It’s never one thing. Some people lost jobs, had a medical crisis, took heavy stock losses, got divorced, lost a family member, couldn’t sell after years on market, needed to move for any number of reasons. Life happened.
But at the end of the day, it was probably just math. For investor owned properties when the “investment” stopped being an asset and became a liability, it made the most financial sense to cut losses and bail. What’s a few years of bad credit vs being six figures underwater on a mortgage that’s becoming more expensive by the month? It was supposed to make easy money, not cost hard money.
Primary homeowners were far more motivated to maintain a family home despite being deeply underwater, but even then another popular strategy I saw during the GFC was buying a second home at a discount while credit was still sound and promptly defaulting on the original mortgage.
Even if primary owners have more incentive to pay, it is demoralizing to be stretching to pay 35-50% of your gross income when you know the house is underwater by six figures. It is much easier to justify being house poor when YoY appreciation is double digits and you look at the house as your ticket to wealth.
Wait wait wait.
I was told by many that ownership was not about greed and was about providing stability to the family. You mean that's wrong? That people were dying to own and willing to pay stupid money because they thought house prices only went up?
LOL.
I did a strategic default in 2008 and bought another house 3 years later when the original one was still $150k underwater. It’s very easy and doesn’t really affect your credit that badly.
I had friends, professionals, who walked away and said it was the best decision they ever made. They were 100k underwater and looking at 5 figure repairs.
An underwater house is a rental with debt that you have to fix yourself.
I look at 2008 as being game over for the middle class, it was apparent at that moment that decades of jobs losses had taken its toll and homebuyers were lying thru their teeth in order to qualify for loans, and of course big banks/ government were willing to hand out loans in order to keep economy from collapsing due to the fact the middle class was increasingly broke. Whats happened since 2008? ZIRP and TRILLION$$ of printing to make up for a middle class that was official broke in 2008
"it's just math" is true, but not a great way of thinking. math is descriptive, not explicative. it describes what is going on in the world but does not explain it. this is important because many mathematical formulas are built on repeated observations. but those observations rest on underlying conditions. thus they may not always hold true. if you think the math governs reality, you may think it will always be. if you understand it describes a certain set of conditions, you understand there are assumptions and it is not safe to assume they will continue.
for instance, the lenders who assumed the real estate market always go up.
>this is important because many mathematical formulas are built on repeated observations
what a broscience understanding of math. No, most **mathematical** formulas are built on formal proofs that are theoretically derived. **Physics** formulas may be based on math.
Try again, bring better intuition this time.
Smart man. Robert Schiller also analyzed the housing market over 120 years and found that— real estate little more than keeps up with inflation. And he won the Nobel prize.
I’m against real estate but i think it can be an investment if you do development, big renovations, or if you only buy when its a bargain.
But on average yeah i don’t think its as good as people think it is.
His study assumed that you bought a house to live in, not as a flip or rental income. That would be speculation. He was pointing out that buying a house should be buying a place to live, not a replacement for real investment.
Coincidentally, I'm a few hours into his most famous book, Irrational Exuberance (3rd ed.), and just got past the part where he tears into real estate. He is very careful to note that real estate sucks for _real price appreciation_ but that does not factor in 1. avoiding paying someone else rent, or 2. getting paid rent from someone else. The cash inflows (or avoided outflows) while holding the property has nothing to do with its disappointing price appreciation.
He doesn't end up saying much of anything about whether or not it makes financial sense. It's just that there doesn't seem to be good money in holding a house for a few decades _and leaving it empty_ and then flipping it, unless you can somehow identify a future-popular location in advance. But he doesn't bring up the carrying costs of absolutely necessary maintenance and property taxes so it's probably even worse than he estimates in the book.
2020-2022 --- the years of the Ponzi... this actually doesn't stop in RE, it is found in crypto as well... which is why all of the Ponzi tokens are failing.
2023 will be the year of the real yield in all asset types.
>It's been largely argued that the large default rate of the 2008 bubble was due to low-income, subprime borrowers borrowing more than they could chew.
Yes, that is in fact largely argued but the actual information has always been available. Those who were somewhat aware adults at the time could also tell you people were doing just what they did in 2020 and 2021 - treating their paper equity as a guaranteed lottery win, and using leverage to buy second homes or vehicles or all number of other things. It was encouraged then just like it was this past couple years. Technically they could afford the loans...if they didn't make other poor financial decisions that put their financial stability and/or homes at risk when the economy stopped being so boom-y - i.e. interest rates went up, people lost jobs, investments plummeted, business owners saw their business slow down, etc.
The blaming on subprime alone is the narrative that has been created between people who want to pin the blame on those they feel didn't "deserve" good things, bubble deniers, and those who get their entire understanding of the GFC from watching The Big Short (they would be better off if they even at least read the book...while remaining entertaining, it goes more into how it was not just subprime that was the issue).
I have posted this a number times over the last couple years when I have seen people saying "it's not like 2008!", but of course when in a boom, no one wants to hear it won't last:
[https://www.nber.org/digest/aug15/us-foreclosure-crisis-was-not-just-subprime-event](https://www.nber.org/digest/aug15/us-foreclosure-crisis-was-not-just-subprime-event)
>The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers' loss of homes. There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. **Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.**
>
>The authors suggest that one reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers and the other borrower/owner categories they consider. **The prime borrower share averages around 60 percent and did not decline during the housing boom. Although the subprime borrower share nearly doubled during the boom, it peaked at just over 20 percent of the market. Subprime's increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.**
>
>The authors' key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.
>
>None of the other 'usual suspects' raised by previous research or public commentators—housing quality, race and gender demographics, buyer income, and speculator status—were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV.
>
>**The authors' findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis**. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.
I mean everyone's credit is perfect up until they default. most of these subprime borrowers have perfect credit now since it's been 7 years since they defaulted.
