My RANT: a population bankrupt in MATH
....is going to happen with rates, housing prices, all this debt....and math scores?!?!?I'd say rates need to continue to rise, housing prices need to align with the fundamentals, and MBS investors need to "take their medicine" for lending money to risky borrowers with little or no risk premium. I'm sure that all those people who tried their darndest to get loans will be the first ones to grab lawyers when their payments adjust, and they don't have the magic 6-figure appreciation they were "promised" or "guaranteed".
As you can guess, the market is pretty slow right now. Higher rates, less than rapid appreciation, and the fact that holiday credit card bills haven't arrived yet are the major contributers. I'm not looking at many deals, and I feel like I'm inspecting porta-potties when I do get to look at one. In the name of "competition" and not losing market share, investors and lenders have lowered standards further than your local public school. Nobody seems to think for themselves, or crunch their own numbers anymore. Take this post that was forwarded to me by a reader (from the Motley Fool):
"I am starting to get into rough times financially. My
mortgage is going up an extra 900 a month leaving my
mortgage to $3400 a month. My bills monthly with
everything food, gas, utilities, etc. total to almost
6800 a month. credit card bills are 800 a month. My
husband and my income total together is only 4500 a
month. We made bad decisions by refinancing alot in
the last two years and the closing cost, prepayment
penalty fees ate up alot of our equity. I paid off our
cards and unfortunately have run them up again to get
cash to pay bills and stuff. We will now just be
concentrating on paying our mortgage and some bills
and I have been trying to get an extra job with no
success. So my credit card bills will be behind in a
couple of months and unless a miracle happens, it will
be delinquent. I want to know what I should do. If I
should just pay what I can monthly or claim
bankruptcy? Total CC bills is 30,000. Please advice."
What kind of a mathematically challenged 'homeowner' thinks they can exist in the...hold on, I'm going to use two dirty words here....LONG TERM by spending $6800 a month, when they only make $4500 a month combined?!?!? Heck, their mortgage payment with no taxes and insurance BEFORE it jumped $900 was $2500 a month. That alone is 56% of their income before paying for anything else. This is not algebra, geometry, calculus, or differential equations...just basic math than can be done on any 99 cent calculator from the local drugstore. 4500 - 6800 = -2300 uhhh...uhhhh....honey, do you think we can afford this?!?!?
But I don't fault just them. I fault the "do gooding" lender that gave them a loan (actually multiple "refi" loans) in the name of "helping them achieve the American Dream of home ownership". Since these borrowers obviously aren't that 'up' on basic math, I'm sure the broker realized it, and made a fat commission on them. I'd love to see an in depth investigation of how these borrowers got their loans in the first place. I'm almost positive that no rules or laws were broken...the standards are just that low...and THAT is the problem.
I not here to get into some education debate (just follow my thought process before you blow up), but if you look at the CAlifornia High School Exit Exam (CAHSEE) results, you will see that only 63% of the people pass the math portion. The link is here (click the top report, combined, all grades) When I went to school, a 63% was a 'D' or an 'F' depending on the grading scale being used (90-100 A or 93-100 A, 85-92 B, etc). The reasons 'why' the results are what-they-are is immaterial. Once these people turn 18, they are allowed to apply for loans. Not once have I ever seen a broker or a lender ask to see a borrowers CAHSEE results when they applied for a loan. See where I'm going with this?!?!? The lenders don't care what 'politically correct' tag the education system tacked on somebody to 'explain' their results one way or another. In the 'real world' all they care about is 'passing' you so that you can get a loan, and they can get paid. Am I making any sense?
I am just sick and tired of the crappy borrowers that lenders will give millions of dollars to!! Don't believe me?!?!? I was in an office today and I wrote down the highlights off of one of the flyers there. Try these on for size:
This lender will do 100% stated interest only loans to 1.4 million with a 620 FICO score.
They will do 90% stated interest only loans to 2.4 million with a 620 FICO score.
They will do 95% stated interest only on NON-OWNER OCCUPIED housing.
The thing is, I don't know who is buying these loans?!?? Who in their right mind would give somebody with a 620 fico score, a loan to 1.4 million with NO money down?!?!? The only person I think wins in a loan like this, is the loan officer/broker who makes 20-30k in fees doing the deal. See my post on leverage if you haven't already for a more in depth perspective.
When I got into this business I had no idea how low the standards had gotten...or how low they would become. Maybe the people in capital markets see something I do not. I think they are 'driving' by looking through the rear view mirror. They are looking at the performance of these untested products over the past 1-5 years to determine how they should move forward. Only time will tell who is right. But from what I have seen, there is waaaaay too much debt in the hands of people that have no idea what they are doing. They barely, if at all, have the income to support their current debt levels...and will be in for a certain shock when their ARMs adjust $900 a month...or more.
