Atlas Shrugged: The Mocking

Tuesday, May 10, 2011

Giving Credit Where Credit Is Due

Sometimes we think there is no justice in the world. There are no gods and goddesses, no system of divine judgement, reward and punishment, and therefor no heaven or hell. We forget that people make their own hell and must live in it every moment of their lives. Let's watch Megan McArdle twist herself into knots as she tries to justify her decisions without accepting any responsibility for her actions.

Case in point:

In April, 2010, McArdle was eager to buy a home but couldn't find an affordable one.

We've been dipping our toes into the DC housing market recently, but after this weekend, I think I'm just about ready to give up. Anything that comes on the market at a decent price is snapped up almost immediately--by my count, mean time from listing to contract is under seven days..... This should be a golden time for buyers with decent credit, stable incomes, and modest requirement for neighborhood safety. But there's almost no inventory, and what there is, can't be sold.

It's not totally unreasonable to think that prices will go up in DC, eventually; huge swathes of Northwest and incresingly [sic], Northeast are gentrifying at a pace faster than anything I've ever seen--and before I moved here, I was a lifelong New Yorker. But even here, that shadow inventory means it's not going to happen for a few years.

Nationwide, we're probably looking at a long period over which house prices don't fall, but they don't really rise much, either, and the market sorts itself out by letting inflation eat away the nominal value of peoples' outstanding mortgages. And over here on Florida Avenue NW, we're probably looking at a few more years crammed into an oddly-laid-out one-bedroom-plus den flip house.


In August, 2010, McArdle informed the world that she was going to buy a house "on the cusp of a double-dip recession" because she could pay less on a mortgage than rent and she had no plans on moving away from DC. She also told herself that the rush to buy before the homeowner's tax credit expired was over:

6. Interest rates are low, and housing is in a post tax-credit doldrums. If you have the down payment, it's a pretty decent time to buy a house in DC.


So she did.

So the McArdle-Suderman household are about to become householders. We're in the process of buying our own little 3 bedroom, 1.5 bath slice of heaven....


She expected DC housing to appreciate but said that it was okay if it didn't; she didn't think of the house as an investment.

Step One: Why buy a house?

I have spent enough time reporting on the financial crisis to have made very sure that the answer to this was not "Because renting is just throwing your money away!" All calculations, mental and otherwise, were based on an assumption of no house price appreciation. I actually expect that the house we're buying will probably appreciate in value, as it's on the border of one of DC's hottest "emerging" neighborhoods. But one never knows what is going to happen, and any house that is a stupid purchase unless the value is going to rise at a steady clip, is a stupid purchase. We figure that as long as the thing doesn't lose too much value, we're okay.


The plumbing had broken on her rental and she wanted to take advantage of the tax credit like everyone else.

7) The house had to work, financially, without the tax deduction Given that we do freelance, we already itemize, so we're glad to take the home-interest deduction. But we were not interested in a "stretch" that was only really feasible with a big tax deduction; we wanted a payment that was the same as, or less than, the rent we were already paying.


Just because McArdle doesn't like government assistance doesn't mean she'll turn it down; for example, see her student loans, mortgage deduction, and employer-provided, government-subsidized health care. She wanted that house and the tax credit so she ignored the fact that everyone else wanted the tax credit as well. But there was trouble in paradise. Prices on desirable DC property didn't go down as much as McArdle wanted. She decided to blame the homeowner's tax credit. What else could she blame? It wasn't her fault that she couldn't have both the tax credit and lower house prices. It was the government's, for danging tax credits in front of people who were impatiently waiting for housing prices to go down enough so that elite young(ish) journalists can buy socially enviable housing.

While I haven't compiled scientific data to back me up, my experience in going through the listings is that the housing tax credit grossly distorted the market. Almost anyone who wanted to buy, or sell, in the next twelve months, hastened to put their property on the market before April 30th. The market still clears--the few houses that are priced where the market wants to buy get snapped up immediately. But there are precious few of these. Most of the market, at least in the neighborhoods where we can afford to live, is the stuff that's hard to sell-- beautiful fixer-uppers that require more capital than we have, and overpriced places that won't appraise for where they're listed.


