mostly the fault of your local government(and, I suppose, of the local homeowners themselves who don't make it an issue). If cities removed all the non-hazard-related zoning laws, property values would mostly be tied to the expected cap rate. And this would happen whether or not homeowners knew how to calculate a cap rate. And valuing something based on its profit potential seems close to the definition of an investment.
OTOH, this reduces the ratio of property owners to renters, who are less likely to care about property rights(I wonder if this is one reason the cities skew left?). So your city might end up like California if you did that, and something even worse than zoning might come along. Historically, only property owners could vote, which is one way to solve that problem; it's possible the modern approach is to segment a certain percentage of the population into SFHs. You could check that hypothesis by seeing how SFH-owners skew politically(I haven't done this).
I don't actually know anyone who owns an SFH, isn't an investor, and considers their SFH to be an investment. So I'm speculating on their motivations.
Can you elaborate on the homeowners considering their home an investment - and why they shouldn't?
I've moved from Europe to Canada 20 years ago, and I'm still coming up against it all the time - I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down.
EVERYbody around me thinks I'm crazy and that houses are #1 best investment ever.
Most Americans (and apparently Canadians) think their home is a very good place to park their entire net worth. Meaning they think its guaranteed to appreciate and appreciate faster than all other assets and investments a person has.
They also tend to only look at raw numbers that look impressive unless you don't think about it too much rather than the whole picture. Grandma bought her house in 1970 for $10,000 and sold in 2005 for $100,000 (made up example). Looks impressive at a glance, however, What's the carrying cost of the house, transaction costs, inflation, and the performance of other investment vehicles during that time period?
This thinking is part of what drove the 2000s housing bubble. Its also part of what causes people to become "house poor," meaning a very large part of their income and assets go towards their primary residence leaving them unable to save any money and have no retirement fund.
>a recent Gallup poll shows that Americans now believe housing is the best long-term investment, beating out stocks, bonds, and gold.
The reality is house prices stay about lock step with inflation on average over the long haul. There's other reasons why I house is a bad investment even if they did outpace inflation. Not that they are a bad thing to buy or own, I am a homeowner myself, its just not a great financial investment.
The American government also subsidizes home ownership in various ways which can play into the fantasy.
>I consider home/condo a utility, a bill paid for purpose; it can go up, but it can also go down.
This is a great attitude. A home can be a fantastic thing to own. It is great at providing housing! It can provide a sense of pride. Its just not a great financial investment and every portfolio should be diversified even if it were.
> Most Americans (and apparently Canadians) think their home is a very good place to park their entire net worth. Meaning they think its guaranteed to appreciate and appreciate faster than all other assets a person has.
Most Americans have no choice, because you can't buy 1/3rd of a house or a room in a house, or a basement. You have to buy the whole house and very rarely will a family be able to outright get themselves into 2 mortgages on houses in a desirable area. In other words, you're painting a picture of choice where there is none. Renting has the same underlying problem - you alleviate yourself of depreciation risk, but you take on the risk of being at the mercy of the landlord and area gentrification and being priced out of it eventually.
> The American government also subsidizes home ownership in various ways which can play into the fantasy.
Not in as many ways as you think. It's rather the higher density urban areas that subsidize the suburban low density single family houses (most of which are very shoddily constructed).
> Its just not a great financial investment and every portfolio should be diversified even if it were.
Like I said earlier, most Americans don't have a portfolio of investments of any sort. Housing is a relatively stable asset for the risk-averse, and incidentally also provides you with a place to live.
> The reality is house prices stay about lock step with inflation on average over the long haul.
The reality is that discussing real estate prices without discussing location and separating structure value from land value is a gross and useless oversimplification. Look at property values in desirable urban areas: they far outpaced inflation and have recovered after the housing crash in less than 5 years.
> being priced out of it eventually
This applies to home ownership as well. Taxes can increase to where you can't afford to live there anymore.
> It's rather the higher density urban areas that subsidize the suburban low density single family houses (most of which are very shoddily constructed).
I'm not sure I understand what you mean. I am talking about, mostly, income tax deduction that applies to everyone. There's also the 30 year mortgage and VA loans and (I think) FHA loans.
> most Americans don't have a portfolio of investments of any sort.
Many times it because they put all their income into their house because they believe it is their house that it the key to building them wealth!! My only point was this is a common misconception. Housing is for living in, unless its an investment property that generates cash flow but that's not what we are talking about.
Buy a house, or rent, there's tradeoffs. There's pros and cons of both. Its different for everyone at different times in their lives. As I said, a house is a great place to live in! My only point is the American/Canadian mindset that buying a house is the ultimate way to build wealth is false. It might, if you are really lucky, but don't bet on it. Especially don't bet your future on it!