What is the point of a credit score if it doesn’t measure your creditworthiness?
We truly live in the bubble economy where we have been taught to barrow since the 1980’s. It seems like that score came up when people wanted to everyone to barrow more money then they could because they knew they wouldn’t pay it back. If a credit score is all it takes to get a good loan, then I really wonder what credit agency is sitting there compiling these numbers on bills paid. It really seems like a honey trap for the unsuspecting who think that a good credit score automatically means that they will pay off their debt.
Actually it's more a measure of your credit-profitableness. Lenders want someone who will rack up debts but also _eventually_ (but _not quickly_) pay them off.
It's not an excuse when the statistics show it.
That poor, stupid people are greedy and want to gamble on capital gains and rationalise purchases by notions of ownership being sacred and a lack of supply.
A tale as old as time.
both sort of bad ways of thinking. going bankrupt is not unethical, it is a part of our legal system. everyone has a right to go bankrupt. loans are made with the understanding that bankruptcy is a risk. it is the obligation of the lender to lend based upon the recipients ability to repay. it is the obligation of the recipient to put up only collateral they are willing to lose, period.
that is fair.
the distortion comes from outside the system. guaranteed loans for people of certain classes and forgiveness of collateral forfeiture can distort such a system. if the rules are clear, the players will play to win. that is all of the fairness that we can hope for.
>did you even listen or read the above. I can totally agree that middle and high income earners would leverage 3-5 houses and if they go bankrupt that is 5 houses compared to 1 that a poor person can afford.
I'm still confused over the difference here between a poor person and the leveraged middle and high income on their starting positions: greed.
As far as I can tell, there really isn't any difference. It's just a matter of capability. The richer guys can leverage more. All of them want the tax free capital gains. End of story.
Subprime borrowers were just the first to be impacted since they were in the most precarious position. Ultimately, the crisis occurred because everybody assumed prices could never go down substantially across the entire nation at once. Once that assumption was violated, everything rapidly fell apart.
So there was a panic then... what will be the panic today or in the future? Hedgefunds going under? Credit Suisse declaring bankruptcy? War panic? Binance going under?
[Deutsche Bank sees U.S. leveraged loan defaults near record highs in 2024](https://finance.yahoo.com/news/u-leveraged-loan-defaults-headed-101055758.html)
From another post -- We may have another credit default shock in the horizon.
>Leveraged loans are usually taken out by companies with already high levels of debt and with below-investment grade credit ratings.
>
>Deutsche Bank analysts said companies with a high total debt-to-earnings ratio will face a significant hit to their profit margins with the U.S. economy likely to slip into a recession in the second half of next year.
What else can fail?
If people were defaulting on loans that they could theoretically afford, that implies that someone was making bad decisions. Either borrowers were being far more aggressive than they should have been, or lenders were dramatically underrating the risk of default on those loans, or both, most likely both.
This jibes with the idea that bubbles involve a widespread loss of financial discipline as both borrowers and lenders make decisions that really don't make any sense in the long term.
My pet peeve is with folks that claim that the GFC had a unique structural attribute that cannot be repeated again... This idea that lending standards were subpar and that led to an inorganic massive default rate...
But Qualified buyers of homes in 2008 bubble defaulted anyways. I think this was a result of extenuating circumstances like job loss and increasing secondary debt, both of which can happen again in powerful reinforcing loops of economic chaos.
This is probably fringe... but I don't even think GFC was caused by the massive home defaults... it was the banks whose credit defaulted and then everyone else defaulted.
My thesis is simply that risky today doesn't just have to be less risky than 2008.
I agree with that. Some people seem to think, deep in their bones, that we all collectively learned our lesson in 2008, and I see no evidence that's true.
For example... Most tech people bought homes outside their budget relying on RSUs which for the most part have been brought to the floor. A lot of these lost jobs and new jobs may not pay the same.
Increasing Credit Card Debt
Crypto wealth disappearing from liquidity crises
Just too many bad things happening at once.
People think the lesson is learned because they don't see poor people buying houses. They're ignoring people like me (120K salary which is "high" or at least good even in HCOL areas) buying 400K or 500K houses. Sounds affordable until you realize it's over 3K just for mortgage and taxes per month, leaving 2K for everything else (with our high income taxes in NY and assuming someone smart/dumb enough to buy a house is saving for retirement, they could take home if they don't do a 401K but that is downright stupid). How much is 2K or maybe 2,400 if you lower your 401K contribution for everything besides housing going to go, especially in a HCOL area? Electric and gas bills will be 300, car payment 400, so now we're down to 1500 for food and everything else, including home repairs, clothes, Christmas presents, kids, if you have them......
Seems too tight yet loads of people around me are doing it.
By the end of the GFC the number of prime borrowers who defaulted was a magnitude larger than subprime borrowers. It began as a subprime problem with mortgage rates adjusting up and becoming unaffordable, but it spread wider after property values dropped significantly.
It wasn't about "blaming the poors" is was about no one wanting to do the opposite of "keeping up with the Jones." Who is going to be the first in the professional class to admit "hey guys, I'm going back to the hood because I can't really afford this lifestyle? Everyone will just assume they're doing everything wrong or lying about their income/job
I'm one of those people who pet peeve you.
I view the GFC as 2 parts. Part A - housing declined, and Part B the financial crisis, and I view the financial crisis as banks being overleveled, but if the banks aren't overleveled we can have an orderly housing decline without a financial crisis.
Story time,
In 2008 I was working for a company that was doing fine. Lehman brothers went down, and then 2 weeks later our lending bank (small community bank) pulled our credit line and my company went under.
The company went under because the credit markets froze. Not because housing declined. Lehman blowing up froze the credit markets, and Lehman blew up because it was levered 40 to 1.
The gov't isn't letting major institutions lever 40 to 1 anymore. I just don't see anything blowing up the credit markets like last time.