As always, McArdle forms a theory based on ideology and wishful thinking and then blames the government when reality doesn't mesh with her fantasy life. For it turns out that Megan McArdle was (gasp!) wrong and the housing market has not bottomed. House prices started going down. Not that she cared, mind you!

Since we bought our new house, we've had to confront the possibility that we've already lost money. Over at our sister publication, I explore why that doesn't bother us:

Although I may spend odd moments cruising through the listings to see what neighboring houses have sold for, my husband and I agree on one thing: "Who cares? We're not going to sell," he said the last time I told him about a comparable house that sold for less than ours.

We didn't buy our house for an investment; that's what our investments are for. Our house is to live in. We bought mostly because we wanted to commit to a place, and to make it over to suit us exactly. Landlords get testy when you rip out walls and replace the stove; besides, who wants to spend money installing custom blackout curtains only to have the place sold out from under you?


She didn't care at all!

The housing market still isn't clearing. In my neighborhood, almost nothing is coming on the market even though we're well into spring, and half of what does appear is either utterly decrepit, or wildly overpriced, or both. People are not selling unless they absolutely have to. Nor are people buying. I think the value of our house has dropped, but I can't be sure because nothing's moving on the market.

[yip yip]

Where does it end? By historical standards, prices should have bottomed by now. But we had the first-time-homebuyer's tax credit, which temporarily buoyed prices by moving a lot of demand forward. Given that, I'd say we have at least another year for the price collapse to run.

As I wrote earlier, this doesn't particularly bother me.


Nope, watching her house become less valuable doesn't bother her in the least.

Words to strike terror in the heart of any homeowner: "And Now House Prices Will Now Drop Another 20%".

[yap yap]

Given that we just bought a house a few months ago, I'm sure this post will inspire a couple of readers to ask whether we regret that decision. The answer is that no, we don't, for several reasons.... 2. Washington DC is a slightly weird market, because government employment is stable, and government activity has been increasing. The ratio of rental prices to home prices isn't particularly high, and has actually fallen somewhat over the last year. Meanwhile, the population of the city has now increased for the first time in 50 years. Our neighborhood, which has had few services, is now gaining crucial commerce like restaurants and grocery stores nearby, which should help support prices.


3. We're in it for the long term. We expect to own this house for longer than the seven-year average; for us, even in a worst-case scenario, eventually inflation will erase at least some of our equity losses. If we stay in the house as long as we hope, ultimately we'll have locked in a housing cost that will end up being well below the current market. We won't have bought at the bottom, of course--but the universe is too complicated for me to think that I can reliably buy anything at the bottom.


You know, for someone who doesn't care, McArdle sure does worry a lot about losing money on her house.

Many economists have been saying we would have a second drop; one look at McArdle's chart shows why. Prices rose astronomically during the bubble and it's a long way down to normal levels. McArdle knew this.

Four years on, why is the housing market still falling? The obvious culprit is the homebuyer's tax credit. Even as it was enacted, a lot of people were complaining that gimmicks like this (and the Cash for Clunkers program) weren't providing useful stimulus; instead, they were distorting the market by pulling demand forward from future years.

As a couple of commenters note, McArdle is being deeply dishonest here. Nobody expected the tax credit to solve the housing problem, they just hoped it would slow down the housing market enough to keep it from going into free fall. The tax credit's effect was, as McArdle's chart plainly shows, quite small.



This chart was created by Steve Barry and appeared, as McArdle noted, at The Big Picture. McArdle did not note the tax credit blip as Barry Ritholtz did, since that information was on a need-to-know basis and McArdle decided you did not need to know.



That seems to be even truer than most people expected. In DC, this actually caused an uptick in prices, because the buyers were concentrated into a pretty short time frame. A lot of the properties coming on to the market were short sales and foreclosures, which take a very long time to close. That meant that a lot of people were getting into bidding wars over the relatively small number of properties available. The bidding war was frantic enough to cost them money--but not to clear the short sales, which were often more than $100,000 underwater. I myself got caught by the tail end of it--because the comps that we were using were inflated by the tax credit, we probably overpaid for our house.