Yes, you have to buy housing, you need somewhere to live. A house is a good choice for many. A house may be cheaper than renting. It's just not a guaranteed generator of wealth like most people believe. You shouldn't disregard funding your retirement to buy a house. You shouldn't stop saving to buy a house. Diversify your assets.
Depends on your definition of investment and what you're looking to get out of it. If they maintain value by appreciating at least at the rate of inflation, then they're a great store of value. At that point, you need to take all expenses into consideration (including any applicable tax deductions and rental incomes from rooms) in order to determine whether you're net positive or net negative versus renting. This can't be generalized since it depends on your local housing/rental market, however I can speak for my own situation where I pay about the same for my home as I would for a rental where I'd live by myself. If I was to rent out my extra room, I'd be paying significantly less.
That's a bit long winded, just don't want people automatically rule out home ownership since not only can it be a point of pride, it actually can be financially beneficial if you're willing to do the math for your own situation.
In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.
I don't think people are saying you'll never come out ahead (like one might say about someone who wants to take up daytrading). Most of the arguments I hear are, "houses are a terrible investment" or "don't think about it as an investment" and they're not trying to dissuade people from buying houses--just from buying them as an investment. Calling it an investment encourages people to buy when they should rent, or buy larger houses than they should. Houses being the largest purchase most people make and the one thing containing most of one's wealth (and the fact people only do it a few times in their life) should mean people need to be very careful about the decision. People also tend to undervalue the subjective attachment to the houses they live in, causing them to make poor financial decisions.
Like others have said, houses generally perform slightly less than inflation, there are additional costs like maintenance, taxes, and insurance people generally don't always consider. Houses are illiquid, you can move to a place with smaller rent, but you can't divest yourself of half your house (you could take a second mortgage, thought). It's also much easier to relocate when renting even if you're paying the same rent. When fixing up your house it's easy to not think about cost/benefit or blindly think your upgrades will pay for themselves.
Perfect comment, you explained my feelings and points better than I could.
Like I said, I am a homeowner. I love being a homeowner. But I just can't stand the myths around homeownership that people tell me. I didn't buy a house in order to get rich, I bought a house for consumption, to live in. I hope I come out ahead when I sell my home. I'll be happy as pie if I break even.
My dad asked me why I was buying a house if I thought it was a poor investment. "To live in." He was honestly confused as to why someone would buy their primary residence other than "because it's an investment."
Nobody believes a car is a good investment but we all still buy them, to use them.
>When fixing up your house it's easy to not think about cost/benefit or blindly think your upgrades will pay for themselves.
This is a great point that should not be overlooked. I think HGTV is terrible in this regards. One of my coworkers told me you should always get every single upgrade you want because you will always get that money back when you sell. This is just so untrue I find it difficult to believe that anyone would actually believe that.
Because, at least in the US, except for the '08 crash housing has ALWAYS gone up.
Now, it hasn't (and hadn't) gone up as quickly as the stock exchange, but it typically is a safe place to park your equity and let it grow. And especially during the height of the bubble and currently, it's growing in value rather quickly, so people (perhaps influenced by HGTV) started viewing it as not only a safe investment but one that, with a little DIY work, could be a rather fast growing investment!
EDIT: added graph/article
Why Your House Is Not An “Investment”... a true investment requires more than the prospect of an increase in value.
* A house has a more important primary purpose
* A house can’t be an investment if you never plan to sell it
* Thinking of your house as an investment can lead to equity stripping
* The carrying costs of a house are too high for it to be an investment
* Your house won’t generate cash flow
* Price appreciation is the magic ingredient, but it’s not guaranteed
I'm not actually arguing against home ownership, I am a home owner myself. A primary home (for most people) should be thought of more as a commodity item.
> A house has a more important primary purpose
Aren't houses purchased for the intent of renting them out investments? This would argue that they are not. Seems to be proving too much.
Despite the title, this section of the article is actually about how illiquid houses are. Which, again, proves too much - old bonds are also extremely illiquid, but no one says they aren't investments.
> A house can’t be an investment if you never plan to sell it
I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house).
> Thinking of your house as an investment can lead to equity stripping
This says that thinking of your house as an investment leads to poor decisions, not that it is wrong. Sure, maybe it does, but that's a completely different argument.
> The carrying costs of a house are too high for it to be an investment
The carrying costs of a house are typically negative, unless you conveniently forget that a house covers a short position and is thus paying you back (in the form of covering your rent). Which the article does.
> Your house won’t generate cash flow
Again, it is covering a short position. It saves you from paying rent, which is mathematically identical to forcing you to continue paying rent but paying you the same amount.
> Price appreciation is the magic ingredient, but it’s not guaranteed
This is true of all investments.
