Seattle Bubble

• WCRER: Affordability Drops Again
• WCRER: Price Declines Get Rolling
• WCRER: Affordability Continues To Drop
• Affordability Continues Downward Slide
• Housing Affordable… Or Maybe Not

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45 responses so far ↓

• 1 rose-colored-coolaid // May 14, 2008 at 11:53 am

  Two points on this.

  which allows them to buy more home for the money,” said Glenn Crellin, research-center director.

  What is the obsession with “buying more home for your money”? Why can’t I just buy the same home for less money? That’s what we should really be pitching. Less home will save you money over the long run (lower heating costs, lower taxes, lower maintenance costs), allowing you to do actually things with your money rather than just live in it.

  Despite national reports which suggest that no homes are being sold, a sales rate of nearly 98,000 units (statewide) is similar to the number of sales that prevailed 10 years ago,”

  Can we really make that comparison? I have a gut feeling that people are generally a lot more active in terms of home purchases than they once were. Let’s say you have 100 people, and in 1960 70 of them owned a home. They almost never moved and therefore sales were rare. Now, let’s say you have 100 people and 7 can afford a home. Those seven move every other year.

  Which is a ‘better’ market? The later might have more sales, but I don’t think it’s more healthy. That’s why I wonder how well we can compare sales rates from years ago to today. If people were more stable 10 years ago than today, a healthy market today would have significantly more sales than the historical data.

• 2 vboring // May 14, 2008 at 11:56 am

  Seattle is becoming more livable every day.

• 3 patient // May 14, 2008 at 12:18 pm

  Same rate as 10 years ago is good? I remember hearing statements like Seattle has been and is just exploding in population growth and that’s what has been and will continue to drive prices higher forever. Now it’s hinted that it’s not bad if 10 years of population growth result in 0 growth in sales.

• 4 cheapseats // May 14, 2008 at 12:27 pm

  To me “more home for the money” isn’t just size, it may better location or a number of other factors. I havent honestly been looking at houses until recently because my price range was placing me at an unacceptable commute. I am starting to see houses in areas that were previously unavaliable to me. Aside from commute I may be more likely to buy in these areas because I think that they will hold value over time better than other areas.

• 5 David McManus // May 14, 2008 at 12:47 pm

  cheapseats,

  Wanna buy mine in Kenmore? Built in 2003, hardwoods, and I’m only asking 50% over what I paid for it ;-)

  It’s a screaming deal!

• 6 Chris // May 14, 2008 at 1:12 pm

  Per Pierce Co.’s inventory tally…is this from the same data set? Pierce has, what, 1/3 the pop. of King co. and has 2/3 the listings. Are things just that “bad” there or should we expect King co. to follow suit in terms of homes lists as a percentage of total homes…

• 7 Ira Sacharoff // May 14, 2008 at 1:14 pm

  There does seem to be a bit of a contradiction: Seattle is known for it’s eco-grooviness, but then folks are lusting after 3000 square foot homes. Just sayin.

• 8 David McManus // May 14, 2008 at 1:14 pm

  Ira,

  Do as I say, not as I do.

  -Seattle

• 9 rose-colored-coolaid // May 14, 2008 at 2:29 pm

  To me “more home for the money” isn’t just size, it may better location or a number of other factors.

  Maybe, but I suspect that is not what most people mean. Otherwise, why move out to the exurbs to get “more house for your money”? When most people say they want more house, they mean more house. Costs, convenience, sustainability be are all second fiddle to MORE.

• 10 vboring // May 14, 2008 at 2:44 pm

  any word on how the distressed sellers index is changing?

  we seems to still have relatively few foreclosures in town, but based on seeing a more short sale listings, it seems like distress must be increasing in the market.

• 11 biliruben // May 14, 2008 at 3:09 pm

  We want a house with 2000 non-basement sq ft; not much more, not much less.

  We could get that right now in Kenmore or Edmonds.

  What I hope to accomplish by waiting is that we can get that 2000 sq ft (along with all our other litany of needs) in-city by waiting until next spring. We don’t necessarily want more house, we just want in-city. It’s not really about convenience either, as neither of us work downtown. I just like Seattle, and I’d like to live here. Not the eastside. Not Edmonds.

