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Maritan Headsets (from Joel on Software) is a long but worthwhile article on software standards -- both not having them early enough, and having them and trying to enforce them. Parts of it made me laugh out loud, like the paragraph containing this passage: "[...] but of course when you plug the headphones into FireQx 3.0 lo and behold they explode in your hands because of a slight misunderstanding about some obscure thing in the spec which nobody really understands called hasLayout, and everybody understands that when it's raining the hasLayout property is true and the voltage is supposed to increase to support the windshield-wiper feature, but there seems to be some debate over whether hail and snow are rain for the purposes of hasLayout..."

Rescue me: a fed bailout crosses a line seems (to this non-expert) like a good analysis of what just happened to the market and the dollar. (Need a login ID? Try BugMeNot.) I am more scared, and more angry, about our government's economic policies than I've been in a while. As someone on my subscription list said (I forget who), the people who actually took personal responsibility and saved rather than spending recklessly are the ones who are going to get hammered by this, while the idiots who bought houses (or corporate holdings) they couldn't afford and racked up tons of debt will be bailed out because we can't stand to say "too bad you were an idiot".

As long as I'm saying "too bad"... too bad, Michigan and Florida. Agreed.

On a lighter note: Garfield Minus Garfield is surreal. And since seeing it a week or so ago, I haven't been able to read Garfield "straight".

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I know you're a libertarian, but I still wince at this a bit. Corporate holdings are one thing, houses are another... really it is useless in the housing market to blame the people who took out the loans, I think, because people lived in a context where the danger was very hard to understand. Pittsburgh is not New England or the West Coast. The markets in these places made it nearly impossible for anyone in the middle class to buy a house.

Believe me, we're the ones on the shaft here -- unable to move because of this grand national stupidity (in general) and all the foreclosure signs around here (in particular). And we were careful enough to not get an ARM or do anything ridiculous to get into that situation. But I don't blame the people who did, really. People around here who got ARMs and whatnot were just trying to do what we were doing -- get a house for their family in a New England market that makes it almost impossible for the average middle class family to do so. The size of a reasonable home purchase is so mind-boggling that you have to use whatever conventional wisdom around you that you can get -- you take on faith that the mortgage and everything else makes sense. If the bank will lend you so much money, not to take it seems to be only marginally less rational than hoarding gold under your bed (you never know, the government could default). We were told we could borrow almost $40K more toward this house whose mortgage is killing us -- people tend to go along with what the bank tells them they can borrow, stupid or not.

So talk about people being idiots makes me uneasy because the real fault is with the banks that threw money at people even as they knew they were bad risks. In any event, the cause is irrelevant -- my house (and yours) will continue to lose value on the market as long as there's not enough money floating around to prop up the price. So when people get indignant about bailing out home buyers to punish bad choices, the joke is on them -- it's your own house value you're cutting. Really we need something like the Depression-era FHA that stabilized prices on a systemic level by rescuing people who were trapped in their houses by the market. Surely some of that $200 million a day we're spending on Iraq could be put to good use.

I agree with you. We originally did an ARM when we bought this place because we were buying the new before selling the old. We always paid the full amortized payment (no neg am here). A year in, we refinanced into a 5/25 because the rates were rising, and we were hoping things would be better after the election. We're now 2 years in, and hoping to refinance before we have insufficient equity (we originally had over 20% down in). But the credit scare is keeping loan rates up, despite the fed cutting rates and the conforming loan cap being raised. So we're keeping our fingers crossed that we can refinance into a 30 year fixed.

This is all because we're in a housing market that is an expensive one. So I agree: we need to do something to restore confidence in the market. Now, that could be insurance -- but that could also be things that make sure amounts get paid back over longer periods making things affordable.

I agree with you 100%

And I agree with Monica. I was pressured for years by people who told me it was horrible I was renting and that I had to BUY NOW or never be able to own a home. I'm inherently financially conservative and it was obvious to me that if you can't afford a fixed rate mortgage with 20% down, you can't afford the house. Too many people believed that the market can never go down.

I bought in October and I paid about 20% less than the guy who sold the condo had payed 4 years earlier (when it was new). Plus he had a pre-payment penalty. He didn't have a lot of choice since he was relocating. I had to make a lot of compromises because I was unwilling to borrow anywhere near what the banks were willing to lend or wipe out all of my savings and have nothing for emergencies. So I have a 2 bedroom condo and not a townhouse, because townhouses with covered parking in the area I wanted to live in (and do live in) cost half again as much as I was willing to spend. And Washington, D.C. is hardly a low cost area.