>Aren't houses purchased for the intent of renting them out investments?
Those are investment properties which is a different thing than we are talking about. We are talking about a primary residence bought to live in.
Yes, some investments are illiquid, I have some personally, but its stupid to have your entire portfolio in illiquid assets.
>I buy plenty of VFINX that I don't intend to ever sell. I buy them for the dividends (incidentally, the same reason I would buy a house).
A house doesn't provide dividends. Unless you are talking about investment properties, which, again, isn't what we are talking about here.
>The carrying costs of a house are typically negative
Doubtful. Very, very, few people are going to spend as much on rent as they would a house. Houses have a way of eating away at your money in a way renting does not. The carrying cost of my house is certainly not negative.
Of course, "you have to live somewhere" muddles the water a little bit. But its designed to get you to think about your house as more "somewhere to live" rather than "something to build wealth."
>This is true of all investments.
Which is why we diversify, to minimize risk. The American mindset is "buy a house because your house will make you rich." So people overspend on houses neglecting any other investments or savings in the process. That's the real problem.
> A house doesn't provide dividends. Unless you are talking about investment properties, which, again, isn't what we are talking about here.
A house pays you by saving you rent, which as I pointed out farther down is mathematically indistinguishable from renting it to someone else and continuing to pay rent (although this is muddied a bit by tax laws that care about whether the owner is also the tenant).
> Very, very, few people are going to spend as much on rent as they would a house.
This can only be true if you're not comparing similar housing - like, yeah, if I buy a house twice as big as the one I was renting I've lost money. But if you're comparing like for like, this assertion implies that investment properties are a net loss. It's a bit curious how those rental companies stay in business.
I agree with most of your responses, though. But they are all arguments that your house is a _bad_ investment, which is different from it not being an investment at all.
One of the principle causes of the '08 crash was that financiers thought they found a free lunch: there's no way a geographically-diverse portfolio of real estate could crash in value, right?
"(perhaps influenced by HGTV)"
Oh, yes. "So before we reno'ed your house, it was worth $300K. We put $50K into renovations and it's now worth $400K!"
Just like ... "magic". Now I know this is simplistic, as the value of an actual improvement which has had the planning, effort and time in does have a premium over the pure investment. But some of this was farcical, and lead many to believe they could do the same.
People need to stop signing forms they haven't actually read and understand. Make the person stand there while you read and think about it. It pisses them off like you wouldn't believe. If more people were doing that, they'd have to change and have simpler, more straightforward terms.
Ever been to the ER and in a lot of pain? They will give you forms to sign and you will most likely sign every dotted line as soon as possible to get the pain to go away.
Humans are not rational economic actors. Never have been. Never will be. This premise underlies the entire structure of consumerism. Watch "Century of the Self" if you don't believe me.
Yes my local hospital has been repeatedly getting an earful on this topic from me. We recently got calls from a debt collector over a bill that was never sent to our insurance, and I have no record of previous correspondence about it either. At the address provided by the collector as required by law, no one knew anything about the bill, because that department bills separately. They have no contact information for that department's billing. They also had no record of the doctor named in the bill. The only further evidence provided once lawyers got involved? My wife's signature on the very form you're referring to from when she was in labor, waiving all sorts of rights to dispute bills. I chewed them out for it when they made her sign it, too. That same provider had known she was pregnant almost the full term of the pregnancy and I had asked for all forms in advance. It's complete and utter bullshit.
"blame during the financial crisis of 2007-08 as many consumers took on home loans they had no intention of ever making good on"
Citation needed - for the number of consumers who "took a mortgage they never had any intention of paying" (your example), versus "people who took on a mortgage they couldn't keep paying (after the ARM bubble, which, let's not forget, all the banks were promising would be a matter of "refinance at the lower rate we'll have then").
I think the number of people who had no intention of paying a mortgage they took is probably vanishingly small.
> people who took on a mortgage they couldn't keep paying (after the ARM bubble
Citation needed - most of the indexes used for anchoring ARM rates either dropped or stayed steady leading up to and through the sub-prime mortgage crisis. An ARM fixed to LIBOR for example would have dropped in rate when it adjusted.
Problems did occur with non-standard loan types - Interest only, balloon payment mortgages, etc. however the biggest problems occurred because many people had borrowed too much $$ to have any equity in their homes if the values dropped at all. These borrowers found themselves 'upside-down' on their mortgages, unable to sell their homes to move as they owed more than they'd get from the sale. Some of those owners walked away from their homes, some ran in to balloon payments or the end of their interest-only terms and some rode it out. The ones that didn't ride it out got foreclosed on and we're still recovering from the mess.
