The persistence of bad philosophy..

Millions spend half of income on housing

Ray, 44, is looking for work and renting out a room in his two-bedroom condo in Davie, Fla., for $500, but his monthly income doesn’t match his expenses and he’s facing foreclosure.

“I barely have money to survive,” he said.

Ray is one of more than 7.5 million people — almost 15 percent of American homeowners with a mortgage — who are spending half of their income or more on housing costs, according to 2007 data released Tuesday by the U.S. Census Bureau. That is up from nearly 7.1 million the year before.

Traditionally, the government and most lenders consider a homeowner spending 30 percent or more of their income on housing costs to be financially burdened. But that definition now covers almost 38 percent of American homeowners with a mortgage — 19 million of them.

Though home prices have fallen this year, in the most expensive markets where home prices tripled during the boom, many working families still cannot afford to buy a home.

“We had a bubble,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. “This is a case where we absolutely want the market to adjust.”

During the dot-com era, people were willing to invest millions of dollars on businesses that had no hope of ever showing a profit. Sure, you could ‘flip’ them, but everyone knew that businesses based on no profit plus ‘flipping’ would peak, then fall. A lot of people ignored that fact, and they lost a lot of money.

However, the government didn’t finance the dot-com bubble and the majority of the population wasn’t using dot coms to provide warmth and shelter. This housing crisis will move slower and it will be much larger. The dot com bust was like a tornado. The housing crisis will be more like Katrina.

Bankers were willing to lend money to just about anyone because house prices were going up. As long as house prices kept going up, the mortgage system thrived.

However, anyone who thought about this situation would have to realize that housing prices could not continue to rise indefinitely. There had to be a certain point when real estate prices would peak, then fall. This isn’t rocket science, it’s basic physics – economics – life.

But no one thought about it. Bankers, financial experts, stock brokers are educated people. But they didn’t think about where they were going or what they were doing. They didn’t think outside of their little box. Why should they, when the box had such a nice view and the $300-per-bottle vodka was so smooth?

We have to wonder why educated people don’t think. Why do they base their actions and their fortunes on a obviously bad idea?

And what will the next bad idea be?

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About marypmadigan

Writer/photographer (profession), foreign policy wonk (hobby).
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17 Responses to The persistence of bad philosophy..

  1. But no one thought about it.

    Hmm. Some of us did. We were told that we were pessimistic anti-capitalist loons. Pollyannas, in fact.

  2. And lots of people were raising warning signals. I’ve been reading them for three years now.

    There’s a big difference between no one raising a warning, and people choosing not to hear that warning.

  3. mary says:

    Your warnings focused on the war. When did you ever mention real estate prices?

  4. Well, here, for example, I quoted this:

    More tangibly, the incorrigible optimists, as is their wont, are blithely ignoring the dark clouds plainly visible on the horizon. The great housing bubble is popping and the consequences are shaping up as dire, indeed. Not only is the value of the happy homeowner’s house in jeopardy, but also obviously its ability to finance his free-wheeling spending; the end of the housing boom might even pose a threat to his job.

    Also, I’ve mentioned the Iraq war in passing as a contributing factor to an upcoming economic crisis, but my main concern has always been the staggering US debt and the international position of the US dollar. I’ve hardly “focused on the war” as the sole cause of crisis.

  5. Your response to that quote, by the way, was:

    The housing boom is bound to plateau at some point, but that doesn’t mean disaster.

    I think that illustrates what I was saying. Warnings were given and not heeded.

  6. mary says:

    Your response to that quote, by the way, was:

    The housing boom is bound to plateau at some point, but that doesn’t mean disaster.

    That quote was from back in 2005, when I said:

    The housing boom is bound to plateau at some point, but that doesn’t mean disaster. (Jane Galt mentioned that, if a slight housing slump is accompanied by a sharp rise in credit card applications, that’s a bad sign). Oil prices are likely to stay high, which is why alt.energy is interesting but still risky. And, if the Saudis are running out of oil, and if they are buying gold, gold is likely to keep going up. Another risky but maybe good investment.

    We have a housing slump and general alarm about credit, so yes, there is room for pessimism.

