The long slow pop

[RepoMan]

Man, quite the trifecta of housing bubble articles on the local news site today. I'm not going to quite pull a Rucker here, I'll just summarize the titles:

Mortgage Fears Jolt Stocks (http://www.sfgate.com/cgi-bin/article.cgi?file=/n/a/2007/03/13/financial/f140113D78.DTL&type=business)
Dow dives 242 amid troubles for subprime lenders.

Late house payments, foreclosures soar (http://sfgate.com/cgi-bin/article.cgi?f=/n/a/2007/03/13/financial/f091934D46.DTL)

Worries rise over high risk lending (http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/03/13/BUGH7OJVKH1.DTL)

And meanwhile, The Housing Bubble Blog (http://thehousingbubbleblog.com) keeps churning along with nationwide reports of Big Fat Fucking Trouble in the subprime world.

I'm figuring it'll be 2009 before this all hits bottom. The adjustable rates are going to keep spiking over the next two years, and until they've all bumped up and all the foreclosures have gone down, this is just going to keep on snowballing.

There's a place practically across the street from us that's been on the market since last August. They dropped the price from $599K to $579K in December. I think they're hoping that springtime will bring out the buyers. I also think they're dreaming. According to zillow.com (the ultimate pry-on-your-neighbor real estate tool), though, they've owned the house for long enough that their mortgage is pretty tiny, so maybe they're just wanting to wait it out. They're gonna have to wait a looooooooong time....

Edit: Boo yah!
“The lawyer, Alan Ramos, says the loan never should have been made. ‘You have a loan application where the income section is blank,’ Mr. Ramos says. ‘How does it even get past the first person who looks at it?’”

[Jake Plane]

So what does all this mean for potential homebuyers? Wait?

[RepoMan]

Um, yes. Wait. Wait until the foreclosure rates start going back down.

[SlyFrog]

I insert my babble from the other thread here, mutatis mutandis.

[Enidigm]

It does seem like the market is see-sawing on whether to have a honest to goodness crash or just a correction right now.

[SlyFrog]

Yes. I'm now officially in the "starting to get scared camp." We are scheduled to see a house tomorrow; I may tell my broker that I'm out of the game right now.

[Shadarr]

There's a place practically across the street from us that's been on the market since last August. They dropped the price from $599K to $579K in December. I think they're hoping that springtime will bring out the buyers. I also think they're dreaming. According to zillow.com (the ultimate pry-on-your-neighbor real estate tool), though, they've owned the house for long enough that their mortgage is pretty tiny, so maybe they're just wanting to wait it out. They're gonna have to wait a looooooooong time....
I think the crash hasn't actually taken hold yet because a lot of sellers still believe they can get 5-10% annual appreciation and priced their houses accordingly. The places that are priced lower are still selling, but there's a lot of stuff out there that just sits and sits because the seller isn't willing to lower the price. However, as more of these articles start trickling into people's attention, you'll see prices drop as people try to get as much as they can while they still can, which will cause the groupthink to turn and you'll get a vicious cycle driving prices down just like the one that drove them up.

[Shadarr]

Yes. I'm now officially in the "starting to get scared camp." We are scheduled to see a house tomorrow; I may tell my broker that I'm out of the game right now.
Nah, go see the house. Just don't buy it. Watch the mls site and see if that house drops its price and get your realtor to tell you what it sells for, if it does. It's never a bad idea to be better informed.

[Morkilus]

Oh. I thought this said the long slow poop.

<- renting 4 evar

[Shadarr]

Here's another good read from the not-particularly-subtly-named blog The Mess That Greenspan Made: Plankton and Ponzi Finance (http://themessthatgreenspanmade.blogspot.com/2007/03/plankton-and-ponzi-finance.html).

Clearly, the explosion of exotic mortgages – sub-prime; interest only; pay-option, with negative amortization, et al – in recent years, have been textbook examples of Minsky’s speculative and Ponzi units.

And as Bill Gross explained long ago, such mortgages have been the food of the Plankton, the first-time homeowner, driving the homeownership rate to record highs, as displayed back in Chart 1, while also fueling accelerating home price appreciation. But as Minsky had forewarned, eventually this game must come to an end, as Ponzi borrowers are forced to “make positions by selling out of positions,” frequently by stopping (or not even beginning!) monthly mortgage payments, the prelude to eventually default or dropping off the keys on the lenders’ doorstep.

[SlyFrog]

Nah, go see the house. Just don't buy it. Watch the mls site and see if that house drops its price and get your realtor to tell you what it sells for, if it does. It's never a bad idea to be better informed.

Oh yeah, that's what I meant. I wasn't going to call him and tell him it is off tomorrow. Just debating whether to tell him that we are going to dial back the looking for awhile and wait to see what happens with pricing.

I like the realtor (I know, I know, they're slimeballs :), so I don't want to waste his time and let him think I'm actively looking for the perfect house to buy (and take up his time to go out and look at them) if I really have no intent of buying in the next six months to a year in waiting on the market. So I just have to debate what I will tell him if I stick with my decision to dial it back.

Again, to hopefully remove some of the, "SlyFrog's a kooky idiot," thoughts (if that is possible), I have been watching MLS on about 50 houses of interest on an ongoing basis since November. So I'm trying my best to be informed about what is happening.

[shift6]

See the house and make an offer for 10% less. Maybe they're desperate already?

[SlyFrog]

See the house and make an offer for 10% less. Maybe they're desperate already?

