patrick.net

It was never a math problem.

During the boom, people compare 6.5% interest payment to 30% anticipated appreciation.

There should be a national reality check instead. But we all like to drink kool-aid, don't we?

I'm afraid some of these borrowers never had a chance against the "why-do-you-keep-throwing-your-money-away-on-rent" Realtor rhetoric, which cancels out math any day of the week. In fact, I still get that line from realtor "friends"! There's never been a better time to buy !!

Maybe it's the mortgage brokers and the realtors® who need the math test. The realtor who sold us our house is losing his to foreclosure. I like the guy and wouldn't wish a bad situation on him, but it seems he drank too much of his own kool-aid.

Spelling requirement for bloggers? I believe the post should read: "they also have to pay back the principal over the life of the loan." But yes, I tire of reading about all the people I will be helping bail out ...

Peter P,

Precisely! Even during Tangelo's purported personally conducted phone survey where he asked loanowners in some of their neg. am. products why they weren't concerned about the increasing level of debt the response was "the home is appreciating more quickly than the neg. am!"

Now mind you, since I highly doubt Angelo EVER got on a phone to do a survey of people they had ALREADY fleeced, his statement is anecdotal at best and poorly constructed damage control at worst.

Step 1: Buy Microsoft Excel
Step 2: Use pmt, ipmt, ppmt

The actual math is kinda icky.

Oh btw we're getting that National Reality Check as we speak!

But you're advocating teaching something that's apparently forbidden in American schools, financial self-defense.

In high school I remember it being taught that it's OK to allocate 20% of your pay towards paying on credit cards! This was in the 70s! It's got to be only worse now...

This is what you get when you have a society run by the international banksters, see I didn't use the letter J once!

People dreamed that they would get to live in a big house for a teaser rate, and when the rate expired they would sell the house for a hundred or two extra. Put those in 5 more houses and repeat. Basically, different kind of equations going on.I mean the idea is sound, but you gotta be psychic or lucky to know when to get out!

Marty

Download Open Office then use PMT), IPMT(), etc.

"This is it. That time in high school when we were told math would save our life." Val Kilmer in Red Planet

Seriously all people cared about was the monthly nut. Nothing else mattered.

Nothing to do with math or logic.

I have seen too many Chindian science and engineering PhDs falling for the same logic when they take out ARM or even I/O loans buying investment homes at the top.

Speaking of maths, can someone explain this to me. What does a 2.1% drop in the S&P Case/Shiller Home Price Index from Sept.-to-Oct. 2007 mean for someone in the SF Bay Area? I think this only looks bad because Case/Shiller does a three month rolling average and the summer months are no longer supporting the index :-)

>> I have seen too many Chindian science and engineering PhDs falling for the same logic when they take out ARM or even I/O loans buying investment homes at the top

Agree on Chindian herd mentality.

Why every chinese couple I see has two children and majority of them one boy and one girl. How do they do it? Why not three?

@PermaRenter,

The answer is $$$.

It is considered parents' full obligation to pay in full for kid's tuition all the way through college or even graduate school, so an extra child = extra tuition. Most parents also aspire to leave one home free and clear to each kid, so that's an extra financial burden. Two is optimal because one of them is a backup kid, just in case something happens to the other one.

I know some who have two boys or two girls.

well compared to the typical boomer American parents, Chinese parents can sacrifice everything they have for the future generation. Not that this is the best way to raise children, but I have seen most Chinese parents pinching every penny so as to leave the biggest stake possible to their kids, and they expect their kids to do the same for the next generation. The end game in life is to grow family wealth as much as possible.

However, since they raise their kids in America - land of debt, quite a few of these 2nd generation Chinese get disgusted by their parents' frugality and start squandering early in life.

Well, you see, they drown the unwanted ones in the bathtub and the restaurant up the street has some extra-tender "peking duck" that week.

OO I have seen that with Vietnamese parents and kidds .... the parents are such pinchpennies because that's how they had to live on the farm and in the old country, and the kids get disgusted with it and squander ..... so then you see the parent with their teenage kids buying "blingy" stuff with the parents having this long-suffering look on their face .... part of the old culture was to give the kids what they could too, after all.

I wonder if there was this kind of split between European parents and their kids 100+ years ago when they came here? I remember Artie Shaw saying his parents just accepted poverty and suffering, and he was like "To hell with that!" and started playing sax after seeing a guy play one in a vaudeville show, wearing a silver suit no less. He then changed to clarinet because it's easier to carry lol.