McArdle was the helpless victim of government perfidy! She chose to take advantage of the evil, price-inflating tax credit. Nobody held a gun to her head and told her to sign the contract.

In most other places, the tax credit was simply keeping prices from falling too much further. But the mechanism was ultimately the same: we crowded a larger number of buyers into the market without enough time for supply to really respond, because too many of the houses that needed to be sold were encumbered by underwater mortgages.

After the credit, it all collapsed again. There were a few months of confusion, because it took a while for prices to adjust to the new reality: supply was higher, but all the buyers were gone. Almost everyone who had intended to buy in the next few years had moved their purchase forward in order to get the tax credit.


Or they could have waited for the expected double dip in housing prices. McArdle took a gamble that the tax credit was larger than any dip in housing price and lost. She could have waited but didn't want to. She made a choice but instead of accepting responsibility for her decision she blamed the government instead.

The tax credit was no doubt a fine thing for people who managed to sell their homes in that narrow window. But of course, there are parallel losses--the people who have lost jobs, or gotten transferred, or gotten a divorce, in the intervening year, and need to sell their houses, and face a market with virtually no buyers. It's hard to argue that the program improved much. I mean, you could posit that it somehow allowed us a more orderly transition, but we still have a large backlog of foreclosures, and judging from the recent declines, we simply moved moved some of the pain into the future. We didn't actually make the process less painful.


Damn you, Government Menace, for forcing McArdle to take advantage of your tax break and for not solving the housing crises at the same time!

As this graph from Barry Ritholtz shows, house prices are still well above their historical levels. The government cannot legislate that imbalance away. You don't have to be a "Work the rot out" liquidationist of the Andrew Mellon school to think that eventually, prices have to fall to market clearing levels, and that slowing the process down might not improve it much.


In conclusion, governments are incompetent and we all should just get rid of those troublesome rules, regulations and entitlements as the Koches are always telling us to do.

44 comments:

fish said...
This comment has been removed by the author.
fish said...

She is right that DC is outperforming most housing markets. It was still a stupid/impulsive time to by a home. Waiting just 2 years would have saved them tens of thousands of dollars. Unimpressive for a Econ editor.

blivet said...

Susan, I really appreciate your persistence. I can't stand to read Jane's stuff anymore. I must have become sensitized to her prose, or maybe she's gotten even sloppier and lazier with time. In any case, the best I can do is give her blog a quick skim one in a while. Please don't stop providing your valuable service.

"As always, McArdle forms a theory based on ideology and wishful thinking and then blames the government when reality doesn't mesh with her fantasy life. " sums the subject up perfectly, and of course "[yip yip]" is a perennial favorite.

KWillow said...

I knew she'd be sorry about her house. Even without knowing the loan terms, how much they put down, etc. it was obvious they -especially ArgleBargle- didn't know doodle-plop about what the housing market was up to.

Another case of conservatives believing their fantasies and ignoring facts. As well as being bone stupid. But if she has lots of Wall Street investments they must be doing pretty well? Maybe she could sell some stock & pay off the house.

Lurking Canadian said...

Let us not forget that this is a woman who could not understand the airline's viewpoint when they said it was her fault she was late for the plane, since she was stuck in traffic. It's always somebody else's fault, unless it went well, in which case it's because she's a Randian superhero and we're lucky she is willing to share her brilliance with us.

fledermaus said...

"Washington DC is a slightly weird market, because government employment is stable, and government activity has been increasing."

Let's all take a moment to wonder as the McMegan ponders government supported property prices.

KWillow said...

I wonder what her Old Man On The Bus would have to say?

atat said...

I'm sure that the wise old black man on the bus in her head would tell her that she shouldn't regret buying when she did because she was right and because she's good and smart and pretty and tall and smart and the pots and the pans and we're staying forever and ever and ever and ever happily ever after so there.

Myles said...

D.C. is an odd market, and I think McArdle will win out in the long run as it gentrifies more and more.

It's a housing market with a great deal of upside potential. I don't see why it can't hit Paris-level prices, depending on the degree of gentrification.