Yeah, I'll take a look at it. The problem is, I really do think, regardless of whether there is going to be a big market slide, that people here are really being greedy in their asking prices. I'm seeing a lot of houses sit on the market because they are just priced unrealistically. That's part of what is unnerving me.

So asking 10% less for some of these inflated asking prices might be still paying 20% too much. :)

[Shadarr]

That's why you should get your realtor to tell you the selling prices. If you only ever see the asking price you won't really know what the market is. If you know what similar properties have sold for you'll have a better idea what a house is worth.

[RepoMan]

Except in a falling market, even recent sale prices aren't a good indicator of current value.

I'm not sure why I'm hyping the crash so much -- I'm a fucking homeowner! But then again, we always looked at our house as a way to stay in touch with the market, not as a long-term investment. (e.g. if the market spikes, our house spikes, and our next house is not out of reach... if the market tanks, our next house tanks along with our current house.) Maybe I'd have a different attitude if we weren't planning to move soon. Or maybe not. Investments are long-term animals, and bubbles always come and go, and if you're not holding something for >10 years you're dancing on the edge.

[Damien Falgoust]

Next week I close on the sale of my house, which I've lived in for two years, for about 10% over what I paid (yay divorce). It was on the market for all of two months, during which time we actually had two offers (one fell through). What pop?

Yes, my anecdote trumps statistics. Neener neener.

[SlyFrog]

That's why you should get your realtor to tell you the selling prices. If you only ever see the asking price you won't really know what the market is. If you know what similar properties have sold for you'll have a better idea what a house is worth.

I'm doing that myself, and asking my realtor prices where the market data hasn't hit the MLS sites yet.

It is absolutely great this day and age. Most of the MLS enabled sites let you do the research yourself. The last place we went to, I went to my realtor with a package of paper showing comparables, and mentioning that nothing with the house's square footage, age, and lot size had sold within the last two years for a price higher than $60k less than they were asking for theirs.

I'm actually being pretty brutal on the research on this stuff. As mentioned, I've been watching listings, comparing sold comparables on line, etc. since November, to the point where I'm probably spending too much time at work on the web obsessing over this. :) My biggest fear is not that I will overpay vis-a-vis existing comparables and other houses in the area; my fear as that those prices, along with what I pay, will be bubble inflated prices, and the market will drop from there in the next few years.

[malphigian]

Yet NYC housing pricing continue to go up and up.

I can't tell you how insane prices are in NYC (not even manhatten, brooklyn too). A poorly constructed, small, aluminum-sided house in an "up and coming" neighborhood (i.e. one with no business and poor subway access) runs well over a million. You can get one for only $900k in Bed Stuy (famous for being name checked by every east coast hip hop artist as the place where you earn your street cred). These are placed that sold for $150k-200k or so 5 years ago.

Meanwhile hundreds of new "luxury condos" are going up all over the city with 2 bedroom apartments going for a million or more.

I've pretty much given up, I realize new york can't go the opposite direction of the rest of the country forever, but who knows when it's going to come down to something reasonable.

[jeffd]

Just enjoy the schadenfreude when all the owners of those million dollar shitholes are left hanging.

[Andrew Mayer]

I've pretty much given up, I realize new york can't go the opposite direction of the rest of the country forever, but who knows when it's going to come down to something reasonable.

It's a limited real estate issue. It'll won't come down without a serious market correction or rise in the crime rate. Hard to say whether that will happen quickly or slowly at this point.

Same for San Francisco.

[bago]

Sooo... yeah. I've had this penthouse apartment for the past three years in a housing hot city (Seattle) and my rent hasn't budged. When we hit double digit inflation to pay back China for the sub-prime boomlet and deficit, with all of this fresh new property on the market and no cheap lending...

Rent won't be seen as throwing your money away.

[Lurb]

... if the market spikes, our house spikes, and our next house is not out of reach... if the market tanks, our next house tanks along with our current house...

Same situation here. Neighbours are selling their houses, similar to mine, for 240K€ (bought new 5 years ago for 120K), to go to live in nicer 300K ones. If the market crashed, say, by half, I'd happily sell again for 120 and buy a 150 one. I don't think the stupidly inflated price of a house I 'm using to live in and would need to replace if I sold it has anything to do with my real net worth.

[WarrenM]

Sooo... yeah. I've had this penthouse apartment for the past three years in a housing hot city (Seattle) and my rent hasn't budged. When we hit double digit inflation to pay back China for the sub-prime boomlet and deficit, with all of this fresh new property on the market and no cheap lending...

Rent won't be seen as throwing your money away.
This is only applicable to people with idiot ARM loans. We have a fixed mortgage rate. We're not affected and, as a plus, we get to own.

[BennyProfane]

I'm currently trying to sell a house in SE Michigan (I know, should just go ahead and slit my wrists now). And hoping to buy in NC as soon as the Michigan sells, assuming hell hasn't frozen over by then. Meanwhile, just trying to familiarize myself with what's out there, what neighborhoods I find desirable, etc. This mess with the crash is a good reason to wait a while, but I am also driven by not wanting to have to sign another year lease on the current rental, which would push me back to buying until Summer 2008.

Meanwhile, I'd be interested to hear more about how you are doing the research you mentioned, Slyfrog. I've checked a number of MLS listing sites, including their .net, and I don't see the sort of research tools you mention--for example, the ability to find already sold properties with selling price, etc. I'd love to start tracking properties closely enough to, as you say, show up at the seller's agent doorstep with verifiable data showing comparable pricing, etc.

