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A student-debt bubble fueled a housing bubble
- GauntletWizard 3y agoIt's overcorrections all the way down.
- deleted 3y ago[deleted]
- iancmceachern 3y agoWell done
- internet101010 3y agohttps://archive.ph/SAeFR https://archive.ph/SAeFR
- salil999 3y agoI'm curious what people think a fix to this would be. My suggestion would be to have regulations on who is allowed to take on a loan. The ultimate decision can be done by the bank but some basic requirements can be enforced via policy.
- paulpauper 3y agothe fix is the market adjusts itself with lower prices for homes, tuition, etc.
- bt4u 3y ago[dead]
- sooheon 3y agoA market cannot exist if the central government is guaranteeing loans (i.e. ensuring there are no survival incentives for lenders). Remove the guarantees, and market will correct itself.
- gpapilion 3y agoIsn’t this what happened with the credit default swaps? Banks found ways to lend money and pass the rush between them, causing failure for everyone. Yet here we are again with a new version of the same issue.
- sooheon 3y agoEven dumber. Because this time it's not the banks outsmarting regulators with opaque products, it's the regulators themselves saying "lend all you want, we'll back the loan!"
- Qwertious 3y agoI don't think housing is actually a bubble - a bubble is a situation that only exists due to widespread belief, but the current situation is fueled by real chronic problems. Namely: zoning laws that prohibit dense housing, and a widespread homeowner voting-base who vote to keep the laws as such. The market can't adjust itself because it's not broken; everyone buys houses because it lets them avoid future rent hikes, and basically everyone needs to buy/rent a house near their job if they don't want to go broke, so there's a huge captive market.
- sooheon 3y agoBetter answer: just stop central government guarantees on loans. State guarantees are what allow FM&FM to lend money without regard for actual risk management, because they know they will be bailed out. Remove the guarantees, and banks will actually have to do their due diligence on credit risk. No need for clunky regulation, when this is what the credit market is for.
- vxNsr 3y ago[flagged]
- PartiallyTyped 3y agoWhy not allow defaults on federal loans?
- sooheon 3y agoSure. Or why have federal loans at all?
- PartiallyTyped 3y agoPrecisely; tertiary education should be free as it’s a matter of natsec.
- thom 3y agoWhat effect would this have on the type of people would got to go to college?
- sooheon 3y ago1. It would lower price of education, because you no longer have a source of infinite credit. 2. More people would "get to" go to college, because 1. 3. Those who do get loans, would get loans proportional to the value the education will generate. 4. Unprofitable majors will become cheaper to take. Also, this isn't just about student loans, it's an even bigger problem for mortgages.
- Humboldtsnee 3y ago[dead]
- strken 3y agoFrom an Australian perspective, US loans are in an unfortunate middle ground where they're not dischargeable in bankruptcy and are protected by your government, but are owed to private companies and must be paid off regardless of your income. Making them dischargeable from the start would have stopped a lot of problems from forming, since borrowers could just default, thus lowering the average education fees due to downward pressure on loan amounts, and tightening lending requirements. Nationalising loans and only requiring repayment at high incomes would make them easier to deal with - the repayments just out of your tax, are only added at high tax brackets, and lower your borrowing capacity. Sitting in the middle of the two sides is the problem.
- Humboldtsnee 3y ago[dead]
- paulpauper 3y agoWhether it's tip-flation, shrink-flation, student loan payments, credit card payments, surging insurance premiums, healthcare, or just good ol' CPI inflation, Americans are getting squeezed left and right.
- salil999 3y agoThis has been the case for about two decades now. I genuinely don't know how people who make a median income are surviving in the country.
- Humboldtsnee 3y ago[dead]
- sooheon 3y agoLoose credit fuels bubbles, who'd have thought? State backed credit guarantees are a conditional obligation, meaning they don't affect the state balance sheet (until they do, all at once). It's like crack for central governments.
- riku_iki 3y agowhen those guarantees are executed? When person dies or flees the country?..
- sooheon 3y agoWhen we get another 2008. When enough people default on their debt, the government (i.e. the taxpayers) is now on the hook to guarantee these loans (i.e. bail out the banks).
- riku_iki 3y agoyou can not default on student debt, if default means filing for bankruptcy. Not paying means that some people will just track income and it will be garnished.
- sooheon 3y agoOk, call it delinquency. You can't legally default on student debt, but functionally, those who have not and will never make their repayments have defaulted, you're just not calling it that.
