The stimulus package: the good, the bad, and what are you going to do with yours?

[emeleel]

The family economic stimulus package has nearly passed, it seems:

Taxpayers would get checks under economic stimulus plan - CNN.com

Will it help? Just make everyone more greedy the next time we start feeling the pinch? Put the government into unnecessary further debt?

And what are you going to do with yours - stimulate the economy, save it, pay off debts?

[mjfrombuffalo[$]]

Bad:
It increases the deficit.
It doesn't extend or enhance unemployment insurance or Food Stamps, both proven economy-boosters in previous recession management.
It doesn't increase infrastructure spending, another economy- and job-spurring technique.
It may end up being too late.

Good:
They dropped the part about making permanent Bush's "make the rich richer" tax cuts.
It doesn't include the bit about businesses being able to get new refunds on previous bad years.

More details on what was dropped/what was kept: Stimulus package: What's in and out - Yahoo! News

Good articles on recession, recession-avoiding, what to do now:
How to Stop the Downturn - New York Times
Borrowers With Good Credit May Benefit - New York Times

I stimulated the economy two days ago by buying stocks and bonds after the interest rate cut but before the market rallied Any rebate check we get will probably go to savings or to paying off debt, not spending.

[erik_kosberg]

It's a tossup whether I'm more financially irresponsible than the federal government or vice versa. But if they want to put a check in my mailbox, fine by me.

[pippadaisy[$]]

I'm going to go spend it on scratch-off cards and beer and cigarettes, just like they expect me to. Aren't you?

[mjfrombuffalo[$]]

pippadaisy said

I'm going to go spend it on scratch-off cards and beer and cigarettes, just like they expect me to. Aren't you?

[realtraveller]

So they're going to federally insure more sub-prime mortgages up to $700,000? They're going to give away that kind of money to people who can't afford the mortgages? And then when the defaults come in, the taxpayers will be on the hook for the losses. Ay-yi-yi.

Inflate the housing bubble some more. Only to have it collapse again further down the road.

[mjfrombuffalo[$]]

Does FHA limits affect what's considered a "jumbo" mortgage? The median home price in my county is $475,000 (and we're not talking McMansions here), so many (most?) people end up having to go with "jumbo" mortgage terms instead of conventional mortgages.

[lynnzop[$]]

pippadaisy said

I'm going to go spend it on scratch-off cards and beer and cigarettes,

What was that Steve Martin line? "I spent most of my money on women and booze. The rest I just wasted." Something like that.

[mtomm[$]]

I'll use it to pay down debt. When is it coming?

[hadassahchana[$]]

I'm going to use it to stockpile light bulbs.






Ok, kidding. I'm kidding!


I think it's just an election year toy, but I'll happily cash it and stick it in savings.

[jgibson2[$]]

The last time they did this, they deducted it from next year's tax refund check. If that's what it is, then never mind.

Otherwise, it's going to pay off debt.

[mjfrombuffalo[$]]

Ya know, instead of issuing checks they should just take the $$ off my tax bill for the year or add it to my refund. Probably faster than doing a whole separate process. I'll write a check for, say $2000 in April, they'll send me a check for $1200 in July. I'd rather just write them a check for $800 in April and call us even.

[erik_kosberg]

erik_kosberg said

It's a tossup whether I'm more financially irresponsible than the federal government or vice versa.

According to this site my share of the federal debt is higher than my personal debt so I guess that means I'm more financially responsible than the federal government. Can I add my check to my poker bankroll and not feel too bad about it?

[mtomm[$]]

jgibson2 said

The last time they did this, they deducted it from next year's tax refund check. If that's what it is, then never mind.

Otherwise, it's going to pay off debt.

That is what I was wondering. It always seems like some cheap trick.

[magenta321]

I didn't see any money last time. I am waiting to hear the "oh, but you're the only person on earth who doesn't get one" line again.

If I actually got one, it would go in the emergency savings fund, which is also known as the "I'd like to go to grad school one day fund," which could also be known as the "I thought I'd go to grad school but instead I'm paying off this unexpected debt and being a homeowner sucks balls" fund.

[brian_igo]

I don't think this is going to do any harm, but I don't think it will help, either.

This kind of stimulus package is effective when the economy is put on its heels by a shock event, like 9/11. The problem here is that consumers have record levels of debt and credit is becoming a lot harder to obtain. I expect that a very large percentage of people who get these checks will use them to pay bills, which doesn't do anything for the broader economy.

The tax credit for capital investments in small business will be worthless. Even with a tax credit no one in their right mind will buy new equipment unless they feel confident that their business will grow over the next year or two. I think this is just another example of Republican fiscal rhetoric being as detached from reality as a Mother Goose story.

realtraveller said

So they're going to federally insure more sub-prime mortgages up to $700,000? They're going to give away that kind of money to people who can't afford the mortgages? And then when the defaults come in, the taxpayers will be on the hook for the losses. Ay-yi-yi.

