3 ms·

I agree with your assesment that banks and speculators are equally to blame, but it is easy to label people who got screwed by this as being irresponsible and o

I agree with your assesment that banks and speculators are equally to blame, but it is easy to label people who got screwed by this as being irresponsible and or stupid. I don't think that is true (and for alot of people, irresponsible moves might have actually been economically rational) So lets say I bought a house during part of the bubble well within my means at the time. I put 20% down, and then had a fixed rate mortgage. I had 6 months to a year of living expenses in cash in my bank on top of the cash I had to put down on the house. I lose my job, 1 year goes by, 18 months goes by. I have no more emergency fund, and the house is now worth less than I bought it. I'm fucked. I have no money left and I owe a huge amount, my mortgage is under water, and up until that moment I made completely responsible decisions except that I bought the house at the top of a bubble that I didn't know existed. I hypothetically had not only 20% down, but an emergency fund equal to 2 years mortgage payments plus food and utilities (which at that point you have close to 40% of the value of the house in cash, who had that?) Compare that to somebody who had no money in the bank, put no money down, lost their job, but the house had appreciated in value. You sell the house quickly, net about no money gained or lost, and move back into a rental apartment. Really its not that big a deal. I could even move in with a friend for free while I find a job. The big assumption that screwed so many people was that house prices always rise. You can be perfectly responsible on every move, assume house prices always rise and don't realize there is a bubble, and be completely screwed. You can also be completely irresonsible, luck out on your timing of when you buy and when you sell, and come out ahead like a bandit. Actually the conclusion I come to from that is the "safest" option is to put nothing down, take the longest mortgage you can at the lowest rate, and have heaps and heaps of cash in the bank. Take the 20% you could have put down on the house and just keep it safe. You will pay more money over the life of your mortgage but if shit hits the fan you can survive for months or years without going bankrupt, which is counter to the advice of minimizing the cost of your mortgage over the lifetime of it (i.e. lots of cash down, shorter term)

yummyfajitas 16y ago
Say I bought $400k worth of stock options in $MY_COMPANY in a highly leveraged bet which requires me to make monthly margin payments (which may or may not depend on interest rates). Note that $MY_COMPANY is a highly illiquid stock - unlike GOOG or MS, I'll be hard pressed to sell $400k shares of it quickly except at a huge discount. I had enough liquid cash to make margin calls for 1 year, even if I lost my job. Also, the terms of my contract with my broker impose significant financial penalties on me if I change my address. (Notice how virtually all my investments are now strongly correlated with each other? My investment, revenue stream, and ability to make margin calls will all tank simultaneously?) Would you also describe me as making "completely responsible decisions"? Replace $MY_COMPANY's share price with some variable describing the local economy, and you've just described a mortgage. Buying a house is a really bad investment strategy for most people. The only exception is if your goal is to lock in a fixed rent on a fixed address for 30 years into the future.
- kls 16y ago
  While I agree with your logic completly there are other factors that play into a home buyer that are not in play with an investor the bigest one being emotion and sociatal norms. I could not begin to fathom how many times in my life I heard growing up, boy when you become a man buy a house, it's the American dream, they are not making any more land. Real estate always goes up. The advice like hey you could get trapped in a life sucking death trap was not dispensed until late in the bubble and now freely flows in the crash. So you have people that have no sophistication in investment purchasing homes because the common mantra was what could possibly go wrong. You have skyrocketing home prices and people panicking that they are going to be forever left out of the greatness of home-ownership that they have heard about their entire life which all culminates in disaster for the home owner. I find it hard not to blame the bankers, when you have a party that clearly lacks the knowledge to understand the realities of the market and a party that clearly knows that they are inflating the market then you have to place blame on the party that willfully acted while possessing full knowledge. Where the homeowners greedy sure, and I would venture to guess that the number of homeowners that did so out of greed where high but they where also making decisions on information that was reinforced over years of indoctrination information that the bankers willfully exploited with full knowledge that the realities of the market where in sharp contrast to the homeowner perceived reality of what homeownership meant. So while you logic is correct it omits some very important facts the biggest one being that the product was not sold to an investor but the average person.
- krschultz 16y ago
  That doesn't hold any water. If your only choices were investing in $MY_COMPANY at a certain margin payment per month, or putting 80% of that amount of money through a paper shredder, wouldn't it make a whole heck of a lot more sense? Your analogy just doesn't factor in that you have to pay for housing in some manner. Then the argument is rent vs buy, I'm currently on the rent side of that fence, but for plenty of people the rational, responsible, decision is to buy. You haven't actually addressed my original point, which is that blaming the people who got screwed in the housing market ignores any facts about how they got into forclosure. You had plenty of people that put 0 down and their income could never possibly pay for the loan they took out, those people are cupable. There were other people that had a mortgage they could pay for, a large amount of cash in the bank, and were trying to pay off the loan in good faith and got screwed by circumstances outside of their control. I don't blame the people who got screwed by a black swan event they didn't see coming. A lot of people whose job is to invest every day all day missed it coming.

