the housing bubble

[judge wopner]

great article by a pro mr. eric sprott.

http://www.sprott.com/pdf/marketsataglance/03-2006.pdf

www.thehousingbubbleblog.com

 

[Ditto Much]

“‘Linda’ is one of Douglas County’s new poor. She grew up in Castle Rock. Just two years ago, her life was stable. But then Linda was laid off just as her husband’s computer business began to slip. Meanwhile, the interest-only, adjustable rate mortgage on the family’s two-bedroom duplex swelled from $750 to $1,550 a month.”

Yup interest-only, adjustable rate mortgages are a sucker bet and buyer beware.

Honestly I'm a little happy to see some of these people take a hit for there poor planning. Freedom allows us the option to make horrible bad decissions like mortgaging our homes and using the money to buy SUV's and take vacations. One day the bill comes and you get what you paid for (or choose not to pay for)

 

[SellyCat]

You may choose to cynically blame these people for the decisions that were induced by an absolutely relentless media campaign by creditors designed to trigger every conceivable IRRATIONAL process leading them to refinance their homes. You are free to do that, and uninfluenced by such a marketing campaign...but for the sake of intellectual integrity and your own personal credibility, I would resist such simplistic and predictable establishmentarian reflexes.

Buyer definitely beware, obviously. However when one is constantly inundated with a deluge of communications whose overall meaning is "comsume, sonsume, consume! You are nothing without material possessions!", one is destined to be manipulated. It is a fact of psychology that people can, in fact, be manipulated by the mass-media--perhaps you've heard of this phenomenon before? Some people call it "propaganda", and for a hundred years psychologists have known that propaganda can--and certainly does--negatively impact peoples' so-called "freedom of choice".

Considering that fact of science, it seems logically erronious to state that people were, in fact, "free" when they made those choices. To argue to the contrary is to accept an ideological framework whose hallmark is that of wrapping naked exploitation in the veil of personal freedom. And that would be most irrational of you.

 

[Ditto Much]

You may choose to cynically blame these people for the decisions that were induced by an absolutely relentless media campaign by creditors designed to trigger every conceivable IRRATIONAL process leading them to refinance their homes.

Nope it was rational, they spent today what they should have been saving for tomorrow. Its a poor decision and at the end of the day it will likely cost many of them their homes but this is the price of not learning about a key aspect of home economics. Ignorance and gulibility are always expensive.

"A fool and his money are soon parted"

this also means an increase of homes on the market being dumped at lower prices allowing those of us who saved cash during a boom to take advantage of the eventual bust. I've been waiting four years for these people to become victims of there own choices and to take advatage of the circumstance.

You are free to do that, and uninfluenced by such a marketing campaign...but for the sake of intellectual integrity and your own personal credibility, I would resist such simplistic and predictable establishmentarian reflexes.

Don't trust what you see on TV!!! Look TV also tells me that pills will cause my weight to fall off and that for $150 Tony Robins will tell me that I'm a good person who will be successful. If your dumb enough to believe all the ads than your going to be in trouble for your entire life. Blaming society for rational people making very stupid choices is silly.

The example I quoted was a woman who worked in the computer industry. What she couldn't search google for a mortgage calculator. She didn't realize that as interest rates went up her situation would carpet her. Come on you have to be responsible for yourself, freedom includes the option to drop out of school and have a kid at 18 dooming yourself to a life of hell along with your child. Common sense tells you its a bad idea and you should probably not do it.

Buyer definitely beware, obviously. However when one is constantly inundated with a deluge of communications whose overall meaning is "comsume, sonsume, consume! You are nothing without material possessions!", one is destined to be manipulated.

Nope you get socked with just as much as me and just as much as the next guy. We all have the ability to tune it out and turn it off and not get involved. We all have the ability to look at our property and say that we don't care if its last years fashion we're still going to wear the jacket. If we choose to give in to our weekness its our own fault.