I'll stand corrected, your example is more accurate and more specific than mine - those non-standard (non-conforming?) loan types are more what I had in mind than the simple divide between fixed and ARM.
> I don't know the exact details of her situation, but it seems like perhaps the correct decision would have been to sell the house and move to a smaller, more efficient house if the current house is too expensive to maintain given the number of occupants and their age/level of income. I'm 24 and currently rent half a large house in the suburbs from a single guy in his 60s who needs the extra income to maintain the house which he bought when he had a larger family.
In California, this can be difficult to impossible due to Prop 13, a voter initiative from the 1970s that caps the rate at which property taxes rise.
Doing some back-of-the-envelope math, given that Inglewood has a median house price of about $450,000 , if Ms White were to move to a median house in Inglewood (probably a much smaller house since she has a five bedroom right now), her new property tax bill would probably be about $5220 , compared to the $1215 she's currently paying. This isn't quite as high as her property tax bill post PACE loan, but it's pretty close.
In other words, Ms White can't really move; it would wreck her cash flow nearly as bad as this PACE loan.
The flip side of this story is that Inglewood's (and the rest of CA's) home values are probably inflated due to Prop 13 -- lots of people like Ms White become trapped in their homes due to the massive property tax increase they would realize by selling and moving, which reduces the supply of available homes, driving up the price of those that do sell.
In a sane world without property tax caps, Ms White and other landowners wouldn't be insulated from rising property values and probably would have worked with their government to temper rising property values with new housing units. Inglewood (city of about 100,000) only added a meager 1000 units of new housing  in the 13 years to 2012.
 property tax rate of 1.16%, which is probably about right -- in CA there's typically a 1% county assessment baseline plus any bond assessments.
California also has Proposition 60 (the property tax one, not the porn one) and Proposition 90 .
These allow a one-time transfer of the base year property tax values within the same county (and between some counties) for homeowners over 55 looking to change properties.
The rules are a bit more complicated, but it seems like it would apply to Ms. White's situation and prevent the issue you've brought up.
It seems very few people know about this.
Agreed here. It's kind of a dog-eat-dog world when it comes to finances. Everyone has to watch their own backs, because big banks are going to do what is most advantageous to them, even if that means screwing over other people.
There's a wealth of information out there for people to self-educate. Unfortunately, people just don't seem to know where to look. It's a travesty that we don't teach basic finances in high school to students about to graduate and go into the real world. We can sacrifice mandatory PE for a semester or a year to make space in the schedule for everyone to learn how credit, loans, and taxes work.
There's nothing special about credit, loans, and taxes. It's 7th grade reading comprehension and math.
The problem is not financial illiteracy it's general ignorance, illiteracy, and innumeracy.
I am incentivized via the tax code to put money into a 401k, which I can take out early only as a down payment to purchase a home, and rent costs more than monthly mortgage payments, especially with the tax breaks for having one. How am I not being pushed to put my money in investment banks or a home?
> How am I not being pushed to put my money in investment banks or a home?
You're being 'pushed' to save money for retirement. The fact that you can take $10k out one time for a first home is a nice little bonus, but it's a rarely used benefit and isn't exactly evil.
Rent costs less than (mortgage interest + taxes + condo fees + maintenance) where I live. This is extremely dependent on location.
But they don't, and they won't, and that's why this wealth transfer works.
> Consumers can say no
In a pink unicorns and sunny meadows theoretical scenario, that is correct.
In reality, when that whole part of society is corrupt and dishonest, saying "no" to an important instrument (money loans) is a heck of a lot harder.
Making the tax agency also the debt collector for this type of loan is quite ingenious, but also evil. If I'm reading it right, defaulting is basically equivalent to being behind on your taxes.
Does anyone know if this bundling to property tax payments also gives these loans repayment priority in a foreclosure? If it does, such loans could poison otherwise sound mortgages by superseding them to the remaining equity.
> Making the tax agency also the debt collector for this type of loan is quite ingenious, but also evil
Also, because "PACE financing is structured as a tax assessment instead of a loan, the PACE programs do not have to provide to homeowners the same disclosures about the financing costs that traditional lenders must provide" .
> defaulting is basically equivalent to being behind on your taxes
Beyond being collectable as a tax lien, such a default would complicate the property's underlying mortgage. This is because "the tax liens for PACE financing take priority over other lien-holders, and those lien-holders are not notified or given an opportunity to object."
Furthermore, based on the article, it is unclear if some municipal or state governments are partially or fully guaranteeing their PACE liabilities.
Wow, thank you for sharing this!