Inflate the housing bubble some more. Only to have it collapse again further down the road.

mjfrombuffalo said

Does FHA limits affect what's considered a "jumbo" mortgage? The median home price in my county is $475,000 (and we're not talking McMansions here), so many (most?) people end up having to go with "jumbo" mortgage terms instead of conventional mortgages.

Yeah, MJ. Everything over the "conforming" limit is considered a jumbo loan. But it's not FHA - this is set by the quasi-governmental agencies Freddie Mac and Fannie Mae, who buy conforming mortgages that meet creditworthiness guidelines.

IIRC, the limit for a conforming loan right now is $430,000. In all but a handful of areas in the country, that is enough to get into a starter home/condo with a minimal down payment. It should be remembered that the purpose of the loan guarantee programs were to promote responsible home ownership. Use a conforming loan to get into a house or condo, build equity and then use that to get into something bigger. But it was seriously perverted over the last few years, with manipulation of the conforming standards that reeks of fraud.

The answer is not to legalize all of the abuses that have happened. If anyone in Congress wants to make an argument that their district has exceptionally high real estate prices and therefore should have an exemption from the conforming limit, I think they must show that it is a measure of last resort and the market is not on a bubble.

Which gets to what Kathy said. The problem isn't writing more subprime mortgages. That horse is long gone, I have a good friend from my motorcycle board who is a mortgage broker in Chicago and he's telling me that no one is getting a stated income loan or a very high loan-to-value first without having the credit examiners crawl up their ass. A conforming loan today just means that there is money available to loan. The money available in the jumbo market has disappeared.

Raising the limit on conforming loans is only an effort to keep the bubble inflated by creating an artificial market support, particularly where you live. I've become a huge fan of the Irvine Housing Blog. They have a great post up today about how home prices in SoCal are still massively overpriced.

Today I want to look at the rental market and share with you some properties that caught my eye as good deals in the market. I have not been to any of these properties, so I don’t know anything more than what is shown on the internet. A careful inspection of the property may reveal it to be less of a deal than it appears. Also, as a way to relate these properties to fundamental valuations in the for-sale market, I will provide links to comparable properties.


To start, I will share with you one of the craigslist scans I use to get a quick feel for changes in the rental market. I will search for 4 bedrooms in Irvine under $3,000. By limiting the search to 4 bedrooms, I avoid all the Irvine Company spam advertising their apartments, and by setting the limit under $3,000, I get a small enough list to tell at a glance if product availability is growing or shrinking. This scan turns up the following properties that appear to be a good deal:


$2500 / 4br - 4bed/2.5bath w/2088 sqft in Northwood
$2500 / 4br - 3 BR 1 Office Almost New Home in Irvine
$2550 / 4br - Spacious University Park Townhouse

The one at 4601 Kimberwick Circle (second one on the list) looks like a particularly good deal, IMO.


One interesting note is the decline in prices on these 4 bedroom properties. Last year, it was difficult to find a 4 bedroom under $2,800. As you can see above, the leading edge of the 4 bedroom market has dropped to $2,500. This would put the valuation of older, not-updated 4 bedroom properties at around $400K based on a 160 gross rent multiplier. So what are asking prices on properties meeting this description in Irvine?

(shows detailed sales listings on two homes comparable in size and location to the rentals above)

As you can see, the leading edge of pricing for these properties is around $650,000, and based on the comparative rents from the craigslist properties, the values for an owner-occupant are closer to $400,000. At the peak, prices were double (100% overvaluation) their fundamental worth based on rents. Now that properties have declined about 20% from the peak, the level of overvaluation is somewhat less. We are a bit less than half way to the point where prices in the market are at parity with rental valuations. Of course, if rents decline — and they appear to be showing some downward pressure — then valuations will drop.

By traditional formulations, these homes are still overpriced by $250K even though they've lost $200K in value in the last two years. That's how big this bubble got. Increasing the conforming limit will only give a parachute to the people trying to sell these houses, eventually the sale prices need to come back to a level the local market can sustain.


This is just another example of dicking around with moral hazard in the financial markets. When the dot com bubble burst and the Enron accounting scandals took down the stock markets, the government raced to make borrowing unsustainably cheap and easy to stave off a recession. But that just encouraged big players and a lot of home buyers to take even bigger gambles because they had been saved from the pain of losing money in 2000 and 2002.


But you can do that trick only so long before the market takes on risk that is impossible for anyone to fix if it goes bad. That's where we are now.

[pippadaisy[$]]

The really cool part about all this for ME personally is that we never saw the housing bubble here. At all. We might actually be able to get out if property starts coming down everywhere else. It's a huge deal-breaker when companies don't understand that while the "overall" COL isn't all that different, we'd have to get a WAY bigger mortgage, which is an issue.

[mjfrombuffalo[$]]

tru dat.

[mjfrombuffalo[$]]

Various economists weigh in

But apparently no one checked with the IRS when they planned how long it will take