Thursday, September 10, 2009
What is the Main Cause of Residential Foreclosures?
The foreclosure problem in American is not just subprime mortgages. True, banks have been holding on to their foreclosed properties for months, but now they're getting ready to release them onto the market, which could depress prices for existing homeowners, further driving them underwater. But that's not what I'm talking about.
There are huge tidal waves of defaults on option arm, alt-a, and other types of loans coming (see this and this).
But even that is arguably not the main problem.
Perhaps the biggest problem is that the crash in real estate and rising unemployment together form a positive feedback loop. As McClatchy and the Associated Press note, foreclosures rise as jobs and income drop.
As former chief IMF economist Simon Johnson points out, there is a vicious cycle also exists between unemployment and property foreclosures:
Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.
Indeed, the Washington Post notes:
The country's growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind.
And see this.
Some economists give 5% as the magic number: when unemployment declines to 5%, then unemployment will no longer be such a huge contributor to foreclosures.
But Moody's forecasts that unemployment will not go back down to 5% until 2014.
Similarly, the the chief economist for the U.S. Chamber of Commerce - Martin Regalia - "thinks that it could be five years before the U.S. economy generates enough jobs to overcome those lost and to employ the new workers entering the labor force", according to McClatchy.
Indeed, unemployment could be a problem for many years to come.
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When I read aphorisms of the economic genre like "unemployment is a lagging indicator," as is represented here in this article (like so many others), -and from elsewhere, - "the market is forward-looking," I don't get at all confused. I instead feel my intuition about all human knowledge being reaffirmed at the gut level.
ReplyDeleteI feel exactly the same reaffirmation of my -dyed in the wool- assessment of all human knowledge -exactly the same as the day the whole country watched Honest Hank Paulson (Treasury Secretary -de jour-) do his very best imitation of Redd Foxx, "Oh, this is the BIG ONE, Elizabeth!" http://preview.tinyurl.com/n2jppp
And that's my point.
The article asks, "What is the Main Cause of Residential Foreclosures?"
The main causes are -that human beings are better at acting, than they are at the assessing reality.
The whole mortgage act is a good example. Human beings regularly sign up for and banks proffer the legal misdeeds that say, we can monthly pay a fixed sum of money -we currently do not have- over 30 years.
It's a lie. Everyone involved knows it. But all the human actors are going to play along anyway.
Everyone thinks they know what they are doing because they can make certain things happen based upon their acting out -their part.
But this is not knowledge.
Knowledge is understanding the consequences of your actions too.
The banks are culpable, -but they cannot be at fault, because banks are not conscious entities.
Human beings have a very difficult time differentiating between conscious entities from unconscious entities.
Banks, -like the state-, are unconscious entities.
Neither the bank or the state can be faulted, though each may be culpable, in some -very- limited sense.
The distinction is important for realizing a viable solution. We will not see any viable solution though. We will see the matter get glossed over and patched up, Mickey Mouse.
The solution comes from understanding, all bureaucracies (Banks, the state, etc, etc.) are categorically immoral.
Why are bureaucracies immoral?
Because bureaucracies are like Greek Gods. They are quite nearly immortal. No one can withstand them, for (for all intents and purposes) they cannot be killed.
Human beings create these near-immortal, unconscious monstrosities that lord over and tyrannize all of us.
These unconscious, unthinking, near-immortal bureaucracies can even drag us into a court (yet another bureaucracy).
All these bureaucracies are immoral because, by creating them in the present (which is the only place they can be created and given immortality) we are plaguing the future with their immortal tyranny.
It is categorically immoral to detract from the potential of life in the future.
But human beings, being little more than sentient, scientific automatons have no free will with which they might slay these immortal monsters.
No... We are too busy watching yet another immortal monster being created -in the name of health care reform.
We all will hear justifications for this new health care bureaucracy being created -by those who have been deceived into believing this new bureaucracy will do something -for them.
It will too. It will saddle everyone in the future with the tyranny of yet another immortal bureaucracy.
Interesting post - and a very interesting comment on the nature of institutions, corporations, etc.
ReplyDeleteI posted something in a similar "thread of thought:"
http://electrodes.wordpress.com/2009/07/03/an-invisible-person-with-enormous-power-it-starts-with-a-c/
I always look forward to your new posts, I learn more compared to school. Always looking forward. Thank you. I would love some feedback on my site Jiangsu Province when you got time.
ReplyDeleteMauldin wrote that 450,000 jobs needed to be created every month for 60 months for U-3 and U-6 to get whwere they were at last cycle's peak. 2014 is too optimistic.
ReplyDeleteI think you mean a "positive feedback loop" in the following paragraph.
ReplyDelete"Perhaps the biggest problem is that the crash in real estate and rising unemployment together form a negative feedback loop. As McClatchy and the Associated Press note, foreclosures rise as jobs and income drop."
Don, Thank you for that thought-provoking post.
ReplyDeleteBanks aren't conscious entities? So your disregarding the fact that everything a bank does is determined by a conscious entity? Isn't a Bank a collection of conscious individuals that specifically deal with money? Please advise
ReplyDeleteEvery investor must start-up a plan before heading up on buying a property. Learning the basics of real estate is essential rather than visualizing the money aspect. Listen to skilled professionals like bankers, estate agents, home inspectors, etc., they most likely know the latest trend.
ReplyDeleteForeclosure generally happens when the homeowner buys a property on a huge loan and cannot pay back the debt. But in recent times, there have many uncommon reasons for foreclosure and the behavior of the mortgage lenders who’ve been taking charge of the foreclosed properties. Such as, illegal occupancy of foreclosed properties, eviction of innocent tenants due to foreclosures, mysterious suicide due to foreclosure.
ReplyDelete