I leave you with one question:
Out of the 1.5 trillion dollars of ARMs that are set to adjust the next 24 months, how many of those people do you think are good at math, did the math (correctly), and know what is coming their way in the name of higher payments in the near future?!?!?
Even if they do know that things will adjust, I won't even ask if they have a plan for how to deal with it. Somehow, I think there will be more than a few borrowers like the one above.
I really look forward to the comments on this one...
SoCalMtgGuy
posted by SoCalMtgGuy at 11:06 PM
45 Comments:
Here is some more math for you. I originally posted this on CL.
How can someone list a complex for sale, and say it is cash flow positive when it is not even close?
For example, $650K two-unit with monthly income of $2150. If you put 20% down and have a $520K loan @ 5.7%, the monthly mortgage is $3018. Even if you put 40% down and have a $390K loan @ 5.7%, the monthly mortgage is $2263. Of course, I'm not even counting taxes or expenses.
Even if you were able to afford to pay 100% cash, your ROI is less than 4% (still excluding taxes and expenses plus assuming 0% vacancy).
Reference for example: http://www.craigslist.org/nby/rfs/122409824.html
( http://tinyurl.com/7dvpn )
I guess they fall into the 37% that failed to pass high school math?!?!?!?!?
just kidding.
people just ASSUME that 'everybody' else will use a 'teaser' rate to run their calculations...
I hear ya though. It's everywhere.
SoCalMtgGuy
My 7th grader took the math part of the CEE at the start of the school year. She passed. She's good at math but has only been exposed to 6th grade math and nothing special and she passed. The California Exit Exam is a joke as an indicator of mathematical competence it is merely a way to continue to suck the life from the few remaining good public school districts and transfer the money to the worst and most expensive systems. The California funding of public schools is the cruelest joke ever played on the public. First implemented in 1978 in the ensuing 13 years California went from being one of the top 5 primary/secondary education States to the bottom 5 and it wasn't Prop 13 so don't go there. It was the State taking over all local property tax intended for shools and distributing it evenly in the hopes of equal outcomes. The result instead was even worse disparity and the best students leaving and the starving of the best that were left. at the same time it meant no taxpayer willinfness to tax themselves when they saw the money going to Los angeles and not neighborhood schools. Triple hit that explains the slide.
People buying in many school districts need to factor in the cost of private education in their housing costs. I can do math and chose a district that saves me $30k or more per year in tuition.
It's done even that buyers do the math wrong -- it's that they decide it's math, so they shouldn't bother. Still trying to explain to pal that if you have negative cash-flow every month, the tax benefits don't compensate for it. Add declining equity, and what you learn about "the time value of money" is that this wasn't the right time to invest your money. He still thinks that he gains something by losing lots in the market downturn instead of just waiting to buy.
I've noticed that my credit card minimum payments have doubled in the past couple months. If I were on the verge of financial ruin, it would be the hit that pushes me over the edge.
The person spending 6800 a month needs to sell their house immediately. Take $2000 of credit card cash and buy a used shitty Winnebago, park it at some shitty trailer park, and live in it until they can get their expenses under control. Filing BK is not the pancea it appears to be.
Don't schools teach financial basics anymore? I'm not talking about teaching day trading or speculating on futures, I am talking about basic stuff, like what happens when you run up your credit card bill and how anyone can become a millionaire by saving a small chunk of change every month for 40 years.
We had a class like this when I was a senior in high school.
Hmmm...actually, now that I think about it, it is my generation, people who sat through these classes, who are the ones taking out the bonehead loans. Us, and the 60's pothead baby boomers. I guess those classes were a failure.
Karen,
I have a problem with the incredible waste that goes on in school districts. We live in a property-wealthy school district. New schools are popping up out of the ground. We're also paying for a $100 million multi-purpose facility that consists of a football stadium that's almost pro-level, an indoor arena and a performance hall. For high school kids.
$100 million.
They floated a bond issue, and as we all know few people show up to vote for these things on a Saturday during an off year, so the thing got passed. It pisses me off.
Teachers are not paid well, but except for some of the very poorest areas school districts are NOT starved for cash.
There is a new law on the books in Texas that will go into effect this year. School districts are screaming bloody murder. It requires them to spend at least 65% of their budget on education. Imagine that. School districts will have to spend more money on math and reading and less on football.