yummyfajitas 16y ago

Say I bought $400k worth of stock options in $MY_COMPANY in a highly leveraged bet which requires me to make monthly margin payments (which may or may not depend on interest rates). Note that $MY_COMPANY is a highly illiquid stock - unlike GOOG or MS, I'll be hard pressed to sell $400k shares of it quickly except at a huge discount. I had enough liquid cash to make margin calls for 1 year, even if I lost my job. Also, the terms of my contract with my broker impose significant financial penalties on me if I change my address. (Notice how virtually all my investments are now strongly correlated with each other? My investment, revenue stream, and ability to make margin calls will all tank simultaneously?) Would you also describe me as making "completely responsible decisions"? Replace $MY_COMPANY's share price with some variable describing the local economy, and you've just described a mortgage. Buying a house is a really bad investment strategy for most people. The only exception is if your goal is to lock in a fixed rent on a fixed address for 30 years into the future.

kls 16y ago
While I agree with your logic completly there are other factors that play into a home buyer that are not in play with an investor the bigest one being emotion and sociatal norms. I could not begin to fathom how many times in my life I heard growing up, boy when you become a man buy a house, it's the American dream, they are not making any more land. Real estate always goes up. The advice like hey you could get trapped in a life sucking death trap was not dispensed until late in the bubble and now freely flows in the crash. So you have people that have no sophistication in investment purchasing homes because the common mantra was what could possibly go wrong. You have skyrocketing home prices and people panicking that they are going to be forever left out of the greatness of home-ownership that they have heard about their entire life which all culminates in disaster for the home owner. I find it hard not to blame the bankers, when you have a party that clearly lacks the knowledge to understand the realities of the market and a party that clearly knows that they are inflating the market then you have to place blame on the party that willfully acted while possessing full knowledge. Where the homeowners greedy sure, and I would venture to guess that the number of homeowners that did so out of greed where high but they where also making decisions on information that was reinforced over years of indoctrination information that the bankers willfully exploited with full knowledge that the realities of the market where in sharp contrast to the homeowner perceived reality of what homeownership meant. So while you logic is correct it omits some very important facts the biggest one being that the product was not sold to an investor but the average person.
krschultz 16y ago
That doesn't hold any water. If your only choices were investing in $MY_COMPANY at a certain margin payment per month, or putting 80% of that amount of money through a paper shredder, wouldn't it make a whole heck of a lot more sense? Your analogy just doesn't factor in that you have to pay for housing in some manner. Then the argument is rent vs buy, I'm currently on the rent side of that fence, but for plenty of people the rational, responsible, decision is to buy. You haven't actually addressed my original point, which is that blaming the people who got screwed in the housing market ignores any facts about how they got into forclosure. You had plenty of people that put 0 down and their income could never possibly pay for the loan they took out, those people are cupable. There were other people that had a mortgage they could pay for, a large amount of cash in the bank, and were trying to pay off the loan in good faith and got screwed by circumstances outside of their control. I don't blame the people who got screwed by a black swan event they didn't see coming. A lot of people whose job is to invest every day all day missed it coming.