Tuesday, May 17, 2005

The Human Aspect Of The Housing Bubble

This Seattle PI story will likely be played out in households all over the US. "Like thousands before them, Tom, 44, and his wife, Clare Cronkleton, 43, had grasped at home ownership as their ticket to the solid middle ranks of the middle class. The couple made the leap even on their relatively modest incomes, each in the $40,000 range, and with no money down."

"It took a second piggyback mortgage at a steep 15 percent interest rate to pull off the sale. (Then) their 8-year-old son, came down with a mysterious, flulike illness. In the summer of 2004, Tom lost his job."

"They had already refinanced their mortgage at a lower interest rate to cut their payments and drawn out what little equity they had accrued. Tom says, 'As long as things were going good, it was OK.'"

"They listed their house last winter (and) sold in a hurry for $300,000. By the time all the closing costs and commissions were figured, however, they still owed the bank money. The bank finally relented and agreed to a 'short sale'."

"People have been buying on the very edge of their ability to afford a home," says Glenn Crellin, at Washington State University. 'People are (getting in at) a below-average rate, and they run the risk. We may see some households no longer able to afford the houses they're in.'"

28 Comments:

At 2:03 PM, Anonymous Anonymous said...

Buying a $249K house with $80K income sounds reasonable (~3X). In the Bay Area, people would probably get a $700K place with that!

These are relatively responsible people, and they still get crushed. I fell sorry for them.

 
At 2:07 PM, Anonymous Anonymous said...

Is this reasonable?

- Buying an $800,000 home
- Puting $480,000 down
- Getting a 30-yr. fixed mortgage
- Yearly income of $275-$300k

Just looking for a little sanity check as I am rather conservative.

 
At 2:12 PM, Anonymous Don said...

With an income like that who needs a mortgage.

 
At 2:21 PM, Anonymous Anonymous said...

Don,

The house is third on the priority list.

$14 k into my 401k
$14 k into spouse's 401 k
$4 k in my non-deductible IRA
$4 k in spouse's non-deductible IRA
$10k in son's college fund
$15k for son's day care
$18k for2nd child's day care when the time comes.

 
At 2:24 PM, Anonymous numberscruncher said...

(Is this reasonable?)

The main thrust of this board is that we are in a housing bubble (or rather, a credit bubble which has spawned a housing mania.) Obviously putting down 60% and taking on a conventional fixed mortgage is more than conservative. But that's not the issue. The issue is valuation. Is the $800K home sustainably priced or could it lose 10-20-30% (or more) of its value over the next 3-5 years?

By putting 60% down, you will not lose your home in a downturn. You will, obviously, feel less wealthy as your equity diminishes. Others will not be so lucky. They will lose both their home and their money.

Given the historic nature of this boom, the safest way to play it if you absolutely must buy right now is to plan to live in the home for at least 10 years or more. That should give you enough breathing room to withstand any downturn.

It's impossible to advise anyone without knowing the full circumstances? Are you buying in an area which has seen over-the-top appreciation? Are you buying in an area rife with speculators? Etc.

 
At 2:26 PM, Anonymous Don said...

Really, you've got nothing to worry about unless you lose that income. You can float any boat you want on that debt / income ratio.

 
At 2:30 PM, Anonymous Anonymous said...

2:07 Anon, I rather just put 160K/20% down and save the cash in a swiss bank account. I don't expect you to agree with me but I simply don't trust 401K/IRA as they tie you firmly to the US financial system.

 
At 2:50 PM, Anonymous Frank said...

Fairfax County, VA is touted as the "wealthiest county" in the nation with median (or average? I forget) household income of $90k. This usually involves two bread winners so is not that impressive, but people in general do not make inordinate amounts of money. We quickly forget that fact.

These people are in that ballpark. And the median house here is close $400k (or more) now.

 
At 3:08 PM, Anonymous Cody said...

What a sad story. And to think of how many families are going to suffer like that when any unexpected emergency occurs. It is nothing less than tragic that a home - a basic necessity of life - has essentially become a luxury for so many people.

Everyone needs a place to live. What has happened to this country that we've made homes (whether rented or owned) into financial burdens rather than places of refuge / comfort / family?

Ben, I appreciate the hard work you've put into this blog. It's a great resource, albeit a very depressing one.

