Information about the devastion on the housing markets?

[gugliamo00]

It's common sense.

A loooong time ago, when I was a kid, the rule of thumb was not to pay more than 25% of your income for housing. The idea was that you pay your house off and still have a little for emergencies. My grandparents purchased a retirement home in 1960 for about $25,000. It was a retirement community and a brand new home. My grandfather's retirement and Social Security could pay for it. They purchased it to live in. They lived in it 30 years of so -- until they died.

Today people are dumb enough to pay over $300,000 for that house and it's almost 50 years old. People purchase a pile of sticks for a million or so. They can't possibly afford to pay that much, so they take out a negatively amortized loan for 50 years. That means at the end of 50 years somebody will owe about 5 million on the property. The only way they can possibly pay it off is to take out another loan.

Why do people do that? I don't know. Stupid maybe. They could live in an 800 square foot apartment. But they "need" a 8,000 square foot mansion. It's got to have a cathedral ceiling and a formal dining room, and a loft. I have no idea why. So they have this monstrosity of a house and then need another million to furnish it. You got it -- more credit.

How can people be so darn dumb? Greed. They figure in a couple of years they can sell the place at a profit to somebody dumber than they are.

Here's what happened to the housing market. Somebody who was looking for a house woke up one day and said, "That $5-million place I was looking at yesterday -- I could buy the land for maybe $200,000 and for maybe another $300,000 or so, build a nice home. Over a period of time others got the same idea. So people stopped paying those greed-motivated prices.

Now, remember that moron who counted on finding somebody dumber than he was in a couple of years and getting rid of the property? Well, he's stuck with increasing payments on a house that's way more than he can possibly handle. He wakes up one morning and decides he can't possibly pay for this thing so he just walks away.

Remember that money the bank loaned our dummy to purchase that house? They're now stuck with a piece of property on which they loaned 5 million but which has increased to 5.5 million because of negative amortization. They have to pay the taxes and insurance. They can't just sell it any more than the dummy could. So they sell or auction it at a loss. This loss is reflected in the economy by lowering stock prices.

But when the bank sells the 5.5-million property for a million and a half. That's now a "comp" people look at when they're looking for a house. "That house sold for 1.5-mil. Why should we have to pay 5-mil for a house just like it down the street?" And the problem compounds.

Why does it cost $300,000 for a 50-year old property that sold brand new for $25,000? Because the cost of living has gone up. How did that happen? Greed, again. People want to make more money. Enough to live on is no longer enough. So they get raises. The cost of those raises is passed on to the consumer in the form of higher prices. Prices go up, greedy people demand higher wages.

Some companies, rather than pay the higher wages, outsource a lot of their work to third-world countries. Say it costs 5,000 a month to hire a widget-twister -- 6,000 if he's a left-handed widget-twister. There are widget-twisters in Lower Slobovia. So the company makes a contract with a company in Lower Slobovia to produce both left and right handed widgets for a flat rate of $3,000 a month. The company, also greedy, pays $1,000 a month for the office space, $1,000 a month to its workers, and pockets $1,000. This money looks like profit to the company. But it's only paper profit. The money paid to Lower Slobovia is lost to the economy. The people whose jobs were outsourced also cause some drain on the economy. The drain on the economy lowers the buying power of the public -- including that of the widget consumer. So the company isn't really realizing any more income. It's just costing them a little less. So the management gets fat bonuses at the end of the year for lowering widget sales and contributing to the problems of the nation's economy.

Don't people have the right to make money? Sure they do. But they shouldn't do it by playing games with the books. Improve the product. Increase productivity. Expedite procedures. Increase sales. Don't screw the economy.

How did I come up with this theory? Threw my DBA out the window. Don't need to do doctoral-level research. It's happened before. The earliest occurrence of which I'm aware was Santa Barbara, CA. I think it was in the late 1800s. People in LA had just experienced a boom and it reached Santa Barbara. People would turn properties over twice a week. People paid cash. They had it. Where did they get it? They got it from the sale of property. But it was ll paper -- loans -- gambling. Then one day the bubble burst -- started a slow leak. The movement of property slowed and then stopped entirely. People found themselves owing money on property they didn't really want and for which they couldn't pay. Some lost their shirts. Most lost quite a bit. Almost everybody lost something. Know what they said, "It's just a slump in the market." Sound familiar? It's not my theory. It's happened before, and those who are ignorant of history are doomed to repeat it.