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Self-Sustaining Growth "No Longer Exists"

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  • #31
    Re: Self-Sustaining Growth "No Longer Exists"

    When I bought our first home 11 years ago, I could only afford to put down 5%. If I had bought the home four years earlier, I could have done about 10%. Five years earlier yet and I could have had 20%.

    To put 20% down on a first house these days would represent an insane amount of cash reserves. Back before the bubble, when housing prices were generally stable and accessible to those willing to save and get their credit shored up.

    Today I don't think there are too many first time buyers able pony up 20% or even 10% for a down payment.

    Sure many folks were overly optimistic that their wages would go up and that in five years they would be able to refinance to a fixed interest loan. They took a gamble. But I don't think they were fraudulent in their aspirations.

    The lending institutions were not the least bit interested in whether or not the borrowers were going to be able to pay back the loans because they were just playing a middle man, skimming off the top and passing the toxic bundle off to some other sucker.

    And lets not forget the lenders that sold higher interest rate mortgages to borrowers that actually qualified for lower rates. These tactics were going on with great regularity. The lenders had a vested interest in running up fees on the front end because that is what they collect before passing the mortgage off.

    It use to be that getting credit was difficult. Once that barrier was lifted, things spiraled out of control quickly. Predatory lending took the place of good, solid conservative lending practices that made sure the money they lent could be repaid.

    It is my humble opinion that most of the borrowers that ended up defaulting were largely guilty of poor judgement and overly optimistic about their future earnings. It stands to reason no one would want to set up a home and family with the intention of only living there for a few short years. Sure, there probably are some persons that had this thought, but I've not seen any evidence that the vast, overwhelming majority of borrowers were engaged in fraud.

    Unlike the piles, mountains of evidence that prove the banks were.
    Last edited by SpiffPeters; 02-08-2010, 02:51 PM.

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    • #32
      Re: Self-Sustaining Growth "No Longer Exists"

      Originally posted by SpiffPeters View Post
      When I bought our first home 11 years ago, I could only afford to put down 5%. If I had bought the home four years earlier, I could have done about 10%. Five years earlier yet and I could have had 20%.

      To put 20% down on a first house these days would represent an insane amount of cash reserves. Back before the bubble, when housing prices were generally stable and accessible to those willing to save and get their credit shored up.

      Today I don't think there are too many first time buyers able pony up 20% or even 10% for a down payment.

      Sure many folks were overly optimistic that their wages would go up and that in five years they would be able to refinance to a fixed interest loan. They took a gamble. But I don't think they were fraudulent in their aspirations.

      The lending institutions were not the least bit interested in whether or not the borrowers were going to be able to pay back the loans because they were just playing a middle man, skimming off the top and passing the toxic bundle off to some other sucker.

      And lets not forget the lenders that sold higher interest rate mortgages to borrowers that actually qualified for lower rates. These tactics were going on with great regularity. The lenders had a vested interest in running up fees on the front end because that is what they collect before passing the mortgage off.

      It use to be that getting credit was difficult. Once that barrier was lifted, things spiraled out of control quickly. Predatory lending took the place of good, solid conservative lending practices that made sure the money they lent could be repaid.

      It is my humble opinion that most of the borrowers that ended up defaulting were largely guilty of poor judgement and overly optimistic about their future earnings. It stands to reason no one would want to set up a home and family with the intention of only living there for a few short years. Sure, there probably are some persons that had this thought, but I've not seen any evidence that the vast, overwhelming majority of borrowers were engaged in fraud.

      Unlike the piles, mountains of evidence that prove the banks were.
      I don't know what the banks were guilty of other than sheer stupidity in a lot of cases. I don't care what the interest rate is, someone with a household income of 35k can't make a 250k note. The banks were willingly burying people in something that they have no prayer of affording and no ability to pay back. The banks were stupid for doing it, and the borrowers were stupid for doing it. The buyers can claim that they didn't understand it, but before I put my butt on the line for a lot of money, I would pay a lawyer for an hour of his time to explain it to me. Cheapest money ever spent. And don't even get me started on the loans with a second mortgage taken at closing to make the down payment and avoid mortgage insurance. That should be illegal on all counts.

      It doesn't help that this current generation of first time homebuyers wants everything their parents have, in their first home. A young couple with no kids and minimal savings doesn't need a 3000sf house full of new furniture, all of it financed 100%. They need to realize that their parents worked for it, saved up reasonable down payments, and probably bought the nice furniture after they saved up for it. The need for immediate gratification is what is killing us. I am 46 years old and still don't have a big screen TV or granite countertops. But when I do, I won't be in debt for them. Period. The current generation of young adults needs to learn the difference between "nice to have" and "necessity". I think a lot of them are going to get a very rude crash course before the current economic crisis is over.