I agree with all the views that said this had nothing to do with Math.

Buying a house meant paying X$ per month which is effectively 0.65*X due to tax rate (or some such proportion). Compare that to the rent Y being paid now. Only additional cost is Y-0.65*X. That difference was not much and houses always appreciate. Ergo, buy the house.

Most of the people I know who bought used this simple comparison.

Lose interest on down payment ? Why should I worry about that ? It's no big deal anyways. Property taxes ? Oh, they cannot be deducted due to AMT ? Really ? This AMT is too complex, I don't have the energy to understand it. ARM resetting after 5 years ? Who knows that happens after 5 years, don't worry too much. Opportunity costs of future mortgage payments ? Man, now you are really hurting my brain. Don't analyze so much, dude. House are never a bad investment. Just buy what you think you can afford (without actually calculating all this), and get on with life. Life is too short (meaning it's better to own a house than actually enjoy life.)

Oh I don't know? One of my wife's co-workers (Viet gal's) husband died while she was raising 5 sons. I remember the husband, great guy. Anyway this gal worked 3 jobs and as she got older the elder boys picked up some of the slack.

The boys understand her sacrifice so they continue to show their appreciation. Nicer cars (but no bling lifestyles). She was able to get them college but there weren't any free houses.

StuckinBA,

Best Description of FB Mentality for 2007!

Hands down! You've managed to cover the "thought process" from 2000 up to present in two paragraphs. Nicely done.

It has nothing to do with math - neighbors and co-workers buy a house which means it is time for you to do so as well.

Duke Says:
Step 1: Buy Microsoft Excel

Obligatory potshot: If that is your step 1, you have bigger problems than math. :-)

Anyway, I know someone who is smart enough to _write_ spreadsheet software - and she still went and bought a condo earlier this year. Not a Chindian either, but someone who came into some relatively easy money and decided to go ask a realtor what she should do with the $$$.

I have seen too many Chindian science and engineering PhDs falling for the same logic when they take out ARM or even I/O loans buying investment homes at the top.

Well, anything is possible with someone with permanent head damage.

Precisely! Even during Tangelo’s purported personally conducted phone survey where he asked loanowners in some of their neg. am. products why they weren’t concerned about the increasing level of debt the response was “the home is appreciating more quickly than the neg. am!”

DinOR, I just find it interesting that anyone could get a neg-am loan but a "day-trader" needed 25K equity in his account. :)

Seriously, this isn't Math or Logic. I tend to think this is a problem where ingrained historical "truth" did not keep up with reality. Let me explain...

Earlier, it took real savings to go buy a house. You had to scrape together a 20% down-payment, and show some ability to service the 80%-LTV debt load. As a result, houses 'appreciated' slowly and in any slowly changing system, there is less likelihood of a disconnect between input parameters and output result. Since the rate of change is slow, the results are more predictable and inputs are tempered by realistic expectations. And because it takes hard-work and diligence to get that money together in the first place, there was a certain self-selecting quality to the participants in this market.

People sorta got used to this - and buying usually made more sense for so long that it became a truth that people accepted without feeling the need to re-evaluate whether it still applied.

Once the fliptards started getting 90%-103% LTV financing, all this suddenly changed. None of the old benchmarks seemed to make any more sense, and short-term empirical data showed that foolish risk led to big rewards. This started drawing in more and more people, who were not really equipped- mathematically, financially or temperamentally - to play this. Dumbass rules started becoming common ("We are a 3 income family because my house is a third income, ha ha.") - and what was worse was that people began to believe that these dumbass rules worked, because they saw dumbasses made a lot of money in 2005.

Things are already changing now - and like all pendulant phenomena, it is on its way to over-correcting. The only people who actually have the capacity to even _understand_ what the f*ck is going on are those who have the math, logic and economic comprehension, plus the necessary patience to put focus these skills on an analysis of the situation. Your average doofus, even the generally sensible one, doesn't quite grasp all the things that are going on in the credit markets.

By the way, I spoke to three people today - lay people, not very acutely vested one way or another in the housing market - they all independently conveyed their impression that Cupertino prices have fallen based on anecdotal data that they saw in their neighborhoods. One of them lives near Garden Gate, the other two are by Foothill.

DinOr 3:10 PM ---- that is cool to hear about.

Frankly, the normal American standard for raising kids is to kick 'em out at age 18 to sink or swim and tell the little fuckers to get lost.

