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Source link: http://archive.mises.org/3679/mortgage-pyaments-to-be-funded-by-mortgages/

Mortgage Pyaments to be Funded by Mortgages?

June 6, 2005 by

It’s hard to know what to say any more about the insanity otherwise known as “the housing market”. Compare this article: Californians’ home equity up $1 trillion since 2000, BIA says

    In addition to strengthening the economy, the gain in home values makes it highly unlikely that widespread mortgage defaults will occur in the event of a sharp economic downturn, said Alan Nevin, the association’s chief economist.
    “People have the ability to borrow against their homes,” Nevin said. “If times get tougher, they could borrow a sufficient amount to pay their mortgages.”
to a piece that I wrote a couple of years ago for Lew Rockwell, intended as satire:
    The mainstream economist responded to these charges. “Home owners can simply extract equity from their home by refinancing and use the cash they take out to pay the difference between their income and their mortgage.” Home owners extracted $491 billion of equity from their homes last year according to the Wall Street Journal. “Home owners are already using home equity from refinancing to meet ongoing monthly expenses,” he continued, “It is a small step forward to start using these funds for the mortgage itself.”
If people borrow against their home to pay their mortgage, then how will the additional debt be paid? By more borrowing? Where will it all end?
I also posited the idea of people quitting their jobs to day-trade real estate:
    Eventually, most of the US labor force will be employed in one of a few types of work: real estate developer, building contractor, appraisers, real estate broker, and real estate agent. Their work will consist of the construction, financing (and re-financing), purchase, and sale of residential real estate. Day traders who now trade NASDAQ issues may be able to day trade residential real estate if sufficiently liquid markets and continuous price quotes are available.
Also true to life:
    In December, Paul Galasso quit his Costco management job to join his wife, Evelyn, as a full-time real-estate investor.

    The leap from salaried manager at a $48 billion public company to residential real-estate entrepreneur wasn’t impulsive, Galasso said. The couple made more than $100,000 from five Eastside deals they completed during 2004.

    Galasso, 38, is among the growing ranks of weekend real-estate investors in the area who, encouraged by a housing market that continues to sizzle and buoyed by the success of initial deals, have decided to pursue the practice full time.

I think that I should give up trying to write satire.


Stefan Karlsson June 7, 2005 at 3:20 pm

Relax, Bob, it’s just economic science making new progress. Did you for example know that we now know that when you’re buying something, you’re really producing it?

That’s what the highly innovative economic star Larry Kudlow has figured out with his new concept of “core” GDP being private consumption and investment expenditures, the issue of whether these purchases was produced and financed in America being made irrelevant.

And the U.S. federal government has also produced path-breaking innovations in economic science,

pointing out to us that a 36% price increase is really a price cut.

xteve June 10, 2005 at 12:28 am

“If people borrow against their home to pay their mortgage, then how will the additional debt be paid? By more borrowing? Where will it all end?”

Why would it end? Haven’t you heard? The good times will last forever! As housing prices continue to rise, which they forever will, then there will always be equity to extract, equity which grows by itself just from being a house. Forever!

If worse comes to worst the Federal Government can always bail everyone out. It’ll be able to do this through borrowing. Surely this too can go on forever.

I think we all understand the lessons from the stock market bubble: don’t buy stocks, buy houses!

Gee whiz, Mr. Blumen, for someone writing in an economics blog, you sure don’t know anything about how the economy works.

Robert Blumen June 10, 2005 at 12:51 am

xteve: It seems so obvious when you put it that way.

Dennis T Cheung June 12, 2005 at 11:36 pm

I think xteve was being sarcastic.

A more likely scenario is that people will just use their credit cards to finance the gap – especially with those 0% introductory rates. Then they’ll just tranfer the balances around. Eventually, they’ll use the 1.5% rebate on those cards to help pay off the debt. Failing, that, there are lots of ads on TV to help good people get out of those credit situations.

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