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      • #33
        Re: Self-Sustaining Growth "No Longer Exists"

        Originally posted by SpiffPeters View Post
        When I bought our first home 11 years ago, I could only afford to put down 5%. If I had bought the home four years earlier, I could have done about 10%. Five years earlier yet and I could have had 20%.
        I also only put down 10%, but when you include closing costs and a modest budget for painting, floors, and appliances ($10k) I ended up spending 15%. I think it would have taken me another 3 years of saving at least to come up with another 10%. And in the interim, I wouldn't have had a house for my kids to grow up in.

        And lets not forget the lenders that sold higher interest rate mortgages to borrowers that actually qualified for lower rates. These tactics were going on with great regularity. The lenders had a vested interest in running up fees on the front end because that is what they collect before passing the mortgage off.
        I don't have much sympathy there. I got quotes from about 15-20 different lenders. A mortgage is the biggest purchase of your life, if you're in for 30 years it is probably just as big (or maybe even bigger) than the house itself. Not shopping around for the best deal is your own fault. The only thing that really differentiates one lender from another is price [keep in mind whoever it is will sell the loan in 2 months anyway], so you've got a perfectly fungible commodity.

        It is my humble opinion that most of the borrowers that ended up defaulting were largely guilty of poor judgement and overly optimistic about their future earnings. It stands to reason no one would want to set up a home and family with the intention of only living there for a few short years. Sure, there probably are some persons that had this thought, but I've not seen any evidence that the vast, overwhelming majority of borrowers were engaged in fraud.
        I tend to agree, I am sure there are a bunch of people who just got "caught up" in the whirlwind and only a small group of people really gaming the system. Either way, I think they need to take their lumps and move on.

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        • #34
          Re: Self-Sustaining Growth "No Longer Exists"

          Originally posted by JTROANOKE View Post
          I don't know what the banks were guilty of other than sheer stupidity in a lot of cases.
          They weren't stupid. They knew exactly what they were doing.

          Banks knowingly gave mortgages to people that didn't pass the sniff test. Banks didn't care and preferred these low credit rated borrowers because they could pile even more fees and higher interest rates on them. The fee's were collected by the bank issuing the loan, the higher interest rates on these mortgages inflated the 'value' of the securitized mortgage packages they banks turned around and sold to investors.

          Following me so far? The banks took all these loans they knew were likely to default, put them into a bundle with good mortgages, and sold the whole bundle to investors.

          As if that wasn't bad enough, these same banks then offered an 'insurance' policy on these securitized bundles, except it wasn't called insurance. It was called credit default swaps. To call it insurance would have meant it would have been regulated. Because credit default swaps were unregulated, the banks were not required to actually maintain a capital fund to cover any claims the investors may file when the bundles they bought start shriveling up.

          There are currently tens of trillions of dollars out there in credit default swaps. That's a mighty big potential capital obligation, but your saying the banks are just being 'stupid'.

          The banks and real estate agents fed on the same over exuberance that drove the dot com bubble.

          Like I said, my first and so far only house was virtually beyond my means when I bought it. I wasn't able to put 20% or even 10% down. I couldn't afford to buy my house today, and I live in a modest little post war house (less than 1,200 square feet).

          House prices are completely out of line. Unless today's home owners are willing to devalue their real estate, then the kids coming up are just simply going to have to resign themselves to 40-50 year mortgages.

          The only reason the banks gave away money because they could actually make money. These guys are not stupid. Heck, they got over $700 billion dollars from us didn't they. How stupid is that?

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          • #35
            Re: Self-Sustaining Growth "No Longer Exists"

            Originally posted by SpiffPeters View Post
            House prices are completely out of line. Unless today's home owners are willing to devalue their real estate, then the kids coming up are just simply going to have to resign themselves to 40-50 year mortgages.
            A 40 or 50-year mortgage won't help. You're paying so much in interest the first few years, that extending the term won't matter. That is why they started pushing interest only or negative amortization products, because that is the only way to reduce the monthly payment.

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            • #36
              Re: Self-Sustaining Growth "No Longer Exists"

              Originally posted by cpw View Post
              I tend to agree, I am sure there are a bunch of people who just got "caught up" in the whirlwind and only a small group of people really gaming the system. Either way, I think they need to take their lumps and move on.
              Exactly the point. I think there was a lot of exuberance in the market, or froth as it were. People were seeing friends and family members buying a house and then trading up in a few short years. I could have bought a house in the early 90's but I refused to pay the exorbitant capital gains to someone that had only been in the house for three or four years.

              Sadly, when I finally bit the bullet, the sellers realized $50k capital gain on the house which represented about 54% gain in their original investment.

              Like I said, I couldn't afford my house if I had to buy it now. It's ridiculous.

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              • #37
                Re: Self-Sustaining Growth "No Longer Exists"

                Originally posted by SpiffPeters View Post
                Exactly the point. I think there was a lot of exuberance in the market, or froth as it were. People were seeing friends and family members buying a house and then trading up in a few short years. I could have bought a house in the early 90's but I refused to pay the exorbitant capital gains to someone that had only been in the house for three or four years.