This after barely feeding them and showing no support for schoolwork or much of anything at all.

which is why I love this site! I want to see the US system as we know it and grew up in it just DIE and this site is.... Doomerlicious!

And here is my WTF-moment of the day - I see a reuters headline in my RSS feed, "Wall St sinks with Bhutto killing".

Why on earth would Wall Street sink because of this? Oh, I get the whole "instability" angle, but really? IMHO, this actually plays into Musharaf's hands, since he can delay elections and use the army to repress dissent in the grand tradition of military despots everywhere.

It seems to me that anytime Wall Street "sinks", the MSM scrambles for some one-time reason to hide a secular pullback. "Yeah, it crashed today, but that was because of Bhutto, and that won't happen again - so good time to buy now." I mean, REALLY?

And here is my WTF-moment of the day - I see a reuters headline in my RSS feed, “Wall St sinks with Bhutto killing”.

Thankfully, it has nothing to do with this:
Citigroup Inc (C.N) may need to slash its dividend 40 percent to preserve capital, and with Merrill Lynch & Co (MER.N) and JPMorgan Chase & Co (JPM.N) may write off $33.6 billion of debt this quarter as the global credit crunch deepens, a Goldman Sachs & Co analyst said. I can see the jihadists now: "Let us time this conflagaration to coincide with the analyst report from Goldman Sachs and the Case/Shiller report."

Whatever happens, a bank dies, a tiger jumps a too-low wall, blame "TERRORISTS" eco or otherwise.

SP,
I agree. They'll use any excuse they can to just tap the RESET button a little. They won't actually hit it. They'll just bleed the lamb until until the powers that be say ok, were in position, let 'er tank.

Basically they have to give themselves time to clean out the safe, the desk drawer, and the flowerpot with fake flowers that's stuffed with bills inside. And raid the fridge.

Then, let 'er tank.

let ‘er tank

Good. Then those who "foolislhy" saved cash can buy assets at realistic prices.

Headset says: Good. Then those who “foolislhy” saved cash can buy assets at realistic prices.
Mish vs. Schiff, and it looks like Headset is picking Mish (deflation) as the winner? I'd have to say Singapore, China and the Mideast investment funds might agree with you.

EBGuy,

You nailed it. I have been packing away cash in Treasuries, banks and Credit Unions looking to pick up houses after the decline. Those two Mish rebuttals to Schiff sound like music to my ears.

But if Schiff is right, I'll just be another clown like that guy who invested in a national chain of bath houses right before AIDs kicked in.

Let 'Er Tank! LOL!!

But you 'feel fng"? What, you feel like the fuckin' new guy? Ooooo Kkkkkk.....

At least you didn't say you feel like a REMF.....

There will be deflation on things you don't need, and inflation on everything that you absolutely need.

Pay - deflation, therefore housing - deflation, construction materials - deflation. Lack of confidence also means the credit market and stock market go into deflation

However on the other hand, the government will just keep printing, because that is what they are here for in times of financial difficulty. But the newly printed money won't go back to housing, stock market or bond market any more. A multi-year boom typically means mis-allocation of resources, so the newly created digital money will go into sectors that have been under-invested seeking profit, instead of bailing out underdogs.

Therefore both Mish and Schiff are right. We will have both deflation and inflation.

prezident Musharaf has a lot less power now. With the killing of the PM he is faced with a situation he might not be able to contain. If he falls... Umm, what u gonna do boy?

Marty

Dec. 2005 = loose credit for everyone!
Dec. 2007 = loose nukes for everyone!

Mhrist Says:
prezident Musharaf has a lot less power now. With the killing of the PM he is faced with a situation he might not be able to contain.

Well, we will see - I expect he will use this as an excuse to delay elections and strengthen his grip by re-imposing a martial dictatorship.

My point was that while this is a significant issue politically, I don't believe the crap in the MSM about _this_ being the main cause of Wall Street's slide today. IMHO, there are far more relevant pieces of bad news on the economic front, whose impact the MSM is neglecting to report honestly. EBGuy referred to a few of them. There is also news of more downgrades from Fitch, recessionary unemployment numbers, accelerating housing price declines in October, and... risk premiums jumped on lower end of commercial paper. Each of these would have had a far greater impact on Wall Street than yet another dictator getting rid of yet another political rival.

SP, I was answering why the assassination made things difficult there.
Err, about here... you crazy? We are fuked... Who is gonna own us is the question?

Marty