The banks weren't throwing money around to people who weren't grabbing it thinking they'd sell in 2 years for huge amounts more.

We really need some sort of financial education in our high schools.

We really need some sort of financial education in our high schools.

Yeah, that's what I love about libertarians. I'm a genius; anyone who acts differently than me, and that's most people, is a moron who deserves whatever they get.

Hey, guess what: you can put the 20% down and get the 30 year mortgage and still be on the shaft in this whole situation. On the other hand, choosing when I would have a family that needed a house is about the same as choosing when I would be born. So, as an obvious moron for not being able to do that, or a possessing a crystal ball telling me house prices would decline at the highest rate since the Depression, it's obvious that I have to sell out to geniuses like you or be trapped in my house. That rewards your genius and punishes my stupidity. Which is only fair, right.

Uh, having a family doesn't mean you need to buy a house. Plenty of people with families live in apartments or rent houses. My family (Mom, Dad and 2 kids) lived in a 1 bedroom apartment until I was almost 4 years old. And it probably did me some good by teaching me about not living beyond our means.

It might be worth your looking up what the average square footage of American homes and the average size of American families have been historically. People have entirely unrealistic expectations of what they need.

And, by the way, I'm not a libertarian.

Well, since you're omniscient, you already know I'm an American historian and quite aware of historical standards of housing in this bloated country, let alone compared to worldwide standards, though I'm puzzled as to why you then don't live with six of your family members and neighbors in a room, which would be both financially prudent and close to the historical, global norm.

Oh, that's right, it's because your family is my family is everyone's family, ergo you know exactly why everyone does what they do, or rather what they should do based on what your family was able to do.

Unfortunately your omniscience didn't extend to understanding that the comment about when I had my family didn't imply that I ran right out and bought a house when said family arrived. But I'm sure you do already know that we didn't buy a goddam McMansion somewhere but a fairly small house that was reasonably within budget by any conventional standard. Actually we did something pretty similar to your family, it sounds like. Even your genius family found it difficult to have four people in a one bedroom apartment. Of course the difference is that yours lived within your means until they could do better, whereas we lived within our means until we could do better... and then the value of our house dropped 20%.

So, clearly, your family did better than teaching you mere financial wizardry: they also gave you the universal omniscience to know a down market was coming and to actually time your birth to foresee when you could execute the coup of buying in said market. I shudder to think of the implications for dullardry in my own benighted offspring. Their genetic propensity for foolishness is compounded by having a father who thinks that someone who spouts libertarian buncombe might actually be a libertarian, whether they admit it or not.

Really, it's amazing that you know everything about everyone already, but I suppose that because you know everything already, you already factored in my amazement. Which is even more amazing. I mean, it's either that, or you're seventeen years old, so...

I'm neither omniscient nor particularly clueful about home ownership, so I'm going to ask a stupid question.

whereas we lived within our means until we could do better... and then the value of our house dropped 20%.

Why is this a problem? Is it primarily that you can't easily move anywhere until you pay down the mortgage to what the house is currently worth? I mean--unless your income goes down as well you're not suddenly going to be unable to afford the payments you had been making before and thereby get kicked out on the street, and if anything you'll get a break on property tax, no?

Essentially, yes -- I have a job in another city, and would very much like to move there, but the drop in the value of the house means that in order to move, I'll probably have to bring money to the bank that we don't have since the value of the house has dropped enough to cancel out our equity. Nothing is certain until we find a buyer, of course, so we don't know just how unlucky we are. While the payments are the same, the growth in other costs (the heating bill more than tripling since we've moved in) makes it very hard, thus the desire to move somewhere where the housing cost is cheaper to begin with.

As far as property tax... the city's costs will stay the same, it seems to me, so while they might value the house less, I'd imagine they'd up the millage so the tax would be the same. Hey, if we're stuck here, we need the schools to be decent... so there are no real breaks in all this, I think.

The banks weren't throwing money around to people who weren't grabbing it thinking they'd sell in 2 years for huge amounts more.

Not necessarily. Some of those people were deluded by mortgage brokers into taking on more debt than they could afford, for a house that they intended to live in. Remember that the brokers made money by writing loans, not by making sure that those loans were viable. They had every incentive to defraud the borrowers.

