I think folks are grossly underestimating both the global demand for liquidity and the feedback action inherent in housing. We have an almost triple-witching of classic collateral concerns.
For a new home, the land has to serve as collateral for the building loan, then the building has to serve as collateral for the purchase loan, then purchase loan is bundled into a MBS where it serves as collateral in the repo market.
This makes for huge amplification effects in and of itself. Place on top of that the fact that the price of land is extremely sticky and housing suffers from time-to-build and you have the potential for a massive Yo-Yo.
I had hoped that a massive expansion in rental housing would buffer this, but alas that seems not to be going to pass. Instead this, from Bill McBride is:
Second mortgage purchase mortgage lending above 80% loan to value has begun to creep back into the market. Prudent Underwriting standards and deep risk analysis have convinced some private money to come back into the housing finance market of late. We’ve added an 80 / 10 / 10 product recently that has no Private Mortgage Insurance.
I will be highly shocked if it stops here. The products will start coming out of the woodwork. Loans will gush in.
Folks will say – have we learned nothing?
But, there is nothing that could have been learned, save for the fact that the US government needs to issue more debt and support that debt with greater immigration, but that is fantasy at this point.
The simple fact is there is not enough collateral in the world and the US government is not issuing enough debt. This will happen again and again and again. If not in housing, then in metals. If not in metals then in polysilicon. If not in polysilicon, well . . . you get it.
The core problem is that the world needs lots of young people under the rule of a democratic government. But it has old democracies and young basket case countries. This does not make for a world where safe sovereign debt can be issued.
We could attempt to reform the basket case countries but the easier solution is to youngify the democracies. Europe is beyond help in this regard. The US, Canada, and Australia are the world’s only hope. More immigrants. More young immigrants and more sovereign debt.
If not, this will never stop.
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Thursday ~ April 26th, 2012 at 10:02 pm
curtd59
Good book or long article topic.
My side would see political instability partly because the available stock with which to ‘youngify’ isn’t all that good. However, that aside, your broader point, which is how the world needs safe collateral is something that could use distribution.
It’d be a good time soon, for you to put together a Karl’s Ideas page.
Thursday ~ April 26th, 2012 at 10:23 pm
Lord
As long as they document and verify incomes and qualify them in full, there isn’t much to be concerned about. Prices would only stabilize as incomes are not allowed to go anywhere. There will be a shortage of lending opportunities though unless the next new thing arrives. If you want immigration, then perhaps a green card for each doctorate granted to a foreign national.
Thursday ~ April 26th, 2012 at 10:23 pm
Hance
sounds like a Ponzi scheme
Thursday ~ April 26th, 2012 at 10:50 pm
John A
Here’s another one, this one about the LA area:
http://articles.latimes.com/2012/apr/22/business/la-fi-commre-comeback-20120422
Friday ~ April 27th, 2012 at 3:51 am
John (@champion_88)
It sounds like what you are promoting is a scam.
For example, we say that the health care reform is only affordable if everyone is forced to buy insurance.
But the only reason that sounds true is for young people to literally throw $3,000-$4,000 out the window every year because there is NO WAY you are spending that much on medicine unless you get a terminally-ill illness and most people would prefer to just take their chances in that regard.
Plus, if you have a terminally-ill illness, do you really need to worry about your finances going forward?
You’d have to get sick an average of 6-8 times per year just to break even and no one gets sick that often. The only time of your life where coverage starts becoming useful is when you have a lot of precautionary tests or when your body starts breaking down, but provided you don’t abuse your body, that won’t happen until at least 50 years old.
So for anyone under 50 and certainly under 40, all health care is is a ponzi scheme. The young people are forced into paying for something they don’t need so that further down the line, others will pay for them.
And that is the point you are promoting in general. Young people generally don’t need the government at all, so by having a large percentage of your people be young, you can screw them with endless taxes that they will never take advantage of.
I’m not sure what the ideal age composition of a country is, but I can say that I would NEVER promote the authority of government to continue screwing its citizens, which is the crux of your post is aimed.
Friday ~ April 27th, 2012 at 3:54 am
John (@champion_88)
I forgot to include this in the original post, but the health care example is only an example.
This scam applies to anything this author’s post refers to: Social Security, Medicare, etc. are both ponzi schemes too, but because elderly people have begun dependent on it, they support it.
That actually perfectly illustrates the dangers of becoming dependent on the government.
Additionally, I’m not sure why you think it’s a good idea for the US to issue more debt? Wouldn’t that just accelerate the inflation cycle until it becomes unsustainable?
Friday ~ April 27th, 2012 at 10:30 am
cig
The core thing health insurance buys you is big ticket life-or-death items say cancer treatment where $100K or $200K will cure you and allow you to live healthy decades afterwards. Or incurable diseases that don’t kill you but where you can have a reasonable life as long as you get regular but expensive treatment for the rest of your life.