Lou Minatti:
I never understood why schools waste so much money on sports complexes and football. I went to a "priveleged" public school, where luckily the teachers were the best compensated teachers in the entire state. Even so, I was amazed how much money was basically dumped into sports. We had a pool, an indoor track field (besides the standard ginormous indoor gymnasium), outdoor track made with astroturf (not asphalt!), several tennis courts, and ample outdoor terrain for the "lesser" sports such as soccer. My poor band teacher had to fight tooth and nail to keep funds going for the marching and concert bands; we had to rely on private contributions from parents and fund drives to stay afloat. Meanwhile our craptastic football team had multiple coaches and their own private nursing staff. They threatened multiple times to cut funding to arts and music; fortunately the "mozart effect" studies were in vogue at the time and we managed to save our music program. Oh and get this... our teachers WENT ON STRIKE at one point... for more bennies on top of their 100K salaries. Mindboggling.
Our country has gone batshit crazy! It's no wonder our gummint is 8T in debt, people are at -$2300 monthly income. The end is nigh!
::end rant::
There is so much going on in this post I don't know where to start.
How about: $800/mo credit card (minimum payments), mortgage increasing $900/mo, and $2300/mo negative cash flow that causes the FB to begin his post by saying "I am STARTING to get into rough times".
Methinks this "started" long before he applied for a mortgage...
I can't really fault the lender in this scenario. Sure, putting someone in this kind of loan should go against anyone's moral fiber - but isn't a salesperson's job to maximize sales? What about the person that sold this guy his Hummer? Or $50K of furniture? Or the trip to Tahiti?
As much as these people share fault in getting someone over their head, the ultimate blame lies with the FB. I don't care how bad someone is at math, any adult that has managed to secure a job that pays the median income can figure out income - outgo = what's left.
It's a reasonable argument to say that the FB was swayed by the "real estate always goes up" line, but people believe what they want to believe - just like they believed the NASDAQ would go up forever.
And even if it doesn't, I'm ENTITILED.
My wife and I bought our first home 20 years ago in the San Fernando Valley. A 1000 sq' 50 year old starter in an okay neighborhood back when rates were 12%. We both drove $600 cars. All of our friends thought we were crazy, living like "paupers". 7 years later, we sold, fled CA and moved to Idaho. We paid cash for 5 acres of amazing view property 10 miles outside of town. The property had a 10-year-old mobile home on it that we lived in for 10 years while we saved to build a house. Again, everyone was puzzled why we chose to live "that way".
3 years ago we built a modest 1800 sq' home and took out a 15 year fixed 30% LTV mortgage that we plan to pay off in 5 years.
Sorry for the rambling post, but having made sacrifices for many years I have absolutely ZERO sympathy for someone that gets themselves into this kind of mess because they "deserve" to live a millionaire's lifestyle.
So Cal - nice story about another FB. Unbelieveable that there are people like that. I have run into that, with some people that I have looked into their finances and provided some education. Most of these people were too trusting of these snakes that were only looking to get a high fee without any regard for their customer, or where the loan would go. I agree, no GOVT bailout for FB. Also, there should be no GOVT bailout for people losing homes in floods, etc, when they didn't buy insurance (same for hurricanes, fires, earthquakes, etc). Guaranteed homeownership is not a right. It is a privilege for those that can truly afford with. It is not a racial issue, but strictly economonical.
Reading these ridiculous stories by FB after FB is making me feel like a grumpy old man -- and I'm only 38!
How crazy was I for taking advantage of low rates by refinancing 2.5 years ago from a 30- to a 15-year mortgage and locking in a 5 1/8% rate (w/out sucking out any equity)? Gee, that's what I thought reasonably smart people would be doing all over the country. Ever read an amortization chart? I always cringed at seeing a 30-year chart and seeing how much $$ went to interest in the first 15 years of the loan. Now, less than 3 years into our 15-year mortgage, we're paying $100/month+ more to equity than interest. It would've taken 12 years or so on our "traditional" mortgage(remember back in ancient history when traditional meant 30-year mortgage?!?).
The gods must be crazy...
Anonymous @ 9:49 -
I feel like an old curmudgeon and I'm soon to be 25! I see people making less money than I do with newer cars and newer TV's, and getting themselves into interest only loans on overpriced or poorly-located property. Personally, I'd rather spend that money on good quality food, rent a nice apartment, a have good internet connection. And I still manage to have enough money left over to buy everything in cash. This past May I was able to take a 2-week vacation in France without taking out any loans or running up any credit cards (of course, I saved some money by going to youth hostels and staying with family). How/Why do people let themselves sink to their eyeballs in debt? Why do people need SO MUCH BLING?! Why do you NEED a MOTO RAZR?!?!? Instead of paying thousands a month to finance that hummer that you just leave parked in the driveway, why not just spend 100 bucks each month on a nice dinner and a concert downtown? I bet you'll have more fun, spend less money, and maybe learn something culturally relevant. I just don't get it. At all.