  I want to live in Seattle, "golly" it.

• 12 patient // May 14, 2008 at 3:45 pm

  biliruben that’s about the size we will be looking for as well but on the Eastside due to the convinience of dropping off and picking up the kids. Who wants the heating bills on a 3000 sqft home? And with the current price per sqft it’s cheaper to throw away stuff that can’t fit in a 2000 sqft home and by new if you miss it than to pay for storage in home…

• 13 Garth // May 14, 2008 at 4:05 pm

  I will have to find it again, I read an article recently where the author hypothesized that “suburbia” (SUV’s McMansions, strip malls) was the greatest mis-allocation or resources of all time. He predicted that suburbia would be the .com IPO of this financial crisis (going away and not coming back).

  Historically I think I would say moving massive populations to Siberia is probably first, but suburbia is more fun to hate.

• 14 biliruben // May 14, 2008 at 4:11 pm

  Yeah - it’s probably even tougher on the Eastside, unless you get a bit farther out. I can’t believe how much people are paying for a house in Bellevue or Kirkland. Kirkland! When third-rate suburbs rate million dollar homes something ain’t right.

  I drop redfin over kirkland, and the ave list is 924K. I drop over Laurelhurst/Viewridge and it’s 724K. WTF?

• 15 EconE // May 14, 2008 at 4:25 pm

  Bili….I’m guessing that the reason that it’s higher over Kirkland is that there were so many million$+ new builds that are just sitting…and sitting…and sitting.

  Try perusing the listings some time in that category. You’ll be surprised at how many empties there are.

• 16 biliruben // May 14, 2008 at 4:39 pm

  You’re right. Looking at $M+ on redfin over 45 days for the region makes an interesting map. Massive inventory just sitting in Bellevue/Kirkland. The only place that approaches that on this side of the lake is Madison/Leschi.

• 17 alex // May 14, 2008 at 5:28 pm

  [The Tim] Let me reiterate a point we’ve tried to make here in the past:
  falling home prices is a good thing.
  When the reports have data that show dropping prices and a
  slowing market, that is the exact opposite of “doom and gloom.”
  ——————————
  Unless, of course, you’re a real estate agent … or broker … or you own a bank that is heavily vested in real estate loans…. or you work for one such bank… or you’re in business, and your main customers work for that bank, or for the real estate agent, or for the broker…. hmmmmmmmmmmmmmmm.

• 18 rose-colored-coolaid // May 14, 2008 at 5:51 pm

  #17 You’re correct. Falling prices is only good for the 35% of the population who are renters, and whatever part of the other 65% who would like to move up (yes falling prices not rising prices make it easier to move up). Falling prices are bad for those looking to cash out and the couple percent of the population you listed.

  Overall, falling prices are good. This is true for every single commodity! You like your cheap computer even though it would be better for MSFT, Intel, IBM, etc if prices stayed at the 1980 level on a dollar per performance level. Sorry if you’re in one of those industries that is faltering alex, but for everyone else this is good news.

• 19 The Tim // May 14, 2008 at 6:01 pm

  RCC, you may (or may not) recall that Alex is trying to sell his Woodinville house.

  Although he has said numerous times that he personally would like to see (and even cause) price drops.

  Also, based on his IP, I highly doubt he works in RE.

• 20 Ira Sacharoff // May 14, 2008 at 6:50 pm

  I’m one real estate agent who thinks falling prices will be good for me professionally.
  Lower prices means more people will be able to buy houses.

• 21 alex // May 14, 2008 at 8:39 pm

  RCC & Tim: I was speaking on behalf of that few percent of the population to add a contrarian voice (btwI forgot to list construction people).

  My own personal hope is that it all crashes badly, as I’ve always made clear. I’m one of the 65% trying to move up, so I have my eye on the [shrinking] difference between my house and the one I’d like to buy.

• 22 AndyMiami // May 14, 2008 at 9:55 pm

  Ira. said. I’m one real estate agent who thinks falling prices will be good for me professionally.
  Lower prices means more people will be able to buy houses.

  Hi Ira..lower prices and tighter credit will actually mean even less buyers and lower prices.eventually a bottom will arrive but Seattle is a LONG way from that bottom..long way..

