The Twelve-Year Mistake Part 4: The Mistake

By Shamus Posted Monday Jun 3, 2013

Filed under: Personal 216 comments

It’s 2008 or so, and I am enjoying an influx of good fortune. Unfortunately, every good turn is countered by a disaster. I get a lump of money from contract work, but then the car breaks. Heather gets some money from painting, but something goes wrong with the house. My website begins generating more money, but our bills go up even faster.

Cars and Windows

Heather and I are really hemorrhaging money now. Our aging Ford Taurus needs some expensive work. If the bill was any higher, I'd say get rid of it and replace it, but I'm willing to put down the cash if we can get another year or so out of it. I bite the bullet and pay for the repairs. Then four months later something else expensive breaks.

I agonize over this, but really I shouldn't. We don't have the money to repair or replace the car without borrowing, so we're stacking up debt either way. The only question is to figure out how to minimize our debt, which is just an exercise in delaying the inevitable.

I can see that this money loss problem isn't going to go away. I figure it's better to borrow now if it means we can get our spending under control later. It's time to make a command decision.

Making my best guess, we replace the twenty-year-old Taurus with a much newer Mitsubishi Gallant. It's smaller, newer, more fuel efficient, and hopefully it will cost less to keep it on the road. It’s tough to get all five of us into the car, but I’m willing to trade comfort if it means we can live within our means.

Looking back through the hundreds of pictures in our archives, this was the only shot I could find of the Gallant. Not to spoil anything, but we didn’t own it long and didn’t want to take pictures of it. Also: Dig that crazy early snow.
Looking back through the hundreds of pictures in our archives, this was the only shot I could find of the Gallant. Not to spoil anything, but we didn’t own it long and didn’t want to take pictures of it. Also: Dig that crazy early snow.

Making another guess, I decide to replace the downstairs windows. Those are the largest windows with the most severe drafts. This racks up a couple grand in debt, but I hope they'll pay for themselves quickly by putting a stop to these murderous gas bills.

I have never hated a car before now. I like some cars, I’m indifferent to most, but I have now found a car I can hate. I don’t just mean I’m angry at it. I mean I hate this car on a personal level. The Mitsubishi is a nightmare of continuous repairs. It’s like the thing is trying to spite me. I lose count of the number of times it leaves Heather and the kids stranded on the side of the road during a simple shopping trip. In our first year of ownership it feels like we replace half of it.

It’s not even fuel efficient. It’s a cramped little 4-door that’s much lighter and about ten years newer than our old station wagon, so I’m not even seeing any savings with fuel costs.

shamus_2009_kids.jpg

The new windows are nice, but they don't produce the game-changing reduction in fuel use that I was looking for. Our bills drop from $400 to $300. Nice, but $300 is still a monumentally oversized heating bill, the kind sent to houses much larger than ours. Do I borrow more money and take another guess at where the heat is going?

It's a trick question. It's more debt either way.

When the Mitsubishi turns out to be a financial disaster, people say helpful things like, “A Mitsubishi? You should have known better than to buy one of THOSE!” Of course, if this was true then nobody would ever buy Mitsubishi. The problem is that data on auto reliability is incredibly noisy, as well as being both politically and emotionally charged. It's like the console wars with a dash of Red State vs. Blue State. For those of us who don't care what brand logo we have on the grill or what sort of engine is under the hood, the entire thing is incredibly tedious. All I have to go on are consumer reviews and ratings, and it's hard to get Apple-to-Apples comparisons for the same class of vehicles of the same age. It's hard to tell the difference between “Nobody ever complains about this car because it's reliable” and “Nobody complains about this car because nobody buys this car.” Research is difficult and of course the best cars aren’t available on the used car lot, because people don't sell those. (Also, it's still 2008, and the world of aggregating consumer opinions isn’t quite as useful or reliable as it will be in a couple of years.)

So I’ve made the problem worse and all I have to show for my troubles is a slightly less drafty house and a lot more debt. The pile of bills is starting to look kind of scary. We’re starting to hit the cascading failure state that poor people run into, where missing a couple of bills leads to late fees, which leads to panicked over-correction, which leads to overdrafts, which leads to bouncing checks, which leads to double-punishment fees, which annihilates the money you were going to use to pay the bills next month and pushes you that much further in the hole. We’re in a downward spiral, and I don’t know how to stop it.

Sometimes people who make decent money get snarky or condescending about it. “You just need to learn to manage your finances.” True, but this is like saying the solution to traffic accidents is to not get in crashes. It’s totally possible to be careful and frugal and end up financially ruining yourself anyway.

If you’ve never lived paycheck-to-paycheck, then here is how it goes…

  1. An irregular bill shows up. Something broke, somebody got sick, you get a speeding ticket, whatever.
  2. You don’t have enough money to pay the bills. The cash just isn’t there. Paying late incurs late fees, which make the problem worse, so you want to be late on as few things as possible. You pay as much as you can, taking your bank balance down to almost nothing.
  3. Except! You forgot about that one auto-pay fee for your website, or that one time you used the debt card to pay for gas, or you accidentally bungled the math and spent slightly more than you had, or there’s that one check you sent out two months ago and forgot about and the recipient is now getting around to cashing. Because of this, you bounce a check. That $100 check to pay the electric bill doesn’t clear because you only have $95 in the bank. The bank punishes you for this by charging to a fee, which ranges from $20 to $100 depending on the bank. So not only do you not have enough to pay the bill, but now your bank balance is actually negative. They charge you another fee for that. So your bank balance is now -$50 and you still haven’t paid the bill. A bunch of angry notices are sent out.
  4. You put some more money in the bank. Say $100. You now think you should have about $100, but you actually only have $50. You write another check to the phone company and it bounces, incurring another double-whammy overdraft fee + extra fee. Once again you’re in the hole.
  5. The mail finally arrives, and you realize your blunder. You’re now down a couple of hundred dollars and you still haven’t paid the electric company or the phone company. They hit you with some punishment fees for sending the bad checks, plus a late fee for not paying on time. So there’s another hundred bucks in random fees. More bills end up late the next month. Since you live paycheck-to-paycheck, you will never, ever be able to catch up.

Think about a situation like that: You know that your entire coming week of work is all going to be eaten by fees stemming from a simple mistake.

For a while I say firm, declarative things like, “We need to keep this from happening!” But if your solution to a problem is “don’t make mistakes”, then it’s not a solution. If you’re worried about falling off a cliff, the solution isn’t to walk along the edge very carefully, it’s to get away from the edge.

This cascading failure is not the problem. It’s a symptom. I'm actually walking around thinking I’ve just recently screwed up, but the truth â€" which I'm about to figure out â€" is that I blew it years ago.

Diagnosis

It's late 2009, and I've finally figured it out. It's about 8 years too late, but it's nice to finally debug the problem. I've run the numbers and I've realized that this house was a bad purchase. Not because it's drafty. Not because it's old. Not because it needs too many repairs. This was the wrong house because I was shopping in completely the wrong price range.

I'd blame it on a bad call made during a stressful time when I was dealing with the loss of my dad and in a terrible hurry to find a place to live â€" and I'm sure those were contributing factors â€" but in truth I had no idea what I was doing.

The bank approved me for $N house loan, and so I just passed that number along to the realtor. They showed me houses in that range. I was shopping in passive mode. I'd had such phenomenal good fortune with my first home that I didn’t realize the danger I was facing. I mean, of course houses go up in value, and of course you can sell them whenever you like! I made $35k in a year and a half and I sold it in two weeks. How can you go wrong with numbers like that?

Image unrelated. Just put this here to break up this wall of text. Protip: If you want a picture of someone who is really camera-shy like my wife Heather, the best thing to do is to give the camera to a little kid. The pictures might be from a low angle and are sometimes a little blurry, but shy people are more comfortable around kids and don’t get the “OMG I’m being judged” feeling like they get when an adult is aiming the camera.
Image unrelated. Just put this here to break up this wall of text. Protip: If you want a picture of someone who is really camera-shy like my wife Heather, the best thing to do is to give the camera to a little kid. The pictures might be from a low angle and are sometimes a little blurry, but shy people are more comfortable around kids and don’t get the “OMG I’m being judged” feeling like they get when an adult is aiming the camera.