I am not saying that poor math is by any means the only or main cause of this.
But, if people cannot pass the most basic of math tests, how do you expect them to handle anything financial...when finance is MATH!!
Yes, there are 'smart' people who are making the same mistakes. I know other 'engineer' types who are incredibly smart, but they have zero financial sense.
It is going to take the bursting of the largest credit bubble in history to burst for people to get a flipping clue.
Oh that's right, I forgot...some REALLY smart math people have billions of derivatives that will "save" us.
SoCalMtgGuy
Cereal,
Nope, nothing is wrong. If you look at the fact that most lenders have been doing several BILLION dollars of loans per month the past few years, you will see that it adds up pretty quickly. The industry has been doing 2-3 trillion per year the last few years.
Yes, the amount of debt out there is staggering...
SoCalMtgGuy
I just wish everyone predicting 2006 weren't so sure renters will "benefit." The houseowner bubble will have consequences. I'll use an extreme (and therefor unreralistic) example to illustrate. The big bad bank takes over the FB who is 120% LTV. The big bad bank puts this dog on the market AND on the rental market for 80% of what is owed. That's 96% of assumed value. No one will rent this, one more property is no longer in the rental market, the FB is in the rental market. Things get worse for renters. Add on inflation which will accellerate and may rents rise. Remember, rentable properties have been being pulled off the market. The "new" crap is not in the same market, too expensive and in non-traditional areas.
This is all graduate math, I know but just think about the recent past trends. Purchase prices have decoupled from cap rates (rent prices in relation to purchase prices). Why assume they will not only recouple but favor the reverse?
This entire situation will humble the self proclaimed "investors" who mock the "bitter renters" for pricing themselves out.
JT, I see you've been reading the Craig's List RE forum like I have. :-)
They get pretty hot over there. People who rent are LOSERS, and the only way you can get rich is by "buying" with a wacky loan. The people on Craig's List are literally blinded and cannot see outside of the bubble that envelopes them.
Lived in my mom's basement during my 20s. People laughed. I didn't care. Stacked up over $500,000.
Paid cash for my car.
Paid cash for my Master's.
PAidcash for my apartment. (And gutted it to brand new for $15k)
My remaining $400k gives me about $20k-$30k a year in interest..
Now, I only work parttime and take my summers off. I play in a band, run marathons, and have become a good cook. I also write a lot. My friends are all wage slaves.
Bling bling to the cubicle monkeys...!!! I'll be at the swimming poool.
As much as I enjoy reading the blog. I would dare to say that some of these posts have a dash of..scha·den·freu·de. Its ok to be conservative and frugal but I am getting tired of posters who 'boast' about how they are smarter for renting and living on a budget. Donte get me wrong, I am not 'knocing' you because I am conservative myslef but I think you guys have to accept that some people can afford to buy a 250k homeme, drive a new SUV, pay bills and still save money in the bank. Not everyone is living on the edge with an IO/ARM/Neg Am. mortgage and leased BMW.
Regarding California results..
In LA in particular, about 50% of Mexicans flunk out of HS, and about 57% of Blacks. Whites complete around the 70% level. So, practically speaking, the CA school results aren't telling you about White people (now less than 50% of CA population), the vast majority of which can do basic math.
What is wrong here is that people who CAN do math find no reason to spend 5 minutes and actually do it.
That is the problem. Too many people no longer believe there can be a bad outcome; no one thinks a few minutes of numbers can tell them anything worth thinking about.
Is it the Greenspan put, writ large? Or is it just the sorry state of our civilization?
It isn't "math", it's greed and foolishness.
But the real, real question is why the lenders are doing this. They aren't simpletons, they have i-bankers and high-IQ super-mathematical poindexters working for them.
My answer is it lies overseas: China.
They are pursuing mercantilism, not capitalism, which they can do because the losers (Chinese poor) are politically oppressed. They hold dollars (and eventually hence MBSs) for *non-economic reasons*. They aren't trying to make a profit on their bonds, they have something else in mind.
It's a great scam: destroy US industrial capacity, and gorge US consumers on cheap debt and trinkets made in China. When it finally pops, dollar collapses and US domestic buying power is erased. The usual upside of a low US-dollar, improved domestic production & exports doesn't happen because China + Japan of course have big trade barriers, and domestic demand will be erased. Next step: outsource the rest of the industry because US consumers are too poor.