[Glenn]

“The lawyer, Alan Ramos, says the loan never should have been made. ‘You have a loan application where the income section is blank,’ Mr. Ramos says. ‘How does it even get past the first person who looks at it?’”I keep hearing this repeated all over the place, but it's not even the best part of the Wall Street Journal story. The BEST PART is that the quote followed an anecdote in which a 70-year old woman, who was in danger of foreclosure on a $900 a month mortgage, was talked into a super-duper-special-secret loan by a cold-caller from New Century in which she made no payments for two years, after which her mortgage ballooned to $2200 a month. Yes, she left the income section of her application blank, and yes, the loan was approved.

[noun]

Hell no, this is fantastic news. Foreclosures forcing unethical lenders out of business is great for the rest of us, especially those 20 somethings and even 30 somethings that have been unable to buy their own house because of astronomical prices now have a better chance of doing so. An increase in foreclosures means more inventory on the market, which is AWESOME for buyers. Just imagine all the desperate sellers and bankers ready to make a deal to get the debt off the books.

Short of a nuclear war on American soil, I'm hard-pressed to think of anything decreasing the value of American real estate any time soon.

[Fugitive]

A friend of mine works in the underwriting group of a mortgage company, and they do try to be diligent about this stuff, but it's as flawed as any other process. Loan officers and applicants will make up numbers, revise them later on just to make them fit acceptance criteria, obfuscate their true income, hide their debts, and so on.

The underwriters are still supposed to catch that, but there'll be someone somewhere who's too overworked (they've been crazy busy for years now), too naive, undertrained, no longer caring, pressured from above...

[Shadarr]

The BEST PART is that the quote followed an anecdote in which a 70-year old woman, who was in danger of foreclosure on a $900 a month mortgage, was talked into a super-duper-special-secret loan by a cold-caller from New Century in which she made no payments for two years, after which her mortgage ballooned to $2200 a month. Yes, she left the income section of her application blank, and yes, the loan was approved.
Good for her. I mean, she's already in danger of losing her house and somebody offers to let her live there for free for two years and then lose her house. Sounds like a no brainer. Presumably she left the income section blank because its irrelevant; you don't need income when you aren't paying the mortgage.

[SlyFrog]

Meanwhile, I'd be interested to hear more about how you are doing the research you mentioned, Slyfrog. I've checked a number of MLS listing sites, including their .net, and I don't see the sort of research tools you mention--for example, the ability to find already sold properties with selling price, etc. I'd love to start tracking properties closely enough to, as you say, show up at the seller's agent doorstep with verifiable data showing comparable pricing, etc.

Let me give you a verifiable example that works in my area. Go to www.minnesotahomes.com. Click on the "Property Search" tab. Then click on the "Twin Cities Solds" tab. From there, using the filtering tools on the left side of the screen, and the map, you can look at areas and determine sold prices in the area within the last 6-24 months (depending on how you set the filter). It even pops up little "pins" on the map for you so you can see at a glance where things sold, what price, etc.

Now that obviously works for the Twin Cities, but I imagine there is something similar for almost any large metropolitan area.

[drewl]

There's a couple problems there....
why does a 70yr old still have a mortgage?
why wouldn't she sell it and buy something she could afford?

I'm hoping for a huge pop.....hopefully I can get a Mcmansion for $100k!

[Midnight Son]

I am vindicated. Again.

[SolomonGrundy]

Just sold mine above market value- dodged a bullet.

[Robert Sharp]

This varies by area, though. Some places get hit much harder than others, so I always take these articles with a grain of salt. In CA, it's a BIG deal. Down here in the SE? Not so much. When you can get 15 yo (or less) houses with 1800 sq. ft. for $130-$160k, adjustments are MUCH less of a problem.

[DeepT]

Are there general MLS sites you can use? Id like to start watching prices in my area of Florida so I can have a better handle in a year or two.

[Midnight Son]

Looks like the smart people are in this thread........ :)

[Shadarr]

http://mls.com/

[DeepT]

Weee. That site just showed a house that is 1 bedroom, 1 bath, 1794 sq feet for...... $6,950,000 unfortunatly they want me to do a free trial (which will likely result in junk mail / email out the whazoo) to see more info.

The town I live in is a "working industrial town", not anything remotely close to a luxury community with rich people. Id love to drive by that place and see what a 7 million dollar 1 bedroom / bath house looks like. Maybe they have a tree which has golden apples on it in the front yard.

[Shadarr]

Maybe they said bath when they really meant olympic swimming pool?

[SlyFrog]

Well, it appears that Senator Dodd may just bail everyone out and stop the foreclosures:

U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said today.

``The impact of losing 2.2 million homes I suspect will be in a lot of areas of our cities and towns that are already pretty hard hit, so we clearly want to look at that and legislate,'' Dodd, a Democrat from Connecticut, told reporters in Washington after a speech to the National League of Cities.

Foreclosures involving homeowners who took out subprime loans from 1998 until 2006 could cost $164 billion, Dodd said, citing a December study by the Center for Responsible Lending in Durham, North Carolina. The government needs to provide at-risk homeowners ``forbearance or something like that to give them a chance to work through and get a new financial instrument here that they can manage financially better,'' Dodd said.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aww3A6BGTLuQ

[chet]

Well, it appears that Senator Dodd may just bail everyone out and stop the foreclosures:

That is crazy talk. The only logical end is the end of western civilization, SO DO NOT BUY A HOUSE!