(NYC, on the other hand, is actually more tied to the broader American housing market than is commonly thought.)

Anonymous said...

she reminds me of this comic strip:

http://lh3.ggpht.com/_n2eZ-TwBUcQ/TCpuOnByFUI/AAAAAAAABD4/fFisCmHiS3w/s1600-h/Mafalda...Qucalorhace5.jpg

ecl

Mr. Wonderful said...

we're staying forever and ever and ever and ever happily ever after so there.

Several years ago the wife and I rented a house in Burbank from a couple who were moving to DC and who told us, "We're never selling this house, and we're never moving back."

Three months into the lease, they said, "We're selling the house." After invoking our secret weapon (i.e., the lease), they relented, and we lived out the year, and then moved.

As I read MM's words I thought, "Watch. The Sudermans will sell within two years for good, bad, or indifferent reasons. Then behold the backpedaling and excuse-making."

Can't wait!

Anonymous said...

So good I read it out loud to Mr. Aimai while he was doing his excercises this morning. Who knew that Megan could be put to an aerobic, rather than merely emetic, use?

aimai

KWillow said...

Our house has diminished in value about $150K, possibly more, when I consider the upgrades we made: carpet, Pergo flooring, custom closets, landscaping. And we are considering moving -to be closer to our daughter's school. Its a dilemma. We'd be getting a great house in the "rich, Old" part of Town, for a good price, but then again we loose $200K. That's a lot, and though we have a decent income (our main advanage is no debt, we paid-off the house), I'm guessing its about 1/3 of ArgleBargle's family income. The question is: which is most important, daughter's schooling or our retirement funding?

at any rate, whatever we decide or whatever happens, I won't be blaming the Government, except perhaps for allowing-encouraging the real estate bubble, knowing the huge amount of fraud that was involved.

But you'll never hear ArgleBargle sniveling about "The Banks & Wall Street" robbing and destroying our country.

Myles said...

She is right that DC is outperforming most housing markets. It was still a stupid/impulsive time to by a home. Waiting just 2 years would have saved them tens of thousands of dollars.

Dude: INTEREST RATES. I don't think she'd be able to lock in the rates she has now if she waits too long.

It basically takes a genius to time the interest rate market just right, and let's just say Megan isn't that genius.

But again: you can't really go wrong with the D.C. market; it's not like the market in, say, Chicago or Atlanta; it's more like the market in the Bay Area or Aspen.

I am convinced that in the long run, she really made the right financial call here.

Myles said...

We'd be getting a great house in the "rich, Old" part of Town, for a good price, but then again we loose $200K.

That's complete nonsense. If your house dropped $150,000, so must the "rich, old" part of the town drop too, unless they are somehow supernaturally resilient, which (if it is the case) is a huge, blinking buy sign.

Basically, you have to also consider that "rich, old" parts of town, if in a nice city on the coasts (or a city like Boulder, CO, etc.), have a *higher* rate of valuation growth than other areas, due a confluence of factors (growing wealth inequality, the growing "heritage" premium, etc.). I don't think this is necessarily an either/or situation.

On tax: I'm not wholly familiar with the tax situation in the U.S., but I was under the impression that you can write off the capital losses against future gains.

I think you might actually have a win-win situation on your hands. Consult a estate professional or a senior financial advisor.

Anonymous said...

(And of course, if you can lock in low interest rates right now, and if you can be sure you'll always be able to make the payments, it's basically free money: sooner or later accelerating inflation will eat up the principle.)

Myles

satch said...

I had to love the "...government employment is stable" assumption. She must be ignoring those RNC memos re the goals of her pals in the Republican Party.

Anonymous said...

Myles you really need to stop blockading about stuff you know nothing about. The old part of town has better schools and a better tax base. Schools are a sign of good tax base and places eightfold schools did not lose value like other places. If Keillor improved their property with cold hard cash renovations but can't recoup that money at the sale that's a loss that can't be made up when they buy into a new area. In addition they will be able to afford less house and the housing stock they can buy will be higher priced relative to it's quality since people are paying for thevdoor school district location.

Aimai

Anonymous said...