This is scary stuff. People are so stupid and ignorant to see what has happened to this housing market. It has become just like gambleing.No money down and the promise of rising prices. Wow we can get rich quick here. Scary when anyone with a pulse can get a loan. All this speculation will lead to disaster for a lot of vulnerable people.Glad to be on the sidelines renting for now.
Arizonadude
If you can get a loan and buy
a house, do it.
In California, the purchase loan
gives you protection. All you need
to do in case of crash in home price
is to give back the house to the bank.
The bank can not go after other assets
that you have.
Never refinance. That's when the bank
can go after your other assets.
That's not true. If you have a second mortgage, they can come after you. The 'walk-away' only works if you only have a first, which generally means you have put down 20% cash.
California law figures if your house drops more than 20%, the lender deserves to eat dirt for helping you 'get stucco.' Some people think it is just another loonie California thing, but I think it is kind of neat.
Well, I guess it's not going to be neat if FB's all think they are going to get away scot-free.. then it becomes one of those Unintended Consequences.
Anon 3:26 said:
---- As much as I enjoy reading the blog. I would dare to say that some of these posts have a dash of..scha·den·freu·de. Its ok to be conservative and frugal but I am getting tired of posters who 'boast' about how they are smarter for renting and living on a budget. Donte get me wrong, I am not 'knocing' you because I am conservative myslef but I think you guys have to accept that some people can afford to buy a 250k homeme, drive a new SUV, pay bills and still save money in the bank. Not everyone is living on the edge with an IO/ARM/Neg Am. mortgage and leased BMW.----
I completely agree with you. There are lots of people that can truly afford their nice homes and cars.
I'm here to let people know that not everybody is making the money needed to afford their lifestyle. Many people are living a lifestyle through the use of debt.
If you can put 10-20% down, afford to get a fixed rate mortgage, and plan to stay for several years, then buy the property if you like it!!! If you want it to be a home and plan to stay put for a while...then buy a place.
In many of the "bubble" areas, renting is an absolute bargain compared to the cost of "ownership".
Look at my post on "should I buy or wait". I don't tell people what they should do, I just give them the math behind the deal, and let them make their own decision.
Thanks for stopping by...
SoCalMtgGuy
Anon
Where I live the majority of people cannot afford what they are buying. There are no 250k houses not even in the ghetto. Actually you could get a condo in the ghetto for that. 350 to 400k gets you a home in the hood here. I'm talkin' bars on the windows, 50 years of deferred maintenance, 400 sq ft POS shack. Your neighborhood? Well, I can tell you that yes you have to be stupid to buy here. Your starter home will not be a nice place to live in or a great investment either. The pitbull to people ratio is about 2 to 5 and the same for sex offenders. The local banks tellers are safely behind plexiglass. The Rite Aid closes at 5 because of the crime. Don't believe me. Check the San Diego MLS. http://www.sdhomepix.com/ Go to find your Dream Home, check the 92105 zipcode. On the right side click details then basic view. You don't have to register. My personal favorite is the beauty on page 18, MLS # : 056066671. The seller will entertain offers between 625,000 to 675,00, hilarious. I suppose the higher price is because it's only a couple of blocks from the police station.
Who needs math when you have pandering politicians willing to tax your more financially responsible neighbors to pay for your retirement and healthcare when you retire.
Who needs math when the Federal reserve reduces interest rates below inflation whenever there is the slightest problem (i.e. hedge fund trouble, banking trouble etc).
I am beginning to feel that savers in the US are really suckers given the political realities around us.
Guys, I think probably they are spending $680/mo not $6800. This was probably a typo.
If thats the case, honestly, they are still f'd. But not royally f'd.
These people should be ashamed of themselves. Pathetic. And what eats me alive is that some "good thinking" financially capable, and not RE dumb person was probably outbid (a few times) for the house that these clowns are in.
-Anth
Hey SoCalMtgGuy! I LOVE your blog!! You are so spot on .. it's great to know you see the same trends in So Cal as I am seeing in MN!! 24 months from now .. we are going to see a Nationwide Foreclosure Boom unparalleled in Mortgage History. It is scary as Hell .. but it is nice to know someone else out there sees it coming!
And to Boomin In Boise .. you are correct, too, my friend. This ridiculous sense of entitlement that folks have these days fueling this nonsense! I didn't get a house until I could afford it .. and that was when I was 33! I didn't assume I deserved a 4 Bdrm, 3 Bth Home at 25 like the majority of today's 20-somethings do.