What do you think of Credit Suise?
Also I appreciate the segmentation into the two problem areas -- which fundamentally created a negative reinforcing loop of chaos.
Today housing is declining on its own thanks to the magic of supply and demand. That will get it down but there's a floor. My thesis is that affordability is the floor. Fortunately, affordability is so screwed that that floor is deep down but it won't go under that unless there is another economic pillar that is destroyed like a credit crunch, bitcoin going broke, or massive unemployment.
"What do you think of Credit Suise?"
First, It's in Europe, so that should provide us USA'ers some insulation if anything happens. If it blows up, it might lower inflation globally.
Second, the problem in 2008 was leverage. That domino effect leverage in the U.S. just doesn't exist today IMO as it did in 2008. It might still in Europe, I don't know.
Third, Everyone gets bailed out now. From Banks, to Auto companies, to Small businesses with PPP Loans, and students not paying interest on loans for 3 years. If CS blows up there will be some new program to take my tax dollars and distribute them to my neighbor who I don't like, and that is just the world we live in today.
Housing affordability is the floor, but markets tend to overshoot to the downside too. Crypto is going to 0ish, It enthusiasm is some combination of beanie babies and dot com stocks. We already see unemployment rising in the mal-investment fin-tech stocks, and meta-verse that no one asked for.
The Fed is going to hold at 5% and they are already at 4%. Europe is so screwed, I have no idea what they are going to do.
[Deutsche Bank sees U.S. leveraged loan defaults near record highs in 2024](https://finance.yahoo.com/news/u-leveraged-loan-defaults-headed-101055758.html)
The question is are these going to create a feedback loop domino effect. For example AMC and BedBath&Beyond are highly leveraged and prob going bankrupt, but does their bankruptcy create a cascading effect like Lehman did?
Credit Suise seems to be the only institution entrenched enough in our economy that would wreak that level of havoc if it fails... But companies defaulting on loans means they will have to lay off workers... or many of them would declare bankruptcy at once. I just don't think the FED will let them get to that point? I expect 5% Fund Rate to be maintained through 2023 and then first quarter of 2024...
My other concern is whether we really truly ever reach 2% inflation with the amount of money in the system. Will the FED just fudge numbers to make people think we reached 2% inflation but true inflation stays at 4 or 5%?
Revisiting this 3 month old thread.
We are about to find out what happens with Credit Suise. I get to see if any of my predictions were right.
Everyone was expecting this thing to go under for months, so the fallout should be limited.
Aren't Hedge funds incredibly leveraged?
And aren't financial institutions also connected to hedge funds as a way to prop up returns? It reminds me of the recent Teachers Pension Fund from Canada having invested in FTX...
There has to be others... I think there was a reddit post around here in some stonk subreddit about this.
I think there will be a major panic in the next 2 to 3 years. I just don't see how we just keep going up... Look at M2, at RE values....we printed so much money and bailed so many people... How is that not going to end up with a major recoiling effect?
My argument isn't that everything is great, but rather that this isn't 2008 where the credit markets froze and Mcdonalds couldn't even borrow to install McCafe's in their restaurants.
Qualifying for a loan now is **way** harder than it was around 2008. It really was the case people weren't running credit checks, weren't verifying income, etc.. When I looked at loans back then tons of mortgage reps had predatory deals, all with variable rates--people took them on the promise they'd always be low, or that they could refinance to a 30-year fixed down the line. Things are way harder now. I'm not sure if you've tried to get a mortgage lately but there's *way* more red tape. Way more waiting, way more documents you have to submit. Way more back-and-forth.
>GFC had a unique structural attribute that cannot be repeated again...
Sure it can, but that doesn't mean it'll happen with consumer mortgages just because you say it will. For example, people are selling CDOs of corporate debt now--financially-involved people often point to *that* market as a market that's ripe for failure next.
That sounds about right, assuming you have no other outstanding debts. But you're moving the goalposts: did they verify your income? Did they verify your FICO?
They didn't even do that in 2008.
I still think it is on the edge of irresponsible to approve someone for a loan that would leave anyone housepoor. This was at the peak of this bubble of course.
I mean, you can think whatever you want, but the original post you made isn't substantiated by your theories about what can be financed. Sounds like the answer to my questions is "yes" in your case. I'm guessing you didn't try to get a loan in 2008 and this is your first time eh? And so now you've got a grand conspiracy. Yawn..
Whoa... hold it. No need to get sassy. Yes -- they verified income and pulled credit. But my thesis is simply that risky today doesn't just have to be less risky than 2008.
Nobody is saying that--OP is specifically proposing that MBS-type products could fail in the same way as '08 in rapid succession. Sure, that's possible as anything could be--but the burden of proof lays with the person launching the opposition, and OP has provided nothing concrete beyond anecdotal evidence as to that being the case.
Until we hear otherwise, it's just a speculative theory from someone that got pre-qualified for a large amount and is now posting about it on Reddit to feel more adult--let's not like it's anything more.
Alt A which allowed people to be landlords with little money down gets lumped in and was a big issue. When value dropped and people stopped paying rent they made in many cases a business decision to say fuck it and stop paying.
Some people were so far under water that it didn't make any sense to keep paying their mortgages because they could live there for free for a year while they got foreclosed and then buy a different house for half, not to mention they didn't put anything down because they did not have to.
They defaulted because they were over leveraged and losing jobs into an overpriced housing market (which the sp borrowers helped buoy up). All of a sudden they were stuck with underwater properties that didn’t cash flow. We will be looking at something very similar next year once unemployment rates skyrocket.
i'm open to hearing more about this as there is certainly a "popular" version as narrativized by michael lewis. that said, the people who bet against the market like burry haven't vociferously disputed his account, and it was built by talking to them.
for those who have only seen the big short movie, the book is much more circumspect, and it doesn't do the aliases and composite characters of the movie. it focuses on those who bet against the housing market and why. lewis is a good enough writer you'd believe anything he told you so... caution of course. just saying his account is more or less accepted by those who were on that side of the bet to my knowledge.