Sorry the iPad autocorrects. Should be bloviating not blockading and k willow not keilor.

Aimai

Myles said...

Myles you really need to stop blockading about stuff you know nothing about. The old part of town has better schools and a better tax base. Schools are a sign of good tax base and places eightfold schools did not lose value like other places. If Keillor improved their property with cold hard cash renovations but can't recoup that money at the sale that's a loss that can't be made up when they buy into a new area.

But that's a completely sunk cost. If they can't recoup the improvements now they can't recoup the improvements ever. It's just that the numbers look worse now.

Also, if the area lost value more quickly than the schools part of the town, then in the long-term it's better to bail out and get equity in an area with less downward potential.

In addition they will be able to afford less house and the housing stock

True enough. But also, they have no debt in what is right now a insanely low-interest rate environment. If you can lock in the low interest, an mortgage right now really is free money, counterintuitive as might sound. (My home's in Canada, where this feature is sadly unavailable due to the banking oligopoly.)

atat said...

"Should be bloviating not blockading..."

Blockading works. As in, Myles just set up a b.s. blockade with five posts in a row.

Susan of Texas said...

Yet--strangely--the Canadian banking system did not crash as ours did. I wonder why.

People do recoup improvement costs if the market goes up, and meanwhile they enjoy those improvements.

I have seen housing prices rise and fall with the economy. In the 80s we had a boom and bust in which the wealthy areas lost some value but regained it when the economy improved. The suburbs lost a great deal of value and recovered some in the next boom.

I have no idea what will happen in the future, except that gas will get more expensive. McArdle's problem is not that her house is losing value; it will probably make her money in the end, as long as she isn't forced to sell fairly soon. Her problem is that she sees money as a sign of intelligence and self-worth, so watching the market go down drives her crazy. Which is very amusing.

KWillow said...

Well, I was embarrassed about writing about personal problems here. Sorry! -Kwillow

Susan of Texas said...

There's no need to feel embarrassed at all. This mess is affecting all of us and it's very upsetting.

Anonymous said...

Yet--strangely--the Canadian banking system did not crash as ours did. I wonder why.

It also doesn't allow for things like 30-year fixed rate mortgages, which people like Elizabeth Warren are pushing (as a 'plain vanilla' mortgage option). The Canadian system in fact doesn't allow for, in practical terms, fixed rate terms of more than 5 years.

I mean, of course, if such things like 30-year fixed rates are available (the amount of free money implicit in such an arrangement is just mind-boggling, which is why I find it so puzzling that people like Elizabeth Warren are endorsing it), by all means take advantage of it.

Myles

Anonymous said...

Here's the Wells Fargo current rates page:

https://www.wellsfargo.com/mortgage/rates/

Honestly take a look. A regular 30-year fixed is at 4.625%. A FHA 30-year fixed is at 4.5%.

That's actually mind-blowing. I can bet dollars to donuts that Wells Fargo will never make a single penny on any of their 30-year fixeds issued on this date today, if they are actually writing long-dated mortgages with 4.625% rates.

Myles

KWillow said...

4.5% seems like a good rate of return. I wish I were getting that on my Savings Account at WF. I'm getting something like .0003%

I am quite sure Wells Fargo is making money on honest loans.

Anonymous said...

4.5% seems like a good rate of return.

No it's not, if you are locked into it for thirty years.

There is just literally no way that the inflation rate over the 30-year horizon is predictable to an extent that you'd be willing to offer sub-5% rate mortgages on them, especially given default risk. There's a name for people who make such bets: idiots. Anything could happen in 30 years; we could have a short spate of high inflation at some point in that timeframe.

If I were running Wells Fargo, the first thing I would do is impose (to the extent legally possible) an absolute moratorium on any consumer-market mortgages with terms fixed for more than 5 years. The amount of reckless risk-taking implicit in such a loan is just astounding.

I'm getting something like .0003%

The right comparison isn't an at-will savings account, it's the same long-dated CD. There actually aren't 30-year CD's, so no comparison can be made. Would you be willing to put your money in deposit for 30-year fixed at 4% fixed?

Myles

Anonymous said...