 
At 3:25 PM, Blogger Ben Jones said...

Cody,
I thought hard about not posting it because it is hard on the senses. I try to lighten it up, sometimes too. Thanks for reading.

 
At 3:55 PM, Blogger Joe Schmoe said...

Wow, that story is really depressing.

The Seattle PI is a left-wing newspaper, and I always take "human interest" stories like this with a grain of salt. The liberal papers always portray the poor as everyday, middle-class folks who are victims of circumstance -- if it happened to them, it could happen to you. But usually if you scratch the surface, you find a history of drugs, irresponsibility, bad choices, etc.

But this story is different. This really is a working-class family who lost their home becuase of an economic setback, the loss of the husband's job. Maybe he's partly to blame -- he hasn't worked in almost a year, not even at a menial, part-time, temporary job -- but still, it's not like they were incredibily irresponsible or ran up their credit cards or whatever.

Still, though, the overwhelming majority of blue-collar and middle-class people go bankrupt becuase they spend too much money. Big Screen TV's, $70 shirts at Macy's, etc. Stories like this are NOT the norm.

But with this housing bubble, maybe they will become the norm. That's really troubling. Everyone here knows that an interest-only loan is suicidal in an environment of rising interest rates. But does the manager of the wine department at your local grocery store really understand that? He's capable of understanding it, yeah -- but does he?

It's hard to have much sympathy for the middle-class couple who overextended themselves to get a McMansion instead of a more modest home. But what about the young families who just want to buy a middle-class home and do whatever their mortgage broker recommends?

I was interviewing a bunch of people like that in the Inland Empire of SoCal last week. They were nice, hardworking people. I bet a lot of the younger ones had interest-only loans or ARMs and $300,000 or $400,000 3 br/2ba 1800 sq ft middle class ranch houses. They weren't grasping for luxury and status; they just wanted to buy a regular home to raise a family in.

 
At 3:57 PM, Anonymous Anonymous said...

3:08 hit the nail on the head. We've turned houses into a casino and ATM instead of shelter. This is a direct result of obscene loosening of credit and Americans not producing anything of value that's worth investing in anymore.

What's next? A bubble in wheat? how about corn? After all, they aren't making any more farms, and everyone needs to eat, right? get in now, or be priced out forever...

 
At 4:13 PM, Anonymous Anonymous said...

"But this story is different. This really is a working-class family who lost their home becuase of an economic setback, the loss of the husband's job."

They had no savings. They were basically rolling the dice that everything would continue along perfectly, and when it didn't, the bank took a loss on the house. This is a moral hazard, these people bore NO risk. Would the family have socialized their gains just as their losses were socialized?

What happened to having SAVINGS? How different would this story be if this person had 6 months salary stashed in the bank (which used to be the MINIMUM recommended). Where is the story about the couple that lived well below their means and stashed away the extra pennies they saved just in case disaster struck? That story does not exist anymore, if you lose your job and your house, woe is me, its not my fault, life is unfair. There is no incentive to save in this society anymore.

 
At 4:21 PM, Anonymous Anonymous said...

4:13, the problem is that saving is becoming increasingly difficult. The fed may say there's no inflation, but come on... we all know there is and has been for a while.

Wages have been stagnant over the past 5 years (equities have been flat as well). At the same time, the price of fuel has shot up, the cost of education continues to go through the roof, and of course the price of housing has become ridiculous.

The only thing that's gotten cheaper is stuff that no one really 'needs' like big-screen TVs and computers.

I have no idea what the CPI measures anymore, but it doesn't reflect prices that I pay for just about anything.

 
At 4:52 PM, Anonymous Anonymous said...

The CPI represents the percentage of increase that the government has to pay-out on wages and/or entitlements to its employees or recipients... it's not a realistic measurement of the state of the economy...

 
At 4:52 PM, Anonymous Anonymous said...

I take your comments on inflation to heart. OF COURSE there is high inflation, look at the prices of housing. The WSJ today said that housing is 45.3% of the average worker's paycheck in Utah. Sounds like inflation to me! But I differ with you here:

"the problem is that saving is becoming increasingly difficult."

No. Saving has alwys been difficult. The difference was that people were incented save in the past. Not just by high interest rates either. But by FEAR of what would happen to them if they were struck penniless.

