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You have to avoid moral hazard. In a just world, Bob would get screwed because he took a risky bet. If you don't allow Bob to fail, you tell people they need

You have to avoid moral hazard. In a just world, Bob would get screwed because he took a risky bet. If you don't allow Bob to fail, you tell people they need to be more like Bob. Then you have a nation of Bobs and the game can never end. We need to let risk takers fail. They gambled and lost. That should serve as a warning to other risk takers to better calculate their exposure.

AnthonyMouse 5y ago
Bob didn't pay $500,000 for a house because he was trying to speculate in the housing market. He did it because he needed somewhere to live and that's how much houses cost when interest rates are held at 0% by the government. What is it that we were trying to get all the Bobs to do in the alternative?
- 01100011 5y ago
  Like it or not, Bob is an investor. He had a choice to rent or stay in his current residence. He is not compelled by any force to participate in an inflated housing market. He should do his due diligence and not assume risky bets that he is unable to handle.
  - Spivak 5y ago
    Ehhhh like I get where you’re coming from but it would be fantastically bad policy for a nation to treat housing like this. A person’s primary residence needs to play by different rules if you’re gonna crash the market semi purposely. When the forces that cause the market to crash are the feds monetary policy it’s a tough sell that it’s actually a free market. To first order individuals should be able to purchase shelter assured that it’s fairly priced. The concerns should be like “the foundation is cracked” not “JP Morgan is pumping house prices.”
    - 01100011 5y ago
      If you cause Bob's house to go back to being $200k then it only screws the Bobs. It doesn't screw the Mary's who bought at or below $200k. Your logic is what gets us into these messes, because it removes moral hazard by telling speculators that housing is special and therefore immune to risk. Of course it's not a free market. Has America ever had a free market? When is the last time that the real estate market hasn't been manipulated in some way?
    - ClumsyPilot 5y ago
      How could housing be a free market if no-one produces land? Land is a zero sum game, you can't pretend same laws apply to it and iPhones
      - Spivak 5y ago
        Markets for a fixed number of goods work fine in general; concert tickets, limited edition shoes, rare antiques. The housing market is heavily absolutely distorted but not because land is a fixed quantity.
        chii 5y ago
        > The housing market is heavily absolutely distorted i still don't understand what these distortions being claimed are. "artificially low" interest rates isn't a distortion - it affects everything, and the rates may not be that low, compared to the growth. As for taxation, real estate isn't treated too differently from any other forms of investment.
        stickfigure 5y ago
        The 30-year fixed-rate mortgage is pretty unique to real estate.
        zajio1am 5y ago
        Ability of third parties (politicians, bureocracy, NIMBY groups) to block or retard production of new assets. From what i heard from developers, getting permissions for a new appartment complex takes many years, several times longer than actually building the complex.
        ClumsyPilot 5y ago
        Inability of third party to capture value they create - an apartment complex in the middle of the forest is worthless. It needs utilities, shopping centre, major metro line, highway, arts, jobs, good schools, and general 'nice area' vibes created by artists on the verge of bankruptcy. None of those things area created by the construction company. In fact randomly building houses leads to congestion, lack of places in schools and other facilities, and miserable living conditions.
  - brandmeyer 5y ago
    Bob's first house wasn't an investment. He was covering his short position. Bob was born short. Bob's N+1th house is an investment.
    - mccorrinall 5y ago
      While I like this comment since it’s concise and pretty accurate in some way, I’d like to point out that you don’t have to buy a house to cover your „short“ (a roof over your head). You can rent it instead. When buying a house, bob becomes heavily invested.
      - pempem 5y ago
        This does ignore the fact that rents are also, in fact, going up. Before the interest rate rose most people could not afford their own place in most cities on minimum wage. In SF we've been living with roommates well into our 30s. Lovely but not exactly how it used to be generally. At the same time some of us salaried folks have gotten small windfalls this year, but most jobs haven't seen a comparable rise in salaries. All of this leads me to be on team taxation.
        mccorrinall 5y ago
        I‘m from Europe and never been to SF, but imo taxation isn’t necessarily needed. Instead the „american dream“ should be adjusted. Not every human needs their own family home. Build more apartment complexes. I’ve recently seen in a youtube video by the NYT that there are actual lobbies against changing low density housing zones to high density housing zones: https://youtu.be/hNDgcjVGHIw?t=253 https://youtu.be/hNDgcjVGHIw?t=253 I’d recommend to give it a watch :) Imo the soviet apartment complexes are a good idea. I live in one as well (Germany), and I can afford rent without hassle.
