• Byron posted an update 2 months, 1 week ago

    • just as the US passes the $23 TRILLION mark and the debt continues to outpace GDP #ItWillTakeARepublican

          This opinion piece actually UNDERSTATES the risks by not focusing on the level of interest rates now vs. then:
          1. With interest rates where they are now, borrowers qualify for LARGER loans (Debt-To-Income ratio is a function of the monthly payment)—all else equal. Borrowers are qualified in large part based on this ratio.
          2. With interest rates where they are now, there is virtually no room to “rescue” borrowers by offering them even LOWER refis (either via government program or via workout with lender)
          3. Along with #1 above, there is the concept of “lifestyle creep” which goes along with more expensive homes. Not too many Honda Civics parked in the garages of McMansions (or today’s equivalent). Auto loans outstanding—as but one example—are at all time highs along with average remaining term!

            • You’ve probably already answered this but…with such low rates more than a decade into the expansion unless there’s a paradigm shift how much longer can this last? 1 year? 2 at the most?
                • Nope, I haven’t answered that because that is always “literally” the TRILLION dollar (or more) question. In financial markets, coming to the conclusion of what will (or might) happen is orders of magnitude easier than determining WHEN something will happen (which is implicitly a combination of WHAT and WHEN). In over-simplified terms, predicting two variables (think of each as “if this, then that”) is definitionally more difficult than predicting one, provided that they are not 100% correlated.

                  This is what both fascinates and frustrates me about discussions of the financial crisis: In the way that it is most often portrayed, evil bankers willfully and knowingly flew our global economy into a mountain by engaging in irresponsible transactions that were destined to fail. [obviously an over-simplification with a bit more than a tinge of sarcasm]

                  A concept that I’ll often toss out when engaged in conversations on this topic:
                  1. If the conclusion is that _____ (subprime lending, auto loans, etc.) was “irresponsible”, then please highlight to me the DISCRETE set of terms that and the DISCRETE dollar which made it so. For example, we can all probably agree that selling/buying a house for cash is not “irresponsible” as a concept. There are iterations between that and borrowing 100% (or more) of the value of the house on the “irresponsibility” scale. Within that scale there are countless individual circumstances, dollar amounts, competitive and regulatory forces at play—all while the price of the underlying asset (the home) is moving in a direction that provides confirmation (real vs. false is indistinguishable except in hindsight) that the “system” is working. With each passing day, there are those who reject transactions that others accept. Those who reject, in many cases feel that “this is getting ugly”–but never with 100% certainty because the system hasn’t “yet” collapsed. Among the “rejectors”, there is a VERY LIMITED time during which they can adopt that stance AND remain a bona fide “market participant” (whether we’re talking about either an institution or a person seeking home ownership). During that LIMITED time, the extent to which asset values continue to rise serves to vindicate those who continue to “play” while casting the “rejectors” in the light of imprudence.

                  A summary (if you glossed over the above): Before the crisis EVERYONE involved in the housing market was “the smartest person in the world”—until they weren’t. Even in hindsight, no one can identify the discrete point in time at which the collective market shifted from “smart” to “stupid”.

                  So, no, I have no idea on timing but I’m highly confident in my expectation of another collapse.