• 23 Ira Sacharoff // May 14, 2008 at 10:13 pm

  Credit has already tightened, do you think lending standards are going to get tighter?
  Maybe I’ve swallowed the Kool-aid, but I think a bottom will occur somewhere between summer of ‘09 and the beginning of 2010, though I think things will stay flat till maybe 2012.

• 24 Sniglet // May 14, 2008 at 11:13 pm

  Credit has already tightened, do you think lending standards are going to get tighter?

  Yes, I do think that credit is going to get MUCH tighter. It is still possible for people to get Alt-A loans, or loans with less than 20% LTVs. Heck, there are still 80/20 loans still available!

  To put it another way, the variety of mortgage products today are more numerous, and easier to get, than what was available even 10 years ago. We have a ways to go before we reach the same degree of lending propriety that was common as recent as a decade ago. I think that our perspective as to what is “normal” has become so incredibly skewed over the last 15 years that we can hardly remember what the world of mortgage finance used to be.

• 25 bitterowner // May 15, 2008 at 6:28 am

  To give you an idea, 10 yrs ago Continental (now Homestreet) bank would only pre-approve us for a 420K house with 20% down on a combined income of about 170K/yr. Neither my spouse nor I have any credit issues. Think of what those kinds of standards would mean today.

  Even more telling - we didn’t even need to argue. There were plenty of good options in that price range. Still seemed expensive back then, but prices were not completely stupid and unjustified like they are now.

• 26 Sniglet // May 15, 2008 at 7:18 am

  Sorry, I mean to say that is still possible to get Alt-A loans with less than 80% LTVs.

• 27 notabull // May 15, 2008 at 8:00 am

  “To give you an idea, 10 yrs ago Continental (now Homestreet) bank would only pre-approve us for a 420K house with 20% down on a combined income of about 170K/yr. Neither my spouse nor I have any credit issues. Think of what those kinds of standards would mean today.”

  The housing market would be totally screwed.

  However, I don’t think it’s going to get as strict as it was before. Wall Street totally screwed themselves (no doubt about that) but they’ll be back, just not as bullish as before.

  Back in the old days, a single bank might hold onto their loans and so each individual loan needed to perform well or they had a big loss. Now, with larger securitized pools of loans, you can simply jack up the rate a bit to compensate for the risk, or buy insurance (hopefully from an insurer that was also punished for excess and correctly prices the premiums). The problem with Wall Street recently was *not* simply that they reduced down-payment requirements (although they should have never gone to 0% down - 5% would have been fine). The problem was that they made stupid loans that didn’t even pay back the interest accrued, and made loans to people with no income, or people that liked to just “state” their income. They loaned money to liars and dead people and nobody in the chain of transactions gave a crap because they were all getting their skim and it was “working”, until it, um, stopped working.

  Recently, friends of mine got a loan with 95% LTV. They have good credit, W2s, etc, and are paying a premium interest rate (about 0.5% on top of “normal”) to cover for the insurance aspect of the high LTV. The underwriting on that loan was good, regardless of the down-payment and the risk is correctly priced in the rate.

  Once Wall Street goes back to correctly pricing the risk, and issuing loans that actually require principle payments (HORROR!) they can continue with 5% down and be totally fine.

  Right now it’s very difficult to get a HELOC in WA, which is one of the better performing housing markets (meaning declines have been smaller). You can only get up to 85% CLTV and get a prime rate (currently 5%). Want 90% CLTV and you’ll probably be at PRIME+1-2%.

  IMO, we’re almost back to where we’ll finally end up going in terms of underwriting and loan programs. I think we’ll likely undershoot a little, and then loosen up a little. They’re money to be made in securitizing loans, but Wall Street needed to be punished for their lack of wisdom before they realize how to correctly price the product.

  Of course, in 20 years the wisdom will have gone and we’ll be doing this all over again….

• 28 notabull // May 15, 2008 at 8:23 am

  “To put it another way, the variety of mortgage products today are more numerous, and easier to get, than what was available even 10 years ago. We have a ways to go before we reach the same degree of lending propriety that was common as recent as a decade ago. I think that our perspective as to what is “normal” has become so incredibly skewed over the last 15 years that we can hardly remember what the world of mortgage finance used to be.”