I ran the mortgage payments in my head and they seemed reasonable, but that's because I was over-simplifying things. Now that I've sat down and forced myself to think through the problem, I see that our monthly bills and groceries come to exactly what I make. We can pay our bills just fine, assuming nobody ever gets sick, cars never break, computers never need to be replaced, we never observe Christmas, and I always get timely raises that keep up with inflation. Instead everybody is taking turns in the hospital, the car is about as reliable as a Doofenshmirtz device, the house costs a fortune to heat, and I haven’t gotten a raise in six years. And I can’t handle the unexpected costs because I didn’t leave any room in the budget when I bought the house.

I feel stupid now. It seems simple in retrospect, but of course the input data is incredibly noisy. Heating bills travel on a year-long sine wave. Electric bills follow the inverse wave. It’s hard to get a feel for how things are overall. But the other contributing factor – and I think this is true of a lot of slow-moving problems – is that it’s hard to diagnose problems if you view them at a really low framerate. I was only looking at and thinking about finances for ten minutes a month, and it’s really hard to see changes at that speed. If I was playing a strategy game and the last eight years were compressed into a couple of minutes I’d be able to see things easily. At any given moment a snapshot of the bills might look dire or reasonable. It's not until you average things out that you can see the true costs of living someplace. And if you want to get a handle on spending, you need to expand your definition of “groceries” to be “anytime we buy the things we need to live” and not just “stuff we buy at the grocery store”.

I guess this is what managers call having a “big picture” view of the problem.

Head. Hit. Desk.

I don’t have a picture of my face the moment I realized how badly I blew it, so here’s a picture of the kids doing I Have No Idea What.
I don’t have a picture of my face the moment I realized how badly I blew it, so here’s a picture of the kids doing I Have No Idea What.

Normally the solution to this problem is simple: Move someplace you can actually afford. However, the housing bubble has popped. If this house was any further underwater I’d be paying my property taxes in Atlantis. Even during the housing “boom”, this area wasn't exactly booming. The population of this particular town is falling and aging. Baby Boomers are selling off their empty nests and moving into apartments, retirement homes, managed care facilities, or little suburban houses were they won't have to cut so much dang grass. Their kids have left town. Nobody wants drafty old four bedroom homes that need constant care.

I’ve done what I could for the place. We’ve patched the bad spots, fixed some pipes, added air conditioning, put in new windows, replaced the abominable 70's carpet with wood flooring, and pulled out the horrible ugly fence. But even with all that work, I can drive a mile in any direction and pass half a dozen houses that are newer and nicer than this one and that are asking less than I owe here.

Here we’re pulling up the evil 70’s CARPET OF DOOOM.
Here we’re pulling up the evil 70’s CARPET OF DOOOM.

Worse, I'd be compelled to be as open and honest about the problems in this house. The previous owner wasn’t criminally deceptive or anything, but they did a good job of painting over the cracks, as it were. I couldn’t do that. If I sold this place, I’d have to let the buyer know this place is a demanding project.

Now that I have a better sense of how it works, I see places where we could have gotten the room we need for a lot less money. If we could live in a place in town, give up the garage and the yard, and put up with a bit more noise, we’d be fine. We could live someplace a lot cheaper and still have all the space we need for the kids and computers. We’d have half the mortgage payment and the rest could have gone towards paying off Heather’s student loan. If I could do it again, I'd know where to look and what to say to the realtor. But I can't do it over again. I need to deal with the mess I’ve made.

It is physically impossible to pay the bills here, and it is physically impossible to sell this place. I have no idea how to solve this problem.

 


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216 thoughts on “The Twelve-Year Mistake Part 4: The Mistake

  1. Psithief says:

    So did you declare bankruptcy?

    That’s a thing that gets done, right?

    1. Alan says:

      I’m wondering the same thing. That, or just walking away from the house and letting the bank foreclose. Both are absolutely devasting emotionally to most people, but those relief valves exist for good reason.

      This is why I find it frustrating when people blame the housing collapse on homeowners who took out too large loans. Where is the culpability for the loan officers whose very job is to assess if someone can reliably pay their bills? Oh, right, they made the exact same assumption Shamus did: housing prices always go up, so there is no practical risk. And the idea that people are highly rational, informed consumers engaging in carefully considered optimized behavior and who thus deserve when financialy bad things happen to them, shows a profound lack of awareness of how actual human beings work. Sadly, this mindset that people in dire financial situations somehow must deserve it permeates American culture, meaning that when people have good reason to do something as desperate as declaring bankruptcy, they feel compelled to put it off even though it hurts them more.

      1. Mephane says:

        this mindset that people in dire financial situations somehow must deserve it

        I can attest from direct observation that in Germany, it is the very same mindset. “You’re poor, in debt, even *gasp* unemployed? You’re just lazy, dumb and incompetent, you get what you deserve.”

      2. bloodsquirrel says:

        People really shouldn’t be trusting what amounts to a salesman without doing a sanity check first. What does a loan officer know that you don’t once they’ve told you what your monthly payment on a loan would be? There’s a certain level of basic responsibility for your own finances that you can’t expect to be able to offload to other people. If all you run into is a mortgage that’s a little too high for you doing that, you’re getting out lucky.

        This is the kind of thing we should be teaching people to understand on a cultural level, not letting it slide until something explodes in our faces, then trying to find a mean ol’ business person to blame so we can start working on our next global economic disaster.

        Of course, if you’re really looking for someone to blame, the problem would have never happened in the first place if the government hadn’t pushed the secondary mortgage market so hard. The banks actually making the loans didn’t worry because they were just going to turn around and sell them. Politicians were covering for an incredibly dysfunctional industry right up until the crisis hit. The shifting the blame that people let them get away with afterward is one was downright criminal.

        Also, declaring bankruptcy isn’t just emotionally devastating. It destroys your credit, doesn’t wipe out all of your debts, and may require you to liquidate assets that you don’t want to. It’s a method of last resort, not a reset button that starts you off clean and fresh.

        1. Alan says:

          What people should and shouldn’t do is fascinating theory, but I’m stuck in the crappy real world with all this irritatingly irrational people. Sure, I’m all for financial responsibility, but “people should be more financially responsible” isn’t improving anything.

          It is true that there are layers of blame. But financial institutions get the lion’s share. Their very job is to assess risk. They have teams of people and complex computer simulations dedicated to assessing risk. If more homeowners go bankrupt than they expect, they are to blame. No one forced them to make high risk loans.

          I’m kinda hoping everyone here knows about the financial ramifications of bankruptcy or walking away from a mortgage obligation. What I was focusing on is that there are good, rational reasons to take those steps, but because as a society we tell people that they are Bad People Who Deserve it, people make emotional decisions to delay doing so, hurting themselves and others in the process.

          1. Alan said: “No one forced them to make high risk loans.”

            This is 100% precisely contrary to the truth–for the past 20 years, financial institutes have been increasingly REQUIRED, under threat of losing their licensing, to make high risk loans. That, and the fed has an easy money policy that they maintain regardless of economic markers–Alan Greenspan became incredibly politically charged because he sometimes, OCCASIONALLY took the politically undesirable step of *gasp* allowing interest rates to rise to sane levels. We don’t have this nowadays. All the financial indicators that ought to be telling banks and other financial institutes to STOP LENDING MORE MONEY have been given an enormous shot of anesthetic.

            The only blessing in all of this is that most of the big companies that would be fueling a stimulus bubble and outrageous inflation have come under enormous regulatory pressure in recent years and are TERRIFIED to invest money in anything–that’s why many of them are paying off their government loans years early even though ordinarily this would not be profitable for them. When there are no profits to be had, the best you can do for your company’s financial future is to NOT BE IN DEBT up to your eyebrows.

            However, the inflation is still coming–it’s already easy to see in the price of food and other goods that cannot be insulated against the effects of the money market. And the price of gold is so high it’s giving me fits. Now, gold isn’t some magic fortune-telling device, but as a commodity it is the *least* affected by sudden changes in supply, so when the price has TRIPLED in THREE YEARS, it’s time to be very, very worried.

            1. Raka says:

              “…for the past 20 years, financial institutes have been increasingly REQUIRED, under threat of losing their licensing, to make high risk loans.”

              I dislike making flat assertions of “you’re wrong”, but this is a pernicious myth that absolves lenders of their responsibility while not-so-subtly implying that “see, this is what happens when you try to help Those People”. And it’s not at all supported by the facts.

              In my reply to Deoxy below I debunk the crisis-causing role of “if only the poor banks hadn’t been forced to hand money over to the undesirable classes”. But I will acknowledge that there were very strong incentives (both positive and negative) encouraging lenders to issue the risky loans. They’re just not incentives that make for a good de-regulation narrative.

