It's Just Money

Teen Teaches Financial Literacy to Adults

I freaking love this.  One of the topics that I have seen frequently on the PF blogosphere is how little financial education there is for America's youth, and how that leads to poor decision making as adults.

In a reversal of roles, High School Freshman and Teen Columnist, Emily Hu, writes For Adults, It's Payback Time.

A brilliant nugget from Miss Hu's article: 

"It comes down to this: Once upon a time, when people were forced to really consider what they could afford and credit actually counted for something, people bought houses they could live in for a few years."

Isn't this how we got in this mess?

I found this Kiplinger's "Truth or Bunk?" Quiz on Free Money Finance's site.  I haven't even finished the quiz, but I ran into this question and it bugged me:

"True or false:  Never buy a home that costs more than 2.5 times your annual income."

I knew they would consider the answer false, as it's become a somewhat outdated rule of thumb.  Interest rates are lower than they used to be when this was widely used.  But I answered "True" anyway.  Here was the response:

SORRY, WRONG!

Your answer A. True is incorrect.

The right answer is B. False

Good luck even finding such a house in many major cities.  Instead of the price, what counts is your monthly payment.  And that's affected by your down payment and the terms of your loan.

I didn't add the emphasis.  They bolded, "what counts is your monthly payment."

Seriously, isn't that how we got into this mess?

Presidential Candidate Subprime Bailout Position

In case you haven't heard, it's an election year.  This means endless and tiresome political commercials, mailings, and even phone calls.  This is not a political blog, as god knows there are enough of them out there.  But, as politics can have a major impact on our collective and individual pocketbooks, I'm going to venture into some political ground.

About two years ago, there were a handful of housing bubble blogs and risky finance blogs out there warning us of the impending housing and mortgage meltdown.  Most notably, The Housing Bubble Blog and Another F'd Borrower.  The housing industry dismissed such talk as doom and gloom.  A bunch of Chicken Littles.

Then it began.  Sales slowed.  The rate of price increases slowed.  Then flattened.  Soon, the subprime mortgage holders who were relying on price increases in order to refinance or sell at a profit found themselves in trouble.  And we all know what followed.  Government intervention.

I made my position on the matter known in an open letter to my senator.  As expected, the idea of a bailout is predominantly a Democrat issue.  Surprisingly, however, it has crossed the aisle.

So, as we continue into the primaries, and try to educate ourselves on the candidates and their positions, I have taken some time to research where each of them stand on the subprime bailout.

Car vs. House, good perspective

It's no secret that real estate is generally a good investment, while cars are almost certainly not.  I say "generally" for real estate because it is very possible to turn real estate into a terrible investment.  Flippers, sub-prime buyers who can't handle the payment reset, and someone who overpays in a hot market are cases where real estate could end up a poor investment.  When is a car a good investment?  Well, almost never.  I knew a guy in high school whose dad was a mechanic.  They used to buy used cars, fix them up and sell them for a profit.  In that rare instance, or perhaps selective collectibles, a car might be a worthwhile investment.

Otherwise, while they are both "use assets," a house is likely to make you better off in the long run, and a car is not.  Again, no big surprise.

I was listening to Dave Ramsey today, as I often do if I am in my car during the afternoon.  A 25 year old woman called in.  I don't remember her name, but we'll call her Kathy.  Kathy asks Dave if she should get an apartment or build a small starter house.  Naturally, Dave asks her two questions, "do you have any debt?" and "how much do you make?"

Not long ago she was debt free, but just recently purchased a new car, and financed the whole thing.  Also, she bought a small piece of land on which to build a small starter house.  The car was $31,000 and the land was $20,000.  She owes $31,000 on the car, and $16,000 on the land (she put $4,000 down).  Her income is $43,000.

You can imagine what came next.  "Sell the car," Dave instructed in no uncertain terms.  "Today."

"Well," she kind of pleaded, "does it matter what kind of car?"  Of course, we all know the answer.  It's really not difficult.  Spending 72% of your annual income on a car is just silly.

With the car payments, she would have a difficult time financing the construction loan for the house.  Essentially, she was sacrificing a house for a car.  Dave put her situation into perspective very effectively.

"You're 25 years old today, right?  Let's say you wake up tomorrow and you're 35.  Let's pretend that you're still single for the sake of simplicity.  You may be married with a bunch of kids, but that doesn't matter.  At 35, would you rather have a house that you are ten years into payments on, or a ten year old car?"

Well done, Dave.  We don't even need to wait for the answer.