How many people with 30 year mortgages actually hold them for 30 years? Perhaps Wells Fargo has some data about this and that's why it's willing to issue 30 year mortgages.

Emily

Rugosa said...

OT, but I just caught the Taibbi-McArdle smackdown at Tbogg’s place (http://tbogg.firedoglake.com/2011/05/14/mcbambi-vs-taibbzilla/), and my mind is further boggled by McArdle’s career ascent. She is woefully unprofessional: a serious lack of preparation, a shifty-eyed demeanor, and a distractingly unattractive hairstyle.

She doesn’t do research, so she is left with only the most threadbare of arguments. Of course, Goldman Sachs ripped off their clients – every seller does! She accepts a second-hand report that GS did do proper disclosure; Taibbi, who actually read the pertinent documents, says no they didn’t. Who should the audience believe? She finally falls back on her classic assertion that everything is very complicated, so no one can really understand it.

Anyone in the public eye knows that you need to look at the camera, not off to the side as if at a shiny object, and not have your hair hanging limply in your face. I’m not elevating style over substance; it’s called engaging the audience. This is basic advice she should have gotten in any class where she had to make a presentation, but then I’m assuming she paid attention in school.

Susan of Texas said...

That's great stuff--classic McMegan. All her old arguments, as you say, which are incredibly weak but people believe what they want to believe. It's not necessary to present a winning argument, any old thing will do so the faithful can ignore what they want to ignore.

McArdle doesn't read the material because she doesn't have to. Arguments based on evidence are so last century.

Look at Velshi--he instinctively (or maybe deliberately) tried to paint Taibbi as a slightly obsessed moral scold. He sure didn't ask McArdle if she read the documents.

I hope to have more on this later.

Anonymous said...

How many people with 30 year mortgages actually hold them for 30 years? Perhaps Wells Fargo has some data about this and that's why it's willing to issue 30 year mortgages.

It makes no sense, if you have a 30-year fixed at 4.6%, to not hold it through maturity, because if you were to try to refinance it you would not get a lower rate. If the mortgaged were to be issued when the rate was like 7% or 8%, then it would make sense, but it isn't.

Additionally, any data about hold-to-maturity would be discrete and would necessarily differ by clientele. The problem is that no just Wells Fargo, but every big bank out there, is offering 30-year fixed at 4.6%. Which means they can't possibly be doing their due diligence. Fixed, unlike adjustable, doesn't allow the loan officer a great deal of flexibility in setting rates.

I actually have a pretty good guess what they are doing with the 30-year fixeds: they are selling them into specifically tailored mortgage CDO's. While the loan is a disaster for a bank to be making, it is more than a hundred basis points above Treasuries, so some investors get attracted to them. But of course leads to principal-agent problem.

Why Megan isn't focusing on the ridiculous 30-year fixeds is completely beyond. She's against Elizabeth Warren; well, just about the stupidest thing Warren has ever done is push the 30-year fixed as a 'vanilla' option while demanding that banks hold on to their mortgages (clearly contradictory goals). Attack her on this; Warren's position here is irrational and indefensible.

Myles

Anonymous said...

It makes no sense, if you have a 30-year fixed at 4.6%, to not hold it through maturity,

Unless you have to move to a different town, or your family grows and you need a bigger house, or any other number of things.

Emily

Susan of Texas said...

Myles, where did you get that information on Warren?

Anonymous said...

http://videocafe.crooksandliars.com/heather/matt-taibbi-and-megan-mcardle-square-over-off

Here's the link to Taibbi's schooling of Ms. Megan of Sunnybrook Farm.

A classic.

Anonymous said...

Myles, where did you get that information on Warren?

The one I can find right now is this, where she premises that 30-year fixed rates have a legitimate place, by suggesting that a family should have taken a 30-year fixed instead of an ARM:

http://www.law.harvard.edu/news/2007/10/03_warren.html

Here's the Roosevelt Institute take, with which Warren is very closely affiliated:

http://rortybomb.wordpress.com/2011/02/03/the-debate-over-the-gses-and-the-30-year-fixed-mortgage/

My personal position is that 30-year and 15-year fixed rates should be banned except for very exceptional purposes. To me, it seems very obvious that Warren is a financial populist in the Prairie tradition, rather than someone who is dedicated to upholding the integrity and soundness of an international-grade financial system.