              Traditional security instruments had low yields due to a number of causes; significantly (but hardly exclusively) a Fed rate that was historically low for a historically lengthy stretch of time. This heightened demand for secure and lucrative investments (okay, obviously demand is never LOW for those [duh], but there was additional pressure). A passel of recent regulatory changes (every one of which was vigorously lobbied for by the very lenders who were about to burst into flame) created a bunch of attractive new options in mortgage-based securities. Much of this is summed up here.

              Now I’ll leave the safety of citations and speak from my own industry experience. The initial demand for mortgage-backed securities and the bundling of existing mortgages (including sub-prime) was probably fine. We had ample data on risk and return. The problem came in that these attractive packages created a powerful demand for more, which created large profit incentives all the way downstream to generate more mortgages. This massive demand created a massive surge in issuing loans, requiring changes to terms and requirements to produce the loans. This made historical risk analysis effectively worthless. Pre-bubble subprime mortgages were decent investments; somewhat higher risk, but significantly higher reward. Bubble mortgages changed the risk factors, but that never showed up in the risk ratings. Risk ratings are primarily based on history, not analytical speculation — at least when it’s in the immediate interest of the ratings agencies to do so.

              There’s your positive incentive– everyone involved was making money hand over fist. The negative incentives were an emergent property of this fact and specific structures in our market system. Any company that didn’t jump on the gravy train was punished by investors, which meant that capital would flee to the bubble-pumpers. This meant that cautious companies were not only failing to make money off the bubble, but were actively losing money. At the high levels, share prices and bonuses were directly driven by participation in the bubble. At the lower levels (admittedly, relative to the general populace, not particularly low), you would just be fired.

              I get why everyone involved did what they did. There was no villainy. Much of it was not even greed as much as survival (survival in a system entirely structured around unfettered greed, granted, but survival nonetheless). What I absolutely cannot abide is the “no one could have predicted” dodge. BS. I was there. We knew. Everyone knew. The only thing we couldn’t predict is exactly when it would all come crashing down. But we all knew it was coming, and the goal was to take some profit and hand off the asset with ludicrous speed, in hopes to be holding as little risk as possible when the music finally stopped.

              1. Deoxy says:

                OK, I have a major problem when you start with this:

                I dislike making flat assertions of “you're wrong”, but this is a pernicious myth that absolves lenders of their responsibility while not-so-subtly implying that “see, this is what happens when you try to help Those People”. And it's not at all supported by the facts.

                (the completely gratuitous innuendo of racism is nice, by the way)

                and then end with this:

                I get why everyone involved did what they did. There was no villainy.

                which was her point.

                Here’s another example, with both of the same problems, only absolutely right next to each other:

                In my reply to Deoxy below I debunk the crisis-causing role of “if only the poor banks hadn't been forced to hand money over to the undesirable classes”. But I will acknowledge that there were very strong incentives (both positive and negative) encouraging lenders to issue the risky loans. They're just not incentives that make for a good de-regulation narrative.

                (Again, thanks for the completely gratuitous innuendo of racism.)

                So, there were very strong incentives, both positive and negative, but they weren’t “forced” (except that the incentives were strong enough to force everyone who didn’t do it out of the market). Oh, and these incentives apparently weren’t some form of regulation, because it doesn’t make a case deregulation… somehow.

                So, we’re wrong, and you agree with us. Wha??

                Oh, but I will agree with this:

                We knew. Everyone knew.

                Yup. And one party did nothing (well, some members gave speeches warning about it and/or asked for action… but nothing was DONE) while the other party actively supported continuing the obvious stupidity. Calling them morons is the charitable, both parties.

                1. Raka says:

                  Classism != Racism. The myth itself is profoundly and unpleasantly classist, and I see no reason to not point that out. I don’t claim to know what beliefs anyone holds in their hearts, so I apologize for implying that the implications of the myth were also the motivations of specific individuals who espouse it. That was not my intention, but my writing failed to make that distinction.

                  That aside, the myth is plainly and factually wrong. So I certainly don’t agree there. The myth also claims that regulation (additional constraints on what business can/must do) caused the crash; my argument is that specific DEregulation (fewer constraints) was far more instrumental in this crash. The incentives I mention are a direct result of that deregulation.

                  I’m only addressing the specific assertion that government regulation (ie, the CRA) obliged banks to make risky loans, and that this played a substantial role in the crash.

                  1. Deoxy says:

                    The only “class” involved is “those with bad or insufficient credit history”. People of that particular class exist at ALL levels of income, and people at all levels of income abused the system. There is no CLASS argument going on here at all, in anything even vaguely resembling what that is usually used for.

                    (“Those People” is a commonly recognized reference to racism. That said, it is also used, to a lesser extent, for class-based claims as well… which, in this country, have historically boiled down to race in many instances as well. Ah, the joys of veiled references… the point is that they can be taken for something innocent, such that the innocent usage gets tarred as well. My apologies for taking it as a racial reference.)

                    As to regulations, regulations is what this is all about! The “incentives” we both agree were put in place by the government are put in place by regulation.

                    So no, this is not remotely about DEregulation. DEregulation would be the government leaving them alone, not distorting the market so completely as to put the sensible, responsible actors out of that business.

          2. Deoxy says:

            No one forced them to make high risk loans.

            Check the Affordable Housing Act.

            If they wanted to stay in business, yes, they were. They would be punished severely if they didn’t… and the government guaranteed the loans, so they were richly rewarded when they did. This crisis falls SQUARELY on government shoulders, and the shoulders of those who agitated for the government to do so.

            At the risk of getting political, I will point out that this directly and personally includes the current President… and that his first presidential opponent made a speech on the Senate floor saying we needed to deal with this problem before it blew up in our face.

            That’s all I’m saying about it. The rest of the factual research you can do yourself.

            OK, one last thing, to try to smooth the firestorm I’m hoping not to start: one party did much less damage than the other, but even the “less damage” is still quite a bit more than “none”. Both parties have blame.

            1. Amarsir says:

              You’re completely correct, Deoxy. But it can be summed up by saying politicians are no different than the rest of us: better at looking back than forward, and too confident at every step.

              It used to be the rule that you put 20% down and the monthly payment (fixed rate) is no less than 25% of your take-home income. That was a safe system. But as time went on, that safety prevented everyone from remembering why it was needed in the first place. For decades the down payment decreased and the income share increased. Until the crash.

              And trying to buy a home in 2008? At that point banks were so scared that they were refusing to lend even under those standards. The pendulum had swung too far the opposite way.

              It’s tempting to blame a few politicians, bankers, or over-borrowers. But time makes everyone complacent. (Taking that into consideration, the real flaws are A) people who expect someone else to do their thinking for them, and B) centralizing a single decision so that if most are wrong it become all are wrong. Sadly, the pendulum has not shifted on that. )

            2. Ah, yes, “those who agitated for the government to do so”. If you look you will find that “those” were those very same companies, and government higher-ups recruited from the top echelons of those companies. So no, I don’t think the poor dears were “terrified” of anything. Rather, they were running low on sources of this hugely profitable, leverage-able product just lending to credit-worthy people, so they arranged to lend to not-so-credit-worthy people, but backed by federal money.

              A lot of people along these threads are talking as if “business” and “government” were these highly distinct, often opposed forces, of vaguely equal size or perhaps with government bigger. This is not the case, certainly not in the United States and increasingly not in many other places. In the US, it hasn’t been for some time now. “Politics is the shadow cast on society by big business” has never been more true. Elections run on money. Money comes from business. Oh, sure, a tiny amount comes from unions, but the leagues are different. And some comes from a ton of individual donors, but how much isn’t dependent on the party’s policies it’s dependent on how professional and far-reaching their fund-raising operation is. The money for that operation comes from big business. And big business, unlike average citizens, is very specific about what their policy requirements are. Each senator and congressperson has literally dozens of corporate lobbyists schmoozing them, and greasing the wheels to the tune of literally billions of dollars per year nowadays. Increasingly, legislation actually gets literally drafted by corporate groups and then handed to legislators to put into bills verbatim. The top regulators and economic advisors come from the industries they regulate and return to those industries after a stint of a few years; this is true under both Republicans and Democrats.
              There just is no difference in orientation between government and business. It’s not that government is powerless, to the contrary. It’s that government is largely in the business of helping business. The excesses of government stem largely from their efforts to give big business nice things using taxpayers’ money, and to suppress any efforts to stop this process. This is why the FBI is more interested in investigating environmentalists as “terrorists” than in investigating militia groups who might really be terrorists; the former are bad for business, the latter are not.