[Enidigm]

Wow. Can i buy 10 houses now and let the government pay for my irresponsibility?

These subprime lenders are just scams against the financial community anyway.

It's funny how hard it is to steal 50$ from the corner store but easy to steal millions from financial institutions - once you're a "real" company.

[Shadarr]

Yeah, I want people to go to jail over this. I also want a pony. Want to lay odds on which I get first?

[Andrew Mayer]

You don't want the pony badly enough.

[shift6]

I blame poverty.

[Damien Falgoust]

Yeah, I want people to go to jail over this. I also want a pony. Want to lay odds on which I get first?Maybe you can get an interest-only loan to finance the pony purchase.

[Midnight Son]

I recommend an stated income, 2/28, option ARM! It's the ultimate in pony purchasing!

[chet]

That is crazy talk. The only logical end is the end of western civilization, SO DO NOT BUY A HOUSE!

That is crazy talk. The only logical end is the end of western civilization, SO DO NOT BUY A HORSE!

[shift6]

http://shift6.com/qt3/cant_have_a_pony.jpg

[Midnight Son]

That is crazy talk. The only logical end is the end of western civilization, SO DO NOT BUY A HORSE!

Admit it: you bought a McMansion you can't afford.......

[RepoMan]

That is crazy talk. The only logical end is the end of western civilization, SO DO NOT BUY A HOUSE!
That is crazy talk. The only logical end is the end of western civilization, SO DO NOT BUY A HORSE!
That is crazy talk. The only logical end is the end of western civilization, SO DO NOT BUY A HORSE HOUSE!

[bago]

This is only applicable to people with idiot ARM loans. We have a fixed mortgage rate. We're not affected and, as a plus, we get to own.

Plus working Epic during some of their biggest years didn't hurt.

[WarrenM]

Plus working Epic during some of their biggest years didn't hurt.
I don't remember Epic giving any courses on how to buy a house or anyone there ever telling me about how stupid an ARM loan would be. No, I figured that stuff out on my own.

[TheTrunkDr]

I don't remember Epic giving any courses on how to buy a house or anyone there ever telling me about how stupid an ARM loan would be. No, I figured that stuff out on my own.
True, however not everyone has the money you do and live in a realestate market like NC. Many of us live in markets like LA, SF, Seattle and Boston where what you paid for your house probably wouldn't get most of us a shit box studio apartment in a neighbourhood where you'd be affraid to step outside at night. I'll agree ARMs and interest only loans are generally stupid (a fixed interest only can be a good move if you're disciplined and regularly make payments to principle since the rate is generally lower) but having more money does give you more options.

[WarrenM]

Hey, I could have easily paid $400K+ for a house if I wanted to. But I didn't want to. I paid for the house that I needed and I did it in an intelligent manner.

And yes, I make more money than the average American family but I'm guessing so do most of the people on this board.

[jeffd]

And yes, I make more money than the average American family but I'm guessing so do most of the people on this board.

Nitpick time!

You do understand why this statement is irrelevant right? What matters is what you make in relation to the area you live in.

I'm single and I make more money than the "average American family." That being said for the area I live in I'm probably barely at the median income level. I certainly couldn't afford to buy anything more than a shoebox condo in this area without selling half my soul.

[SlyFrog]

Hey, I could have easily paid $400K+ for a house if I wanted to. But I didn't want to. I paid for the house that I needed and I did it in an intelligent manner.

"Needed" is an interesting choice of words there. The house that I "need" would probably be a 500 sq. ft. 3 room shack. I'd prefer something a bit more than that.

[ElGuapo]

My neighbors put their house up for sale last week, about mid week. When I was leaving for work this morning, their realtor was outside changing the "For Sale" sign to "Under Contract".

Springtime! For Hitler! In Germany!

[Nick Walter]

"Needed" is an interesting choice of words there. The house that I "need" would probably be a 500 sq. ft. 3 room shack. I'd prefer something a bit more than that.

You've hit on a good point, but I think it's too complicated and slippery a point to have much bearing on this discussion. People have a lot of factors influencing what they consider the minimum acceptable level of housing. It has a lot to do with their background, family size, the quality of housing they perceive their peers to have, etc.

I'm another person who could have easily made payments on a larger/nicer house than I have now but opted instead for something more modest because I like having plenty of money in savings in case something really bad happens.

[shift6]

It's relevant in terms of whether or not a government bailout is needed for Target employees who bought $700K homes because they're fucking stupid.

[SlyFrog]

It's relevant in terms of whether or not a government bailout is needed for Target employees who bought $700K homes because they're fucking stupid.

Serious question: Do you honestly think they are stupid, or do they just realize that there is a limit to the bad things that can happen to them because of it in the U.S.?

I really don't buy that people were so confused about housing prices and mortgages. I think it is much more likely that on average, people were simply greedy, wanted more than they could afford, and figured they would live well for awhile and figure out the rest later, and the worst that would like occur would be losing the house.

There is a big sense of entitlement for things like that in the U.S. right now; everyone should be able to have a five bedroom, 4,000 square foot house, and it's not fair if I can't have one because I know someone else who does.

[shift6]

That's precisely what I meant by "stupid".

[Nick Walter]

Serious question: Do you honestly think they are stupid, or do they just realize that there is a limit to the bad things that can happen to them because of it in the U.S.?

