Obama administration pushes banks to make home loans to people with weaker credit

[geek tragedy]

74. Short-term there is a risk of loss of equity/down payment

for buyers. But, longer term the risk of perpetual negative HPA just isn't there--inflation will happen.

The short-term vs long-term dynamic for renting vs buying is essentially unchanged. Yes, you can get crushed if you buy high and sell low. That's always been the case--every investment has its risks. Different households will have different risk profiles. Where we live in Brooklyn, there's a very real long-term risk of getting crushed by the rent escalator's perpetual climb. If you know you want to stay in the area, and you can afford to buy, you almost need to. Otherwise you're going to get forced out by rising rents at some point. If you're not planning to stay, then you don't want to commit the $50-$250K down payment plus selling costs in case you have to move.


As a data point, we bought in 2010 and our mortgage today is a lot less ($450/month) than our rent was in 2009. When factoring in HOA and tax deduction for interest, our yearly housing expense is about $4000 less than when we were renting. And on top of that our home has appreciated more than 50% in value in three years (upstairs neighbors place just sold at that mark up with identical floor plan etc). So, had we chosen to not buy and continue renting, we probably would have cost ourselves our retirement.


There was a lot of purchasing of short sales/foreclosures--but those were usually the least well-maintained, least desirable properties etc. A lot wound up being tear-downs. Demand for new construction is outstripping demand to the point where builders have trouble finding workers.


Interest rates will climb and this will lead to downward pressure on housing prices--on this we can agree. That's part of the market constantly seeking equilibrium. But the changes won't happen overnight--they'll occur over time as other factors--supply/demand/incomes move.


FRM have always been a bad bet as an on-balance sheet asset for banks--constant prepay and interest rate risk. Really only enabled by Freddie and Fannie. Otherwise everyone would be getting ARMs, which can at least take away the interest rate risk.

Lower roll rates will mean slower prepay speeds, which does help their value.

You're very wise to be on guard re: prepay burnout as well as forced repo/putback/bounceback risk. As you well know, risk is what the mortgage business is all about--it's all about (a) what risks to have an appetite for and (b) how to prudently manage the risks taken on.