                Sadly, when I finally bit the bullet, the sellers realized $50k capital gain on the house which represented about 54% gain in their original investment.

                Like I said, I couldn't afford my house if I had to buy it now. It's ridiculous.
                The fact that you could not afford to buy your house today is one of the reason many bought in the early 90s. The housing market will make corrections every once in a while but will generally still see an increase when they settle down. I'm not sure looking at what the seller is putting in their pocket is a great way to put a value on properties.

                Mark
                "Somewhere a Village is Missing Twelve Idiots!" - Casey Anthony

                I never lost a cent on the jobs I didn't get!

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                • #38
                  Re: Self-Sustaining Growth "No Longer Exists"

                  I tried to time the market. I failed to realize that the housing market was in a severe bull market and that values were inflating at unrealistic rates. I don't begrudge someone making a profit. But housing prices have long since reached the point where many young families are facing a significant barrier.

                  Kind of like musical chairs. Those of us that got in some time ago would only be negatively affect by a tsunami of a market correction. Even at a twenty percent correction the value of my house would still be worth more than I paid for it (even after adjusting for inflation). That rate of growth is simply obscene and counter-productive to a healthy society.

                  Comment


                  • #39
                    Re: Self-Sustaining Growth "No Longer Exists"

                    Originally posted by SpiffPeters View Post
                    I tried to time the market. I failed to realize that the housing market was in a severe bull market and that values were inflating at unrealistic rates. I don't begrudge someone making a profit. But housing prices have long since reached the point where many young families are facing a significant barrier.

                    Kind of like musical chairs. Those of us that got in some time ago would only be negatively affect by a tsunami of a market correction. Even at a twenty percent correction the value of my house would still be worth more than I paid for it (even after adjusting for inflation). That rate of growth is simply obscene and counter-productive to a healthy society.
                    Twenty five or so years ago before I bought my first house, I listened to how my inlaws paid 35k for theirs thirty years earlier. These stories don't mean much because what matters is what the current market will bare when you are ready to buy. I agree the price jumps were obscene, and in my opinion just one of the symptoms of a society headed for trouble.
                    Maybe the American dream of owning a house must change to something different? We waste an awful lot of land and energy builidng these dream homes. I grew up in The Bronx and lived in apartment buildings. Countless people lived good lives and raised happy families in those apartments.
                    When my sixteen year old daughter leaves for college in a couple years it will just be my wife and myself in a 2300sq ft house, that too is obscene.
                    Just because we can afford to live in big homes on big plots of land does not make it right in the grand sceme of things.
                    Three dollars for a gallon of gasoline and we are still driving gas guzzlers. The knife continues to plunge deeper and instead of backing it out, we medicate ourselves with all sorts of distractions.

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                    • #40
                      Re: Self-Sustaining Growth "No Longer Exists"

                      Frank - You are right on. Bulls eye. I couldn't agree with you more.

                      Of course the argument exists that everyone has a right to build a McMansion and drive gas guzzling vehicles so long as they can afford it.

                      I wish I could claim the following quote as my own:

                      "The chief value of money lies in the fact that one lives in a world in which it is overestimated." H. L. Mencken

                      I agree that attitudes and expectations need to be realigned partly because they have severely deviated from what traditional values that served us well, but also because the financial landscape of the world is quickly changing.

                      Hopefully most will land on their feet. But there are some that are in for a rude fall. And it will be the rest of us left to pick up the pieces.

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                      • #41
                        Re: Self-Sustaining Growth "No Longer Exists"

                        The housing market is funny but you have to look at it in decades not days. Oddly enough I have three kids who all ended up owning units in the same large condo project.

                        Kid number 5 purchased hers at the age of 22 and paid $120,000. Kid 5 sold and made $160,000 which she put towards a new house.

                        Kid number 4 had cold feet and waited a year longer and paid $220,000 when he was 25 years old. Kid 4 sold and made $45,000 which he put towards a new home.

                        Kid number 6 bought (1/3 partnership with 2-cousins) the following year for $260,000 when she was 22 years old. Kid 6 sold her 1/3 share and made $80,000 which she held for three years while she tried different parts of the country then finally settled out-of-State and put it to another condo.

                        To confuse things even more, kid 1 bought her home out-of-State for $90,000. Kid 1 sold her home for $120,000 and moved into a tiny rental with her husband and 3 kids. They then spend the next year building their own home with sweat equity. Today that home is just short of $400,000.

                        In contrast to our kids, my wife and I bought our home 35-years ago and are still using it as our primary residence. The home has increased 10-fold and then some.

                        The point is, when times are tough you may have to be more creative when buying a home but if you buy to own a home and not just a mortgage it can be done.

                        Mark
                        "Somewhere a Village is Missing Twelve Idiots!" - Casey Anthony

                        I never lost a cent on the jobs I didn't get!

                        Comment

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