I need a place to live

Circumstances with our current living situation have suddenly required my Fiancee and me to find a place to live.  We continue to scour the for sale listings, but LA remains over priced.  Besides, if we are going to buy a place, I don't want to be rushed into the decision due to circumstances.  I want to take our time and really find a place that we like and is a good deal.

For now, we are looking for rentals.  We have decided that we will be satisfied with a small rental in order to keep our expenses small.  We are looking at one bedroom and even studio apartments in the areas of Pasadena, Glendale, Burbank, and West LA.  I have been searching on Craigslist.  I'm planning on signing up for westsiderentals.com.  Any other suggestions?

Letter to my Senator

Senator Barbara Boxer
112 Hart Senate Office Building
Washington, D.C. 20510

Dear Senator Boxer:

Like many Americans, I have followed the housing market with great interest.  In particular, I was awed by the rapid ascension of real estate prices here in California.  I, personally, reached a point financially where it was feasible to purchase a house sometime in mid 2005.  By this, I mean that I had a small down payment saved, good credit, and a stable enough income to feel confident that I would not miss any mortgage, insurance or property tax payments.  Of course, the use of negative amortization or interest only loans would have allowed me to make a purchase earlier, as prices were still rising rapidly.  However, I realized that keeping up with payment adjustments and rising rates would have put me at risk for default or foreclosure.

Ultimately, I was not lured by low interest rates and easy access to credit.  The offers from the supposedly predatory subprime lenders were abundant, but I cared enough about my financial future to do some research.  I learned quickly about the certainty (not likelihood) of payment adjustments and resets.  I understood that if I could not afford a house with traditional lending (30 year fixed, good credit, income documented), I should not take on the risk of home ownership.

Today, the press writes daily about the problems with subprime loans.  In their stories, they profile families who got in over their heads.  I wonder where these stories were two years ago.  I am thankful that I am not one of those families.  However, I do not consider it luck.  Families are forced into delinquency and foreclosure because they borrowed more than they could afford to pay.

All of this is unsettling.  As a patriotic American, I do not wish to see law abiding families in distress.  However, even more unsettling is the talk that I hear about a bailout for the borrowers and lenders of subprime loans.  We now hear stories of outright fraud on loan applications.  Whether they are the acts of lenders or borrowers, both parties must be held responsible for their respective roles.

The borrowers knew they were taking a gamble.  The gamble for those who entered the market early paid off richly, as they saw their real estate purchase appreciate in price.  Whether or not they were able to make their payments didn’t matter.  They sold at the higher price, pocketing a profit, tax free if they lived, or claimed to live, in the property for two years.  Those that came later witnessed the handsome profits, and sought to get their piece of the action.  It is those buyers/borrowers who are now facing foreclosure as the pyramid scheme proved them the greater fool.

The lenders were enablers in all of this.  Yes, they profited on each loan.  They are sophisticated financial minds.  They weighed the risk of defaults against the rewards of profits, and opted for profits.

As we examine both the lenders and the borrowers, they may appear different on the surface.  Borrowers are often unsophisticated, first time buyers, financially instable.  Lenders are led by sophisticated, educated, wealthy individuals.  However, as we look past the surface and examine what was really going on, the differences fade.  Both understood that there was risk involved in the transaction.  Both saw the potential for handsome profits.  Both opted to bear the risk in order to reach for the profits.

That the profits eluded them should not mean that the risk should also be escaped.  There is a system in place for borrowers who have borrowed more than they can handle.  It is called bankruptcy and foreclosure.

As the stock market declines reached historic levels in the bear market of 2000-2002, there was outrage over the deception of Wall Street analysts and chief corporate officers.  Many of them paid for their acts in the form of fines, suspension or expulsion from their professional practice, or prison.  Likewise, perpetrators of mortgage fraud should face a similar punishment.  However, no bailout was offered to the investors of Enron, Worldcom, pets.com, or e-toys.  Nor should there have been.  Money was invested with the hopes of profit, and the understanding of risk.

I have great confidence that you, as my representative in Congress, will vote against a bailout in any form.  Families that rented before they stretched themselves too thin to buy a house they could not afford will go back to renting.  Employees of subprime lenders will find other employment.

Privatization of profits and socialization of losses is not good for America.  It will encourage excessive risk taking.  Instead of the boom and bust of a normal cycle, we will have the inflation and bursting of bubbles.

Sincerely,
A concerned citizen

Subprime Blame Game - CNNMoney.com gets it all wrong.

Right there on the front page of CNNMoney.com's website, "Subprime blame game.  Some 2.4 million homeowners are in danger of losing their homes. Critics are pointing their fingers at who is responsible - here are the main targets."  Curious, I clicked.  Here is what I found.

