bills_fan Posted October 6, 2008 Posted October 6, 2008 The problem is this solution may be far worse down the line. If the problem is falling home prices, leading to the mortgage securities falling in value (and being unattractive to the $3 trillion in private equity on the sidelines) then we need to either prop up prices or allow this deleveraging/price discovery process continue. The only way I can see housing prices propping up is if Americans are permitted to invest a percentage (25%, 50%, 100%?) of their 401(k)s, tax-free, into their homes. You could tap those assets for use in down payments, tax-free which would stabilize the housing market and get private equity off the sidelines. The banks would start lending again and away we go. I can also see this picking up a populist twist..."Why give Wall Street all you retirement money to put in stockjs and bonds when you could put it into your home." Now, I'm not advocating for this plan, I think it brings inflation, a second housing/credit bubble and long term liquidity problems for individuals asthey try to tap the resources in their homes for retirement. But it could work...at least short term.
John Adams Posted October 6, 2008 Posted October 6, 2008 That's as creative a reasonable solution as I've heard. I wouldn't do it. My interest rate is so low that the mortgage is practically free and I have more confidence (maybe misplaced) that the market will go up faster than my home value. That's based on historical values of real estate, which barely beat inflation. The "tax-free" angle is inviting but I still wouldn't do it.
Lurker Posted October 6, 2008 Posted October 6, 2008 You could tap those assets Uh, that's what helped get us here in the first place.....
GG Posted October 6, 2008 Posted October 6, 2008 But would people want to invest into a falling market? Also, you'd be taking your investment out of higher return equities into lower return real estate at a time when equity dropped 30% YoY. I think that private equity will start pouring into financials shortly.
John Adams Posted October 6, 2008 Posted October 6, 2008 But would people want to invest into a falling market? Also, you'd be taking your investment out of higher return equities into lower return real estate at a time when equity dropped 30% YoY. I think that private equity will start pouring into financials shortly. Agreed 100%. I'm sure some people would jump at the chance though.
bills_fan Posted October 6, 2008 Author Posted October 6, 2008 But would people want to invest into a falling market? Also, you'd be taking your investment out of higher return equities into lower return real estate at a time when equity dropped 30% YoY. I think that private equity will start pouring into financials shortly. Again, depends on your horizon. For my 401(k), and my son's 529, we're just buying stocks on sale. But the horizon is 15+ years. If you planned to buy a home and live in it for 10+ years, yeah, go for it. Otherwise, it may not be worth it. Personally, I'd do it, if I could get close to my purchase price on my current place. This would be to accomodate my expanding family (and have room for Mom). Live there 15 or so years until I could swing the Bud Foxian place in the city I always wanted.
GG Posted October 6, 2008 Posted October 6, 2008 Personally, I'd do it, if I could get close to my purchase price on my current place. This would be to accomodate my expanding family (and have room for Mom). Live there 15 or so years until I could swing the Bud Foxian place in the city I always wanted. If the '89-91 NY real estate crash is any guide, you'll have your Bud Fox East River view much sooner than that.
blzrul Posted October 6, 2008 Posted October 6, 2008 Most 401k's can already be tapped without penalty for this purpose, up to a certain amount anyway, but it has to be repaid. I see the point of "investing in yourself" and it's an interesting thought. However knowing people, if they had the money in their 401k and realized they could get at it without penalty, it wouldn't be long before people would start flipping houses ... almost "laddering them"....ending up with huge mortgages and no 401k. Kind of like where we are now. It's really a cultural thing to contend with on the human side, and on the lenders' part they have to realize that lending to greedy people who can't afford it is bad for their bottom line. Unfortunately the precedent set last week gives them 700 billion reasons to think otherwise....
Chef Jim Posted October 7, 2008 Posted October 7, 2008 Most 401k's can already be tapped without penalty for this purpose, up to a certain amount anyway, but it has to be repaid. I see the point of "investing in yourself" and it's an interesting thought. However knowing people, if they had the money in their 401k and realized they could get at it without penalty, it wouldn't be long before people would start flipping houses ... almost "laddering them"....ending up with huge mortgages and no 401k. Kind of like where we are now. It's really a cultural thing to contend with on the human side, and on the lenders' part they have to realize that lending to greedy people who can't afford it is bad for their bottom line. Unfortunately the precedent set last week gives them 700 billion reasons to think otherwise.... What's $10k going to get you and it's only for a first time home purchase? Why would you want to sink part of your retirement money into an illiquid asset? It may be fine when you're younger but how is it going to generate income (which is the sole purpose of your retirement accounts) when you're retired if it's in your home? Am I missing a step in your plan bills_fan?