    Anyway, you said that the great housing bubble was popping back in 2005. It wasn’t. If an investor had the inclination, he could (at that point in time) have invested in housing and still have made money. But if the investor believed that the bubble was bursting even when it was not, he’d lose out on potential profit. Persistent pessimism isn’t any more accurate than persistent optimism.

  7. mary says:

    Hmm. Some of us did. We were told that we were pessimistic anti-capitalist loons. Pollyannas, in fact.

    Pollyanas aren’t pessimistic anti-capitalist loons, they’re eternal optimists.

    When I was using the term, referencing some Ghostbusters bit when Egon, the grim but usually accurate Ghostbuster was predicting disaster. Peter said “Don’t be such a Pollyanna, Egon”

    I can’t remember if that was from the cartoon or the film.

  8. Anyway, you said that the great housing bubble was popping back in 2005. It wasn’t.

    It was. The prices peaked just before that post. Or do you you have some figures that indicate otherwise?

    If an investor had the inclination, he could (at that point in time) have invested in housing and still have made money.

    Even though prices have declines since then? How does that work?

    The point of your post was “why didn’t someone notice this was going to happen?” Someone did, and when it was pointed out to you, you poo-pooed it.

    However, anyone who thought about this situation would have to realize that housing prices could not continue to rise indefinitely. There had to be a certain point when real estate prices would peak, then fall. This isn’t rocket science, it’s basic physics – economics – life.

    Exactly.

  9. FYI, from Wikipedia:

    The booming housing market appears to have halted abruptly for many parts of the U.S. in late summer of 2005, and as of summer 2006, several markets are facing the issues of ballooning inventories, falling prices, and sharply reduced sales volumes.

  10. We have a housing slump and general alarm about credit, so yes, there is room for pessimism.

    That’s like saying you’ve got a cut when you’re missing an arm.

    Want to stay up nights for a few weeks? The next phase of this will likely be capital flight from the US and a US dollar crash. I’d love to see the fed stop that from happening, and there’s still hope, but if I had to bet, I’d bet on the dollar crash. I doubt that even China and the Gulf States have have enough reserves to stop that from happening.

  11. mary says:

    According to Wikipedia, the market began to soften in some but not all markets in winter 2005 through summer 2006.

    The market did not soften in the NYC area or in other areas that I know of, so obviously this was not a complete, nationwide trend. In 2005, if I was looking to make a profit, I wouldn’t have invested in property in, say, Texas or the Midwest, but the NYC area was still good. So, yes, I could have pooh-poohed you and still made money.

    Want to stay up nights for a few weeks? The next phase of this will likely be capital flight from the US and a US dollar crash.

    We’ll see. Our best course of action is to concentrate on our strengths (technical research, development) to decrease our reliance on the finance sector and nasties in the Gulf.

    The British rely very heavily on the Gulf and they’re in quite a pickle.

  12. Dave J says:

    The four most dangerous words in economics: “this time, it’s different.” When you hear that, RUN.

  13. Our best course of action is to concentrate on our strengths (technical research, development) to decrease our reliance on the finance sector and nasties in the Gulf.

    Too late.

  14. The market did not soften in the NYC area or in other areas that I know of, so obviously this was not a complete, nationwide trend.

    Nothing is ever a homogeneous nationwide trend. But in aggregate, the national bubble burst in 2005.

    The point is (again) that there were people doing the correct analysis at the correct time and predicting things that turned out to be correct. They can’t be blamed that they weren’t listened to.

  15. mary says:

    “this time, it’s different.” When you hear that, RUN.

    Thanks, I’ll remember that. I usually run when people talk about ‘flipping’ something or another.

    There’s a house at the end of our block that people bought to flip about a year ago, at the peak of the market. It’s not flipping.

  16. mary says:

    They can’t be blamed that they weren’t listened to.

    No one is blaming anyone. But when the constant refrain is ‘you’re doomed’, and no solutions are offered, people tune it out.

    I just saw Bill Clinton on Jon Stewart, and he was saying the same thing, that we need to invest more time and effort in new technologies. If there’s a problem, the best thing is to seek solutions. Screaming ‘the end is nigh’ doesn’t help anyone.

  17. But when the constant refrain is ‘you’re doomed’, and no solutions are offered, people tune it out.

    Their loss. But solutions were offered as well. They, too, were ignored.

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