  Here’s where I think we disagree. Wall Street securitization is here to stay, so the “normal” that end up at *will* be different to the “normal” of a decade ago. The question in my mind is regarding the size of that delta. You’re essentially saying that the delta is zero, which basically states that spreading the risk doesn’t lower the premium at all. I just don’t see that as possible.

  I don’t think the delta will be big - we’re obviously moving (moved!) away from liar loans and neg-am mortgages…

  The three Cs of underwriting are below. I know you probably know this, but others might not:

  -Capacity - Demonstrated and documented income that make it more than likely you’ll be able to make the (fully indexed) payments assuming you don’t get fired. Includes bank reserves, so if you *do* get fired, you don’t instantly default.
  -Collateral - Down payment. Your skin in the game, and something to keep the bank happy that if you do foreclosure, they lose less money, if any.
  -Creditworthyness - FICO score, history of paying bills, or not as the case may be.

  It’s OK to loan money to someone with less collateral but good credit and capacity, but this should raise the price of the loan. More fees, higher interest rate, mortgage insurance, etc. It’s all about pricing the risk effectively, and with so many people on Wall Street looking to make money, they will figure out ways to make investors comfortable buying pools of loans again.

  Wall Street’s problem is that they layered these risks and made loans that required no capacity, collateral or credit worthiness. Having zero C’s is just plain stupid. They’ll be back to the 2C’s + insurance model.

  Pooling risk does decrease the overall risk, just not to zero, like Wall Street kinda figured with their recent episode of greed.

• 29 Sniglet // May 15, 2008 at 8:58 am

  Here’s where I think we disagree. Wall Street securitization is here to stay, so the “normal” that end up at *will* be different to the “normal” of a decade ago. The question in my mind is regarding the size of that delta. You’re essentially saying that the delta is zero, which basically states that spreading the risk doesn’t lower the premium at all. I just don’t see that as possible.

  I am not saying that securitization is dead, but I definitely believe that we will return to the credit standards that were the norm for a good 30 years prior to the last decade. Spreading risk around doesn’t reduce it, which is largely the point of this whole credit crunch. Also, keep in mind that I am not saying that mortgage interest rates are going to rise substantially (I am more agnostic on this, and securitization competition most likely will continue to keep rates low). However, I do believe that all lenders will revert to the traditional mean in regards to their qualifying requirements: and this means 20% down for those with a high credit score (substantially more down-payment for poor credit scores), and absolutely no HELOCs leaving less than 20% equity.

  If for no other reason, lenders will wind up moving to require traditional qualifying criteria simply because the housing bust will have demonstrated that price volatility can easily chew up even substantial amounts of equity. If we can see nation-wide average price drops in the 25% range, and even deeper declines on a regional basis, this will be all the convincing every lender will need to start demanding substantial down-payments (not these wimpy 5% down deals).

  No lender ever wants to be in a situation where the borrowers have negative equity. This real-estate downturn is providing AMPLE evidence that foreclosure rates skyrocket for homes that are worth less than the mortgage. Thus, it is only prudent to demand 20% (or better) down-payments if prices can easily fluctuate in a 20% range.

• 30 TJ_98370 // May 15, 2008 at 9:13 am

  No lender ever wants to be in a situation where the borrowers have negative equity….

  Correct me if I am wrong, but my impression as to a major contributing cause of the current problems in the financial sector / mortgage industry is that the “lender” really didn’t care about the borrower’s ability to pay. The risk to the lender was removed upon securitization of the loans into CDO’s.

• 31 jon // May 15, 2008 at 9:17 am

  Actually spreading risk around does reduce it. When two investors exchange part of their risky investments, some of that risk cancels out. As an extreme example, consider two investments that are exactly opposite. By combining those two investments, the total risk is completely eliminated.

  Securitizing mortgages makes that process or reducing overall mortgage more efficient, and so allows lenders to easily reduce the level of risk they face. The problem is that investors did not account for all the multitudinous forms of fraud that became possible with the plentiful new credit. Once better procedures are in place, the spigot can be opened up again. When that happens, lenders will be able to again take on more risk than they used to be able to, provided they keep a close eye on the mistakes from before.

