Wells Fargo to Boost Credit Default Swaps as Trading Rises

a reply to: Aazadan

What population though because the labor force has actually declined 12 million people in the last 8 years?

originally posted by: onequestion
a reply to: Aazadan

What population though because the labor force has actually declined 12 million people in the last 8 years?

The labor force can decline while certain sectors do well, and localized areas based on those sectors can flourish. For example, the town I used to live in. 8 years ago they had a median wage of $14,000 per year and then they turned to fracking to replace their previous main exports of poverty, crippling depression, and being the world leader in developing a certain type of cancer (not treatment, just the illness). Now the median wage is up to about $25,000 while maintaining a very low cost of living and a large chunk of the population has 6 figure jobs where there used to be under 10 of those total in the town. That's an example of a place where the current economy has been beneficial, not that it hasn't brought other issues.

Basically, it's complicated. If you're doing well though (upper 10% for sure, upper 30% more debatable) you're doing MUCH better these past few years than in previous years. If you're not in that group though you're doing worse, that's the group that has lost their jobs and is seeing declining wages.

How this all relates to houses is it's that group that's doing well that's in a position to purchase homes. There's been a shift over the past 2 decades in home buying. People don't buy 1-2 homes anymore, instead it's a smaller group purchasing a larger number of them. This is for a few reasons, but one of those reasons is growing wealth inequality. For many people it's a fantastic time to be buying homes right now, but people who can't afford it want in on the action as well. My personal line is that if you can't outright purchase a home on 1 years salary (or have it fully paid off in less than 2 years) you can't afford that home. But others use different lines, a previous poster quoted 2x a years salary and financial planners say 20% of income which works out to 3x take home salary on a 30 year, or 4x base salary.

The problem is, for people in the bottom percentiles or even the middle ones, salaries are declining while inflation is boosting the price of goods, and home prices have been kept artificially low. Even 4 times annual income often times isn't enough to purchase a home, which leads to a rush of buyers now trying to get in while they can even though it's more than they can safely afford.

This is where these bank products come in. If one bank doesn't make the loan another one will, and as a result competition dictates that the bank has to make the loan. So the banks are making the loans, and then insuring the loan against the probability that the borrower will default. This covers their bases either way and it's part of what happened in the previous collapse. The other part of the previous collapse though was that loans which were insured were packaged as low risk loans rather than high risk, insurance isn't a get out of jail free card because if a lot of people default at once insurance can't cover it all. The ratings agencies didn't do their job and they rated the insured subprimes as AAA when they were in reality much higher risk than that. Even that wouldn't have done the damage it did though, except because of the AAA rating, these bonds were then resold to other investors and used to back things like state bonds, retirement plans, and so on.

Just offering CDS's are cause for concern but those alone won't lead to a repeat of the previous financial collapse.

So, in short. A minority of the population (20%-30%) is doing extremely well and can afford to purchase several homes in a buyers market. This is leading to entire neighborhoods gentrifying and fueling an increase in home values, while the fed has kept interest low trying to stave off this bubble. A majority of the population is trying to also get in on the action as is typical in a bubble but can't safely afford to do so, and the banks are better on those people defaulting sooner or later.

originally posted by: onequestion
Can you give a long term projection or predict a future outcome?

Here is a good update for you and plays into what we were discussing:

If Fed Chair Janet Yellen has her way, there likely will be two rate hikes this year, contrary to current market expectations. Source