        mccorrinall 5y ago
        To be clear: the lobby against such high density buildings is the neighborhood itself.
  - barbazoo 5y ago
    Not if the market does not offer rental properties. Unless you're in the big city, the rental market can get very small.
  - endorphine 5y ago
    > He is not compelled by any force to participate in an inflated housing market. But he _is_ forced to participate in that market, even if he doesn't know it; whether that's by renting or buying is another question. Renting is less risky but it's still a bet, no? I'm not sure.
- Teever 5y ago
  We all need a place to live but we all didn't take a risk in taking out a mortgage like Bob did. Bob's risks shouldn't negatively influence people who have more risk aversion to the point where it's less risky to take risks like Bob because then we'll all take risks like Bob and then end up in the situation where we are now.
  - selcuka 5y ago
    It's not all Bob's fault though. He had to live in somewhere and the only way for him to afford a house (theoretically worth $200K, inflated to $500K in the above example) even if he had $200K in savings was to get a $300K loan. Now if you reduce the house prices back to $200K levels he won't be able to refinance it anymore and his current bank will screw him even more.
    - forgotmyoldname 5y ago
      It’s not the first time this happened. Houses lose desirability due to jobs moving out of town, crime rising, and so on. Buying an overpriced house shouldn’t guarantee you a solid return in the future. We’re at a point where we’d rather Bob secure his “investment” while younger generations can’t afford a home to live in.
      - selcuka 5y ago
        That's a bit out of context. My comment was a reply to: > We all need a place to live but we all didn't take a risk in taking out a mortgage like Bob did. My point is it wasn't necessarily a risk Bob has voluntarily taken. I'm not saying that we shouldn't do something to fix this but we shouldn't cause Bob to go bankrupt while trying to help younger generations as Bob may not be the opportunist here.
        salawat 5y ago
        Correct. The bank, and the seller are. The seller has his money already. The bank created money out of nowhere to service that mortgage. To my point of view, I see exactly where the haircut makes the most sense.
- SinParadise 5y ago
  Bob should stop treating real estate as an investment vehicle and instead just use as you would a car. It depreciates, it appreciates, you extract benefit from it regardless of its speculative value.
  - ivalm 5y ago
    Except his mortgage is still under water and the banking system will fail (also rational Bob should just walk away from the house to lower his debt through bankruptcy and house repurchase). This is kind of similar to what happened in 2008, except 2008 was still “small” scale.
    - SinParadise 5y ago
      >Except his mortgage is still under water So? The house is as livable the day before the mortgage went underwater as the day after mortgage went underwater. It only matters if Bob care about selling the house. If Bob's primary intent is to live in the house as opposed to selling it, it wouldn't be a problem.
      - ivalm 5y ago
        At the very least you are screwing the owners of the mortgage who will have to write off lots of loans as Bobs everywhere walk away from the underwater mortgages (which is oftentimes the right thing to do even if one didn’t intend to use the house as an investment). But also it significantly limits Bob’s options in life. They can no longer refinance to repair the roof, they can’t move to a different city for a better job, etc.
        xenihn 5y ago
        >At the very least you are screwing the owners of the mortgage who will have to write off lots of loans as Bobs everywhere walk away from the underwater mortgages Yes, that's the point... >But also it significantly limits Bob’s options in life. They can no longer refinance to repair the roof, they can’t move to a different city for a better job, etc. Bob knew the risks.
- cambaceres 5y ago
  In Sweden, people definitely buy houses/apartments on speculation. People don't think about it like that though, they think "prices will continue to rise forever, so I need to get into the housing market as soon as possible so I don't miss out on getting wealthy." This has made the Swedes the second most indebted people in the world. If rates here where to go up with, say, 2 percent units then it would be a blood bath.
- salawat 5y ago
  If Bob was buying a second property to rent out to someone else to keep his wealth in a non-depreciating asset class, that is not the case. If Bob was a first-time homebuyers, then he just got royally screwed because of all the speculation propped up by nigh interest-free lending, which was absorbed via inflated ask prices. There really is nothing natural about the economy of the last 15 years. At all.
srj 5y ago
Current policy has been telling people to be more like Bob since the GFC.

