Let's try to understand the housing bubble

(taken from my McMansion story)

Another source of price rises associated with the mortgage and cash-out boom may simply be the persistent upward bias of appraisers, seeking commissions on ever-higher principal amounts. That is, each appraisal in any neighborhood inflates prices a bit, and each subsequent appraiser then references the most recent. Therefore, more appraisals may lead to higher prices--especially when homes are never actually sold, as is the case with cash-out refis. In those cases, the cash is gained, but no sale ever verifies the appraised price in a market.

having JUST gotten my house appraised, my perspective is that it rarely works that way.

sure, there are aggressive appraisers, and sure, they can inflate their assessment of home values somewhat, though, even for a refi, the loan application still has to pass by a loan officer, who will insist on comparable actual home sales.

now, of course, the appraiser does have some discretion in terms of which 'comparables' to use, but there's still a fair tie back to reality.

moreover, all this merely inflates home valuations for refi/home quity purposes. none of this information gets published, filed, or anything else that would lead actual buyers to be swayed by such info. actual buyers rely on actual sales when pricing houses.

There appears to be room in this cycle for a whole bunch of wiggleroom. "Who will insist on" is subjective (will s/he insist on that, if pressured not to from above?)

And then, no one actually buys the refi house--except Fannie Mae, the mortgage. SLLLLUUUUUUUUURPs it up. No questions asked.

Oh I forgot--over ten percent and rising of mortgages now are sub-prime, according to one report.

I do think this best explains the price rises recently--no one has been able to.

But lets not also forget the new homebuilders are all merging into price setting monopolies to hand over the mortgage paper to Fannie. Both Fannie and the homebuilders are in good with the GOP, according to my research.

actual buyers rely on actual sales when pricing houses

And how many buyers know the first thing about appraising for resale? And how many buyers are aware that the 30,000 in upgrades they put into the mortgage of a new home has just put them upside down?

Did you know that in a purchase situation that all realtors work for the seller, even if they are the "buyers" realtor? Unless, of course, they are specifically classified as a "buyers broker". I'm sure this isn't consistent state to state, but it is the typical norm. Unless some law has passed in the last 5 years that I'm not aware of......

So, the buyer relies on a realtor that is technically working for the seller to get their comp data. :crazy:

Oh, and in my last suit and tie job I did appraisals. The pressure was so great on my office to sell money that I could produce the most convincing "phony" appraisals you've ever seen...... It aint that hard to do.....

Those of one of the Fed governors--not greenspan nor one of the voting members, but one who has a SON IN THE HOME REAL ESTATE market!

Something tells me you can't both be wrong. I'll try to find the document later.

BTW this topic of "home bubble" is quite the buzz in some very high circles. Though they usually won't use the word "bubble."

They are saying "side effect" or "over capacity in real estate" in order to not panic the public. Also, it isn't news in the headlines.

The FDIC report said there is credit danger, but refused to use the word bubble.

I still get "biased" market reports that I use for our business. No one ever says the "B" word. They keep referring to how bad the supply to demand ratio is, but then paint everything as being peachy keen....nothing to see here....move along...the housing market is doing just fine.......

I was unaware, from your other post, that roughly 10% of mortgages are subprime. I agree with you, that everything is being done right now to avoid a panic. But, to be honest, I don't have a clear handle on everything that is REALLY going on.

I just read that in a report a few days ago.

Not sure if I want to read it though. I'm already too damn depressed with things already. The next person who tells me how great the economy is doing...might punch them out.....

I was talking with someone recently about ranchers and farmers in my state. Most small time ops are broke and are selling out for pennys on the dollar to big time ag corporations. As I mentioned in my other post, this was the first sign that things were going bad back in the "Golden Years of Reagan".

Nothing ever seems to change. No one learns from our past mistakes. Gotta' run, but if you can find the articles you've mentioned I'll check back later and get "depressed".

It is around ten percent subprime. It jumped up and has been high for a few years. The worrisome part is there is now a high loan to equity ratio with prices so high, and ARMs with some of that.

I'll just bet the subprime cos give higher appraisals.....this might help shed more light on the mystery.