- riku_iki 3y agosome collection agency will go after them and collect payments through court order from their wages.
- sooheon 3y agoYes, and? If the underwriting on the loan is bad (which it is), they won't recover enough. The root problem is those making the loans don't actually have skin in the game because of government guarantees.
- devjab 3y agoI wonder how the American student debt explains how the same thing is happening to housing in Denmark. Now, I’m not arguing against the article, having high student debt is certainly going to impact your ability to own a home, but it’s certainly not the only factor which is at play. Our sister company develops housing for renting. Which was a very lucrative business back when interest rates weren’t evil. What they really do, however, isn’t to rent out homes, it’s making investors money. Keeping rent high is a bigger part of that journey than actually renting out homes, because ultimately the end goal isn’t to own the building, it’s to either sell it or use it as leverage in other projects that makes our investors money. In the city I live in, we have 10.000 empty dental right now, which is quite a high number in a city of a quarter of a million people, but the rent isn’t going down. It’s not going down, because it’s hard to increase if once you lower it, and since the goal isn’t really to rent out these homes but rather to make investors returns, it’s better to ride a decade of empty rentals than to lower the rent. It’s better because the finance data looks better when the potential profits are higher, and as long as that is more important than actually realising that profit then rent isn’t going to come down. Now, obviously there is some competition in the rental market, but every investment bank developer is sort of in our shoes and while it’s obviously a little bit of a game of chicken, it’s not really, because there is still a housing shortage in popular towns. But because we’re playing chicken, the smaller sized rental companies don’t actually need to compete that hard on pricing because we won’t lower ours, and there is enough of a demand that they can get a way with just being in our slipstream. I’m not sure if that’s a thing in America, and there is a lot more to it than this. Here in Denmark we have the same urbanisation and population decline as many other places, so housing is very uneven with urban areas increasing prices while rural areas see theirs plummeting to the point that some homes are frankly unsellable. But it’s mainly due to general debt, and how we let people borrow too much money, which student debt is part of, but not the single contributor to.
- quickthrower2 3y agoHow do the 10,000 landlords collude to not rent out their apartments? In Sydney it is way more free-market like. Rents tanked during covid and rocketed after (relative to their covid low). I feel like there are 2 types of owner. Ones that rent them out, and one's that don't. Not ones that rent them out, then let them be empty when rents threaten to fall.
- vxNsr 3y agoAnd of course the politicians responsible for this horrendous policy will not be held responsible, they will be given a free pass by the media who will point to some boogeyman and then blame climate change.
- alakep 3y agoYou should owe the money to the school. Will align incentives. If graduates don’t make enough to pay back the debt then the school could become insolvent. As it should.
- Temporary_31337 3y agoAlignment of incentives is fine. But if the school goes insolvent on older debt someone else will take over repayment and current students will suffer even if new curriculum is better
- Mistletoe 3y agoThis is brilliant.
- Humboldtsnee 3y ago[dead]
- sooheon 3y agoSchools don't need to be burdened with credit management, nor do they have the capability. When you take out a loan for a business, you don't take out loans directly from each of your suppliers and employees, you go to a bank who should know a thing or two about credit risk. You should just owe money to banks -- and banks should be allowed to fail. Right now, the only people on the hook are the taxpayers who bail the banks out.
- drewcoo 3y ago> Schools don't need to be burdened with credit management, nor do they have the capability. Universities, with their huge endowments and large staffs to manage investments, have already become financial institutions.
- Ekaros 3y agoConsidering how they manage various scholarships too, would loans be that much to add? They already deal with money in multitude of ways including things like grants. So there shouldn't be that much difference.
- Temporary_31337 3y agoThe statement: “Fannie and Freddie ignore much of what borrowers owe, allowing them to qualify for huge mortgages.” I honestly don’t see anything wrong in that per se. If you have a large and sufficient source of income to service both debts why wouldn’t they?
- salil999 3y agoI can see that point but I think in general the average American will not have a large and sufficient source of income. The article mentions how these firms are slowly raising the debt-to-income ratio to >50%. That's not because they're being nice - it's because they can trap more people into taking out enormous loans.