Between the entitlement types, the refi/credit addicts and those who should be on the MARI List, it is a wonder the economy isn't worse off than it is!
Thanks again, SoCalMtgGuy!
You have won me over as a regular reader!
Anth,
That is NOT a typo. $6800 was the total of ALL their monthly expenses. Their mortgage was 3400 of it, add property taxes, insurance, food, gas, bills, car payments, car insurance, cable, electric, phone, credit cards, etc, and you could EASILY hit that number.
They have $800 a month in MINIMUM balances on their credit cards.
SoCalMtgGuy
They want to do a BK? Sorry you missed the train lady. Now your BK will have strings attached. After you car down, house down, clothes down, and downsize everything else in about 10 years you might and I say just might acquire some wisdom. Until then smile because you're a FB'wr!
arioch,
I don't know any more to that story than what I posted. A reader sent it to me in an e-mail.
About your story, as much as I hate to say it, I'm not surprised one bit. A few years ago I would have thought you were making it up, and that you should head for Hollywood with "storytelling" skills like that.
The sad fact is that "buy now...pay later" is the new American motto. I love the furniture commercials that have "no payments until 2010!!". Are you kidding me?!?!? I guess because so many people maxxx themselves out buying the house, they need to wait 4-5 years to START paying for the furnishings for it.
If you don't mind me asking, at what store, type of store was she shopping at??
Thanks for the comments...
SoCalMtgGuy
socal, wow, what a story. you know, I get the feeling these guys just got pulled in by a real nice sales job by a Realtor.
I went to an open house a few months back where the home was staged, and the realtor had two sheets of handouts. one was the usual home description and pics, the other was a sheet showing how this $860,000 condo can be yours for $2200/month at 1% ARM. when I pointed out the near $4000/month 30 year fixed mortgage was twice what I paid for rent for the same condo across the street, she called me old fashioned and out of touch and how NOBODY use 30 years anymore. oh yeah, and how in reality ALL of the mortgage WILL be tax deducted, so really, the home would be FREE in a sense.
now all you need is someone with a little less informed, a nagging wife that loves the place, coupled with average math skills, and there you go, you got a sale. (by the way, that condo surely sold 2 weeks after my visit).
Hey, I found a realtor/flipper in Vegas in trouble enough to be offering two of his flips for "short sale." Think you can comment on short sales, the way they work, and how that affects your FICO? (see my blog)
I joked to my wife a while ago or so ago about the massive debt people were carrying in addition to the I/O loans they had and that we were closing. I said, "I have a funny feeling about these folks, perhaps they will be back refinancing again in a few months. I called them "refinance refugees." We laughed, but underneath the tongue in cheek comment we were really concerned about the scores of people we closed for.
Over the last month or so, several are back....in worse shape financially. As a neutral party, we can do nothing but close the deal. And the yield spreads on these are obscene.
T.Kane
Legacy Escrow Service, Inc.
California School Funding...
California funds schools based on what the teachers' unions want. Under the thinly veiled guise of "it's for the kids" the union looks for every opportunity to feather the nest of their unions and their members to the detriment of students.
any chance of posting the motley fool quote? I would love to see their advice to this fool.
"Equity extraction is the new crack cocaine."
I LOVE THIS STATEMENT> I think I will make a tshirt out of it and wear it to my next family party where all my equity funded realtives will be showing off their new stuff. LOL!
Hello readers and Socal,
I go into this site for amusement. Its is much more entertaining than TV, for which I dont have time anymore as it is almost as bad as E. Makes holes in your brain.
Sometimes I need to peek out (here)
to see if people (at least some) are still as dumb as before, and lo and behold, they are! Anyways, I really hope I dont have to pay for this stupidity in the future.
Considering what kind of economy USA is, Capitalism, you said that you dont want to put all the blame on the borrower, but I do think they have to take the responsibility. If you want to be capitalist, that means everyone for themselves and dont care what happens to the other one, as long a you have gotten the almighty dollar. It is a dog eat dog philosophy, strangely enough, considering humans are social animals, it is hailed.
Caught a glimpse at work before leaving, Oprah was on, and yes..
Bohooo, this pretty wife of this guy had spent their finances into misery. Anything else new?
northgrl
anon - northgrl
I completely agree with you that borrowers have the ultimate responsibility for their actions.
I don't care what the FED did, or the lender said, think for yourself and make an informed decision.
But along the same lines, I don't think you should have a keg of beer at AA meetings.
If somebody is contemplating "financial suicide", don't give them a gun. That is my only point.
SoCalMtgGuy
Hi mtnrunner2,
Long post, for which I apologize in advance. I didn't call you a flipper, just said that your thought processes seemed to follow that line of thought...