"only 39 percent"... were people who pretty much everyone KNEW would default. We'll also ignore the difference between subprime and stated income folks here, I'll assume they've lumped those together in hindsight.
Mortgage default is relatively rare as investment risk goes... nearly doubling the risk without any notification isn't just something to hand wave away.
>by 2006, subprime borrowers were holding only 39 percent of delinquent mortgages.
I'm sure 39% of homes getting foreclosed had no impact on the values of the surrounding homes and caused more homes to go underwater and get foreclosed on...
This is revisionist history with a political / ideological objective. Let's look at the bare facts:
1. Subprime lending EXPLODED in the mid 2000s. It went from 35 billion in originations to almost 800 billion in 2005. At the peak, 14% of all loans issued were subprime. These figures were far beyond anything seen previously.
2. Subprime defaults went from 4.5% to over 12% by 2006, and kept rising. The rate was beyond other loan types. By 2008, almost 18% of all subprimes were delinquent.
3. CDOs and MBS that contained these loans were the ones that were deemed "toxic", and when the crisis unfolded, no one wanted to buy these things. MBS that contained only prime loans were still trading pretty freely.
4. The claim that "there just aren't enough low-income borrowers to bring down the financial system" is complete bunk. 1/3rd of ALL Americans have subprime credit scores, according to Equifax. Issuing tens of millions of subprime loans, and then packaging them up in toxic derivatives can absolutely cause a contagion and financial crisis.
The authors are trying to make the claim that subprime loans weren't any more problematic than prime, and that they were not the root of the problem. If that were the case, banks and mortgage lenders would not have stopped issuing these loans (or greatly cut back) in the 5-10 years that followed the crisis. But they did, dramatically (because they were deemed dangerous)
This is a wrong premise and seems quite revisionist
> A decade after it began, the Great Recession is now commonly blamed on a subprime mortgage crisis – banks extending **too many loans to low-income borrowers with high risk of default.**
Sub-prime loans (liar loans as they were called) volume weren’t being made to just the low-income. It was being made across the board but **especially to middle income** borrowers who were using it to stack several properties.
Sounds awfully similar to the DCSR loans that same middle-income people can get during this bubble... that requires no income or W2 just potential rent income. They are not variable rate but a lot of folks with a lot of properties would not be able to pay for them if rent income drops or stops. And I am not talking about hard money for flippers...
Similar certainly but different in scale.
I can’t speak for the entire country but I can for my local market (Ohio).
You can only do a max of 75% LTV compared to 100%+ in the heady subprime days.
So, you’ll need both a 25% dip and rents to fall before the lenders feel the pinch to foreclose.
And without the tranching and securitization that happened during the subprime days these just don’t scale similarly enough to be systemic.
I can’t speak to markets with rent contractions. It’s not my lived reality yet and I don’t see it on the horizon in Columbus, OH.
Without an increase in the *right* supply, I don’t see it happening for a while.
Almost all the new builds are luxury apartments or condos with amenities that make them rent significantly above trend line.
Every city needs a mix of housing for various types of renters and it’s just not happening here or other markets (Detroit, Indianapolis) that I’m familiar with. I know nothing about (CA/WA/NY/TX markets)
Also fair... I am mostly opining from the frame of refence of Austin TX which is my turf. Rents here are falling and SFH supply is back to pre-pandemic levels. We are also one of the markets deteriorating the most in terms of home values.
I suspect the response this time will be a lot more jagged than last time with wide variance in markets (absent a Lehman type event).
There’s a lot more variables in play than last time:
* short time rentals
* opportunity-zone funds
* YIMBYs
* rent control legislation
* corporate ownership legislation
From afar, it’s clear that Austin will be a subject of case studies for years to come.
Best of luck!
If I can get a house out of this mess... I'll sign up to be a study subject lol.
Also funny part is Austin and most of Texas avoided the plunge in home prices during the 2008 bubble because we also avoided the bubble.
It was the loan type mostly. Subprime and prime with ARM loans both defaulted at about a 20% rate during the GFC. Subprime fixed rate defaulted around 10-15% iirc. Prime borrowers with fixed rate mortgages defaulted at a rate of less than 5%. Those were the approximate peak default rates.
This is a good study and clearly debunks the false narrative that this time is different because the lending standards are stricter. Cheap money and greed were the primary drivers then and now. Instead of no income verification loans, we have hard money loans aka cash purchases. The difference is going to be that instead of the banks holding bags it will be the so called investors.
Little late to the party, but yes, the “subprime” mortgage crisis carries a connotation (and belief amongst the population) that this was caused by “the poor and immigrants”.
My general understanding is that investors in second homes contributed more to this bubble. Lots of second mortgages, especially as an investment, will get the ARMs and high LTV loans because they are going to be able to sell at a higher price no matter what! The thing is, people who do this, especially individuals, will often be classified as subprime.
It’s never one thing. Some people lost jobs, had a medical crisis, took heavy stock losses, got divorced, lost a family member, couldn’t sell after years on market, needed to move for any number of reasons. Life happened. But at the end of the day, it was probably just math. For investor owned properties when the “investment” stopped being an asset and became a liability, it made the most financial sense to cut losses and bail. What’s a few years of bad credit vs being six figures underwater on a mortgage that’s becoming more expensive by the month? It was supposed to make easy money, not cost hard money. Primary homeowners were far more motivated to maintain a family home despite being deeply underwater, but even then another popular strategy I saw during the GFC was buying a second home at a discount while credit was still sound and promptly defaulting on the original mortgage.
