An overview of the ideas, methods, and institutions that permit human society to manage risks and foster enterprise. Emphasis on financially-savvy leadership skills. Description of practices today and analysis of prospects for the future. Introduction to risk management and behavioral finance principles to understand the real-world functioning of securities, insurance, and banking industries. The ultimate goal of this course is using such industries effectively and towards a better society.
Mortgages, part 1
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En provenance du cours de Yale University
Financial Markets
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À partir de la leçon
Module 4
Take a look into the recent past, exploring recessions, bubbles, the mortgage crisis, and regulation.
Rencontrer les enseignants
Robert ShillerSterling Professor of Economics at Yale University
Economics
Mortgages.
Now, mortgages are, mortgages owned by households was recently $13.2 trillion.
And recently, there were 48 million in the United States.
48 million mortgaged homes, but that's one for every six or seven people.
A lot of people still rent in living apartments.
But there's 48 million mortgaged homes.
There are also problems in the mortgage industry.
Because in 2012, right after the financial crisis, when the housing market bottomed.
There were almost 11 million homes that were under water.
Which means the value of the home was less than the value of the mortgage.
That’s quite a startling number.
So that was one in five homes.
What would benefit people who lived in those homes would be to abandon the house.
It's called jingle mail.
You put your keys in an envelope, and
you sign a short letter to the lending bank, I'm out of here.
Take my house, and you go, and you rent.
Now that only works legally in what are called non recourse states.
So some states are recourse, they can go after you and
try to get your money anyway, even beyond the house.
But many of our states are non recourse.
And even if they are recourse states, they won't actually often go after you.
Because it's too expensive, and you don't have anything else typically, so
why bother.
They just write it off as a loss.
But most people don't, most people keep paying.
They live in the house.
Maybe they have some ethical concerns, I promised to pay this, I'll pay it.
But it left our economies in shambles, because these people
typically knew they were under water, so they knew that they had negative savings.
The typical homeowner,
especially younger homeowners, have virtually nothing more than their house.
And if it goes under water, that means their personal net worth is negative.
So we have 10 million families, something like that,
with negative savings, and that's what killed the economy.
They didn't want to spend money when they don't have anything less than nothing.
So they just sat on their house, and they continued to pay their mortgage, and
they didn't spend.
So the whole economy went down.
In the 1920's and before, there weren't as many mortgages.
The industry wasn't as developed.
But the mortgages that you got were typically five year term or less.
You might get a two year loan, or three year loan to buy a house.
Now of course, you're going to live in it more than two or three years, or
often more it anyway.
But how do you deal with it?
We have to just come back and refinance.
The bank says, no problem, we're giving you a two year mortgage to buy a house.
In two years come back, and
we'll give you a new loan at the then prevailing interest rate.
The problem was, in the 1930s, we had the Great Depression.
And it involved a crash in home prices, because everyone was poor.
They couldn't pay as much to buy a house any more.
And secondly, it produced 25% unemployment.
So now in two years, you bought a house in 1929.
It's now 1931, you're underwater.
You go back to the bank and say, I'd like to renew my mortgage.
And the bank would say, no way.
You don't have a job.
Your house isn't worth as much as the mortgage.
So they would they foreclose on you.
So millions of houses were foreclosed in the early 1930s.
That lead to the Roosevelt administration.
They created the federal housing administration in 1934,
that would ensure mortgages.
That is insure the bank against your default.
So the government was taking on the risk that had formerly ban on homeowners.
That's because the whole thing was a total mess.
Houses were worth much less.
Nobody could buy them, they were crashing.
And that made banks fearful of lending to anybody.
So Roosevelt took a big gamble.
He said, we're going to just insure them, we, the government.
And if there's further defaults and further crashes, well,
we're going to take it out of taxpayers, and we're going to pay you off.
So the banks started lending again, and it brought the housing market back up.
The other thing that Roosevelt did in 1934, was to require 15 year loans.
Any FHA loans had to be 15 years until maturity or longer.
This whole idea of giving you a two year mortgage seemed like a bad idea in 1934.
That's established a trend toward long term mortgages.
As time went on, it became standard in the United States to have long term mortgages.
And now, typically, it's 30 years.
At least if you're a younger person, you typically get a 30 year mortgage.
By the way, FHA has been in trouble recently, and it may still be in trouble.
But it hasn't defaulted yet.
There have
been a lot of mortgages that had to be paid out by the FHA that defaulted.
And so they've raised their insurance premium.
From a half a percent a year to 1.5% a year, which has been hurting real estate.
>> Since the 2007 housing bubble, markets seem to be concerned overwhelmingly
with irrational over evaluation of aggregate housing prices.
My question is, should we rather be concerned about
irrational undervaluation of housing prices?
>> That's a question especially for
certain cities like Detroit or Baltimore [LAUGH].
Where prices of, I don't know if they've fallen much in Baltimore may be in certain
>> In certain pockets.
>> In certain pockets.
But Detroit has had prices fall so
much that the city has been tearing them down.
They hit zero, and they're abandoned, and then they become a hazard.
So I guess it's like anything else.
You have to judge whether they're being devalued for a good reason, or not.
Detroit is coming back now.
So it might have been a smart move to go in and buy them, recently.
And you could get them really cheaply.
And then, maybe they will come back.
It's like anything else.
Value investing has to judge.
You can do value investing with housing, but
you have to judge whether there is a prospect with them coming back.
I'm sure there's a good business strategy for doing that.
Maybe I'll buy some property in Baltimore.
[LAUGH] >> Yeah,
[LAUGH] You said you're from Baltimore,right?
>> I am.
>> Yeah, so this thing about mean reversion,
when something gets really cheap, it's has a better chance of coming back.
But not necessarily, it's a somewhat risky investment.
But yeah, homes.
There are number of places where some people argue
prices fallen well below construction cost.
And there won't be any new construction if the houses are selling less than it costs
to build them.
Those might be good investments in the longer run, if the city gets rediscovered.
New jobs start coming into the city, and then suddenly,
those properties would take off.
And they're protected against new construction.
See, if homes are selling well above construction costs,
there's a kind of a cap on their appreciation.
I don't know if a lot of people realize this.
They can't appreciate too much, because builders will come in and
build more of them, and dump new supply in the market.
So there are people who look at these and invest in housing,
trying to find houses below construction cost.
In areas that are coming back, that might be a good investment.
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