It’s not black and white where you get either a harmless cold where you just need a pain killer, or a thing that kills you in two months…
Friday ~ April 27th, 2012 at 7:55 am
Kevin_Hartford (@Kevin_Hartford)
Sounds like a good reason to think about limited abortion…besides the moral and religion reasons. The U.S. needs young people with good technical skills, but we are not producing them, our immigrants (most illegal) are unskilled and our legal immigrants are being limited by protectionist policies to mullify the unions.
Friday ~ April 27th, 2012 at 11:42 am
michelle
And bringing unwanted children into the world will alleviate this how? Sounds like it might just be better to recruit engineers from other countries and sell them foreclosed homes on the cheap. Two birds, one stone.
Or conversely, provide more and better math and science education in local schools. It’s pretty hit-and-miss now, and not getting any better.
Friday ~ April 27th, 2012 at 8:04 am
chops
@John; People having and raising children consume plenty of healthcare. I’m pretty sure this is the younger set?
Friday ~ April 27th, 2012 at 10:23 am
curtd59
@chops
Actually, a disproportionate amount of the healthcare costs (50%?) go to experimental procedures and extending the last year of life. The next disproportionate amount goes to people who don’t take care of themselves and contract preventable illnesses that they expect others to pay for.
Normal healthcare costs are affordable.. The reason that they’re expensive is that the young and the family pay for the indolent and the unaccountable. As offensive as that may be.
So while you’re right that families consume healthcare, they consume pretty cheap healthcare. It’s not a material part of the argument. The whole problem is that we have to have to have bureaucrats or doctors decide who gets treatment or not in order to control those costs. And that’s an impossible job.
Friday ~ April 27th, 2012 at 12:13 pm
Paul Mineiro
First proposing something very close to a Job Guarantee (http://modeledbehavior.com/2012/04/18/is-there-monetary-policy-at-the-zero-lower-bound/).
Now suggesting that the Federal deficit is way too small for net private sector savings desires, causing economic instability.
If I squint, Mr. Smith, you look like an MMT-er
Friday ~ April 27th, 2012 at 1:12 pm
Corey Mutter
Is it possible to alleviate this by reducing net savings demand through redistribution? That is, shift some wealth from those with high propensity to save (the rich) to those with high propensity to consume (the poor).
That’s probably just as unrealistic as the US government issuing “enough” debt. Or maybe those are more or less the same thing if we squint a bit.
Friday ~ April 27th, 2012 at 1:28 pm
Paul Mineiro
This is way above my pay grade, but I think much of the savings desire is a reflection of trade flows. We *are* redistributing wealth (globally), but the foreign sector has high propensity to save. In that case local redistributive policies would help, but there would still be lots of demand leakage due to trade.
That line of thinking leads back to the immigration angle. The (poor in the) foreign sector have elevated savings desires partially because they have no faith in their local institutions. They’d feel more secure if we let them move here, resulting in more consumption and productivity. Win^3.
The narrative is not perfect however. Foreign oil barons are extremely wealthy and yet continue to have high savings desires. They *are* the institutions, but they could lack faith in themselves, i.e., maybe they anticipate revolution around the corner. Such people do not want to move here, however, and give up such tremendous rents.
Overall I’m 100% in favor of more immigration, it’s not a panacea, but it’s one of the few remaining low hanging fruits.
Friday ~ April 27th, 2012 at 8:38 pm
FT Alphaville » Weekender
[...] Stability is not an [...]
Saturday ~ April 28th, 2012 at 4:33 am
NK
As others have noticed, the post is calling for yet another Ponzi scheme. Appalling!
Saturday ~ April 28th, 2012 at 9:24 am
Stability is Not an Option | Penultimate Post
[...] http://modeledbehavior.com/2012/04/26/stability-is-not-an-option/ … the US government needs to issue more debt and support that debt with greater immigration, but that is fantasy at this point. [...]
Saturday ~ April 28th, 2012 at 8:18 pm
Dmitri
For fifteen years time, youngify the democracies but for 100 years time, respect the cultural differences that prevent this happening. Sometimes going backwards is required to go forward. There is an imbalance between the developed and developing world which is partly developmental and partly about values. immigration will mask that difference, but crisis will bring a solution that will include all perspectives….and it is inevitable.
Monday ~ April 30th, 2012 at 9:33 am
10 Monday AM Reads | The Big Picture
[...] doom (FT Alphaville) • Navigating a Tightrope With Amazon (NYT) • Stability is Not an Option (Model Behavior) see also The Calming Effect of Central Banks (NYT) • Optimism Is Up, but the U.S. Housing Market [...]
Sunday ~ May 13th, 2012 at 4:08 pm
Gary Lammert
After the market’s May 23-24 lows, the last 2012 summer hurrah will be boosted by these above mentioned lending parameters and the Troika’s last tranche for Spain.
No, there are limits.
The debt-money-asset system is as self-balancing as it is self assembling.
It has the same characteristics as does physics, chemistry, and biology, the latter where contributed DNA from the male and from the female self organize over time to produce the sentient beings of the known universe.
Thursday ~ May 2nd, 2013 at 6:46 pm
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