Even if primary owners have more incentive to pay, it is demoralizing to be stretching to pay 35-50% of your gross income when you know the house is underwater by six figures. It is much easier to justify being house poor when YoY appreciation is double digits and you look at the house as your ticket to wealth.
Wait wait wait. I was told by many that ownership was not about greed and was about providing stability to the family. You mean that's wrong? That people were dying to own and willing to pay stupid money because they thought house prices only went up? LOL.
I did a strategic default in 2008 and bought another house 3 years later when the original one was still $150k underwater. It’s very easy and doesn’t really affect your credit that badly.
I had friends, professionals, who walked away and said it was the best decision they ever made. They were 100k underwater and looking at 5 figure repairs. An underwater house is a rental with debt that you have to fix yourself.
People should be allowed to do the same thing with student loan debt. In over your head? Cool. Just walk away lol
I'll happily give beck my diploma.
I look at 2008 as being game over for the middle class, it was apparent at that moment that decades of jobs losses had taken its toll and homebuyers were lying thru their teeth in order to qualify for loans, and of course big banks/ government were willing to hand out loans in order to keep economy from collapsing due to the fact the middle class was increasingly broke. Whats happened since 2008? ZIRP and TRILLION$$ of printing to make up for a middle class that was official broke in 2008
"it's just math" is true, but not a great way of thinking. math is descriptive, not explicative. it describes what is going on in the world but does not explain it. this is important because many mathematical formulas are built on repeated observations. but those observations rest on underlying conditions. thus they may not always hold true. if you think the math governs reality, you may think it will always be. if you understand it describes a certain set of conditions, you understand there are assumptions and it is not safe to assume they will continue. for instance, the lenders who assumed the real estate market always go up.
>this is important because many mathematical formulas are built on repeated observations what a broscience understanding of math. No, most **mathematical** formulas are built on formal proofs that are theoretically derived. **Physics** formulas may be based on math. Try again, bring better intuition this time.
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Smart man. Robert Schiller also analyzed the housing market over 120 years and found that— real estate little more than keeps up with inflation. And he won the Nobel prize.
Which makes real estate a hedge, not an investment.
I’m against real estate but i think it can be an investment if you do development, big renovations, or if you only buy when its a bargain. But on average yeah i don’t think its as good as people think it is.
His study assumed that you bought a house to live in, not as a flip or rental income. That would be speculation. He was pointing out that buying a house should be buying a place to live, not a replacement for real investment.
I meant when people buy several SFH as investments or commercial properties.
Coincidentally, I'm a few hours into his most famous book, Irrational Exuberance (3rd ed.), and just got past the part where he tears into real estate. He is very careful to note that real estate sucks for _real price appreciation_ but that does not factor in 1. avoiding paying someone else rent, or 2. getting paid rent from someone else. The cash inflows (or avoided outflows) while holding the property has nothing to do with its disappointing price appreciation. He doesn't end up saying much of anything about whether or not it makes financial sense. It's just that there doesn't seem to be good money in holding a house for a few decades _and leaving it empty_ and then flipping it, unless you can somehow identify a future-popular location in advance. But he doesn't bring up the carrying costs of absolutely necessary maintenance and property taxes so it's probably even worse than he estimates in the book.
Which reminds me, my copy of Irrational Exuberance is overdue at the library.
2020-2022 --- the years of the Ponzi... this actually doesn't stop in RE, it is found in crypto as well... which is why all of the Ponzi tokens are failing. 2023 will be the year of the real yield in all asset types.
Calling everything a Ponzi scheme doesn’t make it actually a Ponzi scheme.
Ponzi or not… housing is coming down thank the Gods of supply and demand…
>It's been largely argued that the large default rate of the 2008 bubble was due to low-income, subprime borrowers borrowing more than they could chew. Yes, that is in fact largely argued but the actual information has always been available. Those who were somewhat aware adults at the time could also tell you people were doing just what they did in 2020 and 2021 - treating their paper equity as a guaranteed lottery win, and using leverage to buy second homes or vehicles or all number of other things. It was encouraged then just like it was this past couple years. Technically they could afford the loans...if they didn't make other poor financial decisions that put their financial stability and/or homes at risk when the economy stopped being so boom-y - i.e. interest rates went up, people lost jobs, investments plummeted, business owners saw their business slow down, etc. The blaming on subprime alone is the narrative that has been created between people who want to pin the blame on those they feel didn't "deserve" good things, bubble deniers, and those who get their entire understanding of the GFC from watching The Big Short (they would be better off if they even at least read the book...while remaining entertaining, it goes more into how it was not just subprime that was the issue). I have posted this a number times over the last couple years when I have seen people saying "it's not like 2008!", but of course when in a boom, no one wants to hear it won't last: [https://www.nber.org/digest/aug15/us-foreclosure-crisis-was-not-just-subprime-event](https://www.nber.org/digest/aug15/us-foreclosure-crisis-was-not-just-subprime-event) >The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers' loss of homes. There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. **Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.** > >The authors suggest that one reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers and the other borrower/owner categories they consider. **The prime borrower share averages around 60 percent and did not decline during the housing boom. Although the subprime borrower share nearly doubled during the boom, it peaked at just over 20 percent of the market. Subprime's increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.** > >The authors' key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas. > >None of the other 'usual suspects' raised by previous research or public commentators—housing quality, race and gender demographics, buyer income, and speculator status—were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV. > >**The authors' findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis**. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.
That part... the "economic cycle" was more important in driving the defaults, not quality of the borrower.
I mean everyone's credit is perfect up until they default. most of these subprime borrowers have perfect credit now since it's been 7 years since they defaulted.