I really don't buy that people were so confused about housing prices and mortgages. I think it is much more likely that on average, people were simply greedy, wanted more than they could afford, and figured they would live well for awhile and figure out the rest later, and the worst that would like occur would be losing the house.

There is a big sense of entitlement for things like that in the U.S. right now; everyone should be able to have a five bedroom, 4,000 square foot house, and it's not fair if I can't have one because I know someone else who does.

Serious answer:

I believe both are factors, but I believe stupidity and shady lending practices far outweigh the greed factor. Going through a foreclosure and/or bankruptcy really fucks credit for a long time so it's hard to imagine a well informed rational actor deciding to game the system for a few years of free high class housing considering that it will then be a looooong time before they can get a decent car loan, get another home loan, etc.

A bailout is an okay idea, but I'd want it to be carefully structured so that only people below certain income levels qualified, and the banks that made the stupid loans still lose a lot of money on the deal. That's the only way to teach the lenders not to pull this kind of crap, hit them in the bottom line.

[SlyFrog]

That's precisely what I meant by "stupid".

Okay. To be fair, there are two possible definitions, one being that they really are confused and unclear as to the loan terms, that they would have to pay them back, didn't understand the finances. The second being that they really didn't care (intentionally), because they just wanted to live high on the hog for awhile and figured, "Fuck it, someone else will clean up the mess."

The first I have some sympathy for. The second should be made to pay for their decisions; no one else who didn't make such decisions voluntarily should have to pay for someone else's. Unfortunately, all of the second class will be lying and claiming they fall into the first.

[malphigian]

Serious question: Do you honestly think they are stupid, or do they just realize that there is a limit to the bad things that can happen to them because of it in the U.S.?

I really don't buy that people were so confused about housing prices and mortgages. I think it is much more likely that on average, people were simply greedy, wanted more than they could afford, and figured they would live well for awhile and figure out the rest later, and the worst that would like occur would be losing the house.

I think you're partially right, but I do not think the people who got ARMs way outside their price range were depending on some sort of safety net. I also don't think they failed the basic math. Self-delusion was a far, far bigger factor.

They were stupid becuase they:
(1) Assumed, like most Americans, that one day, probably sooner rather than later, they were going to get really rich. This is exactly the same rationale behind your example Target employee who gets upset by the estate tax. They assume, naturally, it will one day impact them and their offspring.

(2) They bought the line likely being sold to them by the real estate hype machine -- "don't you know, real estate prices never go down!". You buy the house on a 5 year arm you can't afford, but in less than 5 years you can sell it for 40% profit! It's not even necessarily that they were buying in with the intention of "Flipping" (http://www.aetv.com/flipthishouse/), but that was the "safety net" they had in mind -- "well, even if I'm not rich in 5 years, I can at least sell the house for 40% more than I paid for it".

I've seen lots of recommendations over the last few years that "buying" a house on a 5 year ARM with the intention of flipping it is preferable to renting.

[SlyFrog]

I think you're partially right, but I do not think the people who got ARMs way outside their price range were depending on some sort of safety net. I also don't think they failed the basic math. Self-delusion was a far, far bigger factor.

They were stupid becuase they:
(1) Assumed, like most Americans, that one day, probably sooner rather than later, they were going to get really rich. This is exactly the same rationale behind your example Target employee who gets upset by the estate tax. They assume, naturally, it will one day impact them and their offspring.

(2) They bought the line likely being sold to them by the real estate hype machine -- "don't you know, real estate prices never go down!". You buy the house on a 5 year arm you can't afford, but in less than 5 years you can sell it for 40% profit! It's not even necessarily that they were buying in with the intention of "Flipping" (http://www.aetv.com/flipthishouse/), but that was the "safety net" they had in mind -- "well, even if I'm not rich in 5 years, I can at least sell the house for 40% more than I paid for it".

I've seen lots of recommendations over the last few years that "buying" a house on a 5 year ARM with the intention of flipping it is preferable to renting.


Both really good points, and I think they both in their own way arise out of that same sense of entitlement. You can see it in the study done on narcissism in the U.S. Everyone is unique and special, and everyone will some day become a multimillionaire entitled to huge amounts of money.

What happened to people like my parents? They are blue collar, saw the houses I was looking at, and (politely) expressed their concern that I would get in over my head with those "outrageous prices." Now bear in mind that part of that is because they are coming from a small town where everyone makes $30k a year, and so $200k for a home is "outrageous" to them. But the point is, they do not have college educations, they do not have the ability to crunch numbers, they just realize that there are "rich people houses," and that "people like them," can not afford half-million dollar homes, end of story. They would say getting ARM advice from a mortgage broker about how they could swing such a loan would be simple self-delusion, allowing themselves to be talked into something they know isn't right because deep down, they want to be talked into it.

We have taught everyone to believe that everyone else but them will work in a cubicle for mid-level pay, but that they are a special individual destined for more. It has its good and its bad points.

[Nick Walter]

Both really good points, and I think they both in their own way arise out of that same sense of entitlement. You can see it in the study done on narcissism in the U.S. Everyone is unique and special, and everyone will some day become a multimillionaire entitled to huge amounts of money.

What happened to people like my parents? They are blue color, saw the houses I was looking at, and (politely) expressed their concern that I would get in over my head with those "outrageous prices." Now bear in mind that part of that is because they are coming from a small town where everyone makes $30k a year, and so $200k for a home is "outrageous" to them. But the point is, they do not have college educations, they do not have the ability to crunch numbers, they just realize that there are "rich people houses," and that "people like them," can not afford half-million dollar homes, end of story. They would say getting ARM advice from a mortgage broker about how they could swing such a loan would be simple self-delusion, allowing themselves to be talked into something they know isn't right because deep down, they want to be talked into it.