I'll put the report up later.

I was wined and dined by appraisers. When we ordered an appraisal they would ask..."what value do you need?" We needed to sell the money and they needed the appraisal income. It was a cozy relationship.

The first signs back then that things were heading for doom was; purchase money loans dried up. They went away. The second sign was a few builders just filed bankruptcy and left town. Then Mortgage Insurance carriers started taking quite a few big hits and really tightened their underwriting guidelines.

The shit storm finally hit when 1000's of people found themselves upside down on new home purchases. They couldn't sell unless they could bring tens of thousands in cash to the closing table, so they just walked away from their homes.

Of course, interest rates were much higher then, but I still think it's all relative. People still buy the payment of a home, and not the value of a home.

The trend back then was also that the smaller rural towns got hit hardest first, then the urban areas, then the suburbs.

Some of the bubble is caused by supply and demand in the metro areas.

But low interest rates have made high prices palatable. Perhaps you can't afford a $500,000 home at 8% but you can at 5%. The bottom line for buyers is the monthly payout.

Since mortgage interest is the big deduction, you have the US Treasury subsidizing home ownership. Now this is all well and good for the middle class but the interest payment on a $1,000,000 home is being financed by the taxes paid by the middle class. Nobody NEEDS a $1,000,000 home (even in the most inflated areas) but if you have a lot of money, the mortgage really doesn't cost much.

Incentive to "trade up" your house. Incentive for an ever higher-principal if you are rich, to offset your income.

So then your poorer neighbors point to your house, and say "Fannie spit up the cash to make me equal to the Joneses," and you borrow it against your appraisal weighed against the Joneses house.

At the margin upwardly biased appraisals probably have some effect. The thing is that this is probably most true in the very hottest areas, like SoCal where the appaisal probably means almost nothing as it become outdated monthly. They don't need no stinking appraisal.


Appraisals are a step required by mortgage lenders to protect their interests. Nowdays mortgage lenders don't need that protection because they sell off the mortgage right after writing it. They don't care if the house is worth half what it sold for or if the buyer doesn't make a single payment.They don't take no stinking risk. That risk is for someone else. Like the GSE's for instance.

Something like a trillion dollars in mortgages were made last year. This gigantic industry applies the lessons of mass production to produce credit, not things. The appraisal is in most cases a pro forma process which is nothing so much as a bother to all, buyer, seller and lender, all of whom want to do the deal. Risk is not part of the equation for any of them so why worry about it.

Money and credit always flow into inflating markets. It is the nature of all markets. Inflating markets inevitibly spawn their own stories about how the bom will never end and the sky is the limit, etc. etc. Mounting excesses and moral hazards are swept aside as the sad musings of pathetic worry warts and losers.

(you said)
"That risk is for someone else. Like the GSE's for instance."

Only half the story!

To my surprise, I (and a few others) discovered recently it is FDIC banks and US bond funds who ARE MOST EXPOSED to GSE MBSs. THAT means there is serious systemic risk. This explains Greenspan's posture recently.

Oh, by the way, several of the GOP senators in charge of reforming this are shady. Hagel, of voting machine fame (my forte) and Oxley, and then the other one who is being investigated for 9/11 intelligence leaks.

Feel good?

I'll be posting parts of the two FDIC reports.

I guess they have the full faith and credit of the US government, so that's good. For now.

I actually think Fannie and Freddie will hold up much better than the various homebuilders. Congress has some incentive to back Freddie and Fannie, but the homebuilders will be tossed away.

That's because homebuilders have gotten addicted--too comfortable with handing over mortgages to Fannie and Freddie.

The drug will be cut off soon.

If they don't do something to trim the debt growth, terrible times await all, just like Greenie says.

The FDIC report of a few days ago seems to roughly agree with Greenie, and me too (particular aspects of debt growth). In fact, I'm thinking Greenie read that report and the other one, and got worried.

So you've got FDIC , Greenspan, and kinda conservative lefties like me saying "look out".

Ginnie Mae's AOK though, from what I see.

LOL from another thread!

Couldn't resist posting it here.

Note: the moderator does not like the "fart" word in titles.