- ricardo81 3y agoMy country (the UK) still hasn't recovered it's GDP per capita of 2007, 16 years and counting. It didn't help that our banks were heavily exposed to those financial instruments that covered US housing and the subsequent crash. >Here’s out it works: Mortgage lenders have typically preferred that buyers have a total debt-to-income ratio less than 36%—meaning that monthly debt payments shouldn’t exceed 36% of one’s income. Surely there could be a hard upper limit, though IIRC it's pretty normal for people in the London and South East area to be paying 40-50% of their income on housing.
- throwaway5959 3y agoWait is that in nominal or real terms?!
- ricardo81 3y agoNominal, though in USD (we are a net importer in any event) https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=GB https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?location...
- jonplackett 3y agoEasier to blame students debts that acknowledge the general practice of land lording is the problem.
- Humboldtsnee 3y ago[dead]
- iancmceachern 3y agoExactly, see the Harvard endowment, they have enough money to pay the tuition of everyone going there, but don't
- ggm 3y agoI'd love to know if only in America is the interest rate on your home loan a 10 or 20 year decision. Here in Australia, and from my own experience in the UK you could secure 5 year fixed, and pay a premium interest rate to do it compared to current market variable. The idea that for the life of <that> loan its 2% but sorry, for you its 4% forever, is totally unlike the experience in the UK and Australia. How about elsewhere?
- MisterBastahrd 3y agoHome loans in the US are usually fixed for 15 or 30 year terms. The positive end to it is that you are free to refinance at a lower rate should one come available to you. I personally missed out on 2.5% because I had bought the home too close to the time when the rate was available.
- gbrindisi 3y agoIn Italy you can fix for 15,20,30 years (same as other southern european countries?). Notably access to credit here is harder due to to the debt crisis we had after 2008. In the nordics like Sweden is like Australia, you can fix for a few years at most.
- switch007 3y agoWhat are the interest rates on those terms? That’s the interesting part
- mythhabit 3y agoIn Denmark, all lenders must be able to take a 30 year fixed interest mortgage. If they can do that, and still have additional room in their finances, they can be allowed to take home a more risky loan, all the way down to interest adjust every 3 months.
- bettercallsalad 3y agoAh classic wsj opinion pieces. Where their opinion columnists also said inflation would be transitory and we need more inflation. not less. They don’t realize the housing market in Netherlands, Canada, Australia are far worse. How come? They forget much like their “expert Economists” like those scumbag Fed governors and Nobel laureate Paul Krugman - they had loose monetary policy for over a decade. The right time to raise rates were 2012 when asset bubbles were still not so bad, not after 2021 when finally wages started to catch up just for once. But oh no, wages can’t rise, we need to finally raise the rates now. INFLATION they screamed finally. All along ignoring asset inflation. Ever wondered why house prices aren’t part of their “hedonic inflation measure” whatever that is? https://www.bloomberg.com/news/articles/2019-03-21/powell-aims-to-avoid-japan-deflation-trap-with-dovish-fed-tilt https://www.bloomberg.com/news/articles/2019-03-21/powell-ai...
- fwsgonzo 3y agoIt's also worse in Norway, and not just that but even remote places in Norway. It's going to be everywhere, isn't it? Where exactly is housing cheap now?
- brailsafe 3y agoVery very remote places in Canada in terms of absolute price
- dgellow 3y agoYou can find fairly cheap housing in East Germany (not Berlin of course). But that’s mostly because people don’t want to live there, there is way less economic activity.
- misstuned 3y agoPlaces with few jobs and a low quality-of-life. I live in a place like that now, a car-reliant northern England town where there's no transit service, it's not safe after 7pm and the locals will threaten to fight you if you look funny. Luckily I have a job, it's not as well paid as the same job in other areas but I'm employed and don't pay a huge housing cost. But I'm miserable, it's a horrible place to live (especially as a childless 30-something single person) and I'm looking to move somewhere that's nicer. I'm really struggling to do that, because trading up in areas is difficult, I'm looking at a doubling of housing costs (plus all the other costs of moving) in exchange for ~20-30% more pay in a more affluent area. There are a lot of people like me, trapped in crappy areas with low housing costs and unable to trade up despite being full-time employed. I feel like I just exist here, weekends are my escape but I need to escape forever.