The ability to sabotage mortgage underwriting is basically a timebomb. Apart from being potentially very bad for the financial health of the homeowner (which is subjective in case by case - Inglewood homeowner is definitely in trouble, but the Woodland Hills example seems to be fine with it), I can't see how this is at all fair to the few banks doing proper due diligence, like the local credit unions that hold many of their mortgages.
The line that struck me most powerfully was just tossed in offhand: Riverside's government collects 15% of its annual budget from PACE loans.
The headline here was overhyped. The total volume of PACE loans isn't anything like the mortgage crisis, and total volume shapes secondary effects like bank failures and property value crashes.
But if PACE is becoming a large portion of local government budgets, that causes its own problems. We've already seen the kind of abusive practices which arise when towns get their funding from speed traps. No one likes taxes, but tax revenue is generally a shared burden, and positively correlated with growth and population. When the incentives for financing are to operate against a smaller group of people, things go to hell really fast.
>> Making the tax agency also the debt collector for this type of loan is quite ingenious, but also evil.
Hey, it worked for student loans right? I have no idea how all this is going to play out, but it won't be pretty.
I would assume so. I'd think that this would be treated the same as government backed student loans. Bankruptcy and foreclosure don't mean anything... the loans are here to stay.
That just highlights another problem. Big money using the government as its muscle... but that's another rant for another time.
>"We're going to keep going from crisis to crisis because banks can't say no, and the government(s) deems them too big to fail."
Once upon time there were three categories of banks:
retail, commercial and investment. Retail banks were known as 3-6-3s. They gave 3 percent interest on deposits, lent money out 6 percent and were on the golf course by 3:00PM.
The banks held the loans on their books and had to properly manage their risk portfolio or else go out of business and be out of job. This worked really well for retail banks, they made decent profits and ran a tight ship. Since banking deregulation, risk has been transferred to the tax payer and banks have come to expect outsized returns as the new normal. When regulation tightens in one area in response to a crisis they develop another exotic "product" to exploit some other loophole in order to reach those outsize returns. Its akin to patching a car radiator rather than fixing it. The same tired refrain sold by these folks is always "the market will regulate itself." The US basically has a system of "privatize the profits but socialize risks."
I was struck by this sentence from the article:
"Some local governments that embraced the loans as a way to bring clean energy to the masses didn’t anticipate the messy consequences."
I think "really"? Given the recent history - 2008, unintended consequences didn't enter into your discussions or calculations? More likely is that folks were in the pockets of those with a vested business interest in establishing such program. I have little doubt that lobbyists at least in part helped write legislation that enabled these programs.
Agreed. Also, some economists/researchers are claiming that subprime lending wasn't alone in triggering the crisis, but that it was also a prime crisis as well; that debt levels were already unsustainable, more generally. Not to say that subprime wasn't a big component, but that there may be macro patterns still emerging that's difficult to see/process.
I think this article from M.I.T. Sloan was posted here a while back: http://mitsloan.mit.edu/newsroom/articles/rethinking-how-the...
The behavior you describe is the way every investor should act. And the behavior of the underlying fund managers, and the executives of the companies below- they're all acting the way they're supposed to be acting-- maximizing profit, minimizing risk. Its not the fault of whales, greedy fund managers, poorly managed banks, or ineffective governance. This is capitalism and it is working exactly as designed- to funnel private wealth to a few people and distribute the risk among the masses.
I'm not saying that rent seeking behavior isn't encouraged by Capitalism. I'm saying that rent seeking behavior is screwing society up.
> This whole mess (subprime auto, renovation, and home loans) comes from the increasingly rent seeking nature of Wall Street.
You don't support this statement at all.
>It used to be that fortunes were both made and lost on Wall Street. Now, for large investors ("whales"), it's 3.5% or I take my money to another fund.
Investors have always done this, large and small. And 3.5% isn't a great rate of return. The official CPI, which probably understates increases in the cost of living, was 1.7%.
>If I don't have a consistent positive return, then it's something wrong with the fund/firm, not the natural order of things. This behavior encourages siphoning from pensions, the retirement funds of average people and "fudging the numbers" on packaged securities in order to keep up with the expected returns of the "whales".
That's pretty illegal if true. Do you have any evidence it's actually happening?
Humans have a tendency for unwavering "belief". The obvious is belief in deities.
Our other institutions are just as vulnerable to being treated as infallible. Our economics are, and basically "putting all our eggs" into a global financial system over which we have little say, is this thing we have to keep believing in. "The debt, the debt!" not considering that if humans in the future really need to for survival, an imaginary number on paper can be waved away. We have to believe these things matter.
And it isn't just laymen that are victim to unwavering belief. Very smart people can also be convinced of bullshit.
And the rest of us just have to nod and smile in agreement. What other choice is there?
I think we're in a period of social adjustment from the previous 100 years into the next. The last one was the great depression, leading into ww1 and ww2, after an era of extreme growth in wealth inequality (guilded age).