QUOTE]
It is a fact of psychology that people can, in fact, be manipulated by the mass-media--perhaps you've heard of this phenomenon before?[/QUOTE]

Mass media has also told us to not do drugs, to save three paychecks in case of emergency, to pay off our entire credit card balance each month and to pay into our retirement plans every year. Mass media tells us both positive and negative however we use 'brainwashed' as an excuse when we fall victim to our insecurity and the result is negative. We however compliment ourselves and not the media when it is positive. This has lead to a scapegoating of media for all negative stupidity.

Some people call it "propaganda", and for a hundred years psychologists have known that propaganda can--and certainly does--negatively impact peoples' so-called "freedom of choice".

Obviously!! thats why we advertise products and services and people are dumb enough to buy them. But we're talking about refinancing homes on interest only mortgages here not buying a candy bar. Maybe just maybe these people figured they could have it all and didn't listen to the good advice out there and in weekness made bad choices. We can blame it on the media or we can blame it on the person who could have also watched the programs I watched that explained why these kind of mortgages are sucker bets.

if people make the choice to live in ignorance bad things will happen to them each and everytime.

Considering that fact of science, it seems logically erronious to state that people were, in fact, "free" when they made those choices. To argue to the contrary is to accept an ideological framework whose hallmark is that of wrapping naked exploitation in the veil of personal freedom. And that would be most irrational of you.

Its not a fact of science, its a hypothesis at best. a FACT of science is that gravity accelerates an object at 9.8m/s^2 in a vacume. A fact of science is that if I cut an artery my blood will seep out and I will die. What your are suggesting is that we have no free will outside of advertising and I suggest that this is entirely false. We have our ability to check recheck and think things through and then still make a bad choice out of the greed of the moment.

these people made a bad choice and now they are crying about it, sorry but thats part of living in the here and now and not thinking about the long term. And its also why for 6 years I didn't buy a condo in Toronto knowing that given enough time my money would be better off not vested in over priced real estate.

 

[SellyCat]

I fundamentally disagree with your approach to this subject.

Like, on a very basic level.

 

[Ditto Much]

I fundamentally disagree with your approach to this subject.

Like, on a very basic level.

Is it because people will lose there homes?


I want to assure you that I do have a very strong emotional response to this, I just don't think that emotions should decide most things as they cloud judgment Basing my response purely on emotions I think its terrible to ever take someones home away from them. In fact I think I could pose a very strong argument as to why society is better of insuring that everyone remains in there home. I think anyone who advertises anything that might threaten to take a persons home from them should be brought to trial if anyone is a victim of these actions.

Emotions make most decisions seem like a cakewalk, everyone feels this way. However basing real decisions on emotion rather than logic creates policies that are simply abused.

When these people made decisions to purchase homes they likely got caught up in the emotion. I know of plenty of people who bought homes with %5 down and with jobs that made the mortgage payments greater than %50 of there monthly income. They fell in love with the home and enjoyed the pride of claiming to be a home owner. In many of these cases when final costs came up and property taxes went up and condo fees went up they found that there monthly costs with utilities were closer to %90 of income. If they had ignored the person trying to sell them a condo, and ignored the media telling them to buy a condo and ignored the person trying to sell them the mortgage they would have looked into what I did. Your much better off saving %20 in RRSP's having much lower closing costs and picking a place that is for sale in distress even if it isn't exactly what you pictured.

When you walk into a bank or a mortgage broker you have to understand that although they want to give you money its to make money off of you and there are several ways for them to make more. The less down payment you have the worse off you are, the less capital in the home the worse off you are, the slower at which you repay the capital the worse off you are. If your getting a great deal and your not starting with capital or paying down capital you shouldn't be purchasing a home.

By coddling and protecting people from making dumb decisions we are doing the opposite of what I believe we should do. I say open the flood gates to all forms of stupid advertising of every form possible. Within 5 years no human being will believe a word of it anymore anyway and it would cease to have any grip upon us. By legislating it peace by peace by peace we are facing a never ending battle that will eventually cross the boundaries of sanity. And in both cases inevitably it will end up in court or it will end up costing homes or it will end up costing lives.