I'm very sorry for your loss. I've thought about that subject a number of times, and can't even beging to imagine how it feels... like the loss of a child, there can't be true empathy unless you've experienced it for yourself.
Let me first explain that I come from the school of hard economic knocks. I've been through several recessions, workforce downsizings, a period of very high inflation and a couple of stupid asset bubbles where everyone thought they were f*cking rich without ever doing a thing to actually *earn* it. I've been upside down in a house, too. Stuck there with no savings, a big mortgage payment, in a job that I hated. And I couldn't leave, because I didn't have a wad of $ to bring to closing. Hard knocks.
Outright ownership of a home at retirement (I'm in my mid-40's) is about being in *control* of my economic destiny. It's not about attachment. I have no emotional attachment to this house... in fact I hate it!
It's an oversized, underinsulated mid 80's POS. Due to ahem, 'deferred maintenance' by previous owners, it takes a lot of my spare cash, and my even more valuable free time to keep up with. I wish that I lived in a newer, smaller POS with lower maintenance, landscape, and HVAC costs. I've had better neighbors, too :)
Have I thought about selling it and renting until housing falls off the cliffs onto the pointy rocks below? Heck yes I have. A lot, in fact...
But I'm also in a similar situation
to albrt. I'm 3 yrs into a 15 yr fixed at 4%. I don't expect *ever again* to have the opportunity to get a mortgage this cheap.
Another point, I'm a trailing boomer - so I expect to receive *no* social security benefits. That's right - If I get reduced benefits, I'll be very gratified, but I *expect* nothing. So I am preparing for that expectation.
They'll certainly be having 'means testing' whenever I'm old enough to collect benefits. So if you were stupid enough (as I am) to set aside money for your retirement, they won't be returning the SS wages that they've taken.
Where was I? Oh yeah... the POS house. It's a place to sleep that (when it's paid for) nobody can sell from underneath you, or raise the rent on. *That is important* - especially when you're retired on a fixed income!!!
Could I sell at these astronomical values, rent for a while, and then go bottom-fishing in two years? Sure I could - and I've considered it. BTW I'm probably 30-40% LTV, depending on the stupidity at a given moment.
But I also have a family to consider. There's huge emotional turmoil and expenses that go with buying, selling and moving. I don't know how to put a price on that, but in my wife's case, it's huge. How much is a marriage worth? How important is it for a child to have consistency in their life? A couple hundred thousand bucks? Or is it priceless? I don't know...
My plans have always been about how to support myself when I'm no longer able to work... very long term. I don't really see this transient wealth effect that we call the housing bubble as affecting that plan, is all...
As someone else said, having money in cash isn't always what it seems. I remember when prices on *everything* would go up from one week to the next. I remember federal wage/price freezes. You can 'take a profit' and inflation will take it all away. Keep that in mind over the next few years. Inflation won't touch your home, but it will *ruin* your savings account, and the stock market may not even keep up (as it isn't).
The long term plan for retirement: Pay it off! That eliminates my biggest cash drain and gives me a low fixed rather than large and variable housing expense.
When it's time to retire, sell it and pay cash for something smaller and more useful. In a place with a crappy economy and no jobs. That'll keep my fixed $ worth more. Preferably a place near some good fishing ;)
Set aside any leftover cash from the home sale to pay for the medical coverage that the government will no longer be ble to afford.
Think about this: When you retire, and are no longer contributing to society's bottom line, don't expect society to contribute to yours. If you can't afford to help yourself, neither can anyone else. They're trying to pay their own bills and can't afford to pay yours too.
We're all just human tools, to be used up and discarded as soon as we wear out or break. The sooner you understand and prepare for that day, the better off you will be.
To answer your questions though: Is someone who sells their primary residence to realize the profit a flipper? No. Absolutely not. There's nothing wrong with selling something you own for a profit! That ain't flipping, that's making money :)
Flipping is buying RE short term, knowing that there are huge expenses involved, expecting that an inflated sales value x months later will offset your expenses.
Do I mind if my home loses $500k of value? Hmmmm... Well, no. To my mind, the price of the house only reflects the devaluation of the $. So it's worth two $100 monopoly bills instead of one. Next week it's only worth one $100 monopoly bill. Big deal. What if I have a handful of monopoly money, but *no house*??? That's bad.
Am I worried that if I rent, that rent prices would rise? Yes. Long term, I *guarantee* that renting will absorb any short-term profit. What sounds like a lot of cash right now may not seem like so much in twenty years. Don't underestimate inflation. The FED fears it, with good reason. Maybe I played too much monopoly as a kid, (or had to live in rentals too much as a kid) but in the *long* run, renting will kill you and lead to economic ruin.