- Joel_Mckay 3y agoThe Securitization of mortgages in the unregulated banking sector is around 15 times larger than the entire GDP of North America. This means whenever a market correction occurs, the inflationary control policies of government have minimal effect on the market. Accordingly, "The Noorseekee (нурсики) scam is a multiple-round variant of the gold brick scam" ( https://en.wikipedia.org/wiki/List_of_confidence_tricks#Noorseekee https://en.wikipedia.org/wiki/List_of_confidence_tricks#Noor... ) In general, when the dust settles on the con it is the taxpayer wondering how the false equity evaporated. 2008 rewarded the gamblers, and tossed 6 million American families on the street... often forced to rent the same homes the banks extorted from other people to sell to a fund. If you think anyone actually fixed the core problem, than you are a true optimist =) Money makes some people irrational.
- refurb 3y agoThe Securitization of mortgages in the unregulated banking sector is around 15 times larger than the entire GDP of North America. That's an odd metric to compare total value of mortgages, backed by housing assets, to the annual GDP. Total value of all US residential homes is $44T and google tells me mortgage back securities have an outstanding debt of $24T, so about 50% of what the underlying asset is worth. Seems reasonable?
- soperj 3y ago> Total value of all US residential homes is $44T and google tells me mortgage back securities have an outstanding debt of $24T, so about 50% of what the underlying asset is worth. Sorry for being pedantic, it's 45.45%, but the real issue is that 38% of people have paid off their mortgage. If you take 62% of $44T, you end up with $27.28T, and if you have an outstanding debt of $24T, that looks really fucking bad.
- Joel_Mckay 3y agoIn Canada, 97% of taxed property is mortgaged, and 15% to 30% of these are now in negative amortization. The 15:1 ratio is a conservative estimate of international unregulated leverage in local markets, and cross checked with the asset tax assessments compared to recent GDP (excluding military pay and allowances.) The numbers are so huge it is hard to get a accurate answer out of anyone federally. Yet one can glean sample data from the tightly coupled markets. My popcorn is ready =)
- refurb 3y agoTLDR: government backed mortgage entity decides to take on increasing risk by allowing borrowers to take on more risk, as result home prices are inflated. I've heard this story before!
- eru 3y agoStill the old myth of a 'Housing Bubbble'. I guess that one won't die? There was a housing slump, but no housing bubble. See eg https://www.econlib.org/kevin-erdmann-was-right/ https://www.econlib.org/kevin-erdmann-was-right/ and https://www.econlib.org/archives/2018/06/kevin_erdmann_o_1.html https://www.econlib.org/archives/2018/06/kevin_erdmann_o_1.h... and follow the link to eg https://www.mercatus.org/system/files/erdmann_-_mop_-_housing_was_undersupplied_during_the_great_housing_bubble_-_v1.pdf https://www.mercatus.org/system/files/erdmann_-_mop_-_housin... You can also see https://www.bloomberg.com/opinion/articles/2022-01-10/there-was-no-housing-bubble-in-2008-and-there-isn-t-one-now https://www.bloomberg.com/opinion/articles/2022-01-10/there-... but it's behind a paywall.
- iancmceachern 3y agoThis seems like the minority opinion. It might be right, but it's far from damning evidence that the housing bubbles are myths. It's certainly not proof that it's a myth, and certainly not a commonly held view
- eru 3y ago> It might be right, but it's far from damning evidence that the housing bubbles are myths. Kevin Erdmann's book 'Shut out' https://www.mercatus.org/research/books/shut-out https://www.mercatus.org/research/books/shut-out has a lot more evidence piled up. https://kevinerdmann.substack.com/p/interest-rates-arent-the-problem https://kevinerdmann.substack.com/p/interest-rates-arent-the... has some interesting recent observations about the topic of housing, finance and interest rates.
- iancmceachern 3y agoHere is a book review on that first book. I wanted to dig deeper because the Amazon page only has a handful of reviews, including one stating the book had no index and was not proofread. "Many factors influenced the Great Recession. Erdmann's ideas provide a valuable new perspective, but he goes a bit overboard about dismissing the standard narratives." https://www.lesswrong.com/posts/v9i9XjK266PntDWTp/book-review-shut-out https://www.lesswrong.com/posts/v9i9XjK266PntDWTp/book-revie... These are interesting opinions, but far from absolute compelling evidence of what your original comment stated
- candybar 3y agoThis is content-free nonsense - it's easy to do the math, but those who are eligible for significant "credit boost" from Obama-era whatever plans are non-factors when it comes to influencing home prices in the bay area housing market for obvious reasons. You have to be almost economically illiterate to believe any of this - it's sad how ideology shapes thought and transparent garbage like this gets published everyday.