In the case of people over extending themselves and not having coverage to pay there mortgage they are going to lose homes. It may be for no direct fault of there own, it may be for the stupidest negligence on there part or worse yet because they are a victim of others. To lose your home because you lost a job and a spouse lost a business is horrific. At the most basic level we have to accept that part of any loan with collateral allows foreclosure on the collateral if you don't pay. Without this no bank is going to lend money to anyone for a mortgage.

People will also buy a home and make a choice to leave the city they live in, our get divorced and be forced to sell to settle assets especially in cases with large legal bills. Life is a gamble and sometimes you go down in a pit of flames for making a bad choice sometimes you rise.

Meanwhile, the interest-only, adjustable rate mortgage on the family’s two-bedroom duplex swelled from $750 to $1,550

These people were foolish and should never have paid 750 a month for a 2 bedroom home without paying down any principle. Its pretty obviously the same as renting your own home from a mortgage company with the rental rate directly tied to the interest rate. This is the clearest sucker bet on the market and it doesn't take shit all to see why.

If we have to protect people from making this sort of arrangement its going to be damn near impossible. If the people stop paying for 12 months I can see no other option but to force them out liquidate the asset in a timely fashion and return whatever portion of it that is theres to them. If there capital in the home is 100,000 and the mortgage value plus missed payments is 210,000 and the sale price is 260,000 they should receive 50,000 having lost out on the deal. Thats the very basic concept behind borrowing money and mortgages. An interest only mortgage being the easiest one to understand out there is always a sucker bet.

As well housing bubbles do collapse and people really do lose real money and it really does make life hell for them. This is a fact of life and a reason why you should use caution in your decisions and not always listen to others.

 

[atbell]

I see a point of contention that you two are dancing around.

In science we assume that the body of knowledge, such as how much of chemicals x, y, and z are in your water, is to big for average individuals to know about. Therefore the government steps in and (in theory) legislates and regulates as appropriate for the good of the community.

It looks like Sellycat feels that the body of knowledge about finance is big enough that it requires some amount of safe guarding. Ditto Much seems to think that it is the responsibility of the individual to know all aspects of their personal finance.

I think I lean toward Sellycat's view. I bought a condo recently and had Amen's trouble finding out how much it would cost me per month once I had the down payment down. I'm not claiming to be a genius but I am numerically inclined and I even developed spread sheets for use in understanding interest rate fluctuations, possible rental income scenarios, and resale values. It was still hard for me to gain a good understanding of what I was getting into.

I would say the biggest problem was that the bankers just plain didn't care. They would banter away about things that didn't matter and would try and change the subject when I asked what they should have been asked ALL the time "...yes that's all nice and it sounds like a good plan .... buuut how much is it going to cost per month!!"

Banks should have to tell buyers what their house will cost / month and to explain how it can change.

(sorry, still mad about the buying experience)

 

[SellyCat]

It was still hard for me to gain a good understanding of what I was getting into.

I would say the biggest problem was that the bankers just plain didn't care. They would banter away about things that didn't matter and would try and change the subject when I asked what they should have been asked ALL the time "...yes that's all nice and it sounds like a good plan .... buuut how much is it going to cost per month!!"

This is par for the course; it's delibeate and well thought out.

Lobbyists for creditors in America went to INCREDIBLE lengths to prevent a law from being passed that REQUIRED every credit agency to notify customers of how many months they would be paying and how much they would be paying.

This was faught tooth and nail because of psychology. The credit industry--and yes they do collude, as I will prove in a moment--hired marketing psychologists and determined that if you told people how long it would take them to pay, they would repay the loan back faster. This is a NIGHTMARE for creditors, because it limits the amount of usury they can commit. The worst customers are those who pay off their entire card every month.