There are a lot of corners that could be cut in American households. Do you wash your ziplock bags so you can reuse them? How about jelly jars? Do you buy a whole chicken and cut it up yourself? Do you carpool? Do you turn up the thermostat, or put on a sweater? Do you drink the office coffee, or "indulge yourself" at $tarbucks? "I deserve it"

Not that I am passing jusgement too harshly. I do these things, and I am a freak compared to my friends and coworkers. What do I have to show for it, 1, maybe 2 hundered extra dollars at the end of the month? Chump change, doesn't even cover their minimum payment.

Talk to your grandparents if they lived through the depression. Those were people who knew the value of savings. They were people who knew how to stretch a dollar. Maybe that time will never come again, but maybe it will.

 
At 5:10 PM, Blogger desi dude said...

Just to add tothe previous post.

People pay $5 for a sandwich/burger at the office cafeteria.

Something that simple can be prepared at home in 5 minutes for tenth of the price.

What I see in the office is that people who do that(prepare food at home & ) generally drive a old car, but keep $ in the bank.

One of the economists from India wrote in the news paper, about the value(economic) of the traditional society which is not measured in the modern economic systems.

1. taking care of the unemployed children.
2. preparing food at home instead of buying at the restaurant
3. Taking care of the parents(i.e living together.

America was like this 40+ years ago. India is like this for most part, though it going towards the american way slowly.

off topic, but had to get out of the chest!

 
At 5:23 PM, Anonymous boulderbo said...

4:52,

i completely agree with your position as well as others on this string. i am in the mortgage business and have stated many times on this blog that too many buyers today have no business buying a home, at least by any rational persons standards. an equity position in a propety used to be the basis for a lender making a loan, the borrowers had something at risk. received a flyer today by one of my investors touting the new and improved borrower advantage 103 program, loan amounts to $500,000. and i quote "borrower needs no money in the deal, 2 months reserve requirement can be gift". so basically i can put somebody into a half million dollar loan (on a house that they paid $485,000 for- instant negative equity-woohoo!!!) that doesn't even have two months payments to their name. to all those following this blog, i don't think that you should give the nar and mba figures too much credit. i would guess that the real number of investors buying homes is really understated by 20-30%, making this whole thing a real tragedy. an honest home buyer entering this market is going to crushed all because of unbridled greed in the whole feeding chain, buyers, lenders, realtors, etc. just mho.

 
At 5:46 PM, Anonymous Pete in SD said...

If you're wondering why people don't save in the good old US of A, just look right at our ridiculous and convoluted income tax system. The tax code mercilessly punishes savers and rewards excessive debt. When you diligently save, you get the manure beat out of you on the interest earned. Take out a massive mortgage and you are summarily rewarded with a write-off on the interest. Since 1986, you cannot write off interest on credit cards, auto loans, installment debt, etc. So now everything is "On The House". Great system!!

 
At 6:57 PM, Anonymous Anonymous said...

It's hard to feel bad for this couple, who seemed to have made all the wrong decisions they possibly could have made.

I find it hard to understand why people who have so-so jobs that could be replicated in other parts of the country where housing is so much more affordable insist on living in a high-priced dreamland. They think the American Dream only exists in a kultural wonderland like the Seattle area.

Here Clare almost gets the right idea:

"Moving back to Iowa," she says. "That's always Plan B."

She doesn't want to do that. "I feel like I have to be here to be closer to the values I embrace," she says. "In the small towns where we're from, children aren't playing outside. They are inside with video games. They haven't had exposures to different races or cultures." She doesn't want to raise her children in that environment. "That's a high price to pay."

She'd rather pay the high cost of staying here.

"This is such an expensive place to live," she says. "For $300,000 in Eastern Iowa, you'd get six acres and a farm."

But no, they will stay in Seattle and live a hand to mouth existence so the kids can get some kulture! Open my can of beans, ma. Kids inside with video games? No problem. They can't even afford 'em in Ballard!

For $100,000 in my area of Nebraska, they could buy the best house in town and still get jobs like they had before he lost his. But you ain't got the same brand of kulture here as you've got out there on the coast. No sir.

So go chase your dream no matter what it costs.

 
At 7:18 PM, Anonymous Anonymous said...