              1. Deoxy says:

                Ah, yes, “those who agitated for the government to do so”. If you look you will find that “those” were those very same companies, and government higher-ups recruited from the top echelons of those companies.

                While there is certainly some truth in this, A) that’s a reasonable and common behaviour by members of all industries (called “rent seeking”), and the only way to end it is to reduce the power of government over those industries, and B) that’s only a small part of the “agitators”, as there were plenty of “community organizers” and other grievance-based shakedown artists who benefited from this line of law as well. Again, at the risk of being too political, that includes the current President, who never worked for a bank or any other such company.

                And big business, unlike average citizens, is very specific about what their policy requirements are.

                Your point about where the money comes from is inaccurate, but this point is right: a congressman can make very specific small groups happy very easily, which results in continued money from those groups.

                he top regulators and economic advisors come from the industries they regulate and return to those industries after a stint of a few years; this is true under both Republicans and Democrats.

                Absolutely true! Look up the term “regulatory capture” for more info.

                Basically, the only way to stop this stuff is to reduce the scope and power of the government. When the government’s day-to-day decisions are life-and-death important for your company (especially when it comes to writing regulations), such lobbying and other forms of (let’s be honest) GRAFT are simply a logical, self-preservation response. (Influencing those regulations to not just be less harmful to you but actively MORE harmful to your competitors is just unethical icing on the cake. See the results from the big lead-in-toys scare from a few years ago for a horrendous and scary example.)

                This is why the FBI is more interested in investigating environmentalists as “terrorists” than in investigating militia groups who might really be terrorists; the former are bad for business, the latter are not.

                Actually, you have that exactly backwards.

                There is actual history of environmental groups engaging in terrorism (and much more recently than the best-known Weather Underground stuff years ago), while the militia groups are politically inconvenient for both parties (as they advocate for smaller government) and thus targeted and vilified almost exclusively for political reasons (I only say “almost” because I haven’t checked EVERY major “terrorism” type story about them – all the ones I have have been either completely fabricated or completely induced by federal agents).

            3. Raka says:

              “Check the Affordable Housing Act…the factual research you can do yourself.”

              Indeed, I can! Although, spoilers: I was working as a data analyst for one of The Big 13 mortgage resellers during the run-up, through the beginning of the time the public started to become aware of the plunge. So I’m unlikely to be surprised to learn that, for instance…

              –The Community Reinvestment Act (often called the “Affordable Housing Act”) was passed in 1977, with all of the language “forcing” large banks to make risky loans already in place. The language that obliged consideration of gender and minority representation was added in 1992. Every subsequent change made the law weaker, not stronger. Yet the loans that were at the heart of the collapse were being issued around 2000-2007. http://en.wikipedia.org/wiki/Community_Reinvestment_Act

              –84% of subprime mortgages in 2006 were made by private lenders, and only one of the largest 25 issuers was subject to the Community Reinvestment Act. http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#.Ua8yP5yND-A

              –The bubble was happening worldwide in 2000-2007, which seems rather unlikely to be a consequence of an American law. http://www.ritholtz.com/blog/2011/11/a-global-view-of-the-housing-bubble/

              –This one is a bit heavy on the data-wonkery, but for those of us who like regression analysis instead of just inference from the above logic, the data strongly refutes the Affordable Housing villain-myth. http://research.stlouisfed.org/wp/2012/2012-005.pdf

              1. Deoxy says:

                While I won’t disagree that simply that there are many players, the central point still holds: Fannie and Freddie (2 sides of the same coin) had a massive impact on market behaviour, and their behaviour was influenced extremely by the 1992 legislation on affordable housing.

                That there are numerous other players does not change the incentives and laws put in place for the those players by the government.

                Were the bankers responsible in their behaviour? Resoundingly NO… but then, the laws and government behaviour at the time rewarded them for this behaviour, and those not willing to play this game made much less money.

                “Don’t blame the player for the game.” The blame lands in the same place – with those who made the rules.

                (I point you to numerous comments made by certain of one party wanting to rein in Fannie and Freddie, and several by the other party, most famously one about wanting to “roll the dice” some more, by the other party, as evidence of the ongoing support of this irresponsible bank behaviour by the government, all well before the SHTF.)

                1. Abnaxis says:

                  I’m not sure I understand your position. Do you have any answer for the sources Raka cited? I found the last one particularly interesting–it found, with a robust analysis, that there was not a statistically discernible difference between the quality and quantity of loans issued that fell under the regulations your are decrying versus the loans that did not fall under regulation. Further, he has also provided sources that show that the crash was preceded by Freddie and Fannie decreasing the share of MBSs they held over what it had been historically before the crash, while you continue to maintain the crash was fueled by those same government-backed banks. Finally, he has given specific reference to the rules you are referring to, and has shown that they actually relaxed restrictions on lending practices, while you hold the position that the government was using regulation to rig the game against the free market.

                  There is a financial data analyst refuting your claims with actual, real world data. Do you have any support for your position besides an axiomatic assumption that government is bad for everything? Where is the actual evidence that the collapse was brought about by government missteps?

                  Please don’t take this as being combative. I really would like to see some evidence to support claims, because I like seeing the evidential justifications for both sides in a debate.

        2. Peter H. Coffin says:

          “Shouldn’t” doesn’t enter in. Salesmen^wRealtors do this because they’re good at this game. For most people, the winning move is not to play at all. But there’s a WHOLE INDUSTRIAL COMPLEX set up instead of profit off of people that do.

      3. MichaelG says:

        Look, you can say “it’s not my fault! You shouldn’t have lent me the money!” but what’s the alternative? Big Brother decides when you are qualified for a loan, and how much house is prudent for you to buy?

        And remember the phrase “a fool and his money are soon parted”? If you did protect people from going overboard on housing, they would just get scammed some other way.

        On top of that, it wasn’t just ordinary people who couldn’t do the math who got burned. Banks with staffs of people with spreadsheets also thought housing never goes down nationwide, and invested accordingly. And got burned. So did mortgage brokers who speculated in real estate on the side. So did builders who were flipping a dozen houses at once.

        Housing mania is a recurring theme in history, and this was a bad one. Grumpy people like me sat it out and didn’t get burned, but I sat out the dot-com period when I could have made millions too. Nationwide pessimism and caution isn’t the answer either.

        There’s no substitute for paying attention.

        1. Abnaxis says:

          I am given to understand that your position is that the people who were bit by the mortgage crisis were rubes, and that they should have know better than to buy outside of their means. If I am reading you wrong then correct me.

          The problem with that line of thinking, is that housing loans are not all that simple to to make an informed decision on. How many people do you suppose know what the difference is between nominal APR and effective APR, or how to calculate their expected payment if they take an adjustable-rate mortgage and their interest goes up in two years? How many people can intuit just how much a house is worth by looking at it? By analyzing it alongside similar houses in the neighborhood? Can estimate the repairs needed if a four-year-old furnace fails, or how likely that is to occur? Can come to a negotiating table with a good idea of what the sellers want to get out of the sale and what they should be offering?

          The above covers a very wide range of skill sets that is very rare to find in a single household, and spending hours with Google will only get you so far. Of course, there are professions dedicated to each and every one of those concerns and they are all involved when you buy a home, but all of them–every single one–has a vested interest in screwing over the buyer, even the buyer’s own agent. That, I think, is the real fundamental problem with real estate. Every party involved stands to gain more money proportional to just how much they can gouge the purchaser.

          Yes, it is possible with enough time and enough brainpower (which not everyone has–I know plenty of people who just do not have the mental capacity to do real estate intelligently) you can muddle through and not get completely screwed over. Saying “people just need to be smarter” as a way of dismissing the problem seems analogous to saying “people just need to learn the law” as a justification for throwing out the right to counsel in the (US Constitution) Sixth Amendment. The reason that amendment exists, is because when you’re throwing people into a hostile environment, characterized by (sometimes deliberately) obtuse technicalities, where the stakes are very high, without any sort of support, disaster will follow.

          To me, while it would certainly be ideal to have everyone be educated to properly make decisions regarding their housing, it’s just not realistic. Rather, what would have a greater chance at success is having a system that doesn’t inherently encourage predatory practices.

          The quick, dirty, and inelegant way of doing that is to get Big Brother involved, as you so tactfully put it. The government is a third party with a vested interest in keeping its citizens happy (at least in theory, in practice your average politician could give less of a crap if they don’t get campaign contributions out of it) so it could try to intercede on consumers’ behalf. What would be better would be if the institution just didn’t work that way, but that would take reform on a monumental scale that would have to be enacted by the same people who make money hand over fist in realty, so I’m not holding my breath.