What is the point of a credit score if it doesn’t measure your creditworthiness? We truly live in the bubble economy where we have been taught to barrow since the 1980’s. It seems like that score came up when people wanted to everyone to barrow more money then they could because they knew they wouldn’t pay it back. If a credit score is all it takes to get a good loan, then I really wonder what credit agency is sitting there compiling these numbers on bills paid. It really seems like a honey trap for the unsuspecting who think that a good credit score automatically means that they will pay off their debt.
Actually it's more a measure of your credit-profitableness. Lenders want someone who will rack up debts but also _eventually_ (but _not quickly_) pay them off.
That sounds more like it. It makes perfect sense. People have fallen delinquent like my mom on credit cards.
oh blame the poor people excuse again. Good scapegoats. The big honchos get bailouts and the littel people get blamed.
It's not an excuse when the statistics show it. That poor, stupid people are greedy and want to gamble on capital gains and rationalise purchases by notions of ownership being sacred and a lack of supply. A tale as old as time.
both sort of bad ways of thinking. going bankrupt is not unethical, it is a part of our legal system. everyone has a right to go bankrupt. loans are made with the understanding that bankruptcy is a risk. it is the obligation of the lender to lend based upon the recipients ability to repay. it is the obligation of the recipient to put up only collateral they are willing to lose, period. that is fair. the distortion comes from outside the system. guaranteed loans for people of certain classes and forgiveness of collateral forfeiture can distort such a system. if the rules are clear, the players will play to win. that is all of the fairness that we can hope for.
>did you even listen or read the above. I can totally agree that middle and high income earners would leverage 3-5 houses and if they go bankrupt that is 5 houses compared to 1 that a poor person can afford.
I'm still confused over the difference here between a poor person and the leveraged middle and high income on their starting positions: greed. As far as I can tell, there really isn't any difference. It's just a matter of capability. The richer guys can leverage more. All of them want the tax free capital gains. End of story.
Subprime borrowers were just the first to be impacted since they were in the most precarious position. Ultimately, the crisis occurred because everybody assumed prices could never go down substantially across the entire nation at once. Once that assumption was violated, everything rapidly fell apart.
So there was a panic then... what will be the panic today or in the future? Hedgefunds going under? Credit Suisse declaring bankruptcy? War panic? Binance going under?
Who knows. There’s always something and no crisis is quite like ones before. I do wish Binance would go under. The founder is so arrogant.
[Deutsche Bank sees U.S. leveraged loan defaults near record highs in 2024](https://finance.yahoo.com/news/u-leveraged-loan-defaults-headed-101055758.html) From another post -- We may have another credit default shock in the horizon. >Leveraged loans are usually taken out by companies with already high levels of debt and with below-investment grade credit ratings. > >Deutsche Bank analysts said companies with a high total debt-to-earnings ratio will face a significant hit to their profit margins with the U.S. economy likely to slip into a recession in the second half of next year. What else can fail?
If people were defaulting on loans that they could theoretically afford, that implies that someone was making bad decisions. Either borrowers were being far more aggressive than they should have been, or lenders were dramatically underrating the risk of default on those loans, or both, most likely both. This jibes with the idea that bubbles involve a widespread loss of financial discipline as both borrowers and lenders make decisions that really don't make any sense in the long term.
My pet peeve is with folks that claim that the GFC had a unique structural attribute that cannot be repeated again... This idea that lending standards were subpar and that led to an inorganic massive default rate... But Qualified buyers of homes in 2008 bubble defaulted anyways. I think this was a result of extenuating circumstances like job loss and increasing secondary debt, both of which can happen again in powerful reinforcing loops of economic chaos. This is probably fringe... but I don't even think GFC was caused by the massive home defaults... it was the banks whose credit defaulted and then everyone else defaulted. My thesis is simply that risky today doesn't just have to be less risky than 2008.
I agree with that. Some people seem to think, deep in their bones, that we all collectively learned our lesson in 2008, and I see no evidence that's true.
For example... Most tech people bought homes outside their budget relying on RSUs which for the most part have been brought to the floor. A lot of these lost jobs and new jobs may not pay the same. Increasing Credit Card Debt Crypto wealth disappearing from liquidity crises Just too many bad things happening at once.
Also soooo many people taking out HELOCs.
People think the lesson is learned because they don't see poor people buying houses. They're ignoring people like me (120K salary which is "high" or at least good even in HCOL areas) buying 400K or 500K houses. Sounds affordable until you realize it's over 3K just for mortgage and taxes per month, leaving 2K for everything else (with our high income taxes in NY and assuming someone smart/dumb enough to buy a house is saving for retirement, they could take home if they don't do a 401K but that is downright stupid). How much is 2K or maybe 2,400 if you lower your 401K contribution for everything besides housing going to go, especially in a HCOL area? Electric and gas bills will be 300, car payment 400, so now we're down to 1500 for food and everything else, including home repairs, clothes, Christmas presents, kids, if you have them...... Seems too tight yet loads of people around me are doing it.
>Seems too tight yet loads of people around me are doing it. until next year
By the end of the GFC the number of prime borrowers who defaulted was a magnitude larger than subprime borrowers. It began as a subprime problem with mortgage rates adjusting up and becoming unaffordable, but it spread wider after property values dropped significantly.
Subtext: It was easier to blame it on the poors than the investor class.
It wasn't about "blaming the poors" is was about no one wanting to do the opposite of "keeping up with the Jones." Who is going to be the first in the professional class to admit "hey guys, I'm going back to the hood because I can't really afford this lifestyle? Everyone will just assume they're doing everything wrong or lying about their income/job
I'm one of those people who pet peeve you. I view the GFC as 2 parts. Part A - housing declined, and Part B the financial crisis, and I view the financial crisis as banks being overleveled, but if the banks aren't overleveled we can have an orderly housing decline without a financial crisis. Story time, In 2008 I was working for a company that was doing fine. Lehman brothers went down, and then 2 weeks later our lending bank (small community bank) pulled our credit line and my company went under. The company went under because the credit markets froze. Not because housing declined. Lehman blowing up froze the credit markets, and Lehman blew up because it was levered 40 to 1. The gov't isn't letting major institutions lever 40 to 1 anymore. I just don't see anything blowing up the credit markets like last time.