1. Mortgage Brokers.  Sure, this one was obvious.  They're taking a lot of heat over selling loans in which the borrower had little realistic chance at keeping up with.
2. Appraisers.  Okay.  I have heard stories of appraisers "meeting a number" set by a realtor or mortgage broker.  Obviously, if this sort of thing is going on, they need to take some responsibility for this mess.
3.  Regulators.  Asleep at the switch?  No question, but I really don't think anyone wants Congress to step in and say, "hold on there pal, we don't think you can afford this loan."
4. Lenders.  Whaaat?  How dare you blame the lenders!  Let's be honest.  What else is going to happen when lending standards are eliminated almost entirely.
5. Wall Street.  Wall Street enabled the purchase of Billions in CDOs.  This money became the lifeblood to subprime lenders across the country.
6. Real estate agents.  Every conversation that I have with realtors contains this sentence, "Let me show you how you can afford $xxx (larger than the number that I stated)."  Yea, they belong on this list.

Not a bad list.  So, why do I say that they got it all wrong?  One question.  Where are buyers/borrowers on this list?  Do they get none of the blame?  You make $50,000 and buy a $450,000 condo because your realtor and mortgage broker tell you that they can "get you in with nothing down, and after it goes up you can refinance"?  Shouldn't we expect the borrower to have a "wait a minute" moment?

Or in the case of subprime refis.  You bought a house in 2003 for $375,000, and a mortgage broker tells you that it's probably worth $500,000, and wouldn't you like to pull that equity out?  You only make $65,000, and your credit isn't very good, but jeez, I could sure use a hundred twenty five grand!  Let's see.  I can pay off our credit cards and car loans.  We can remodel the kitchen.  And we'll still have enough to buy that boat we wanted!  Sweet!

What do you think of this condo?

For those of you not in California, Manhattan, and perhaps Boston or Chicago, this post is going to sound completely absurd.  There's a condo that my Fiancee and I took a look at this weekend.  Now, it's way to small for her taste, but I'm intrigued by it.  Here are the details:

Address:  181 S. Marengo Ave. Unit #12, Pasadena, CA 91101
Bedrooms:  0 (it's a studio condo), Bathrooms: 1
Square Feet:  312
List Price:  $239,000
HOA:  $113, includes water, gas and electric

You can find it easily on ziprealty.com if you have a login.  Otherwise, you can find it on Realtor.com without having to register.  Ziprealty.com has more info.

So, what on Earth can be intriguing about $766 per square foot?  Not to sound like a Realtor(tm), but location, location, location.  This condo is in a prime spot one block from the Paseo Colorado shopping center, and just a couple of blocks from Old Town Pasadena.  You can walk to the shops, dining, and nightlife.

But how much is that all really worth?  Well, let's break down some of the numbers.

Funny line at a new condo development

Last weekend, we were driving around and saw signs for a new condo development in the Monterey Hills section just below South Pasadena.  It's technichally Los Angeles, but they like to be thought of as part of South Pas.  And in truth, it's still a nice area.

The building was still very much under construction.  They didn't have a designated "model home" but were showing the most complete unit.  It was a two bedroom, two bath, that looked like all other newly builts.  That is to say, it was nice.  I mean, aren't they all?

The price tag?  $580k.  "It's nice," I told the guy, "but too much."

Sales guy:  "Well, if it's not in your price range, make an offer.  They're almost complete, and we'll consider reasonable offers."

This struck me for two reasons.  First, I didn't say that it wasn't in my price range, or that I couldn't afford it (although I can't), but that it was too much.  It really was.  $580k for a 2br condo with subterranean parking?  Get out.

Second, this was the first time that we walked into a new constuction and been told to make an offer.  Up to this point, newly builts had a price tag.  You want it?  Here's the price.  If you pass, surely someone else would take it.  And, in fact, they always did.  Apparently not anymore.

"Moderate" Income Home Buying Programs

For as long as there have been programs to give lower income families a hand up (or a hand out, depending on your perspective or political affiliation), the familiar cries from the middle class have been heard.  "We can't afford it (usually "it" refers to a house or college), yet all the programs are designed for people who are poorer than we are.  You either have to make a lot of money, or none at all.  Fall somewhere in the middle and you're screwed."

Recently, I discovered some programs that seem to address those folks in the middle.  For many, it may not climb up the income food chain far enough to work for you, but it's a step.  They are called "Moderate Income Housing Programs."  Let me give you an example of one in particular that I was looking at.