bills_fan Posted October 7, 2008 Author Posted October 7, 2008 What's $10k going to get you and it's only for a first time home purchase? Why would you want to sink part of your retirement money into an illiquid asset? It may be fine when you're younger but how is it going to generate income (which is the sole purpose of your retirement accounts) when you're retired if it's in your home? Am I missing a step in your plan bills_fan? Chef, its not exactly "my plan" and I admit it has a lot of holes. Also, I don't necessarily think its a good idea. You raise a good point that I raise in my original post, regarding lack of liquidity later on. But as far as solutions to the current problem, this one is as good as any I've heard recently. It brings with it many other problems, but it does address the root cause of the current problem...falling housing prices.
Chef Jim Posted October 7, 2008 Posted October 7, 2008 Chef, its not exactly "my plan" and I admit it has a lot of holes. Also, I don't necessarily think its a good idea. You raise a good point that I raise in my original post, regarding lack of liquidity later on. But as far as solutions to the current problem, this one is as good as any I've heard recently. It brings with it many other problems, but it does address the root cause of the current problem...falling housing prices. Sorry, but I have a tendancy to respond to posts too quickly before I read the whole thing.
Gavin in Va Beach Posted October 7, 2008 Posted October 7, 2008 Chef, its not exactly "my plan" and I admit it has a lot of holes. Also, I don't necessarily think its a good idea. You raise a good point that I raise in my original post, regarding lack of liquidity later on. But as far as solutions to the current problem, this one is as good as any I've heard recently. It brings with it many other problems, but it does address the root cause of the current problem...falling housing prices. The root cause of the current problem is overinflated housing prices. F**k "propping up" the housing prices for a short-term fix because it will only make it all the worse when it's time to pay the piper. We Americans (primarily the scumbags in government and the executives in big business, but we consumers have to share the blame too) have created this mess because of short-term thinking. I'm sick of it and scared to death what it's going to mean to our children's future. It's time to stop acting like children with no patience, swallow the bitter pill, and put our financial house and economy back on solid ground.
John Adams Posted October 7, 2008 Posted October 7, 2008 Chef, its not exactly "my plan" and I admit it has a lot of holes. Also, I don't necessarily think its a good idea. You raise a good point that I raise in my original post, regarding lack of liquidity later on. But as far as solutions to the current problem, this one is as good as any I've heard recently. It brings with it many other problems, but it does address the root cause of the current problem...falling housing prices. It's a good thought experiment. I don't think that it would cure the problem if done because many wouldn't tap it (like me). But it would probably infuse some money into the mortgage market and make some difference. None of the solutions: suspending mtm, bailout, strengthening the dollar, this idea--none will fix all the problem. Combined, many of them will right the ship. The biggest difference between the current fiasco and certain earlier ones is how proactive the government and private sector is being in clearing the hurdle. Certain cooler heads are trying hard to take care of the problems so this doesn't last long. I heard several European commentators on Bloomberg today saying that what the US is doing puts the Eu countries to shame, and the EU countries are going to be much harder hit by this crisis, for many reasons, but not the least of which is that they have been slow to react. My econ background is The Wall Street Journal daily and Forbes weekly but the above makes sense to me.
GG Posted October 7, 2008 Posted October 7, 2008 I heard several European commentators on Bloomberg today saying that what the US is doing puts the Eu countries to shame, and the EU countries are going to be much harder hit by this crisis, for many reasons, but not the least of which is that they have been slow to react. The EU doesn't have a central bank ...
John Adams Posted October 7, 2008 Posted October 7, 2008 The EU doesn't have a central bank ... Right and worse, they share a common currency, which creates a ton of problems when managing this mess.
TPS Posted October 7, 2008 Posted October 7, 2008 The EU doesn't have a central bank ... I guess the European Central Bank should change its name to avoid any confusion then...