          1. MichaelG says:

            As I said in the post, people who did this for a living also got burned. What was missing was the simple common sense attitude of “is this house really worth twice what it was 10 years ago?” and “should I really be buying something 5x my annual income?”

            These were not small errors people made here. And staying away did not require a Ph.D in real estate — just caution.

            Also, as for “we’re from the government and we’re here to help you…”, the government loved the idea of poor people buying houses, and did whatever it could to encourage them to get in over their heads with nothing down (or even 110%) loans. No help there.

            1. Abnaxis says:

              But that’s over-simplifying, to the point of being disingenuous. There’s a saying (that I learned from Civ 4, go figure) “Everything is worth what it’s purchaser will pay for it.” You’re trying to make it sound so ridiculous for someone to think their home would be worth more in the future when nothing about it had changed, when that’s actually how it works. It doesn’t matter if the home itself has physically changed in any way after your bought it, if someone wants to buy it for double your purchase price it has doubled in value. Further, you throw out the 5x figure like it’s so blatant that nobody should ever make such a large purchase, when 2-3 x your annual salary is reasonable. So I assume that means you know exactly why 3x is not too big, but 5x is just so obviously too much to borrow, and what that means when the monthly payments are amortized after the interest rate gets adjusted by four percentage points? Want to try explaining that in “common sense” terms? When your dealing with very large numbers, it takes more than “caution” or “common sense” to make effective decisions.

              Finally, in the interest of not going too political, I did not itemize all the legion ways the government does a horrific job of representing consumer interests in housing, I’m just saying the in theory the logic behind getting the government involved is that it is at least partly accountable to its constituents, which include the purchaser. In practice the government also gains when a buyer pays more, and financial special interests hold much more sway over political policy than any consumer group. However, it is also worth noting that the government is the only entity in this whole cluterfrak that’s even attempting to solve any of these outstanding issues. The banks are still more than happy to obfuscate the market as much as they can while approving unrealistic loans.

              1. MichaelG says:

                Even if you say “Everything is worth what it's purchaser will pay for it.”, that’s not the whole story. What you are really assuming here is that “if someone gave my neighbor $500,000 for his house, someone will give me that much in ten years for this house.” Not the same at all.

              2. Deoxy says:

                The banks are still more than happy to obfuscate the market as much as they can while approving unrealistic loans.

                Only when the government takes the losses for them. Fix that problem, it fixes LOTS of problems.

            2. I’m not sure where you’re getting your information from, but the poorer folks had (and have) a much higher level of paying off their debts than the wealthier in our society.

              And here’s another thing to consider: Mortgage brokers were the ones giving these loans to people who couldn’t afford them. Why? Because they then sold the mortgages to banks. The broker was holding none of the risk and getting commission for making bad loans. These loans were re-sold and re-sold again. Then a bunch of MBAs created the economic time bombs fashioned from these bad debts and sold them on even more, helping to fashion this house of cards that would eventually collapse.

              The reason that people ask, “why weren’t they told these were bad loans” was because in the old days you were getting your loan from the bank and its loan officer, and they were directly on the hook if you defaulted.

              What really galls me is that regulation against these and other shenanigans made by those in the banking and lending industries have, of course, been opposed thanks to loads of cash directed at lawmakers and lobbyists.

              1. MichaelG says:

                Here’s what I’ve read about this: Back in the 1980s, there was this thing called The Savings and Loan Crisis.

                What happened was that small community banks (called Savings and Loans banks) sold mortgages at 5%. They had loan committees and reviewed loans just as you say. They were in fact notoriously cautious, and people had to hand over every financial document they possessed to get approved (and it took weeks.)

                Then we had huge inflation around 1980, with rates spiking up to 15% or more. The S&L banks were in trouble. Their income was the interest on these 5% mortgages, and their expenses were the 15% they were paying on savings. They started to go bankrupt.

                Congress stepped in and let the S&L banks make more speculative loans. They also upped the deposit insurance limits and made that insurance per account, not per person. Those changes together meant the S&L could offer really high interest rates on CDs (Certificates of Deposit) and try to pull in a lot of business. They also speculated in real estate. The hope was they would grow their way out of the low-interest mortgage problem.

                It didn’t work and the whole industry collapsed in the 1980s. The mess was cleaned up by Congress with something called the Resolution Trust Corporation. It was given all the dead S&L banks, and gradually sold off their assets. The taxpayer ate the rest of the bad debt, to the tune of $200 billion or so.

                The result of all that was banks no longer wanted to be in the mortgage business. After the huge interest rate swings of the 70s and 80s, no one trusted the idea of a fixed-rate 30 year loan. I think in Europe the response was variable-interest rate mortgages. But here, we went with securitized mortgages.

                The idea was that you bundle up a bunch of loans into something called a Mortgage Backed Security (MBS), and then sell it off in pieces. They actually divided it up into tranches, with different risk factors. And they insured the whole package with companies like AIG.

                The point was, in this new system, its the purchaser of the MBS who takes all the risk, not the bank. If the mortgage market goes sour, it’s supposed to burn rich investors, not the banks. So there’s no systemic risk the way there used to be. In the S&L crisis, failing banks killed all the businesses that borrowed from them, which cost jobs, etc.

                So this all worked, but the system got sloppy. They were approving people for loans with nothing more than a credit check. And the downpayments dropped and dropped. In the 1970s, 20% down was the hard rule. Then you could get an 80-15-5 loan, where you put down 5%, got a second loan for 15% and the normal (conforming) 80% loan. But even that didn’t last, and eventually the loans were for 100% of the value of the house, or even 110% (cash-back loans.)

                When the bubble hit in 2004-2005, this system really failed. The mortgage brokers were giving loans to everyone (because it wasn’t their money), and the banks were reselling most of the loans to Fannie Mae and other government-created loan organizations (who wanted to encourage poor people to buy real estate.) They in turn were selling them on to investors, including the Chinese. Lots of money was flooding the system because these MBS seemed like such a good investment. After all, housing hadn’t gone down across the whole country since the Great Depression.

                As you know, it all ended badly. The banks made the mistake of keeping a lot of these MBS shares, even though they knew how toxic the loans were. They were just getting such a huge return they couldn’t afford not to buy. Avoiding the MBS would also mean admitting they were dealing in trash. And you can’t sell a security to investors and also say “I won’t buy any of that myself! It’s crap!”

                So there’s plenty of blame to go around. Arguably, the Fed caused the huge interest rate swings that made 30 year mortgages a bad bet. And they are setting the country up for another fall now. 30-year rates are under 3%, which is just stupid for a loan that long. Banks (or the government itself) are going to get burned again just like in the 1980s when rates inevitably go up.

                And yes, banks knew the loans were bad. So did the mortgage brokers. They thought there were enough good loans to cover the bad ones.

                However, I refuse to let the borrowers off the hook. We aren’t children here, and there are disclosure statements all over the paperwork. You are even given your first loan payment amount when you sign the mortgage. People just think somehow they will make it, or are afraid to back out at the last minute.

                Many people were just stupid and thought owning a house was like being given a gold mine.

                1. Abnaxis says:

                  However, I refuse to let the borrowers off the hook. We aren't children here, and there are disclosure statements all over the paperwork. You are even given your first loan payment amount when you sign the mortgage. People just think somehow they will make it, or are afraid to back out at the last minute.

                  This is where you’re losing me. You’re making it out like it is so blatantly clear when you look through the paperwork, exactly how much a loan is going to cost you. That is not the case–in fact, you really have to dig into the fine print even today to be able to know exactly how much you are on the hook, even after regulations have been introduced to make the documents clearer.

                  To take your example, the banks do list that first payment right there on the first page. But that payment assumes your rate will remain fixed, when a large proportion of pre-collapse loans were ARMs. So what’s that mean? You can probably skip this part if you’re in a rush, I’m just trying to make a point

                  Well, today for a 3-year FHA loan that means your interest rate follows the CMT index after the introductory three years, after which it can go up at a maximum of 1%/year with a total cap of 8%, so all you have to do is look up the CMT index projections to figure out how your rate will adjust, then amortize the remaining principal your loan will have at that point over the remaining life span of the loan, THEN you will have a rough estimate of where your payment is going to be. You can also take that 1%/year (8% max) and derive a worst-case payement schedule, though if markets stay steady (like they had been for 20 years before the crash) you won’t be paying nearly that much.