Another example of psychology being waged as a weapon in this industry. This time, bait and switch. The idea of offering ridiculously low interest rates was invented and sold to the industry by some douche genius. The reason is simple: research showed that people were *much* more likely to get into more debt AND be less responsible about paying it back PRECISELY because of low interest. THE CATCH: *every creditor* will instantly revoke your low interest loan as soon as you miss ONE payment on ANY card! You miss your VISA payment by one day and bam, ALL of your credit cards automatically default to 25% with no notice.

They deliberately use tactics to manipulate and misinform the consumer for the purpose of taking as much of their money as possible. As for the consumer being expected to educate himself, this is not possible. During congressional hearings, professional financial law specialists testified that EVEN they could not fully understand--let alone explain to anyone--what the credit card contracts actually mean. The credit card industry hired entire lawfirms to make these contracts impossible to understand.

The purpose for all this was to make it easy for establishmentarian apologists to impulsively--and self-righteously--blame the victims for their suffering. It makes it easy to *rationalise* why it's okay not to pitty the many people victimised by this unethical and immoral fleesing of the public.

As for the inaccurate definition of science, I will say that science is merely a system of observation. It is not--as any scientist will tell you--concerned with, or capable of determining, the truth. So when psychologists observe the conditions under which a person can be made to act irrationally, they are engaging in science. That science is then weilded as an instrument of thought control.

Claiming that "emotions" cloud "judgement" is to very specifically miss the meaning entirely. Emotions affect judgement...and you cannot seperate the to because the methods used to manipulate consumer are based--explicitly--on the combination of the two. Therefore, no argument is valid excludes either one of those elements of judgement.

No judgement is free of emotion and therefore it is impossible to talk of judgement without considering emotions. (I know the context you said that in was different--that to feel compassion is to limit rational faculties--but it makes for a very nice segue)

 

[judge wopner]

This is par for the course; it's delibeate and well thought out.

Lobbyists for creditors in America went to INCREDIBLE lengths to prevent a law from being passed that REQUIRED every credit agency to notify customers of how many months they would be paying and how much they would be paying.

This was faught tooth and nail because of psychology. The credit industry--and yes they do collude, as I will prove in a moment--hired marketing psychologists and determined that if you told people how long it would take them to pay, they would repay the loan back faster. This is a NIGHTMARE for creditors, because it limits the amount of usury they can commit. The worst customers are those who pay off their entire card every month.

Another example of psychology being waged as a weapon in this industry. This time, bait and switch. The idea of offering ridiculously low interest rates was invented and sold to the industry by some douche genius. The reason is simple: research showed that people were *much* more likely to get into more debt AND be less responsible about paying it back PRECISELY because of low interest. THE CATCH: *every creditor* will instantly revoke your low interest loan as soon as you miss ONE payment on ANY card! You miss your VISA payment by one day and bam, ALL of your credit cards automatically default to 25% with no notice.

this is an interesting point.

i worked for visa for a few years as collections and credit analyst.

even after 2 years there i couldnt fully explain the details of credit card contracts.

that being said i think a few htings are clear:

there is a common fallacy about interest rates being high as the source of revenue for credit card companies.

the majority of earnings from any major credit card compay comes from the point of sale terminal. the merchant pays a premium (anywhere from 1-4% in canada) for every purchase to the credit card company of the purchaser.

visa encourages people using their card so they get commisions, the merchant pays the premium because a visa charge is essentially a gaurnteed payment, and they neednt deal with the security issues and accounting mis-steps of handling cash.

the reason interest rates are so high on credit cards is becasue its cost prohibitive for credit card companies to collect and chase after people.

i was working in a department of 50 people all being paid 28-40,000 annually who's job was only to chase after delinquent accoutns. often the amonts of delinquency are under $5,000 making it too expensive to pursue serios litigation and difficult to dediacate too much time to finding. better to simply cut them off, call in a 3rd party agency who takes a cut and end up getting back half several years later at a heavy loss in interest potential had that credit been used for a non-delinquent account.

selly cat, you seem quite well read, im surpriised you too particiapte in this widely held fallacy.