I would whole-heartedly support some kind of licensing system, where you had to demonstrate you knew some basic things about compound interest and financial planning before you were allowed to take on certain kinds of debt. However, considering how much banks have been profiting from high-interest loans to the ignorant, I suspect they would fight this tooth and nail.

(A few years ago, when there was a big reform in the laws for personal bankruptcy, someone proposed a law requiring credit-card issuers to tell borrowers, on every statement, how long it would take to pay off the balance if they only made the minimum payment every month. The proposal went down in flames. That should tell you how much of a vested interest the industry has in ignorant customers.)

And you can sneer at other people's financial stupidity all you want, but that doesn't change the fact that if you are surrounded by neighbors who overextended themselves to buy their houses, and they get foreclosed on or they resell at fire-sale prices, then your home's market value plummets.

Some of those people were deluded by mortgage brokers into taking on more debt than they could afford, for a house that they intended to live in.

To be clear (because I failed to say this originally), I think lenders that were reckless should pay for it and I think ones who committed fraud should face criminal charges (as well as paying for it). That's what I meant when I referred to corporate holdings, but it was way too murky.

I agree with the comment about needing better financial education. And it's more fundamental, even. I astonished my realtor by insisting on reading the contract before signing. What, I'm supposed to take on the biggest debt of my life without reading it first? Apparently most people do (or did), at least around here. When buying the first time I asked for certain forms in advance and paid a lawyer to review them for me. The few hundred dollars for the lawyer was trivial compared to the mortgage; I treated it like another inspection. (Actually, I think the lawyer was cheaper than the home inspector.)

I'm not being smug here. It never occurred to me not to do these things. What did I get in my education and upbringing that (according to the realtor) many others didn't get? We need to fix that.

A few years ago, when there was a big reform in the laws for personal bankruptcy, someone proposed a law requiring credit-card issuers to tell borrowers, on every statement, how long it would take to pay off the balance if they only made the minimum payment every month.

While my end goal is extremely-minimal government, we can't jump there. As a step toward encouraging the meme of personal responsibility I would totally support that law. (Alas, I'm not surprised it didn't make it.)

I'm all for personal responsibility as long as it applies to the industry as much as the individual consumer. On someone else's blog on the same topic, I idly wondered how much of the current "crisis" could have been avoided if there were a requirement that the institution that approves the mortgage has to continue to hold it (and bear the consequences of bad loans). My mortgage was sold twice during the first three months of its existence -- how can that promote responsible behavior on the part of the lending institutions? Unfortunately, any government bailout is going to primarily save the industry from the consequences of it's bad decisions and greed, rather than saving individual home-buyers from the consequences of their bad decisions and naive optimism.

Of course, I'm not in any of the current classic home-buying categories: neither an over-extender, nor an under-buyer, nor a wait-and-seer, nor an intended-to-flipper. So I can be annoyed at the possibility that other people might get rescued from the consequences of their own short-sightedness, but my own decisions would have been exactly the same even if I'd been omniscient.

I astonished my realtor by insisting on
reading the contract before signing.

People sign mortgage contracts without reading them? Seriously?

So I'm told. I can't verify this personally. (Ok, when I sold my first house I saw no evidence at the closing that the buyer did, but I also didn't ask, so he might well have asked for the forms in advance like I did.)

We really need some sort of financial education in our high schools.

As

osewalrus points out in his most excellent rant, the people who loaned out all this money had plenty of financial education.

I have no sympathy for them either. They knew the risks they were taking in most cases. Which is why subprime interest rates were and always will be higher than rates for people with good credit. (It's also why interest rates on long term bonds are longer than on short term bonds - you are running more risk of default, as well as the risk of inflation.)

The most culpable people are probably the middlemen - mortgage brokers advertising absurd teaser rates and encouraging people to lie on loan applications to borrow more than they could otherwise. Consumer education is not a foolproof solution, but I believe it would help at least some people understand that somebody trying to sell you something is looking out for their interests, not yours.

I apologize for the tone in my post. A different choice of wording would have been better. And I do hold reckless lenders accountable too, not just buyers.