Myles

Pete said...

To me, it seems very obvious that Warren is a financial populist in the Prairie tradition, rather than someone who is dedicated to upholding the integrity and soundness of an international-grade financial system.

Myles, our differences are not fundamentally based on logic, knowledge or history, but on values. Your reaction to that statement might be to oppose Warren, mine is to support her.

It is entirely possible that a 30-year mortgage *at 4.6%* is financially unsustainable; that is by no means the same as saying that fixed-rate mortgages per se are bad. In the 1970s, before the spike at the end, they ran in the 7–9% range; I remember being advised to think about the affordability of 10% before making a decision. The 90s started at 10% and sank to about 7%. (Google "mortgage interest rates history" and it all pops up quick.)

I dislike financiers trying to screw homeowners, and I am not in favor of the reverse either. I suspect Warren agrees.

Susan of Texas said...

Myles, surely there is a Wells Fargo web site that would be eager for your input. This site thinks that our financial system is neither sound nor has integrity. And we need people who want to protect the consumer; the banking system already has more than enough protectors already.

Susan of Texas said...

Also your info on Warren isn't quite correct; I don't have time to go over it but if read the comments at McArdle's posts on Warren you'll see what I mean.

Susan of Texas said...

Thanks for the link, anon.

KWillow said...

The bank is just an arm of Wall Street, which loans WF the money at 3.5%. WF turns around & loans out the money at 4.5%- to a half million people, and Wall Street sells the loans to investors. Most of those 30 year loan houses will be resold 2 times or more. Wells Fargo will make money: Wall Street and the Fed Gov will make sure of that, no matter what one Regulator says in a speech.

fish said...

How many people with 30 year mortgages actually hold them for 30 years? Perhaps Wells Fargo has some data about this and that's why it's willing to issue 30 year mortgages.

This. Average mortgage is held for about 7 years. You pay almost exclusively interest at this time (unless you make extra payments). This is a good money bet for the banks.

In fact the 7 year argument is how many banks seduced people into the ARM mortgages, then when the market cratered, home buyers had their interest rates explode at the same time they couldn't sell their house.

Also, most banks are (as K Willow said) selling the mortgages before the ink is dry.

Myles is right that it is crazy not to take a 4.5% interest rate for 30 years if it is offered, but 30yr fixed interest rates have been historically for over a decade, so I don't see this as a big reason to rush into a home purchase. My guess is property values sag more than interest increases over the next 2-3 years.

Syz said...

Myles - like Megan - loves to pontificate on subjects he clearly does not understand, like interest rates and mortgages.

Myles - like Megan - actually believes that the banks are the victims of greedy homeowners (who trick them into offering 30 year mortgages!)

Myles - like Megan - hates Elizabeth Warren and thinks she wants to destroy all the banks, even though that would mean the end of her own profession as well.

In short, Myles is every bit as much of an idiot as Megan. But you know what? I am glad he is here. We need to be reminded of just how little intelligence it takes to be successful in today's society, so long as you are willing to worship the right masters.

Ken Houghton said...

Her discussion of the tax credit is how we know Megan is not an economist. (Whether she is a finance person is left as an exercise.)

She looks at the $8,000 tax credit and says, "Oooh, that's $8,000 for me! Free money; I want it!"

Any moderately well-trained economist will say, "Hmm. $8,000 tax credit. I wonder how much of that will go to sellers and how much will be realized by borrowers." And, if they check history and behavioral economics studies, they'll conclude that the buyer will be lucky to realize $2,500 of that—arguably less in the DC area, where employment has been strong even through the b/e/g/i/n/n/i/n/g/ o/f/ t/h/e/ S/e/c/o/n/d/ G/r/e/a/t/ D/e/p/r/e/s/s/i/o/n/ Great Recession.

At which point, the stimulus effect of the credit will be exactly what it was—a blip/caesura that gives the market a chance to change direction, not a new paradigm that ensures that it will.

Ah, well.