  I think the main thing they underestimated, besides rampant fraud, was the fact that the new money would create a temporary bubble of inflated contractor prices. When that collapsed nationwide, prices fell and entire markets when underwater. That is a mistake that can be prevented by watching out to make sure housing prices do not rise above long term cost averages.

• 32 Tsuru // May 15, 2008 at 9:19 am

  I don’t think the delta will be big - we’re obviously moving (moved!) away from liar loans and neg-am mortgages…

  True, but there are still shenanigans going on. See this article from this Monday at MSNBC, originally published in Forbes. Here’s the gist of it:

  No down payment? No problem
  Loophole still allowing risky mortgages by disguising money as a gift

  By Maurna Desmond

  updated 11:49 a.m. PT, Mon., May. 12, 2008
  You probably thought nothing-down mortgage loans disappeared in the wake of the American subprime lending crisis, which has ensnarled much of the world in a credit crunch.

  They didn’t. Even more surprising, many Americans can still buy homes with nothing down thanks in large part to the federal government and a legal loophole that lets builders and bankers ensure a steady stream of asset-challenged borrowers for taxpayer-insured loans.

  Anyone who thinks that we’ve seen the worst of this credit bubble is sorely mistaken.

• 33 Civil Servant // May 15, 2008 at 9:35 am

  Garth at #13 — James Howard Kunstler!

  His marvelous book “The Geography of Nowhere” is where the misallocation thesis is developed and distilled. Also “The Long Emergency” is great and gives similar and updated information in support of its central argument, but take heed: that one is bleak as hell.

  This video looks promising, also more where it came from.

  http://www.youtube.com/watch?v=Q1ZeXnmDZMQ

• 34 notabull // May 15, 2008 at 9:50 am

  “Spreading risk around doesn’t reduce it, which is largely the point of this whole credit crunch. ”

  Well, spreading the risk of a single (or few) defaults around a large pool of people will significantly reduce the chance of any individual having to absorb a total loss, although of course it doesn’t reduce the risk of any specific loan from defaulting. If there is a pool of 1000 loans and there is a 10% chance of each loan defaulting, I’d rather own a share in that pool (at a rate that *truly* compensates me for that risk) than own one loan with a 10% chance of default. The ratio is the same, but the loss severity is shared amongst a larger group of loans. Better to have a 100% chance of a 10% loss, than a 10% chance of a 100% loss. Banks always operated on that principle, but securitized investments means the pools can be larger.

  I think the lesson of the credit crunch is not that spreading risk does not reduce risk. The lesson is that spreading and sub-dividing the risk does not remove risk entirely. We had (still have) AAA CDOs that are experiencing loss severity much higher than the models predicted. This is because the model sucked, not that you can’t make money out of a pool with a high loss severity. The lesson basically boils down to the inability of Wall Street to apply a polished sheen to a portion of fecal matter. People actually bought AAA rated tranches of sub-prime CDOs with highly leveraged loans. They took it too far.

  “No lender ever wants to be in a situation where the borrowers have negative equity. This real-estate downturn is providing AMPLE evidence that foreclosure rates skyrocket for homes that are worth less than the mortgage. Thus, it is only prudent to demand 20% (or better) down-payments if prices can easily fluctuate in a 20% range.”

  IMO, that’s an overly simplistic way to look at it. For longer than the last decade you could buy a house with less than 20% down. PMI has been around for decades. It is incorrect to believe that you *needed* 20% down before 2000, so to assume we’ll return to that incorrect history, assumes we’ll actually undershoot the previous norm to a significant degree.

  What mortgage insurance (private, FHA, VA) does, is to insure the bank against loss when there is less then 20% down. Here we have an example of where the C that is Collateral is less then “prime” and so the bank can take out an insurance policy on you, which of course you end up paying. There are plenty of programs out there that do mortgage insurance, *or* an increase in overall rate, which is essentially the same thing (except tax deductible, etc).

  If risk is *correctly* priced according to historic standard underwriting procedures (3 Cs) and without excessive risk layering, there is no need to require 20% down.