To me, a house is a little bit like a savings account. You slowly deposit your money there, and when it's paid for, then you start getting the returns (i.e. a place to live with no mortgage payment).
My question for you is this: If I sold my house (took every dime of my money out of 'savings', so to speak) and had a wad of monopoly money in my hot little hand, what should I do with that money? Put it in the bank earning interest at 4%? Four percent by the way is way less than acutal inflation, so that's a loser vis-a-vis net worth.
I already have *a lot* of money in retirement funds, which are going nowhere fast... absolutely pathetic returns. Should I put even *more* money in there?
Should I speculate in the market? Perhaps an index fund? Have you seen the 5 yr returns on index funds? Buy gold? Oil stocks? More RE?
I'm not bashing you at all! I'm bashing our economy, the government, and the idea that you can get rich without working for it. I'm just explaining my views and personal situation, and asking you to ponder a few of these points.
Best wishes,
Spud
Nice blog!
I had my "epiphany" in 2003. I woke up one morning and realized that should Real Estate ever tank (and it clearly was on an unsustainable trend), I would spend the rest of my life as an indentured servant. I had 13 rental townhomes, a SFH vacation rental, my primary residence and I was building a 48 unit condo complex, what a nightmare! All told I was personally on the hook for over 6 million dollars. It took me over 2 1/2 years to liquidate all of that real estate. I realize in hindsight how stupid I was taking on all of that debt. My wife and I even sold our primary home in 2004. Luckily we got out in time and at a good profit, it good have very easily went the other way. We bought a Motor home, backed our infant daughter and golden retriever up and have lived "on the road" ever since. I figure we'll get around to buying something in 08 or 09 if my expectations pan out. Currently we are in Ft Myers,FL for the winter but are heading out to the West Coast this summer so it'll be interesting to see how each community is doing RE wise as we pass through.There are many "for sale" signs around Ft Myers, particularly in Cape Coral. I look forward to reading more stories on this blog, they are amazing. Thanks for the great site!
Yeah they're all morons, and yeah they're all imminently FB's, but what are you gonna do about it?
We've all accepted the Republican creed of free markets for all, so that would seem to preclude any further (nasty word follows children please leave the room) REGULATION.
No, I think this is just capitalism at work. Only the strong survive - get ready to feast on the picking left behind by these idiots.
I'm an artist -- I make things pretty. I dropped out of algebra because my prof. looked like John Ritter, and I just couldn't focus.
But the whole 'searching for a home' process is very much an education process... I'm crunching numbers more, learning that a higher number afer the decimal point on a mortgage can mean *alot* And that a mortgage means paying for your house 3 times. I've also learned that ARMs are the tool of the devil, and the giver of dreams and the breaker of spirits all in the same breath.
And that the investor-driven market is the killer of the cultural capital that makes areas urban areas interesting and worth living in.
And when thier drywall sags, and their granite countertops are stained with wine, and the laminiate is chipping off the 'luxury high quality cabinets' (I've seen pine! staircases that will wear through in 2 years) they will wonder why they can't sell theri property and recoup thier investment by renting a chipped and stained, and worn apartment as the 'luxury' they were seeking.
Thanks for the rant... I'm new to reading these RE blogs, and they sure are educational!
Another end to the bubble might come from two changes in consumer attitude. It isn't scientific but it is possible for markets incuding housing to just plain old get exausted. SUV sales are still off 30-60% even though the oil price spike is a memory. Then there are the other consumers, the buyers of MBSecs. I find it likely that they won't want any more paper at any price. This doubly worries me as we discussed earlier how lots of seemingly ordinary commercial paper is merely laundered MBSecs. wow gold opportunity! A careful analysis of what assets or supports are actually behind the loan market would probably dictate caution and lightening up on anything with exposure.
That's what happens when you live in a McMansion with central air rather than a window air conditioner in the bedroom, when you've insisted on that stainless steel kitchen with the travertine floors and granite countertops and the most cooking you've ever done is open cans of soup, scramble eggs, and put your own cream cheese on a bagel, when you've decided you deserve that oversized SUV that you're driving an hour and a half each way to work every day because the only way you could afford that huge white elephant you live in was to move to the exurbs.
Some people need a reality check. Anyone who squanders $7600/month on food, gasoline and utilities is overdue for one.
The coming crunch is going to hurt a whole lot of people. Some of them will be the right people.
evun
The housing bust created a whole lot of losers.
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