Friday, December 26, 2008

Houses in Richistan

The market for houses financed by jumbo mortgages is about to enter a death spiral. There are four reasons:
1. Jumbo financing has died up. The government efforts to get mortgage lending moving again are focused on conforming loans. The interest rate relief that has driven down the price of a conforming mortgage has opened up historically unprecedented spreads between conventional and jumbo financing.
2. Houses north of, say $500,000, are move up houses. The whole idea of moving up has been one of the prime casualties of the current housing crisis. Extracting one's equity from a middle class residence to apply towards the down payment on a larger home is harder than it's ever been.
3. The more affluent families that are the principal purchasers of these houses tend to have more financial assets than the general public. They have, therefore, felt more severely the impact of the collapse of the financial markets. They have less in the retirement plans, less in their brokerage accounts and, even if still employed in high paying jobs, are far poorer than they were a year ago.
4. The decision to buy a house has also been an odd decision--one part an investment decision, one part of matter of personal consumption. The more expensive the house, the bigger the investment component. The idea that rich people are different, and are indifferent to losses on their real estate, is ridiculous, and piously repeating it as part of the wealth worship liturgy, doesn't make it any less ridiculous. In any event, to the extent that buying a house is an big investment decision, the willingness to go long an expensive house in a declining real estate market, is markedly diminished.

And that's the mumbo jumbo.

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