• 35 Sniglet // May 15, 2008 at 10:53 am

  spreading the risk of a single (or few) defaults around a large pool of people will significantly reduce the chance of any individual having to absorb a total loss, although of course it doesn’t reduce the risk of any specific loan from defaulting. If there is a pool of 1000 loans and there is a 10% chance of each loan defaulting

  Unfortunately, the pooling and off-loading, of risk has the perverse effect of leading many industry players to make riskier decisions than they might otherwise do. Lenders don’t care about the risk of the borrower because they are just passing the loan off to investors. Investors don’t care about how many risky loans they acquire since they are hedged with swaps, and partaking in “pools” that spread the risk around.

  It’s almost like adding some great safety devices to automobiles only to find that drivers increase their speeds, increasing the rates of accidents, because they feel “safer”.

• 36 jon // May 15, 2008 at 11:29 am

  I wouldn’t call allowing an industry to take on more risk perverse, because it allows more people to buy homes with a lower cost. As long as the risk is managed properly, more risk can be a good thing. As you point out, the system is not mature enough yet, if lenders are not being careful enough when they pass on that risk to an investor. There need to be safeguards and incentives in place to make sure that investors are not being mislead about what they are purchasing. It takes time to develop and put in place all of that. Investors have a huge incentive in fixing the problem, so I have no doubt that they will restrict their business to partners that have best practices.

  Part of the problem is that government is involved in the loan guarentees. That is in effect a large pooling of risk at the national level, but it means that responses to problems have to go through extremely slow processes of regulation and legislation. Now that pooling can be done in the private sector, with greater flexibility, hopefully there will eventually be less need for federal guarantees. That will allow the market to respond without having to wait for Congressional action.

• 37 NotaBull // May 15, 2008 at 11:48 am

  “Part of the problem is that government is involved in the loan guarantees. That is in effect a large pooling of risk at the national level, but it means that responses to problems have to go through extremely slow processes of regulation and legislation. Now that pooling can be done in the private sector, with greater flexibility, hopefully there will eventually be less need for federal guarantees. That will allow the market to respond without having to wait for Congressional action.”

  Our current incompetent president strongly championed the reduction in size and power of the Fannies/Freddies before all this bubble nonsense. After all, the private market can solve all these things, so why have government involved, right? Of course, *now* he’s all for expanding the role of these same entities once private enterprise decides to jump out of the game. Expand FHA! Expand conforming loan guidelines! Bail out Bear Stearns! It’s the old privatize profits, socialize losses approach.

  Regulation is critically important, and the lack of good regulation (in mortgages, securitization, etc) was one of the biggest reasons this thing got so out of hand. Private enterprise and regulation, however, are not mutually exclusive. It’s possible to regulate effectively and have private enterprise make a mortgage market within the confines of that regulation.

  The correct blend of regulation, government sponsored entities, and private enterprise can provide a strong and balanced system.

• 38 b // May 15, 2008 at 11:51 am

  The problem is not securitization, or bad loans or any of that. It is that the securities were (and still are) rated much much higher than they ever should have been. Over at CalculatedRisk they follow some securities (by WaMu) sometimes which still have AAA ratings and are like 40% bank owned foreclosures already. Therefore, securitization is dead until all of the major ratings agencies have been put out of business and new more transparent agencies, which are not financially rewarded by the people being rated, are developed.

  You are not going to see a big return to 100% mortgages or any other product similar to that because the market for a *properly rated* security made up of such loans is the size of the junk bond market, which is already competitive. In order to have the yields required to sell those securities, the interest rates charged to the marginal buyers getting the mortgage will just push them out of affordability anyway.

  Actually good mortgage pools which are properly rated have been securitized and profitable for a long time and will continue to be. However I don’t think this is a big growth area since it is limited by the amount of good people getting good mortgages and is already a mature market.

• 39 Sniglet // May 15, 2008 at 11:57 am

  I wouldn’t call allowing an industry to take on more risk perverse

  If the net effect of spreading and hedging risk is that more risk is taken then I don’t think we are making any progress. In fact, the increase in risky behaviour will just lead to bigger disasters.