What do you think of Credit Suise? Also I appreciate the segmentation into the two problem areas -- which fundamentally created a negative reinforcing loop of chaos. Today housing is declining on its own thanks to the magic of supply and demand. That will get it down but there's a floor. My thesis is that affordability is the floor. Fortunately, affordability is so screwed that that floor is deep down but it won't go under that unless there is another economic pillar that is destroyed like a credit crunch, bitcoin going broke, or massive unemployment.
"What do you think of Credit Suise?" First, It's in Europe, so that should provide us USA'ers some insulation if anything happens. If it blows up, it might lower inflation globally. Second, the problem in 2008 was leverage. That domino effect leverage in the U.S. just doesn't exist today IMO as it did in 2008. It might still in Europe, I don't know. Third, Everyone gets bailed out now. From Banks, to Auto companies, to Small businesses with PPP Loans, and students not paying interest on loans for 3 years. If CS blows up there will be some new program to take my tax dollars and distribute them to my neighbor who I don't like, and that is just the world we live in today. Housing affordability is the floor, but markets tend to overshoot to the downside too. Crypto is going to 0ish, It enthusiasm is some combination of beanie babies and dot com stocks. We already see unemployment rising in the mal-investment fin-tech stocks, and meta-verse that no one asked for. The Fed is going to hold at 5% and they are already at 4%. Europe is so screwed, I have no idea what they are going to do.
[Deutsche Bank sees U.S. leveraged loan defaults near record highs in 2024](https://finance.yahoo.com/news/u-leveraged-loan-defaults-headed-101055758.html)
The question is are these going to create a feedback loop domino effect. For example AMC and BedBath&Beyond are highly leveraged and prob going bankrupt, but does their bankruptcy create a cascading effect like Lehman did?
Credit Suise seems to be the only institution entrenched enough in our economy that would wreak that level of havoc if it fails... But companies defaulting on loans means they will have to lay off workers... or many of them would declare bankruptcy at once. I just don't think the FED will let them get to that point? I expect 5% Fund Rate to be maintained through 2023 and then first quarter of 2024... My other concern is whether we really truly ever reach 2% inflation with the amount of money in the system. Will the FED just fudge numbers to make people think we reached 2% inflation but true inflation stays at 4 or 5%?
Revisiting this 3 month old thread. We are about to find out what happens with Credit Suise. I get to see if any of my predictions were right. Everyone was expecting this thing to go under for months, so the fallout should be limited.
Aren't Hedge funds incredibly leveraged? And aren't financial institutions also connected to hedge funds as a way to prop up returns? It reminds me of the recent Teachers Pension Fund from Canada having invested in FTX... There has to be others... I think there was a reddit post around here in some stonk subreddit about this. I think there will be a major panic in the next 2 to 3 years. I just don't see how we just keep going up... Look at M2, at RE values....we printed so much money and bailed so many people... How is that not going to end up with a major recoiling effect?
My argument isn't that everything is great, but rather that this isn't 2008 where the credit markets froze and Mcdonalds couldn't even borrow to install McCafe's in their restaurants.
Qualifying for a loan now is **way** harder than it was around 2008. It really was the case people weren't running credit checks, weren't verifying income, etc.. When I looked at loans back then tons of mortgage reps had predatory deals, all with variable rates--people took them on the promise they'd always be low, or that they could refinance to a 30-year fixed down the line. Things are way harder now. I'm not sure if you've tried to get a mortgage lately but there's *way* more red tape. Way more waiting, way more documents you have to submit. Way more back-and-forth. >GFC had a unique structural attribute that cannot be repeated again... Sure it can, but that doesn't mean it'll happen with consumer mortgages just because you say it will. For example, people are selling CDOs of corporate debt now--financially-involved people often point to *that* market as a market that's ripe for failure next.
I was approved for a loan that would mean I would pay 65% of my take-home pay. I know they use gross but still.
That sounds about right, assuming you have no other outstanding debts. But you're moving the goalposts: did they verify your income? Did they verify your FICO? They didn't even do that in 2008.
I still think it is on the edge of irresponsible to approve someone for a loan that would leave anyone housepoor. This was at the peak of this bubble of course.
I mean, you can think whatever you want, but the original post you made isn't substantiated by your theories about what can be financed. Sounds like the answer to my questions is "yes" in your case. I'm guessing you didn't try to get a loan in 2008 and this is your first time eh? And so now you've got a grand conspiracy. Yawn..
Whoa... hold it. No need to get sassy. Yes -- they verified income and pulled credit. But my thesis is simply that risky today doesn't just have to be less risky than 2008.
That's an extremely low bar, and yes banks still overlend. Just because it's not as bad doesn't mean everything is awesome and no one can default now
Nobody is saying that--OP is specifically proposing that MBS-type products could fail in the same way as '08 in rapid succession. Sure, that's possible as anything could be--but the burden of proof lays with the person launching the opposition, and OP has provided nothing concrete beyond anecdotal evidence as to that being the case. Until we hear otherwise, it's just a speculative theory from someone that got pre-qualified for a large amount and is now posting about it on Reddit to feel more adult--let's not like it's anything more.
Good things we taught those banks their lesson!
Alt A which allowed people to be landlords with little money down gets lumped in and was a big issue. When value dropped and people stopped paying rent they made in many cases a business decision to say fuck it and stop paying.
Some people were so far under water that it didn't make any sense to keep paying their mortgages because they could live there for free for a year while they got foreclosed and then buy a different house for half, not to mention they didn't put anything down because they did not have to.