                  If you read through that quote, your eyes are probably glazing over. Now imagine having to hunt through fifty pages of “the BORROWER, hereby referred to as Party 1, shall render unto the SELLER, hereafter referred to as Party 2…” to find all that pertinent information.

                  Yes, the documents say right on the front page that the payment is $900, but when the shit hit the fan 90% of people went from a $900 to a $1800 payment, and only combing through that entire document would have saved them that. The government requires that information to be plainly obvious now on the tenth page of twenty you have to sign, whereas before it could be written in the margins of section 34 sub-paragraph c, and many people were taken in by the trap.

                  The only thing Johnny Homebuyer knew was that taking an adjustable rate (which all relevant entities vouched for) saved him $100 on his house payment, and he predictably went for it, because the house payment was explicitly right there on the front page.

                  1. MichaelG says:

                    People were taking out loans at low interest and being told “adjustable means ‘goes up’ after X years.” And they were already at the max they could afford. Sorry, that’s not a good idea.

                    And from what I’ve read, the bubble popped in 2007 when a large group of these new MBS securities immediately went negative. That happened because the borrowers didn’t even make their first payment. That’s when the rush for the exits started. The ARM resets were later. After all, the reset doesn’t happen for years, and the bubble wasn’t long enough for that to have ended it.

                    I got most of this information from NPR’s Planet Money coverage in 2008 and various reading. Also, I lived through the S&L stuff — I’m 54. I’m not an expert though, and there’s a lot of shady stuff that goes on behind a bubble. People know it’s not going to last.

                    I just resent the idea that you have to treat people like children to solve these kinds of problems. I don’t even think that’s a solution.

                    Make the government tell me when I’m spending too much and force me not to? As I said, they were in the thick of all of this. And they could have popped the bubble years earlier if they had just done something about small downpayments. But the whole country would have howled for blood if the Fed had said “20% down — no exceptions.”

                    1. Abnaxis says:

                      My impression of it (that I can’t find any source for, feel free to correct me) was that it was a significant-but-not-majority proportion of people defaulting–like 10% or some-such–but that hit the market and caused rates to go up, which caused more people to default, which caused which caused more people to default, etc., etc. So yes, a large group of people living outside their means by buying homes they couldn’t afford precipitated the crash, but when people refer to the homeowners that got screwed (and more specifically, the homeowners I am talking about), they are generally talking about the 90% that got caught in the avalanche, not the 10% that went skiing near the dangerous peak.

                      And I’m not saying you have to treat everyone like children to solve the problem. Frankly, I have no firggin clue how to solve the problem. I just know the first step of solving any problem is to properly define it, and I don’t think part of that proper definition includes laying the blame on the homeowners that got burned in the bust. I think acknowledging the fact that the home market is designed around sucking as much money as possible from buyers, leading to obfuscation and questionable practices that not that many-if-not-most people are ill-equipped to deal with, is an integral part of diagnosing the problem.

                      I’m not saying government restriction of acceptable loans is THE answer to all of this, but it is ONE answer, and any solution will undoubtedly require some modification of the laws that are on the books now. I’m not advocating financial seat-belt laws, but something has to be done to make the market less hostile, and putting a foot down and saying “no unsafe loans, period” is one heavy-handed, overbearing, ham-fisted way of doing that absent any other modifications to the status quo (which no other entity is going to make as long as they can keep making money without taking on risk).

                  2. Adeon says:

                    [quote]You're making it out like it is so blatantly clear when you look through the paperwork, exactly how much a loan is going to cost you. That is not the case”“in fact, you really have to dig into the fine print even today to be able to know exactly how much you are on the hook, even after regulations have been introduced to make the documents clearer.[/quote]

                    My experience is different. I took out a mortgage a few years ago and amongst the multitude of documents I had to sign I recall two in particular. One specified my monthly payment (including a breakdown of why it was that) and one specified exactly how much I’d be paying over the life of the mortgage (about twice the amount I was borrowing).

                    1. Abnaxis says:

                      I’m guessing you got a fixed-rate mortgage then, or you misunderstood what the documents were telling you. I got an adjustable-rate mortgage, which also gave the monthly payment and the total cost, but both numbers assumed the rate didn’t change from the initial loan period.

                      Those two numbers pretty much go out the window after the initialization period of an ARM (which the banks were pushing pre-crash). You can do some math to figure out a worst-case scenario for what you’ll be paying, but there’s ultimately no way to derive an exact amount for total loan cost or expected monthly payment over the life of the loan.

                      Out of curiosity, when exactly did you get your loan? I’m guessing it was after 2008-09, because that’s when the Mortgage Disclosure Improvement Act was implemented, requiring lenders to explicitly provide loan costs and payment information to prospective borrowers. My understanding is that, prior to that legislation, these costs could be buried in a morass of legalese and misleading interest rates, though I don’t have any personal experience to that effect.

                2. MichaelG said: “After the huge interest rate swings of the 70s and 80s, no one trusted the idea of a fixed-rate 30 year loan.”

                  Interest rate swings directly caused by the Fed manipulating the money supply. The government stepped in to fix a mess they created.

                  Oh, it’s completely true that financial institutions will make egregiously stupid errors and sink their own finances, but it’s small and localized. When you have the federal government controlling interest rates, mal-predictions inevitably become huge nationwide catastrophes.

                  The solution is ultimately to abolish the fed entirely, and leave the many institutions to determine their rates on their own. It won’t prevent some people from being bilked and losing money (nothing and no one can prevent this), but it’ll prevent EVERYONE being bilked by ONE idiot with an obscene amount of power and an equally obscene lack of accountability.

                3. Scourge says:

                  “I think in Europe the response was variable-interest rate mortgages. But here, we went with securitized mortgages.”

                  I can confirm that, if it is what I think at least.

                  You can take a debt to buy a house and then say ‘Alright. I took a debt of 80k. I will pay you 300 each month for fourty years.’

                  The bank will probably say no though as this would be quite to low but lets just go with that!

                  Bank says ‘But you just pay us the debts back, leaving us at nill. You gotta pay more.’

                  So, Joe Schmo pays 300 Bucks each month for fifty or sixty years and is then free with his place and the bank has made some money.

                  And if he dies or something else happens. Bank keeps the place and can resell it or family members can keep paying off the debt if they want it. Eitherway, the bank wins and makes money.

          2. The Nick says:

            The common problem with all this isn’t ‘buyer beware’, but that the entire system is designed to take advantage of people. Nominal APR versus virtual APR verus whatever… there’s no reason to make numbers so difficult unless you want to be able to claim ANY $$$ amount and not have the average (or above average, or the mathematically literate, or the almost-genius) person be able to figure it out on their own.

            Also, banks are the winners when you make a mistake. Housing people aren’t salesmen, in that they’re encouraged to make sales, but they’re literal crooks and conmen who are trying to convince you to get in on the game.

            Even when the banks ruined the economy, the government bailed them out. Even when they “robbed too far,” they got all their money back and more.

            It’s pretty bad when you have a system that makes the local moneysharks and their knee-breakers look like a good deal in comparison.

            Also: the reason why people always want to accuse poor people of ‘deserving’ what happens to them is the Just World Hypothesis. It feels better to believe that a person suffering must DESERVE it. That dude hit by a car? Must have done something wrong in life. Just got cancer? It must be karmic backlash for a life poorly lived. Mother lost her job? She shouldn’t have been a sinner. Etc. etc.

            The reverse, that sometimes bad things happen to good people, is a terrifying proposition that people who don’t think themselves as bad (and even if they are bad, who thinks themselves the bad guys of their own narrative) don’t want to consider, since it means that they are just as likely to suffer the same problems.

        2. “Banks with staffs of people with spreadsheets also thought housing never goes down nationwide, and invested accordingly. And got burned.”

          I saw this higher up the thread as well. This is a popular misconception, at least if we’re talking about the banks responsible for approving the mortgages. They didn’t get burned and had no particular stake in whether housing would ever go down.

          The problem here is financial deregulation and the decoupling of the approval process from end responsibility. See, in the old days, if I’m a bank or a Savings & Loan, and I lend money to someone, they owe the money to me. I have a strong interest in making sure I don’t lend to people who can’t pay me back. Hence these loan officers, whose job is supposedly to assess if people can pay their bills.