Our population grew, but not enough were brought along. A number of us have backslid (my personal buying power has decreased despite raises, anyone in the $100,000/yr realm has power than equivalent pay in the previous generation). Like religions not accounting for non-believers, the system thinks its these folks fault, not its own.
Maybe it's time we start considering resets in our social structures every few years. Jefferson argued for one in the Constitution.
And maybe it's time we heed Adam Smith's advice and fight for equality of outcomes, not just opportunity (a notion we believe exists, but the reality that we are a society where everyone has equal opportunity is laughable). Cause it seems to me, it would do a lot to avoid these lopsided social structures if we're all kept on the same page materially.
Game theory suggests it is a good idea when talking about community policing: https://aeon.co/essays/game-theory-s-cure-for-corruption-mak...
> It used to be that fortunes were both made and lost on Wall Street.
They still are. Hedge Funds lose money and/or go bust all the time. Firms go bust. The stock market has only just recovered levels last seen over a decade ago.
> it's 3.5% or I take my money to another fund
When has any investor ever said "I want to lose money" ?
> They still are. Hedge Funds lose money and/or go bust all the time. Firms go bust. The stock market has only just recovered levels last seen over a decade ago.
I'm speaking about personal fortunes. Maybe I should have been more clear.
> When has any investor ever said "I want to lose money" ?
An investor losing money is different than an investor realizing that losing money is part of the game.
I'm saying that high net-worth individuals won't even consider losing money as an option anymore.
At least part of it comes from how an increase in credit cause the economy to "boom". Basic income would be better, but still may have the same fundamental problems.
Could just leverage up on some 30 year treasury bills for at least 9% annually.
3-4x leverage will get you that.
Where are you getting 9% from annually with T-bills?
with leverage..... as aforementioned
It would be amazing if you could get leverage at rates below T-Bills. You are most certainly not at lower risk than the US government. It may be possible if you play duration arbitrage taking short term loans to buy long term treasuries. But then your playing a very dangerous game.
Would be amazing right
Four child replies deep and someone mentions that leverage could be dangerous, might be a new record folks!
Ironic if you are successful then poor people that can't even lock up $1,000 for a few years will say you are a rent seeking mess.
You can have margin interest rates below the 30-year rate. Is that amazing? (Edit: Never mind, I see this possibility was mentioned in another comment. If your point is that your previuos comment about getting 9% using a leveraged investment in 30-year bonds makes no sense, I agree completely.)
Its not that leverage is dangerous necessarily - if you could get money at a lower rate for a similar time period its in fact nearly risk free. Its just that these opportunities are extremely rare and short circuiting it by using shorter term debt negates the benefits.
And tie up at least $1k for 30 years... most people can't afford to do that.
The current rate is 2.9 and the long term average is 7. If you can get a 9 return right now, it's illegal.
a) its not tied up, treasuries are one of the most liquid markets, you can buy and sell in a milliseconds notice.
b) if you are talking about self directed investments at all, you are waaaaay past the financial situation that "most people" are in and probably accepted that a long time ago
c) and what's 2.9 multipled by 4?
And what happens if the inflation rises and interest rates follow? You'll be earning a cool 7% nominal interest rate and a -2% real interest rate.
If you invested in 30 year treasury bonds six months ago, you have lost 15%. With 3-4x leverage you would have lost half of your investment!
yep, fortunately you have those 9% coupons to lower your cost basis
but really thats what the stop losses are for
(man this really isn't the place to talk about financial markets huh, whats this article doing here then)
So borrow money to lend money? What if the interest rate changes in those 30 years?
> So borrow money to lend money?
this is how it works. you don't think those lenders were lending you their own money do you?
> What if the interest rate changes in those 30 years?
the original loans are almost certainly fixed rate, the end borrowers may very well have to pay an adjustable rate, which just means more profits for the intermediate lender.
The ONLY thing that facilitates that is government intervention and market perversion.
This is one area I think government ought to play its basic role. However given that government its self has been predatory with out money it is hard to expect that they will do anything other than bailing wall street out.
Baptists and bootleggers!
The title made me think that this was going to be about subprime auto loans, which are definitely in "crisis" territory.
This whole mess (subprime auto, renovation, and home loans) comes from the increasingly rent seeking nature of Wall Street. It used to be that fortunes were both made and lost on Wall Street. Now, for large investors ("whales"), it's 3.5% or I take my money to another fund. If I don't have a consistent positive return, then it's something wrong with the fund/firm, not the natural order of things. This behavior encourages siphoning from pensions, the retirement funds of average people and "fudging the numbers" on packaged securities in order to keep up with the expected returns of the "whales".