Not everyone is in debt up to his/her eyeballs. I make approximately 32K a year. I am thirty-five and I live alone with two cats. My house, while tiny and unimpressive, is paid for, free and clear and I am proud of that. My vehicles (pickup and car) are both paid for -- I bought them used and I paid cash. Also, aside from various investments, I have a year's pay in cash sitting in the bank, getting three percent from ING Direct. (It's for emergencies, you know, in case I need money for something important.)

I am not technically rich by the 'huge wads of cash' yardstick. I don't have huge wads of cash. However, if I lost my job tomorrow, my life could go on exactly as it does today for about two years (I live on approximately half of what I make) without me working at all. As a result, my life is not insecure. It's modest, but it's not horribly at-risk. How do other people sleep at night? What if they had an emergency?

 
At 7:20 PM, Anonymous semper fubar said...

Wow. I can't believe what a bunch of smug, selfish, self-satisfied little pricks a some of you are. These people weren't living an extravagant lifestyle. They ran up against some hard luck - a family illness and a job loss. Are you SO sure this could never happen to you? If you think that, you haven't been around the block much.

A lot of people are going to get hurt when the housing bubble pops. You act like you can't wait for working class families like this to suffer.

Your lack of compassion disgusts me.

 
At 9:15 PM, Anonymous Anonymous said...

anon 7:18. I was in your shoes prior to marriage and kids. I was at a higher tax bracket, but my worst year savings since starting work was about 25% pre tax. No debt. Money in the bank. Wife, kids and higher income and financially I've never been cash flow poorer. My effective savings rate is now 0. My assets have moved from highly liquid to retirement accounts and housing. I have enough to weather a financial storm, but it could easily cost me 15 years of sweat. Your lifestyle is great for someone who is single, but don't discount that you may find someone and want to start a family. Once that happens your expenses can grow much faster then you can believe. Much worse, if you are surrounded by credit addicts, you and your spouse will constantly wonder why they have some much and you seem to be searching the couch for change to enjoy a weekend getaway to the local Dairy Queen.

 
At 10:33 PM, Anonymous Anonymous said...

semper fubar, I am the 2:03pm Anon. I don't think many of us want American families to get hurt. It would be unamerican and downright mean.

However, we afraid that the bubble burst is inevitable at this point. We would like more people to get our message and stop the madness before more families are financially ruined.

 
At 4:59 AM, Anonymous semper fubar said...

Anon 2:03 -- my comment wasn't directed at you in any way. It's directed at those who would sneer at a middle class family trying hard to play by the rules, provide a decent life for their kids, and yet through no fault of their own, hit some bumps in the road.

 
At 6:51 AM, Anonymous Anonymous said...

Desi dude and 4:53 PM Anon,

I believe you unwittingly hit the nail on the head... and made a very interesting comparison between generations... today's vs the old world... the old world (older parents & grandparents), stretched the dollars that they had and lived within their means... today, people are living on the other side of the financial equation... they are stretching not their incomes but the financial products that are available -- mortgage, home equity, credit card, etc... very interesting.... real vs. artifical wealth...

 
At 11:46 AM, Anonymous Anonymous said...

I'm probably the one who disgusts you sempre fubar. I'll tell you something. I have compassion for these people, yes. And I know that something horrible could happen to me or my wife too. But here's a little wisdom for you: a lot of people all over the world have lived through things much, much worse than this. And thrived.

I feel compassion for these people, but I think they are reaping what they sowed. Lets say things had worked out for these folks, and a couple of years from now, and instead of taking out $70000 in equity when Tom lost his job, they used that money as a down payment on a "move up" property, and rented their old house out. How do you think they would look at ME, someone who brings their lunch to work, whose wife drives a car with a side mirror taped on, who lives on half their income? They would think I am crazy, like you probably do.

The difference my friend, is that I would not have lost my home, because I have savings. I have savings, because I have chosen to live below my means. That family didn't, and now they are suffering the consequences. You rolls the dice, you takes your chances.

 
At 3:40 PM, Anonymous Anonymous said...

"These people weren't living an extravagant lifestyle.."

I'd call the $600 Explorer payment pretty extravagant. Also, the dad wants to find a job where he "feels like a king". Give me a break. I'd take any job in order to avoid losing my house.

 

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