AnthonyMouse 5y ago

Bob didn't pay $500,000 for a house because he was trying to speculate in the housing market. He did it because he needed somewhere to live and that's how much houses cost when interest rates are held at 0% by the government. What is it that we were trying to get all the Bobs to do in the alternative?

01100011 5y ago
Like it or not, Bob is an investor. He had a choice to rent or stay in his current residence. He is not compelled by any force to participate in an inflated housing market. He should do his due diligence and not assume risky bets that he is unable to handle.
- Spivak 5y ago
  Ehhhh like I get where you’re coming from but it would be fantastically bad policy for a nation to treat housing like this. A person’s primary residence needs to play by different rules if you’re gonna crash the market semi purposely. When the forces that cause the market to crash are the feds monetary policy it’s a tough sell that it’s actually a free market. To first order individuals should be able to purchase shelter assured that it’s fairly priced. The concerns should be like “the foundation is cracked” not “JP Morgan is pumping house prices.”
  - 01100011 5y ago
    If you cause Bob's house to go back to being $200k then it only screws the Bobs. It doesn't screw the Mary's who bought at or below $200k. Your logic is what gets us into these messes, because it removes moral hazard by telling speculators that housing is special and therefore immune to risk. Of course it's not a free market. Has America ever had a free market? When is the last time that the real estate market hasn't been manipulated in some way?
  - ClumsyPilot 5y ago
    How could housing be a free market if no-one produces land? Land is a zero sum game, you can't pretend same laws apply to it and iPhones
    - Spivak 5y ago
      Markets for a fixed number of goods work fine in general; concert tickets, limited edition shoes, rare antiques. The housing market is heavily absolutely distorted but not because land is a fixed quantity.
      - chii 5y ago
        > The housing market is heavily absolutely distorted i still don't understand what these distortions being claimed are. "artificially low" interest rates isn't a distortion - it affects everything, and the rates may not be that low, compared to the growth. As for taxation, real estate isn't treated too differently from any other forms of investment.
        stickfigure 5y ago
        The 30-year fixed-rate mortgage is pretty unique to real estate.
        zajio1am 5y ago
        Ability of third parties (politicians, bureocracy, NIMBY groups) to block or retard production of new assets. From what i heard from developers, getting permissions for a new appartment complex takes many years, several times longer than actually building the complex.
        ClumsyPilot 5y ago
        Inability of third party to capture value they create - an apartment complex in the middle of the forest is worthless. It needs utilities, shopping centre, major metro line, highway, arts, jobs, good schools, and general 'nice area' vibes created by artists on the verge of bankruptcy. None of those things area created by the construction company. In fact randomly building houses leads to congestion, lack of places in schools and other facilities, and miserable living conditions.
- brandmeyer 5y ago
  Bob's first house wasn't an investment. He was covering his short position. Bob was born short. Bob's N+1th house is an investment.
  - mccorrinall 5y ago
    While I like this comment since it’s concise and pretty accurate in some way, I’d like to point out that you don’t have to buy a house to cover your „short“ (a roof over your head). You can rent it instead. When buying a house, bob becomes heavily invested.
    - pempem 5y ago
      This does ignore the fact that rents are also, in fact, going up. Before the interest rate rose most people could not afford their own place in most cities on minimum wage. In SF we've been living with roommates well into our 30s. Lovely but not exactly how it used to be generally. At the same time some of us salaried folks have gotten small windfalls this year, but most jobs haven't seen a comparable rise in salaries. All of this leads me to be on team taxation.
      - mccorrinall 5y ago
        I‘m from Europe and never been to SF, but imo taxation isn’t necessarily needed. Instead the „american dream“ should be adjusted. Not every human needs their own family home. Build more apartment complexes. I’ve recently seen in a youtube video by the NYT that there are actual lobbies against changing low density housing zones to high density housing zones: https://youtu.be/hNDgcjVGHIw?t=253 https://youtu.be/hNDgcjVGHIw?t=253 I’d recommend to give it a watch :) Imo the soviet apartment complexes are a good idea. I live in one as well (Germany), and I can afford rent without hassle.
        mccorrinall 5y ago