The sad thing is, I don't see a change. We're going to keep going from crisis to crisis because banks can't say no, and the government(s) deems them too big to fail. This shit is fucked.
I came to this thread to find exactly this information. Thank you for your post. HN never fails me
That was my impression too. For this to be comparable to subprime loans, there would need to be opaque, surprisingly-leveraged derivatives of these loans. The article doesn't indicate if that's happening (it only mentions bundling into what sounds like a CDO).
you'd make a lowsy newspaper salesman.
I cannot dispute this.
Seems like an example of how it's easy to be "fastest growing" when something is really small. These loans started about five years ago and the cumulative amount loaned is about $3.4 billion. Most of the activity has been in the past year, so of course the rate of growth is over 100%. But the absolute numbers are utterly tiny. For perspective, subprime loans peaked at over $600 billion per year, and total mortgages outstanding are around $14 trillion.
You da real MVP.
W/o paywall http://www.realtor.com/news/trends/americas-fastest-growing-...
Title is definitely a bit overblown, while it sounds like there's a definite problem with the incentive structure that incentives people to sell loans that borrowers can't afford, 22B isn't close to the size of housing bonds during '08. Further peppering the article with comments about it being the 'fastest growing category' don't take into account the fact that the absolute size isn't really that large. It sounds like someone should take a look at better regulating these loans, but the sky isn't falling.
As someone who just signed up for grid tied residential solar panels, this made me review my loan documents again.
Nothing in my documents mention PACE, or the debt-to-tax levy that ruined the old ladies' financials in the article.
So when are you and your fellow investors gonna stick to being human beings? This game has gone on long enough. We're talking about peoples' lives. We're talking about an entire generation of people who can't afford to buy houses because the generation before them gave in to bad credit. We're talking about entire generations of people who are going into a personal debt based economy of fear and coercion. Is that the kind of legacy you want to leave?
There's likely nothing he can do as a single investor. It's like the Prisoner's Dilemma. He could opt out, but now he has to find a new line of work, and meanwhile there's plenty of other investors who will take his place and nothing will change. There's no way to get them all to change their ways at once.
The only solution is government action; it's one of the big reasons we have a government, to fix things that "the invisible hand" cannot or will not. The problem is that our politicians are either totally corrupt or inept. So just like they failed to prevent the 2000s mortgage bubble, and the 1990s dot-com bubble, and the 80s S&L crisis, etc., they're going to fail here too.
In short, if you want to blame someone, the only people to blame are the voters.
When being a human being is more profitable than not. If the incentive structure does not tie individual reward to societal reward then it's the system that's broken, not the people.
"Buy when there's blood in the streets" has always been good advice, but you can't blame a single person - or even a single class of person, in this case a real estate investor - on the immense scale of complexity that has put so many people in such a lousy situation.
A lot of people in this category have jobs, families to support, and so on. It's not like every investor is The Businessman from "The Little Prince."
Don't expect people to not act human. Instead, update the system to incentivize the desired outcomes, given the current peculiarities of human nature.
Unless you think the GP is causing these types of problems, this attitude is entirely unwarranted. Investors buying on a down market soften crashes by providing an infusion of capital when the market indicates it's needed.
If real estate investors took the moral stand you seem to be suggesting here, who exactly would be buying a home from a distressed homeowner? What money would be floating around to cover short sales and prevent foreclosures?
I downvoted you because that's not a substantive response.
As a real estate investor, I lick my chops when I see news like this. But as a human being it's so terrible to see happen over and over again. Watch "The Big Short" if you haven't - everything will crash again.
> America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis
Quite possibly the most uninformative and click-baity title I've seen so far in 2017.
It's very similar. I was working at a mid-size bank a few years ago that was into this. Buy up or make auto loans, bundle them and have them securitized and rated by by a credit rating agency (Moody's, S&P, etc) then you can sell the loans on the open market where they are scooped up. There are lots of state pensions and other retirement plans that end up buying these securities.
It's the same problem as before--banks are incentived to make the loan, but not hold onto it and therefore the banks don't really care about the quality of the loan so long as they can sell the bag to someone else.
Can we just not? I'd prefer to avoid all that mess again ... hopefully, like the ever-impending tech bubble (ie. .com 2.0), the threat of a bubble will temper investors enough to slow growth to healthy-ish levels
I work in the clean energy industry, including with PACE, and can help to answer some questions about PACE/Property Assessed Clean Energy Financing if anyone is interested in specifics.
As long as there's a workaround, it's allowed.
Within the past few days the WSJ has changed access to their site and the previous workarounds no longer work. I wouldn't be surprised if a new workaround isn't found that WSJ submissions will no longer be accepted.
