was a first mortgage on a shabby fixer. Rents rose beyond that mortgage within a couple of years, so I was much better off paying $99 interest to $1 principal to the bank those first years than I would have been paying the entire $100 to a landlord.

What people have to remember about debt, any debt, is that the creditor's hand is always going to be in your pocket no matter what your income is doing. He doesn't care if you're living on beans and rice and not enough of those, he's going to get paid.

Going into debt for a roof over your head is one thing. Going into debt for luxuries is quite something else.

I'll end this with the wise words of Quentin Crisp: "Don't keep up with the Joneses. Drag them down to your level."

left a long term and very appropriate level of skepticism. I'm of an age where I wish I'd paid more attention to the lessons my parents/grandparents could have imparted. Though they are all gone now, I hope they somehow know I finally came to appreciate their wisdom.

It's an appreciable (that's up for debate) asset that you can purchase on credit.

property does indeed appreciate over the long term. The current problem was the ridiculous increase in value which was entirely bogus and based on a credit bubble. Here in FL, an existing home could double in value in 2 years and rise by 50% again. That's simply absurd.

I think 3-5% increase per year sounds more reasonable.

but there was nothing reasonable about the Greenspan bubble.

I know moderately wealthy people that have become very wealthy people in the past few years because the housing bubble collapsed and they had cash-assets or preferential access to lending...so they bought because prices were bottomed. Then they rode it back up and they're not selling because they think it'll go higher. Likewise, even if your house was under water...as long as you could keep making the payments, eventually you were going to be right side up. Extended out a few more years and the equity growth will eventually exceed inflation again. It's a wonderful scam...if you can buy in a depression (and who can?), RE is the sure-fire way to become rich fast.

The system is gamed to the advantage of the wealthy and privileged. Housing collapses are a great way to massively increase your personal wealth if you're rich and don't mind profiting off the misery of others.

think of borrowing the majority of a home's sale price, homes were priced to make their purchase possible. I twas only through the virus-like spread of the bank mortgage that house inflation could outstrip income.

This is also why it used to be that any person with almost any job could buy a house. The guy at the counter in the 5 & Dime, the guy that worked at the service station, the bank clerk, teacher, or librarian, could buy at least a small house. I had a chart somewhere, I'll see if I can find it, that tracked average wages and average housing prices and they tracked together like a pair of vines until the bank mortgage became popular.

"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." - Thomas Jefferson

It used to be much more difficult to get a mortgage than it was in the period when the bubble was created. Banks used to only 80% lend of the purchase price and require that the borrower put up the remaining 20% with his own money. Yes, people with a modest job could theoretically purchase a modest house, but only if they had the 20% down payment saved up - that was and would still be a substantial hurdle for many potential home buyers. It's not surprising that average housing prices and average wages tracked each other closely. It would be surprising if they hadn't because banks used to look at various ratios before they approved the loan. One of the ratios was the ratio of the mortgage to your annual income. (Don't quote me, but I believe the number was 2.5. IOW, the banks would not approve a mortgage for more than 2.5 times your annual income.) Most people tended to buy the most house they could afford, but the 2.5 ratio set an upper limit on what they could afford to pay (unless they put more than 20% of their own money into the deal, which most people likely couldn't.) Given the relationship between maximum loan value and annual income, it's logical that they would track each other closely.

The historical approach described above was conservative and shut a lot of people out of the housing market. It did however, keep the market stable. Sometime in the mid-90's and for whatever reason, banks became a lot less selective about who they would lend to and what they would require for a loan. The relaxed standards allowed a great many more people to enter the market and elevated the prices that could be charged for a home. Large numbers of minimally qualified borrowers bought homes with little or nothing down, and little in the way of reserves, further increasing demand (and prices) for houses. When the economy tanked and many of theses people lost their jobs and with no reserves on which to draw, they were unable to continuing paying the mortgage and defaulted on the loan.

Hindsight is always 20-20, but it's clear to me that relaxing the standards for getting a mortgage was a huge mistake and the main reason that housing is such a mess today.

True back then maybe...not so sure that truism applies today.

It costs them a fortune in legal expenses, and they end up owning a crappy run-down property that they have to try to sell at a big discount.

And keep in mind I never said they wanted to own your house. I said they were planning on it.

Don

They would prefer you to pay back the $200,000 you owe, but if not, rather than get nothing, they will settle on foreclosing, auctioning off a neglected property in a down market, and maybe getting back $90,000 after the expenses.

Last edited Tue Jun 12, 2012, 04:50 PM - Edit history (1)

Banks lose money if they have to foreclose a house. There are no end of costs in foreclosing, maintaining the house and then selling it. and They love it when you pay off the mortgage as scheduled.

My experience has been completely otherwise -- my middle-class family and I have been successful homeowners for decades. Money was put down, mortgages were within 33% of net, and homes were NEVER viewed as ATMs or something to flip.

My, how things have changed -- and NOT for the better.