          After some laws changed, (mostly during the Clinton era but with strong bipartisan support so this isn’t a Democrat/Republican thing) banks found they had the ability to approve a bunch of mortgages, glob them together and sell them in pieces to third parties. They paid ratings agencies to rate these globs AAA, very low risk. This burned the investors, but that’s not the point. The point is, if I’m a bank and I lend money to someone, it is now some other schmuck who doesn’t get paid if the person I lent money to can’t pay it back. Banks typically no longer have any reason to care if they’re lending to solvent people. Hence the widespread abuses, NINJA loans and so on.

          As to what Shamus should do, I agree with Alan. Shamus, you didn’t take out this mortgage that long ago. Sure, twelve years, but the way mortgages work, early payments are almost entirely payments of interest, very little on principal. As principal is whittled down, gradually the interest burden per payment shrinks and you shrink the principal faster and faster. The longer term the mortgage, and the cuter the terms, generally the more early payments don’t pay a deuced thing. You probably have relatively little equity in this house. Walk away and you walk away from not that much.

          In fact, you can do one better. I follow these issues to a moderate extent, and I can tell you that banks are manipulating the markets in important ways right now, ways you can use to your advantage. The general objective is to stop property values from falling any further by keeping homes off the market so supply doesn’t glut. Because there’s a lot of potential supply.
          Basically, there are an awful lot of homeowners well behind on their mortgage payments right now. And there are an awful lot of homes that have already been foreclosed on which the banks are sitting on rather than selling. That latter is often called “shadow inventory” and the real estate business has started to take it into account. So the banks increasingly are simply delaying foreclosure, particularly in areas where the property markets are already really low. That way they don’t have to take possession and it’s not on the shadow inventory. Plus, the lower foreclosure rate gives the impression that things are improving, making investors (if not actual people) more willing to buy. If the banks foreclosed on all the houses that are way behind on payments, prices would drop like a stone again and we’d be right back to financial crisis.

          So in pure game theory terms, I’d say your best strategy would be to stay in your house and simply stop paying the mortgage (keep paying your property taxes though). Start looking for new places to live, and within reason try to make sure moving is something you can do at relatively short notice. And ignore all their threatening letters. It may well be you can go a year or more paying nothing while they avoid tossing you out because they don’t want the home on their inventory helping depress sale prices.

          If and when you do have to move, you should be able to pick a place up cheap because of that very same depressed market. Or just rent for a bit. Your credit rating will be shot to hell, but it’s going that direction anyway and this way you won’t be in much debt, especially if you use that “Not paying mortgage” breathing space to pay smaller debts off.
          If you do get a new mortgage, if it were me I’d go with a credit union next time if you can find one.

          1. Abnaxis says:

            Bear in mind, this blog post is about past, 2009 Shamus, and he’s already said that he can’t really act on any advice, because all these things happened years ago. It’s more like a play-by-play analysis of what went wrong back then.

          2. MichaelG says:

            From what I’ve read, the story goes differently. After the S&L crisis, banks didn’t want the mortgage business. If government wanted people to be able to get 30 year loans instead of ARMs (which it did), they had to loosen the rules and allow MBS. Otherwise, that loan product would have died out (and arguably, should have.)

            And yes, doing it with an MBS broke the link between the people risking the money (investors) and the people approving the loan (banks or mortgage originators.) So it’s no surprise that standards went out the window. They could have seen this coming. Standards declined for decades before the bubble hit.

            It’s not clear to me what the current state of the mortgage market is. I’ve read that the U.S. government basically has all of it, except for the really high-end loans with large downpayments. That, I think, it why we’re seeing such low interest rates. To me, it makes no sense at all to loan someone money for 30 years at 3%. You’d have to assume low inflation for decades.

            I’m not sure about inventory or prices now. What you described was definitely right a couple of years ago. Now we’re seeing price increases again. That shouldn’t happen if banks have a lot of inventory they are sitting on.

            I am surprised people aren’t selling into the rise, killing it off. Perhaps they are so underwater that the market hasn’t hit their breakeven point yet.

            1. Yeah, I realized later that I was foolish to be advising when the post is about the past and anyway Shamus asked us not to. Colour me dim.

              The S&L problems themselves derived in good part from earlier deregulations. Say, in the US are most mortgages really not adjustable rate? With the term they’re for? That’s kind of crazy, yeah. In Canada the general expectation for some time has been regular renegotiation every few years; the longer the term, the higher the rate.

              On the price increases, I’ve seen a number of articles pointing to evidence that the recent price increases are largely an artifact of careful supply constraints such as I’ve described, combined with an influx of investor-class buying, which is making up over 30% of sales. Actual home sales to people wanting to live in a home are if anything still declining in volume. This may not be maintainable for long–in effect, those investors are making a mini-bubble, but if they conclude there aren’t that many greater fools around it could end pretty quick, and real home-buyers are not taking up that slack.

          3. Purple Library Guy said: “After some laws changed, (mostly during the Clinton era but with strong bipartisan support so this isn't a Democrat/Republican thing) banks found they had the ability to approve a bunch of mortgages, glob them together and sell them in pieces to third parties.”

            Not just “third parties”. To Fannie Mae and Freddie Mac–government-funded agencies supposedly guaranteeing these loans with tax revenues. Notice that the collapse was kicked off by the collapse of these two agencies and the big financial aggregators suddenly discovering that their “guarantee” wasn’t worth the paper it was printed on.

            Yeah, the collapse could have been delayed by propping up Fannie Mae and Freddie Mac with more tax dollars, but allowing them to fail was actually the *responsible* decision, horrible as it was. If they’d held out longer, the result would have been even worse.

            Centrally-planned economies just don’t work. Nothing and nobody can plan an entire economy intelligently–all they can do is magnify small losses into GIGANTIC ones.

            1. Well, getting into answering this seriously would be well into the “politics” realm. But I would like to say that I’m aware of this line of thinking and disagree with the direction of causation it implies–that there are other narratives about what went on.

              1. Shamus says:

                See, I’m been following what you, Jennifer, and Goodfellow are saying, and I don’t disagree with any of you. In broad strokes, there’s enough blame for:

                * Government meddling.
                * Consumer ignorance.
                * People trying to run a company in a strange environment and just “going with the flow”.
                * Companies actively exploiting the system.

                Let’s say I pay you to take a really dumb risk. Let’s say I give you $100 to drive 100 miles an hour. You do, and you don’t get hurt. Other people see this, take the same risk, and also turn out ok. Then other people see the crowd driving that fast and conclude it must be safe because hey, everyone is doing it, right?

                When the 15-car pile-up of doom finally happens, who do we blame? Me, for offering the money? You, for taking the initial risk? The people who imitated you? The crowd that followed them?

                I don’t think this blame is an all-or-nothing thing. There’s a temptation to reduce a problem to a single cause. If we can just find the ONE thing that caused this, then we can avoid that one thing and we’ll be fine. But just like my buying decision had multiple causes, I don’t think we can trace events back to a single cause.

                In an ideal world, government would be run by people who understood the market they were meddling with and they wouldn’t set up incentives to take bad risks, companies would know better than to chase bad incentives, and consumers would do their homework instead of following the crowd.

                So… I agree with all of you, basically.

                1. MichaelG says:

                  You know, I don’t expect people to be brilliant. And I certainly don’t expect them to act against their short term interests. No one really knows how the future will turn out. Sometimes the best indication that something is a good idea is exactly that other people are doing it and it works.

                  I just wish, in my dream world, that we’d stop doing the things we knew were stupid at the time. If you listened to NPR Planet Money, they interviewed one person after another who knew they were doing something stupid, said it was stupid, and then saw their bank/government/company do it anyway.

                  And it wasn’t some obscure issue or technical point. The mortgage brokers coined that NINJA acronym (No Income, No Job or Assets) and laughed all the way to bankruptcy. The ratings agencies knew AIG and the other reinsurance companies couldn’t handle widespread MBS defaults. Fannie Mae had been caught restating its earnings. And on and on. Even Greenspan with his “Irrational exuberance” comment was right a decade before this all blew up.

                  So how do you get people to listen to those doubting voices, and not just go 100 miles an hour because everyone is doing it?

                2. In that ideal world of yours, Shamus, government wouldn’t be run by people being bribed by . . . ah, sorry, receiving campaign contributions in the millions from . . . companies with stakes in those markets. At that, it wouldn’t be run by people on, in effect, temporary leaves of absence from those same companies. Most of the top economic regulators came from the likes of Goldman Sachs and go back to them after a stint in government, to lavish rewards for services rendered.

                  In that ideal world, those corporations influencing government wouldn’t genuinely profit from the broader economy going south, either. But in this world, they do. What was good for General Electric may have been good for America, back in the day when GE did its production in America . . . but what’s good for Citigroup is a whole ‘nother question, ’cause finance has managed to decouple its success from that of the real economy to an amazing degree.