credit card companies offer low interst in order to attract people over. they do not want your debt so much as they want your purchasing power and hope that with a low interest rate you will endeavour to pay it back and begin the cycle of credit.

trust me when i say that a credit card company (at least the major ones, cant speak for teh small BS outfits in the US) is most profitable when people pay back their balances. its easier for all involved, a customer in bad debt is a loss of potential purchasing power, all it take is a few phone calls to get your interest reduced if your account is delinquent.

and no they dont spoon feed you these kinds of details to save you money but i dont recall girls telling me exactly what to do to pick them up with success, seems like the veil of secrecy runs deeper than mere capitalism.

 

[SellyCat]

this is an interesting point.

i worked for visa for a few years as collections and credit analyst.

even after 2 years there i couldnt fully explain the details of credit card contracts.

that being said i think a few htings are clear:

there is a common fallacy about interest rates being high as the source of revenue for credit card companies.

the majority of earnings from any major credit card compay comes from the point of sale terminal. the merchant pays a premium (anywhere from 1-4% in canada) for every purchase to the credit card company of the purchaser.

visa encourages people using their card so they get commisions, the merchant pays the premium because a visa charge is essentially a gaurnteed payment, and they neednt deal with the security issues and accounting mis-steps of handling cash.

the reason interest rates are so high on credit cards is becasue its cost prohibitive for credit card companies to collect and chase after people.

i was working in a department of 50 people all being paid 28-40,000 annually who's job was only to chase after delinquent accoutns. often the amonts of delinquency are under $5,000 making it too expensive to pursue serios litigation and difficult to dediacate too much time to finding. better to simply cut them off, call in a 3rd party agency who takes a cut and end up getting back half several years later at a heavy loss in interest potential had that credit been used for a non-delinquent account.

selly cat, you seem quite well read, im surpriised you too particiapte in this widely held fallacy.

credit card companies offer low interst in order to attract people over. they do not want your debt so much as they want your purchasing power and hope that with a low interest rate you will endeavour to pay it back and begin the cycle of credit.

trust me when i say that a credit card company (at least the major ones, cant speak for teh small BS outfits in the US) is most profitable when people pay back their balances. its easier for all involved, a customer in bad debt is a loss of potential purchasing power, all it take is a few phone calls to get your interest reduced if your account is delinquent.

and no they dont spoon feed you these kinds of details to save you money but i dont recall girls telling me exactly what to do to pick them up with success, seems like the veil of secrecy runs deeper than mere capitalism.

I got this info from watching a series of interviews with credit card executives. That includes the specific, very powerful, individual who talks about coming up with the 0.9% interest thing.

What you said doesn't make sense...creditors don't make money when people pay their bills on time--they are borrowing money for free then! If they make a 1-4% premius off the retailer, but 25% interest on peoples' accounts..........how can you say they make more from POP!? That seems to be blatant fallacy!

After they "cut someone off"...that person continues to recieve credit card offers from the same company! These people WANT you to go into debt so they can collect interest--I'm not talking about people who go bankrupt, that's another issue entirely. There are WAAAY more people who don't go bankrupt, but instead fork over huge sums of interest over the long term even if they pay, let's say even double their monthly minimum. That's why the companies were so desperate to prevent people from knowing how long they'd be paying off their credit cards for.

Also...it's just plain disgusting that these same institutions make unspeakable amount of profit off YOUR MONEY via currency transactions (banks) and they have the fucking nerve to pay 1% interest and hit you with retarded fees. It's a scam above and beyond any other. They make BILLIONS every year off of YOUR money and they also make profit off of you GIVING them your money to make profit off of.

The whole industry deserves universal contempt for their behaviour and attitudes toward the individual.

 

[~atp~]

Dan, be nice to our benevolent corporate overlords. Obviously the owners of these massive corporations had the nerve and the risk-taking balls to go out and put their life on the line in order to build the company into what it is today, and -- wait there's more -- they did it all for us!!! If anything I should be buying a barrel and rope, strapping myself over it and waiting with a grin on my face for ... something.