GG Posted October 7, 2008 Posted October 7, 2008 I guess the European Central Bank should change its name to avoid any confusion then... You're right, as it's a central bank in name only, it should remove its name to avoid any confusion. How about that Euro as a reserve currency?
bills_fan Posted October 7, 2008 Author Posted October 7, 2008 The root cause of the current problem is overinflated housing prices. F**k "propping up" the housing prices for a short-term fix because it will only make it all the worse when it's time to pay the piper. We Americans (primarily the scumbags in government and the executives in big business, but we consumers have to share the blame too) have created this mess because of short-term thinking. I'm sick of it and scared to death what it's going to mean to our children's future. It's time to stop acting like children with no patience, swallow the bitter pill, and put our financial house and economy back on solid ground. Problem is that no one, absent extreme circumstances, will sell a house if they lose their entire down payment and have to dig into their pockets at closing to pay off a mortgage. You will continue to have a frozen market, expecially for anyone who bought a house (prime, 30 year-fixed included) after 2003. Right now, if I sold my house (which has a 30 year fixed mortgage, with 21% down payment), I'd lose most of my down payment, and if I had to pay a broker to sell, would have to dig into my pocket at closing. So, you can forget selling and then buying another house. And this is not in California/Florida/Nevada, but NY, a more stable market. A home being one's largest asset (in most cases), until you stabilize housing prices, you will not see a healthy market of buyers and sellers. Sellers won't sell and take that kind of personal loss (which incidentally cannot even be written off your taxes, as a primary residence is excluded from long term capital loss calculations).
Gavin in Va Beach Posted October 7, 2008 Posted October 7, 2008 Problem is that no one, absent extreme circumstances, will sell a house if they lose their entire down payment and have to dig into their pockets at closing to pay off a mortgage. You will continue to have a frozen market, expecially for anyone who bought a house (prime, 30 year-fixed included) after 2003. Right now, if I sold my house (which has a 30 year fixed mortgage, with 21% down payment), I'd lose most of my down payment, and if I had to pay a broker to sell, would have to dig into my pocket at closing. So, you can forget selling and then buying another house. And this is not in California/Florida/Nevada, but NY, a more stable market. A home being one's largest asset (in most cases), until you stabilize housing prices, you will not see a healthy market of buyers and sellers. Sellers won't sell and take that kind of personal loss (which incidentally cannot even be written off your taxes, as a primary residence is excluded from long term capital loss calculations). File under 'Tough Schit'. When you say 'stabilize' you mean 'prop up'. Housing must correct to help fix this mess. If people overpaid and risk losing down payments when they want to sell, oh well. People bet wrong on stocks and lose money all the time, why is housing different? There were many people that recognized the housing bubble and put off buying a house at inflated prices and rented instead. Why should they be penalized for doing the sensible thing? Who are you going to convince to buy your 'stabilized' house with the funny money sub-prime mortgages gone and lenders tightening standards even for those with good credit? If we relax tapping 401ks for home purchases as you propose, do you really think the average schmo is going to feel confident in doing that to buy a house/asset that could still fall in value as much if not more than the 401k itself? Your best case scenario- Congress tells the people "treat your 401k like a normal savings account, empty the whole thing now if you want with no penalty to buy a house." The people respond and do just that and pump all that money back into the housing market. How long does that last until the 401k money slows to a trickle and people realize that, once again, housing has become overinflated? Aren't we now back where we started? Aren't more problems created because while people were pumping money into buying their house their 401ks were nearly empty and didn't realize the benefit from the market turnaround the once again inflated housing market helped create? Now housing values are falling again, the stock market is falling again, and people are getting doubly screwed because the value of their 'asset' is falling and the 401k account isn't anywhere near it should be for comfortable retirement. I still say it's time for long-term thinking and solutions. Short-term/instant gratification is what has gotten us into this mess, but I'm just a caveman, your world frightens and confuses me.
blzrul Posted October 7, 2008 Posted October 7, 2008 What's $10k going to get you and it's only for a first time home purchase? Why would you want to sink part of your retirement money into an illiquid asset? It may be fine when you're younger but how is it going to generate income (which is the sole purpose of your retirement accounts) when you're retired if it's in your home? Am I missing a step in your plan bills_fan? Uh, it wasn't my plan. And, who said $10k? Back in the 1990's my 401K allowed up to $45k loan or more for a primary residence...in WNY where real estate is cheap. And I wasn't endorsing it. I just didn't shoot it down. It's an interesting concept but I personally wouldn't consider it in my circumstances. Unlike you though I don't feel the need to decree that it's bad idea just because it doesn't work for me.
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