We have taught everyone to believe that everyone else but them will work in a cubicle for mid-level pay, but that they are a special individual destined for more. It has its good and its bad points.

Oh this is a keeper. I had to quote it before it got edited away.

If you take the disdainful classism out of that post all that would be left is punctuation.

[Huzurdaddi]

(2) They bought the line likely being sold to them by the real estate hype machine -- "don't you know, real estate prices never go down!". You buy the house on a 5 year arm you can't afford, but in less than 5 years you can sell it for 40% profit! It's not even necessarily that they were buying in with the intention of "Flipping" (http://www.aetv.com/flipthishouse/), but that was the "safety net" they had in mind -- "well, even if I'm not rich in 5 years, I can at least sell the house for 40% more than I paid for it".


Malphigian, this is almost certainly the reason for the masses going into subprime loans. Our economic system is pretty well developed: if you pitch it hard enough then the customers will follow. I have no idea how many new TV shows were created in the last few years about how to flip homes but it seems like more than a few. Further the real estate people on CNBC ( and I am sure on other channels ) constantly repeated the following lines: "real estate never goes down!", "real estate goes up 15% per year lately due to a demographic shift!", "they are not making more land, it can not go down!", "real estate has not gone down in 25 years!", etc. I remember the real estate people on Fox New's money show to be exceptionally disgusting ( the woman on the show covered herself in diamonds, and he phrases she used reminded me of the guy in the 90's how had an infomercial where he said "if you don't do this you deserve to be poor." ) she, and the others on the show to a lesser extent, hocked real estate endlessly.

Anyway, I'm sure SlyFrog will simply say that this is irrelevant. It is all about personal responsibility. The only way that jives with the fact that there is a significant portion ( maybe majority ) of the population that follow such misinformation is that these people are sheep and they deserve what happens to them. I don't agree, but that seems to be his point.

[Robert Sharp]

I have a five year fixed/ARM, but that's because I knew I wouldn't live here longer than 5 years. I had no delusion that I would make a profit. I bought because I checked the market and determined that it was likely I could at least get back what I put into it, so it will end up being cheaper (overall) than getting an apartment or renting a house. And I get the benefits of having my own house. That said, we bought a house we could afford.

I bring this up because in the process the mortgage people hit me with about 20 different options, many of which had lower immediate payments. I didn't take them because I noticed that almost none of the principle was touched for the first several years (exactly how many varied by plan). The result is that people who take on these plans literally get nothing out of owning a house. They get none of the money back that they put in, even if they do sell it for the same price they paid.

However, you only have to look at the payment schedule to see this. You don't really need to do complicated math. The schedule tells you how much of your payment goes toward interest and how much to principle. All loans (AFAIK) frontload the interest, which makes you pay more over time. But some of them do this to such a degree that you make no headway at all really. I'm having a hard time believing that the people buying these houses couldn't see that. So I'm going with the "willfully entered into a bad deal with either unrealistic optimism or a belief that they will be bailed out" theory.

[Robert Sharp]

Oh come on, Nick. Sly isn't being classist about this. He's saying that today's average American has been pumped full of ideals of entitlement that are unrealistic and potentially dangerous. The bright side is that people dream bigger, but the dark side is that their motivation doesn't always match their dreams.

[Glenn]

Someday, when I'm worth like THIRTY MILLION DOLLARS, I'm going to send SlyFrog a check for a thousand just because I know he'll be such a poor loser he'll have to cash it and then I'll own his soul. Then I'll take my Ferrari Enzo and spin donuts on the unkempt lawn in front of his modest home. HAW HAW HAW.

[WarrenM]

"Needed" is an interesting choice of words there. The house that I "need" would probably be a 500 sq. ft. 3 room shack. I'd prefer something a bit more than that.
I would disagree with that. A house that small would harm my quality of life so I therefore need something larger. We bought a 1,350 square foot house because that's what we need to be happy.

[Nick Walter]

Oh come on, Nick. Sly isn't being classist about this. He's saying that today's average American has been pumped full of ideals of entitlement that are unrealistic and potentially dangerous. The bright side is that people dream bigger, but the dark side is that their motivation doesn't always match their dreams.

It sounded classist to me. He wasn't suggesting that the poor should be educated well enough to handle complex financial issues like this, or that regulation should prevent predatory lending practices, he was lamenting the passing of the glory days where the poor were humble enough to not try to rise above their station.

[Rollory]

It sounded classist to me. He wasn't suggesting that the poor should be educated well enough to handle complex financial issues like this, or that regulation should prevent predatory lending practices, he was lamenting the passing of the glory days where the poor were humble enough to not try to rise above their station.

No, he was lamenting the passing of the days when the poor had the common sense to realize they were poor and not get themselves in over their heads based on wild fancy. Being "educated to handle complex financial issues" is far far more likely to allow for errors in judgement that become very costly and that could have been avoided by a simple common sense attitude of "Based on the money I make, looking at an expense of that size is just silly". That was my grandparents' attitude, and that's why my parents and I *aren't* poor.

It's not like it's the first time this issue has come around, either; nor will it be the last.

http://www.kipling.org.uk/poems_copybook.htm

[SlyFrog]

Oh this is a keeper. I had to quote it before it got edited away.

