California's home-building pace won't tame high prices soon

Just like before, it doesn't matter what you do, it matters what most people do. You act conservatively. 50 other people don't. They default and bring the prices of all homes down with them.

The big difference between what's happening now and what happened in 2007 is that banks are better prepared for when people start defaulting, since they will have made all their money before the default. With the short term ARMs people started to default in sometimes less than 5 years and the prices were so low the banks took huge losses.

People can not be trusted with tools like interest only mortgages, especially when builders and lenders work together to push them. And when everyone is using them it arbitrarily pushes prices up, which causes more people to overextend because it's the only tool they can use to purchase a house that they would otherwise be able to purchase for 30% less if that tool didn't exist in the first place. You look up and down the cost and you see all this inventory. And you look at the historical prices and wonder, "Why is everything so expensive?" It's because right now a massive portion of those homes are effectively being subsidized by the mortgage interest deduction. It ends up being a transfer to the government to banks.

The 15- and 30- year made sense given when they were created and the importance of homeownership in solving social problems and equity concerns. All these other tools are disasters. They are handed out in such a way that they are basically designed to fail. But this time instead of getting your payout after the default in the form of a credit default swap, you get your payment before the default in the form of 10-years worth of pure interest payments.

/r/California Thread Parent Link - mercurynews.com