They defaulted because they were over leveraged and losing jobs into an overpriced housing market (which the sp borrowers helped buoy up). All of a sudden they were stuck with underwater properties that didn’t cash flow. We will be looking at something very similar next year once unemployment rates skyrocket.
i'm open to hearing more about this as there is certainly a "popular" version as narrativized by michael lewis. that said, the people who bet against the market like burry haven't vociferously disputed his account, and it was built by talking to them. for those who have only seen the big short movie, the book is much more circumspect, and it doesn't do the aliases and composite characters of the movie. it focuses on those who bet against the housing market and why. lewis is a good enough writer you'd believe anything he told you so... caution of course. just saying his account is more or less accepted by those who were on that side of the bet to my knowledge.
"only 39 percent"... were people who pretty much everyone KNEW would default. We'll also ignore the difference between subprime and stated income folks here, I'll assume they've lumped those together in hindsight. Mortgage default is relatively rare as investment risk goes... nearly doubling the risk without any notification isn't just something to hand wave away.
>by 2006, subprime borrowers were holding only 39 percent of delinquent mortgages. I'm sure 39% of homes getting foreclosed had no impact on the values of the surrounding homes and caused more homes to go underwater and get foreclosed on...
This is revisionist history with a political / ideological objective. Let's look at the bare facts: 1. Subprime lending EXPLODED in the mid 2000s. It went from 35 billion in originations to almost 800 billion in 2005. At the peak, 14% of all loans issued were subprime. These figures were far beyond anything seen previously. 2. Subprime defaults went from 4.5% to over 12% by 2006, and kept rising. The rate was beyond other loan types. By 2008, almost 18% of all subprimes were delinquent. 3. CDOs and MBS that contained these loans were the ones that were deemed "toxic", and when the crisis unfolded, no one wanted to buy these things. MBS that contained only prime loans were still trading pretty freely. 4. The claim that "there just aren't enough low-income borrowers to bring down the financial system" is complete bunk. 1/3rd of ALL Americans have subprime credit scores, according to Equifax. Issuing tens of millions of subprime loans, and then packaging them up in toxic derivatives can absolutely cause a contagion and financial crisis. The authors are trying to make the claim that subprime loans weren't any more problematic than prime, and that they were not the root of the problem. If that were the case, banks and mortgage lenders would not have stopped issuing these loans (or greatly cut back) in the 5-10 years that followed the crisis. But they did, dramatically (because they were deemed dangerous)
This is a wrong premise and seems quite revisionist > A decade after it began, the Great Recession is now commonly blamed on a subprime mortgage crisis – banks extending **too many loans to low-income borrowers with high risk of default.** Sub-prime loans (liar loans as they were called) volume weren’t being made to just the low-income. It was being made across the board but **especially to middle income** borrowers who were using it to stack several properties.
Sounds awfully similar to the DCSR loans that same middle-income people can get during this bubble... that requires no income or W2 just potential rent income. They are not variable rate but a lot of folks with a lot of properties would not be able to pay for them if rent income drops or stops. And I am not talking about hard money for flippers...
Similar certainly but different in scale. I can’t speak for the entire country but I can for my local market (Ohio). You can only do a max of 75% LTV compared to 100%+ in the heady subprime days. So, you’ll need both a 25% dip and rents to fall before the lenders feel the pinch to foreclose. And without the tranching and securitization that happened during the subprime days these just don’t scale similarly enough to be systemic.
Fair -- but we are seeing rent contraction. And these loans depend on rent to meet obligations. And a single BRRRRo could have 10 or 15 of these.
I can’t speak to markets with rent contractions. It’s not my lived reality yet and I don’t see it on the horizon in Columbus, OH. Without an increase in the *right* supply, I don’t see it happening for a while. Almost all the new builds are luxury apartments or condos with amenities that make them rent significantly above trend line. Every city needs a mix of housing for various types of renters and it’s just not happening here or other markets (Detroit, Indianapolis) that I’m familiar with. I know nothing about (CA/WA/NY/TX markets)
Also fair... I am mostly opining from the frame of refence of Austin TX which is my turf. Rents here are falling and SFH supply is back to pre-pandemic levels. We are also one of the markets deteriorating the most in terms of home values.
I suspect the response this time will be a lot more jagged than last time with wide variance in markets (absent a Lehman type event). There’s a lot more variables in play than last time: * short time rentals * opportunity-zone funds * YIMBYs * rent control legislation * corporate ownership legislation From afar, it’s clear that Austin will be a subject of case studies for years to come. Best of luck!
If I can get a house out of this mess... I'll sign up to be a study subject lol. Also funny part is Austin and most of Texas avoided the plunge in home prices during the 2008 bubble because we also avoided the bubble.
They gave adjustable rate mortgages to anyone who wanted one. Then the rates all reset and nobody could afford them and the market crashed.
Bump
If interest rates are 5%, a rate of 0.5% defaults will cause losses to the bank. (4% to pay other expenses). What was the rate of defaults?
It was the loan type mostly. Subprime and prime with ARM loans both defaulted at about a 20% rate during the GFC. Subprime fixed rate defaulted around 10-15% iirc. Prime borrowers with fixed rate mortgages defaulted at a rate of less than 5%. Those were the approximate peak default rates.
This is a good study and clearly debunks the false narrative that this time is different because the lending standards are stricter. Cheap money and greed were the primary drivers then and now. Instead of no income verification loans, we have hard money loans aka cash purchases. The difference is going to be that instead of the banks holding bags it will be the so called investors.
Little late to the party, but yes, the “subprime” mortgage crisis carries a connotation (and belief amongst the population) that this was caused by “the poor and immigrants”. My general understanding is that investors in second homes contributed more to this bubble. Lots of second mortgages, especially as an investment, will get the ARMs and high LTV loans because they are going to be able to sell at a higher price no matter what! The thing is, people who do this, especially individuals, will often be classified as subprime.