If you take the disdainful classism out of that post all that would be left is punctuation.

I did edit it, to make it clear that my parents are blue collar, not color (not being from Kentucky).

Other than that, take your sneering elsewhere. I stand by what I said.

[Rimbo]

Oh. I thought this said the long slow poop.

<- renting 4 evar

Incidentally, I started the other thread before I even opened this one.

[jeffd]

Heh, I'm kind of bummed you oepned the other one. Previously every time I saw this thread in the list I misread it as "the long slow poop" and it made me laugh. You've taken that away from me DICK.

[Rimbo]

I don't remember Epic giving any courses on how to buy a house or anyone there ever telling me about how stupid an ARM loan would be. No, I figured that stuff out on my own.

We bought right around the valley for interest rates (actually, right at the time they started creeping up). When the loan officer was discussing ARM vs. fixed rate, I just looked at him and said, "We're not stupid."

I'm now getting ARM offers that are higher than my current fixed rate. BWAHAHAHAHAHAA

[Rimbo]

Serious question: Do you honestly think they are stupid, or do they just realize that there is a limit to the bad things that can happen to them because of it in the U.S.?

It is because they are stupid, and don't realize that if everyone does a stupid thing, it is still a stupid thing.

[Shadarr]

No, he was lamenting the passing of the days when the poor had the common sense to realize they were poor and not get themselves in over their heads based on wild fancy.
Exactly. Acknowledging that there is a class system in the US is not the same as classism. People today have forgotten how to live within their means; the negative savings rate is proof of that.

Part of it probably is a self-perpetuating cycle. People tend to live and socialize with others in the same class. In our parents' generation, that gave you a fairly good indication of what "people like us" could afford. You didn't need to actually crunch the numbers to figure out whether you could afford the McMansion because everybody you know lives in a normal two- or three-bedroom house.

These days, with everyone running up huge debt on houses, cars and luxury items that they can't afford, you do need to crunch the numbers, because it's very likely most of the people you know are living beyond their means. If you restrict yourself to what you can actually afford, then to outside observers it will appear you are much worse off than your neighbours. If you just go by your gut and say "my buddies at work earn about the same amount as me and they have huge houses and two cars, I guess I can too," you'll end up over your head in debt.

[Jason McCullough]

Can someone claiming that the poor have forgotten how to save money and are now on incredible spending binges please provide statistical savings rate evidence for this? If I remember correctly, my vague poking around in an argument with Phil a while back got me nothing to support this in either direction. I found some stats showing a pretty clear dive in savings rates among the upper middle class and rich, however, with a strong implication it was due to the huge runup in the stock market.

[Nick Walter]

Can someone claiming that the poor have forgotten how to save money and are now on incredible spending binges please provide statistical savings rate evidence for this? If I remember correctly, my vague poking around in an argument with Phil a while back got me nothing to support this in either direction. I found some stats showing a pretty clear dive in savings rates among the upper middle class and rich, however, with a strong implication it was due to the huge runup in the stock market.

I seriously doubt any such evidence is going to be forthcoming. This thread has devolved into a rant-about-how-dumb-the-poor-are soup, seasoned with with a pinch of things-were-better-in-the-old-days for flavor. Facts aren't required for this recipe.

[Nick Walter]

Being "educated to handle complex financial issues" is far far more likely to allow for errors in judgement that become very costly and that could have been avoided by a simple common sense attitude of "Based on the money I make, looking at an expense of that size is just silly".

I'm amused that you think the education and common sense are mutually exclusive.

[SlyFrog]

I seriously doubt any such evidence is going to be forthcoming. This thread has devolved into a rant-about-how-dumb-the-poor-are soup, seasoned with with a pinch of things-were-better-in-the-old-days for flavor. Facts aren't required for this recipe.

Who said anything about the poor? You seem to be the only one bringing them up. But, everything looks like a nail to a man whose only tool is a hammer. The "classism" in this thread seems to exist only in the heads of people who look for it everywhere.

What I think the rest of us take out of it is that it is probably unrealistic to spend more money than you have or will likely make, and somewhat deceptive for the average person to honestly claim that he was rooked into doing it.

[Nick Walter]

Who said anything about the poor? You seem to be the only one bringing them up. But, everything looks like a nail to a man whose only tool is a hammer. The "classism" in this thread seems to exist only in the heads of people who look for it everywhere.


Well going up from my post, Rollory and Jason McCullough mentioned them. If it helps, your browser probably has a keyword search if reading the thread before responding is too much for your busy schedule.


What I think the rest of us take out of it is that it is probably unrealistic to spend more money than you have or will likely make, and somewhat deceptive for the average person to honestly claim that he was rooked into doing it.

If your cherished axiom of "don't spend so much more than you make" was actually followed then a ton of people would never ever own houses. Houses are huge investments, this is why there are 30 year payment plans for them. These payment plans are often quite complex, and lenders often explain them poorly. So all most people can do is look at the monthly payments they'll have to make and figure out if they can swing them. For a lot of these subprime ARM mortgages the payments looked very reasonable. Until interest rates went up.

[Rimbo]

I think the point that "you should live within your means" has nothing to do with what class you are. Poor people can save and rich people can blow away everything.

But I don't think anyone who lives within their means does it through rule-of-thumb guesswork. They know what they make, and they know what things cost.