 

[judge wopner]

I got this info from watching a series of interviews with credit card executives. That includes the specific, very powerful, individual who talks about coming up with the 0.9% interest thing.

What you said doesn't make sense...creditors don't make money when people pay their bills on time--they are borrowing money for free then! If they make a 1-4% premius off the retailer, but 25% interest on peoples' accounts..........how can you say they make more from POP!? That seems to be blatant fallacy!

After they "cut someone off"...that person continues to recieve credit card offers from the same company! These people WANT you to go into debt so they can collect interest--I'm not talking about people who go bankrupt, that's another issue entirely. There are WAAAY more people who don't go bankrupt, but instead fork over huge sums of interest over the long term even if they pay, let's say even double their monthly minimum. That's why the companies were so desperate to prevent people from knowing how long they'd be paying off their credit cards for.

Also...it's just plain disgusting that these same institutions make unspeakable amount of profit off YOUR MONEY via currency transactions (banks) and they have the fucking nerve to pay 1% interest and hit you with retarded fees. It's a scam above and beyond any other. They make BILLIONS every year off of YOUR money and they also make profit off of you GIVING them your money to make profit off of.

The whole industry deserves universal contempt for their behaviour and attitudes toward the individual.

ah yes i agree with the last part, banks in general are nothing more than legal mafia.

again you are by and large wrong about what the major credit card houses ahve as their business goals. im not suggesting they are any more noble, im just letting you know that your line of rationale on this is way off.

canada has one of the highest rates of payment in full on their credit cards, at least that was the state of things a few years back when i worked there. becuase of this canada was considered a lucrative mrket for the big credit card houses for the simple fact that they would be earning Point of Sale commisiions w/ lower rates of delinquency.

the %25 or typically %18 rates are ridiculously high, and are made to deter credit build up. agian im speaking about major credit card institutions, not some shady american credit union type outfit. the costs of collecting and employing people to deter delinquency is quite high, not to mention the fact that credit cards are near the bottom of the priority payment list when a person declares bankrupcy.

the prolonged interest charges and legal battles are not in the banks interests, like i said typically when a person goes over 120 deliinquency and is unable to make a reliable promise to pay, the file is handed over to 3rd party collections who if succesfull in getting payment take a sizeable cut. all while the bill keeps ringing up.

TD Visa will not issue you more credit via a TD Visa gold card when your other TD Visa credit card is in delinquency. this is plain wrong. but CIBC Visa may offer you a card when your TD is in trouble, but they are different entities all togeteher, Visa is just the vehicle of debt issuance used by that bank. Visa takes a cut of it anyway, but the banks are in direct competition.

remember credit card companies want people's purchasing power, their debt acumulation is a liability that has to be actively managed to limit downside risk.

one thing i do disagree with is the heavy marketing by banks to kids in university, adn that they never taught mcuh about personal finance in high school. they make us take gym and history, why not finance which we all have no choice but to deal with.

J

 

[Shug]

I'm with Ditto on this one, surprisingly.

It's your onus, regardless of being felt that you're being sold snake oil on a daily basis. On such a huge life decision as purchasing your first (second, third, etc) house, you should be willing to go outside the lender for information. And relying on an entertainment device for financial contacts and advice? That's just poor judgement, plain and simple.

I think the other side of this argument is kind of shirking their responsibility, by claiming to be the victim of a confluence of forces. Fight back and stand up for yourself, because in the end, no one makes you enter the bank at gunpoint to negotiate a mortgage. There's just that loud and annoying Canadian actor who stops you at the ATM and marches you into the CIBC Financial HealthCheck.

I don't own a house.
I don't have any credit cards.
I don't own a car.
I have very moderate material goods.
I have a modest RRSP fund.
I don't do coke.
I don't even talk to the Jones', never mind keep up with them.

I have a lot of straight-up extra cash - which keeps me safe from accidents and emergencies.

I live life very simply, and I feel very financially secure.