Clearly I don't have a good understanding of housing prices on the coasts. When we bought our house the bank was willing to lend us more than twice as much as we spent. We did the math and it was obvious we could not afford that. We had a choice; we didn't have to spend nearly that much. I think we would have been idiots to sign up for the loan the banks were offering.

In most other areas, when desires exceed means we forego the desire. Housing seems to be different. Granted, if you don't buy you'll be paying it in rent anyway, but it still seems like we -- by which I mean both society and government -- place too much emphasis on home ownership, and I suspect that drives the price up. How did we even get into the situation where the going rate for a modest home is half a million dollars or more? The conventional wisdom at the time I bought was "max three times annual salary", and most of the people buying those houses don't have that. "The market" forced prices up that high, but "the market" is really just people willing to buy and banks willing to lend. What happened on the coasts that didn't happen in other areas, like Pittsburgh? I don't know, but it seems like it's important to understand.

I think one issue is that in the parts of the country that have been very overheated (Boston, the Bay area, NYC), there's hardly any undeveloped land left, but lots of people want to live there.

Another issue (not geography-specific) is that new esoteric financial instruments made it more attractive for investors to hold subprime debt (or at least, for them to hold esoteric financial instruments that held subprime debt), which created a demand for such debt, which created incentives for banks and brokers to loan money to anyone with a pulse.

And of course there were the usual sophisticated computer models that proved that everything was perfectly safe.

Well, it's just the market. We can't be all pro-market when we like it and anti- when we don't, right? So the market is just shorthand for desire and supply. A lot of people want to live here and also want detached single family houses in nice areas with good schools. On a macro level, all of those things are scarce relative to desire. I can't give good sources but basically my sense is that the supersizing of desire (big house with lawn) plus the implosion of cities (schools and denser housing stock) plus wish to live in the general area equals high housing prices over the past 30 years. Also, as with any market, there have to be people willing to fuel the bubble, which is where the banks come in.

The part I feel stupid about is that one thing I felt was driving the market here was proximity to Boston -- the sense that people I knew were using RI as a cheap bedroom community for a Boston commute. Now I see that population in RI has actually started going down. So I was wrong about that, and the housing cost increase was driven purely by market pressures.

Housing is different in that government and society value home ownership as a positive good and provide a lot of the werewithal to you to get in over your head. Also, they're supposed to be different in that there's a stickiness to prices going down -- as my dilemma clearly illustrates, if I have to give the bank money that I don't have in order to move, I'm staying put. I don't think any of us fully, uh, appreciated that these are only brakes and not floors on the market.

And who is immune? I have always loved cities and was happiest in apartments, and yet here I am with a house that is falling apart and a yard I can't manage. There's something in the fact that everyone else is doing it and you measure your life that way, whether you want to or not. There's also something that home ownership, like having kids, is one of those existential struggles that people undertake to prove that they can triumph over challenges. So these popular delusions are just almost impossible to avoid.

Anyway, if you use the three times salary metric, we are only marginally overleveraged, but then there are all the other costs of home ownership such that it is very hard. My point is that when you are talking about such a massive amount of money, all these things are only yardsticks. Everyone made their own choice. Some of those choices were stupider than others, but most of the stupidity is truly apparent only in retrospect. Clearly we are all getting some lessons now in the difference between the apparent and the real.

I've generally agreed with you, but need to add one thing. It's not just the market, it is also policy.

We spent the last ten years dismantling all the Depression era laws that were designed to enhance transparency, promote corporate accountability, and create firewalls within the economy so that if one sector (like banking) collapsed, we would not see it spread to other sectors.

We adopted as our national industrial policy consumer-based policy that relies extensively on consumer spending and consumer debt. We made money cheap, we created incentives to buy homes, we praised the "ownership society." And people, rational actors that they are, responded. Then we compounded folly by allowing unscrupulous lenders and appraisers to collude with buyers to get people into homes they couldn't afford -- all the while soothing folks with "don't worry, everyone does it, if it were a problem we couldn't do it."

And this is only one piece of the puzzle. The dollar was falling well before the subprime crisis came out into the open. Our disintegrating infrastructure, the increasingly cartel-like nature of our economy, or uncontrolled deficit spending, and levels of corruption and graft via contracting unknown since we eliminated the spoils system of civil service, were also catching up with us. If we were a developing nation, we could not get an IMF loan.

The signs have been visible for years. And some of us have been crying our warnings in the wilderness. But most folks refused to have the necessary conversations.

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