Thank you for explaining this.
I wish I could read this article... but i can't. It's been a problem for a while here on HN. I wish moderators would not allow articles with paywall.
I wonder: If it's actually a tax assessment does it transfer with a sale of the property to the new owner? I can foresee a scam of buying a property, fixing it up with the max loan available and then flipping it to an unaware buyer who checks last year's taxes as an estimate of what to expect and then gets a nasty surprise.
Link for those without wsj access.
How do I short this loan category?
That's not how it work though.
These loans are added as a tax assessment on the property so the local government adds the premiums on the tax bill and collects with tax payments. Because its added as a tax assessment if you stop paying on your loan its the same as if you stopped paying taxes. Which means the city seizes your entire house.
This structure makes it so the PACE loan is ahead of even the mortgage holder in the creditors line.
That's even assuming its possible to seize your solar array, central air, insulation, or windows. These loans are for adding permanent features; permanent features of a house can't just be seized individually. They can't seize your solar array in the same way they can't seize your extra bathroom.
If that's not bad enough these loans are being issued without a credit or income check. They are being issued based on the amount of equity the borrower has in their property without regards to financial health or ability to repay and without the same lending disclosures required by other loans.
Ah, yeah. That's problematic.
The article states PACE loans go in front of homeowner mortgages, so they can take your home as collateral if you can't pay your PACE loan payments.
Okay, it's fastest-growing, but is energy-conscious lending anywhere near the size of subprime mortgages?
Even if it is, it doesn't seem like as big a tragedy if the bank seizes your solar array as of they seize your home.
Is this why most buildings in Pittsfield, MA are covered with solar panels?
my beef with these loans is that local governments are using them as profit centers and the having them paid with property taxes changes the level of enforcement while likely keeping consumers in the dark as to the full implications of the loans and penalties
The main study and previous evidence being cited here says that it wasn't disproportionately low-income loans that caused the financial crisis:
> Taken together, the evidence in the paper suggests that there was no decoupling of mortgage growth from income growth where unsustainable credit was flowing disproportionally to poor people.
It was still a subprime crisis if the crisis was caused by unsustainable credit received by those who would not otherwise have had access to it.
They are saying it was not the Community Reinvestment Act (CRA) that caused the crisis, as the contributing loans were not subject to CRA legislation.
Note that the headline is (perhaps intentionally) misleading: it wasn't a subprime crisis.
From the FAQ:
> Are paywalls ok?
> It's ok to post stories from sites with paywalls that have workarounds.
What about sites that don't have workarounds? The workaround for WSJ no longer works.
Note that the Wall Street Journal always works for me, without subscription, through the Tor browser .
> What about sites that don't have workarounds? The workaround for WSJ no longer works.
The exception proves the rule. It's not allowed to post such stories.
It should work if you use the "web" link in an incognito window. WSJ remembers if you visited it directly and then shows the paywall even with a Google referer, but incognito mode defeats that. I agree it's getting to be something of a pain. Thankfully this article seems to be republished in many places.
Didn't work for me.
Huh. I just tried it on this article and it failed for me as well. It worked recently but they must have closed off that loophole.
Now to see if Google penalizes them. Not holding my breath.
Why should they? There's a paywall, it's no secret.
Because Google wants to provide people with useful search results, and "you can't read this article unless you pay us" is considerably less useful.
If you have a paywall, Google will still crawl and index your site, but they'll only do so based on what's available outside the paywall.
If you try to trick Google by showing Googlebot the full article but throwing up a paywall for everybody else, Google will penalize you.
It seems to only work for mobile now; I could not get it working from a desktop browser (with or without incognito mode), but using the web AMP link from my mobile shows me the whole article.
Incognito mode doesn't work anymore.
AMP version worked for me through the 'web' link.
For lazy desktop-browser users: http://www.wsj.com/amp/articles/americas-fastest-growing-loa...
For users who'd rather support a site that didn't paywall it:
They've broken that link since.
Changed within the last hour.
Even with blue-green deployments and a separate AMP solution, it's unlikely that they did a during-business-hours release just to prevent paywall workarounds for a tiny subset of their pageviews.
But by observation, it did change during that timeframe. Possibly they simply updated their AMP solution to better consistency with their non-AMP delivery, and this happened to be the effect we saw.
The WSJ is more agile than you think, and some of their devs read HN. It wouldn't surprise me at all that they built code specifically to break the workaround just for things posted to HN.
I think it works if I use the web link first, before trying the direct approach.
http://www.realtor.com/news/trends/americas-fastest-growing-... looks similar.
OK - The 'web' search/link isn't working for me anymore. Maybe it's time to start rethinking WSJ submissions.
Based on the first paragraph, this is the exact same article: