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Why were house prices going up like crazy during the housing bubble?
Posted on 9/18/17 at 6:16 pm
Posted on 9/18/17 at 6:16 pm
It had to be more than just supply and demand, right?
Like in this scene in The Big Short, the realtor woman was saying "I sold that house for $350,000 the year it was built. Two years later $480, then $585 maybe eighteen months ago. This couple bought it for $650 last year."
The Big Short (2015) - FrontPoint Partners' investigation in Florida & first trade
Why didn't the system correct itself? Why didn't the stupid high prices deter people from buying more houses?
Did the bubble burst because people couldn't pay the mortgage or did they just run out of suckers to buy more houses?
Like in this scene in The Big Short, the realtor woman was saying "I sold that house for $350,000 the year it was built. Two years later $480, then $585 maybe eighteen months ago. This couple bought it for $650 last year."
The Big Short (2015) - FrontPoint Partners' investigation in Florida & first trade
Why didn't the system correct itself? Why didn't the stupid high prices deter people from buying more houses?
Did the bubble burst because people couldn't pay the mortgage or did they just run out of suckers to buy more houses?
Posted on 9/18/17 at 6:21 pm to Langland
quote:
Why didn't the stupid high prices deter people from buying more houses?
People don't buy houses all cash. They use leverage. As long as you can "afford" the monthly payment on bigger and bigger mortgages, the price will go up as those folks bid up the price.
quote:
Why didn't the system correct itself?
It did. The market crashed remember?
quote:
Did the bubble burst because people couldn't pay the mortgage or did they just run out of suckers to buy more houses?
Both. Going back to the top. For some, their loans were teaser rates that adjusted up. What was once a mortgage they could pay became one they could not.
A domino effect occurs. Those mortgages fail, which causes money to suck out of the economy leading to job loss, causing more mortgages to fail and so on.
This post was edited on 9/18/17 at 6:24 pm
Posted on 9/18/17 at 6:36 pm to Teddy Ruxpin
Thanks.
As far as the market correcting itself, I mean why wasn't it a slow correction rather than a crash? Was it the corrupt banks propping the market up?
As far as the market correcting itself, I mean why wasn't it a slow correction rather than a crash? Was it the corrupt banks propping the market up?
Posted on 9/18/17 at 6:41 pm to Langland
quote:
As far as the market correcting itself, I mean why wasn't it a slow correction rather than a crash? Was it the corrupt banks propping the market up?
This was probably more complicated in reality but let's just do an exercise.
Let's say we're handing out loans with 5 year teaser rates. During this period, people are bidding up houses.
Do you see how the bidding up of the price from demand could go up before the consequential downward pressure from default is realized five years down the road?
Can you see how that pressure would start to come all at once, not only from those failing on their mortgages, but from potential solvent borrowers who realize the prices are tumbling and stay away. Demand for housing would drop exponentially. Fear rises precipitously. It isn't a measured withdrawal in this situation, it's a stampede.
This post was edited on 9/18/17 at 6:51 pm
Posted on 9/18/17 at 6:56 pm to Teddy Ruxpin
Thanks again. You're educating the Langland.
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
Posted on 9/18/17 at 7:18 pm to Langland
Too many people were making a ton of money.
Posted on 9/18/17 at 7:23 pm to Langland
You also had 100% financing and stated income loans (a/k/a "liar loans") where you could claim OT baller salary and it was virtually accepted without question.
Posted on 9/18/17 at 7:26 pm to Langland
It's human nature. Speculative bubbles have been created and burst as long as investments/gambling have been around.
tulips and bubbles
Humans have an instinctive urge to take risks to acquire goods/power/money/whatever. As long as the objective continues to increase in value, people continue to buy it regardless of the cost if they expect the selling price increase further. It's not a question of whether the house is worth the asking price or cost or value, it's a question of whether the buyer believes the selling price will be higher in the future.
Stocks, houses, tulips, gold, or whatever have values based on what people think other people will pay for them later. As long as enough people believe prices will rise, they will.
tulips and bubbles
Humans have an instinctive urge to take risks to acquire goods/power/money/whatever. As long as the objective continues to increase in value, people continue to buy it regardless of the cost if they expect the selling price increase further. It's not a question of whether the house is worth the asking price or cost or value, it's a question of whether the buyer believes the selling price will be higher in the future.
Stocks, houses, tulips, gold, or whatever have values based on what people think other people will pay for them later. As long as enough people believe prices will rise, they will.
Posted on 9/18/17 at 7:32 pm to Teddy Ruxpin
I have a hunch "they" could see that the market was slowing (correcting itself), but kept it going by introducing the teaser rates and giving loans to whoever had a pulse. To me, this is an indicator that "they" knew what they were doing. They just redlined that engine until it blew.
Posted on 9/18/17 at 9:07 pm to Langland
quote:
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
I think it's this in a nutshell. And why the hell not. These people were making bank off people's stupidity.
Posted on 9/18/17 at 11:09 pm to Langland
quote:
But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
Tranches were the problem. All these mortgages were grouped together and sold off. Everyone claimed they were AAA rated, including the agencies like S&P they were paid to rate these securities.
The reality is that most of the mortgages were subprime, due to the fact that income verification was not required. The community reinvestment act CRA, required lenders to prove they were not discriminating against buyers. The government loosened restrictions and forced banks to handout subprime mortgages
While it was not the only cause, I believe the original bill set the bar lower for many lenders and they got addicted to the much larger customer base.
This post was edited on 9/18/17 at 11:18 pm
Posted on 9/19/17 at 7:48 am to Ole War Skule
quote:
It's human nature. Speculative bubbles have been created and burst as long as investments/gambling have been around.
This is the correct answer.
Posted on 9/19/17 at 9:58 am to foshizzle
NINJA loans were being handed out. (No Income, No Job Applicant)
You could literally be on welfare, go in, claims you made $100k a year, get approved for a $400k mortgage, pay interest only for five years.
The problem came when those five years were up, and the price of the house had dropped, and the payment quadrupled.
My own experience - we bought our first house in 2003. We were looking at homes in the $175k range, because that's what we could afford. We were approved for $600k.
How many people got those approvals back and upped their budget without thinking about it. That $175k house, we were happy to sell for $152k in 2009.
You could literally be on welfare, go in, claims you made $100k a year, get approved for a $400k mortgage, pay interest only for five years.
The problem came when those five years were up, and the price of the house had dropped, and the payment quadrupled.
My own experience - we bought our first house in 2003. We were looking at homes in the $175k range, because that's what we could afford. We were approved for $600k.
How many people got those approvals back and upped their budget without thinking about it. That $175k house, we were happy to sell for $152k in 2009.
Posted on 9/19/17 at 3:41 pm to Langland
The government decided everyone deserved to be a homeowner. They encouraged and incentivized lenders to oblige.
They later found out that in fact, everyone does not deserve to be a homeowner.
They later found out that in fact, everyone does not deserve to be a homeowner.
Posted on 9/19/17 at 5:34 pm to ItNeverRains
Additionally banks/brokers decided everyone deserved a loan.
It didn't matter if they could pay it back because they weren't going to be ending up holding them.
It didn't matter if they could pay it back because they weren't going to be ending up holding them.
Posted on 9/19/17 at 6:42 pm to Langland
quote:
Yes, I can see that. But the thing that bothers me is that the people who were paid to see it, either didn't see it coming or didn't give a frick.
It is extremely easy to see what happened big picture wise, but the people in the industry weren't really in a great position to do that
The CDO that got it all started
The thing that drove most of this are these things called CDOs, collateralized debt obligation and a failure to understand the risk involved.
Basically a CDO is taking a bunch of debt like mortgages/auto loans etc and grouping all of them together which creates a faux bond / fixed income security. This "bond" then gets a rating similar to government or corporate bond. For example, Wells Fargo takes 10,000 mortgages and sells the repayments from homeowners as a big group
The foundation of why you do this is risk pooling. When you group them together the law of large numbers comes into play and you can better estimate the value. Specifically, this has worked extremely well in consumer debt / auto loan type markets (because they are different than mortgage markets)
People who buy fixed income securities LOVED this. Specifically insurnacecompanies / pension funds because mortgage CDOs lasted 20-30 years which is incredible. They bought so many CDOs, the banks fricking ran out of CDOs based on their normal lending operations.
So what do you do when the supply of your hit product runs out? You order more stock. Banks needed people to buy more homes (create new mortgages) and for more money (bigger mortgage = more debt to sell). They were a production line to pump out CDOs
Housing Bubble
In the traditional bubble sense, people were speculating on home and couldn't afford them. When people decided to sell, the house of cards all fell over
Why no one saw problems with CDOs
CDOs historically have worked with consumer debt because consumer debt is independent. If your neighbor defaults on CC debt, that doesn't have much effect on if you default on CC bills too. The problem is mortgages don't work that way. When your neighbor forecloses on his home, it affects the home value in your neighborhood
This is the concept of independence in probability and is a huge fricking deal. Unfortunately, there was an assumption in the early day of mortgage-backed CDOs that mortgages were independent. Obviously, they aren't independent
Had people realized mortgages in mortgage backed CDOs weren't independent, it wouldn't have been quite as attractive and the production line of pumping out mortgages wouldn't have happened in that way.
Why the financial collapse happened
Not a chance I'm going to take the time to write up how the evolution of CDOs broke the financial markets
Posted on 9/19/17 at 6:46 pm to RJSambola
quote:
Additionally banks/brokers decided everyone deserved a loan.
Not quite, they had people lined up to buy loans, even the garbage ones.
quote:
It didn't matter if they could pay it back because they weren't going to be ending up holding them.
The people buying them knew they were buying garbage loans
It wwas one of the most shitastic displays of improperly applied risk pooling in history.
Posted on 9/19/17 at 10:28 pm to anc
NINJA loans - No income, No job, No assets.
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