[Mordrak]

DISCLAIMER: This isn't a woe is me and my past post; these anecdotes are just meant to illustrate my point.

Honestly, coming from a working class family (and barely that), I wish I had access to a wealthier family. I did in a weird way, but not the kind of life lessons that would help my habits. There's lots of things that "rich" kids pick up from their parents that some poor kids never have access to.

Let's put it this way, it was astonishing to me that my friends had bank accounts before they were 18, let alone with 1000s of dollars in them. When I got my first bank account at 19, I had my sister come with me because I was scared that they would turn me away because of my ignorance.

I'd rather be educated and make mistakes than be ignorant and never have the opportunity.

[SlyFrog]

Well going up from my post, Rollory and Jason McCullough mentioned them. If it helps, your browser probably has a keyword search if reading the thread before responding is too much for your busy schedule.

They both responded to your first use of it. If it helps, before smugly insulting others for their alleged incapacities, you might want to be right yourself. Or instead just continue being a jerk about this, you're doing a good job of it so far. Anything but admit you overreacted and were wrong.

[Shadarr]

If your cherished axiom of "don't spend so much more than you make" was actually followed then a ton of people would never ever own houses.
This statement makes no sense. People who buy a house and are spending more than they earn will lose the house long before the mortgage term is up. People who take out a 30 year mortgage and pay it off are, by definition, not spending more than they earn.

[SlyFrog]

DISCLAIMER: This isn't a woe is me and my past post; these anecdotes are just meant to illustrate my point.

Honestly, coming from a working class family (and barely that), I wish I had access to a wealthier family. I did in a weird way, but not the kind of life lessons that would help my habits. There's lots of things that "rich" kids pick up from their parents that some poor kids never have access to.

Let's put it this way, it was astonishing to me that my friends had bank accounts before they were 18, let alone with 1000s of dollars in them. When I got my first bank account at 19, I had my sister come with me because I was scared that they would turn me away because of my ignorance.

I'd rather be educated and make mistakes than be ignorant and never have the opportunity.

I completely understand this. Even down to knowing the right things to say when dealing with other professionals, the types of banter and small talk that takes place at that level, all of that type of thing that you learn from being in a particular educational, occupational, and money bracket are really downplayed by the rich when they explain why their kids are naturally superior, as shown by their kids' successes, which could only come from just being better and smarter than the less privileged kids.

It is far easier to rub shoulders in that society when you know the code, and those things come second nature to you due to ongoing life training.

[Rimbo]

Honestly, coming from a working class family (and barely that), I wish I had access to a weatlhier family. I did in a weird way, but not the kind of life lessons that would help my habits. There's lots of things that "rich" kids pick up from their parents that some poor kids never have access to, because their parents don't have the knowledge.

And really, I think this is what keeps the rich getting richer and the poor getting poorer.

I grew up knowing that there was no force in the universe more powerful than compound interest. Those who have it working for them will always have an edge over those who don't, and those who have it working against them will never get ahead again.

But I think this knowledge is as much cultural as based on social class. The Chinese and Jewish, for example, just have this kind of knowledge as part of their cultural traditions.

[Mike O'Malley]

Fighting fire with empty words
While the banks get fat
And the poor stay poor
And the rich get rich
And the cops get paid
To look away
As the one percent rules America


Sounds familiar...

[shift6]

The first I have some sympathy for.
Hey, I've got sympathy for everyone who gets fucked by some dickwad in a nice suit. But I don't think the government should spend taxpayer money into bailing people out everytime it happens.

I'm amused that you think the education and common sense are mutually exclusive.
They are, at times. I bring MBAs and the people on NBC's "The Apprentice" to the table as proof. What problem do you have with the notion that someone who makes $10 an hour shouldn't buy a $500K home, or rather that such a statement is perpetuating a class/caste system? Besides all of us in our smoking jackets and monocles swimming in money over here.

[SlyFrog]

Hey, I've got sympathy for everyone who gets fucked by some dickwad in a nice suit. But I don't think the government should spend taxpayer money into bailing people out everytime it happens.

No argument with that. My bigger concern is a level playing field, and that a lot of wealthy people honestly do not realize how much their wealth unbalances that playing field by buying their kids intellectual leverage well before they "compete" with the other kids. But that's a wholly separate subject, and not at conflict with the point you're making here.

[shift6]

Believe me, I feel that. I paid my own way through college (no scholarships either; damn government always keeping white males down!), never received a car or some shit as a gift, etc.

[Jason McCullough]

They should just walk it off out of the bank!

[Rimbo]

No argument with that. My bigger concern is a level playing field, and that a lot of wealthy people honestly do not realize how much their wealth unbalances that playing field by buying their kids intellectual leverage well before they "compete" with the other kids. But that's a wholly separate subject, and not at conflict with the point you're making here.

Frankly, I think this is something that should be taught more in schools as a required topic. Or really, just a year-long required Jr High school / High School course on compound interest.

[VegasRobb]

Until last year, financial counselors at the Home Ownership Center of Greater Cincinnati spent most of their time teaching Americans how to buy a first home. Now, they're deluged by broken and bereft homeowners facing foreclosure.

http://www.yahoo.com/s/537634

Not a bad article, but it doesn't really talk about credit counselors. I think there's still quite a bit of confusion regarding what they are and what they do. It left room for lenders / debt consolidation folks to portray themselves as something that they're not. Usually when the term counselor is used, it implies that there should be some kind of help forthcoming.

I'm not sure that was always the case with credit counselors.