        To be clear: the lobby against such high density buildings is the neighborhood itself.
- barbazoo 5y ago
  Not if the market does not offer rental properties. Unless you're in the big city, the rental market can get very small.
- endorphine 5y ago
  > He is not compelled by any force to participate in an inflated housing market. But he _is_ forced to participate in that market, even if he doesn't know it; whether that's by renting or buying is another question. Renting is less risky but it's still a bet, no? I'm not sure.
Teever 5y ago
We all need a place to live but we all didn't take a risk in taking out a mortgage like Bob did. Bob's risks shouldn't negatively influence people who have more risk aversion to the point where it's less risky to take risks like Bob because then we'll all take risks like Bob and then end up in the situation where we are now.
- selcuka 5y ago
  It's not all Bob's fault though. He had to live in somewhere and the only way for him to afford a house (theoretically worth $200K, inflated to $500K in the above example) even if he had $200K in savings was to get a $300K loan. Now if you reduce the house prices back to $200K levels he won't be able to refinance it anymore and his current bank will screw him even more.
  - forgotmyoldname 5y ago
    It’s not the first time this happened. Houses lose desirability due to jobs moving out of town, crime rising, and so on. Buying an overpriced house shouldn’t guarantee you a solid return in the future. We’re at a point where we’d rather Bob secure his “investment” while younger generations can’t afford a home to live in.
    - selcuka 5y ago
      That's a bit out of context. My comment was a reply to: > We all need a place to live but we all didn't take a risk in taking out a mortgage like Bob did. My point is it wasn't necessarily a risk Bob has voluntarily taken. I'm not saying that we shouldn't do something to fix this but we shouldn't cause Bob to go bankrupt while trying to help younger generations as Bob may not be the opportunist here.
      - salawat 5y ago
        Correct. The bank, and the seller are. The seller has his money already. The bank created money out of nowhere to service that mortgage. To my point of view, I see exactly where the haircut makes the most sense.
SinParadise 5y ago
Bob should stop treating real estate as an investment vehicle and instead just use as you would a car. It depreciates, it appreciates, you extract benefit from it regardless of its speculative value.
- ivalm 5y ago
  Except his mortgage is still under water and the banking system will fail (also rational Bob should just walk away from the house to lower his debt through bankruptcy and house repurchase). This is kind of similar to what happened in 2008, except 2008 was still “small” scale.
  - SinParadise 5y ago
    >Except his mortgage is still under water So? The house is as livable the day before the mortgage went underwater as the day after mortgage went underwater. It only matters if Bob care about selling the house. If Bob's primary intent is to live in the house as opposed to selling it, it wouldn't be a problem.
    - ivalm 5y ago
      At the very least you are screwing the owners of the mortgage who will have to write off lots of loans as Bobs everywhere walk away from the underwater mortgages (which is oftentimes the right thing to do even if one didn’t intend to use the house as an investment). But also it significantly limits Bob’s options in life. They can no longer refinance to repair the roof, they can’t move to a different city for a better job, etc.
      - xenihn 5y ago
        >At the very least you are screwing the owners of the mortgage who will have to write off lots of loans as Bobs everywhere walk away from the underwater mortgages Yes, that's the point... >But also it significantly limits Bob’s options in life. They can no longer refinance to repair the roof, they can’t move to a different city for a better job, etc. Bob knew the risks.
cambaceres 5y ago
In Sweden, people definitely buy houses/apartments on speculation. People don't think about it like that though, they think "prices will continue to rise forever, so I need to get into the housing market as soon as possible so I don't miss out on getting wealthy." This has made the Swedes the second most indebted people in the world. If rates here where to go up with, say, 2 percent units then it would be a blood bath.
salawat 5y ago
If Bob was buying a second property to rent out to someone else to keep his wealth in a non-depreciating asset class, that is not the case. If Bob was a first-time homebuyers, then he just got royally screwed because of all the speculation propped up by nigh interest-free lending, which was absorbed via inflated ask prices. There really is nothing natural about the economy of the last 15 years. At all.

srj 5y ago

Current policy has been telling people to be more like Bob since the GFC.