  I am NOT suggesting we need more regulation, rather I simply believe that there is some sort of historical median of risk tolerance that will always assert itself i the market. There will be times when market participants have increased risk tollerance, but there will also be times when the risk tollerance becomes very low. My belief is that we are just BEGINNING the process of decreasing the risk tolerance in the credit markets, and that there is a long way to go to reach (and overshoot) the median.

• 40 NotaBull // May 15, 2008 at 11:58 am

  “Investors don’t care about how many risky loans they acquire since they are hedged with swaps, and partaking in “pools” that spread the risk around.”

  I do not believe that is the case. Investors in these products *do* care about the risks. However, they incorrectly assessed those risks (because the pools were performing) and the insurance they bought wasn’t going to cover the resulting huge losses because they also incorrectly assessed the risks for the same reasons. There was also an element of Group Think going on. “Everyone else is buying these loans, so why don’t we?”. Finally, the sales department took over and started chasing the commission and not caring what happened next year. If you can make a million bucks in a year, who cares if you lose your job next year? So, commission structures will change. Bonuses will be linked to longer term performance of these pools and commissions removed if you screw the customer.

  What we had here was not a broken idea, but a flawed implementation. Risk was not correctly priced. Assumptions about future performance of pools and house prices were incorrectly made. There was no incentive to care about what happened next year.

• 41 jon // May 15, 2008 at 12:07 pm

  Regulation by its nature can’t keep up with innovations in the market place, so blow-ups like this are inevitable from time to time unless we want to restrict ourselves to an un-innovative society. The changes to regulations to allow the feds to jump in quickly seems like a reasonable response. I’m afraid however that power will be used someday by a politically powerful lobby to extract private wealth, such as forcing investments in neighborhoods of specific demographics.

  The pharmceutical market is similar. As consumers, we are ultimately resposible for choosing where buy our drugs. Since we don’t have the expertise, we really on the FDA to have stringent regulations, which unfortunately greatly slows the development of new drugs.

• 42 jon // May 15, 2008 at 12:12 pm

  “If the net effect of spreading and hedging risk is that more risk is taken then I don’t think we are making any progress.”

  You would appreciate that improved tolerance for risk if you were able to buy a house that you couldn’t otherwise have. That didn’t work out well this time, but the process can be fixed to increase the fraction of people of who can buy a house. I think that owning property is a great way to change people’s behavior to be more responsible, and increasing the level of responsibilty in society is win win.

• 43 NotaBull // May 15, 2008 at 12:19 pm

  “Regulation by its nature can’t keep up with innovations in the market place, so blow-ups like this are inevitable from time to time unless we want to restrict ourselves to an un-innovative society.”

  That is true, and your FDA example is an interesting one. If you treat mortgages like drugs, then you don’t want ups and downs and occasional issues. You *want* regulation, and you want stability. If you’re OK with housing prices jumping up and down and the occasional credit crunch induced recession, then forget about regulating - the market will work for you. It’s working right now in fact, by refusing to lend money until it gets it’s "chocolate" together.

  Personally, and I think it *is* a personal opinion, I would prefer slower (not zero) innovation and more regulation in this area in order to smooth things out a little, even if that means we don’t innovate as quickly.

• 44 b // May 15, 2008 at 12:21 pm

  jon -

  The reason so many people were able to buy houses they otherwise could not was a product of bad risk assessment and not an increased tolerance for risk. When risk is priced properly, like it was 10 years ago, then those who were newly able to buy in the last few years will no longer be able to because the rate they will pay will make it unaffordable. The only reason they could recently is because they were paying only a marginally higher rate as someone who is low risk. I am sure you could find a lender at prime + 10% at any point in the past if you were a bad risk, but that didn’t help you because you could not afford the interest. If risk is properly assessed, securitization of a pool of such loans will not change anything that much.

• 45 Sequim Market Dependent Upon California Market // Jun 26, 2008 at 12:38 am

  [...] “Despite national reports which suggest that no homes are being sold, a sales rate of nearly 98,000 units (statewide) is similar to the number of sales that prevailed 10 years ago,” a statement accompanying the report said. Although Washington’s year-to-year sales drop was a bit bigger than the nationwide decline, “the state’s markets remained more robust than many areas in the West.” [From the Seattle PI, Read Source here.] [...]

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