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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (108538)	3/9/2008 3:50:35 PM
From: ChanceIs	Read Replies (1) \| Respond to of 306849

RE: "One of the causes of the 1929 crash was the abuse of margin....." Hi Hawk. Nice post. Permit me to provide a few technical corrections - intended in a completely amicable/educational fashion. 1) Current federal equity market rules allow the borrowing of 100% of your "initial equity" to purchase stock. If IBM costs $100/share, and you bring in $100 cash to your broker, you can buy two shares for your account. Your broker and the Fed have different post purchase equity requirements. With Schwab, if your equity drops to 30% (corresponding to IBM dropping to about $70 in the example), then your broker will require you to up your equity. If your equity drops below 25%, then your broker has to liquidate you. If Greenspan wanted to prick the late '90s bubble, he could have just raised the Fed requirement. I am a little foggy on the rules when you can purchase more stock on margin if your account has appreciated. I think that any time you have over 50% equity you may buy more. If your account had dropped down to 35%, you would have to wait until it got back above 50% to tap your equity to buy more. 2) You wrote..."means we're purchasing that home on 80% margin." Technically, "margin," is the equity provided for a loan. I think it more correct to say - we bought that home on 20% margin....meaning we put 20% down. In stocks, there is 50% "margin requirement." In real estate, there used to be (in the 1920s) a 20% margin requirement. It seems to me that in the mid '80s, the FHA margin requirement (first time purchasers) was only 2%-3%. To avoid paying PMI, the margin requirement is 20%. Today of course there is no margin requirement. Hmmm. Perhaps I need to update my database. It could very well be that we are back to 20% in these early months of 2008. Maybe 50% by July??? As is usually the case, the government tried to help but made a mess. By fostering house purchases with implicitly government backed loans (lower interest rates by government backing/reduced risk) and the mortgage interest deduction it was just giving J6P a little dose of financial heroine to get him addicted. You forgot to mention that those who remain in their homes and watch their equity drop day by day because of J6P's foolishness, also get to pay increased income taxes as Uncle Sugar buys the bad loans from the banks in order to keep the financial system from imploding. J6P won't be paying any taxes if his income was too low to pay his mortgage. He will probably have no income at all when he looses his job because of the housing bubble induced recession....which he helped create. I observed long ago that our current version of "democracy" punishes the competent and rewards the lazy minded.