                  I take your point that one can look too carefully for a single cause in a complex environment. But it’s also a bit too easy to shrug one’s shoulders and say “Oh well, things are complicated so there’s no point figuring out what happened” and end up ignoring important structural features. The nature of what happened is important, particularly if it’s likely to happen again. Which in this case it is.

                  In a way, this is a macro scale version of your point about having a head for money. The next massive crisis is not going to be averted by deciding that it cannot be understood (because one finds the task of arriving at definite conclusions distasteful in some way).

                  For me, an important tool for deciding between explanations is, why at time A and not at time B? That pretty much throws out all explanations based on it being the crowd’s fault. Not as irrelevant, exactly, but as useless. Sure, maybe it was partly the crowd’s fault, but that has no explanatory power because people are always people. People didn’t suddenly get stupider or less moral, leading to a mortgage crisis. The questions for me are things like, who had what power that they didn’t before? What institutions changed? What was different about the situations people were in?

                3. In that ideal world of yours, Shamus, government wouldn’t be run by people being bribed by . . . ah, sorry, receiving campaign contributions in the millions from . . . companies with stakes in those markets. At that, it wouldn’t be run by people on, in effect, temporary leaves of absence from those same companies. Most of the top economic regulators came from the likes of Goldman Sachs and go back to them after a stint in government, to lavish rewards for services rendered.

                  In that ideal world, those corporations influencing government wouldn’t genuinely profit from the broader economy going south, either. But in this world, they do. What was good for General Electric may have been good for America, back in the day when GE did its production in America . . . but what’s good for Citigroup is a whole ‘nother question, ’cause finance has managed to decouple its success from that of the real economy to an amazing degree.

                  I take your point that one can look too carefully for a single cause in a complex environment. But it’s also a bit too easy to shrug one’s shoulders and say “Oh well, things are complicated so there’s no point figuring out what happened” and end up ignoring important structural features. The nature of what happened is important, particularly if it’s likely to happen again. Which in this case it is.

                  In a way, this is a macro scale version of your point about having a head for money. The next massive crisis is not going to be averted by deciding that it cannot be understood (because one finds the task of arriving at definite conclusions distasteful in some way).

                  For me, an important tool for deciding between explanations is, why at time A and not at time B? That pretty much throws out all explanations based on it being the crowd’s fault. Not as irrelevant, exactly, but as useless. Sure, maybe it was partly the crowd’s fault, but that has no explanatory power because people are always people. People didn’t suddenly get stupider or less moral, leading to a mortgage crisis. The questions for me are things like, who had what power that they didn’t before? What institutions changed? What was different about the situations people were in?

    2. Phantos says:

      My theory: They faked their deaths, but their new identities were exactly the same as their old ones because Shamus wasn’t feeling creative that day.

      “Oh, no, those bills aren’t for me. You want the Shamus who still haunts the Drafty House on the corner. On some nights you can still hear the lament of DRM on the wind…

      Crazy coincidence though, huh?”

      1. Syal says:

        My theory: bank robbery.

        1. MichaelG says:

          If you are going for a quick crime, I’d say arson was more appropriate. Kill the evil house and make sure it never hurts anyone again!

          1. Imposing Snail says:

            His experience with the house left a lifelong hatred of all kinds of masonry, Monaco is a true story and Shamus really is The Mole.

    3. Sabredance (MatthewH) says:

      This is from last year, but it’s an interesting read on the Bubble.

      Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis.

      The very short form is that everybody -borrowers, lenders, securitizers, investors –everybody thought housing prices would continue rising. They were well aware of what would happen if prices dropped, but vastly under-estimated that probability.

      To give one example: if prices are expected to rise for the foreseeable future, then appreciation alone can secure the loan. The borrower doesn’t need particularly good financial resources because in the event of default, they can sell the house and pay off the loan. As such, there is no reason not to loan money to poor people just starting off. Either their careers will advance, and they repay the loan, or they use the appreciation from the house to repay the loan. Everybody wins, regardless.

    4. Simon Buchan says:

      So my understanding of ^^^ all that is that nobody anywhere knows what the heck they’re doing, but only the scientists ever admit it?

      1. 4th Dimension says:

        I also heard part of the problem was economic scientist wouldn’t admit anything was wrong with their models.

        1. Jeff says:

          Since when do we have “economic scientists”?

          (I’m a guy with a B.A. in Economics and a B.Sci. in Math.)

  2. Nick says:

    As someone who only got onto the property market in 2012, I feel for you. House prices around here (South of United Kingdom) have been relatively unaffected by the property crash as we haven’t had it as bad as in American and there’s a lot of demand to live in the South as compared to the North, but it was still a confusing mess to actually get done, and I dread to think what would have happened if I’d had to sell a house as well as buy one.

  3. KremlinLaptop says:

    Right.

    http://youtu.be/SCTKD–_lu8

    That’s some Labrador puppies playing in a yard. Just because that ending require a unicorn chaser.

    Also cars are a horrible money pit that will eat you up alive. Says the man who owns nearly a dozen cars at the moment and the only ones which work are his pick-up and one old American beast. It’s so much worse when it’s a hobby — you get this idea that you can buy anything, no matter how cheap and ratty, and keep it running. And I can. It’s just that it eats you up from the inside and nestles into your newly carved out chest cavity to make a nest of hatred and eternally running expenses.

    “I can weld that. I can change that. I can hammer panels. I know how to re-do brake lines. Changing the diff is an easy job. Oh, the dumbass who owned this before me tried to do that and stripped all the bolts… also is that fuel line leaking? Great.”

    And I guess it MIGHT work if I could just stick to one car and I bought sensible cars like just a teetering pile of W123 Mercs or something. But no! I see some old American piece of crap in the 3000€ range? Buyin’ it. Pick-up? Old GMC.

    …Nothing is as fickle as the Citroen SM, though. It’s like some little Italian man pissed hate into the engine while building it knowing that I would have to hunt down obscure little parts to make it work … and the rest of it which is French doesn’t help much either. (If it was RWD I would just throw one of the SBCs I have laying around into it and live with the fact that any Citroen fan would have to burn me on sight.)

    TLDR: Cars are a horrible hobby, especially if you think you’ll save money by doing things yourself.

    1. Dave B. says:

      A few years ago I bought a ’75 Dart, with the idea that it would be easier to work on than a modern car where everything is computerized and crammed into a tiny engine compartment. Plus it’s a classic, so that’s cool too. Well, everything was great except that the windshield leaked and the floor has rust holes, part of the windshield wiper assembly was missing, the engine runs poorly, the instrument backlights were all burned out, the gas tank had a leak, the cruise control linkage cable is missing, the headlights were disconnected, and the radio didn’t work. Fixing a car like that is an endless well of trouble where fixing one problem only reveals the next…

      1. KremlinLaptop says:

        Oh man, Darts are cool. Two door? Slant-six or LA V8? I’ve never even seen a big-block Dart, much less one of the S/S variants.

        Er, but, yeah. That’s Project Car Hell for you — especially bad on a daily driver. Daily driving an old American barge for a few years made me truly appreciate things like fuel injection and electrical ignition. Most common sight at the office parking lot in December when I drove that car? Me waist deep in the engine compartment of a Chevy Impala trying to determine WHY IT WON’T START. Again.

        That’s where I figured out why Dad had given up his big American car for a reliable little Datsun back in the late 70s (until Finnish winters turned it to rust).

        1. Dave B. says:

          It’s a four-door, with a 225 cubic inch slant-6. And, yeah, it seems like I’ll never be done fixing it, but for all its problems it is still in pretty good shape. The body is in fantastic condition with almost no rust except for the floor. It isn’t my daily driver any more, mostly to protect it from the salt that covers the roads every winter.

    2. MichaelG says:

      At the other extreme, I had a 1982 Toyota Celica as my second car. I knew so little about cars that I never even changed the oil. Some gas station guy offered to check it for me, and came back with a look on his face. “There’s no oil at all on the stick. You are driving with no oil in the engine!” Clueless, I said “well, put some in then!”

      The car ran perfectly for 11 years with absolutely no maintenance. Just put gas in it.

      1. Rob Maguire says:

        Toyotas seem to be extremely reliable. My father is crazy about them – nearly every car he’s bought in the last 20-odd years has been a Toyota, and I can’t remember any of them ever breaking down or having serious problems.

        Just recently his spare Avalon was left unused (which I gather is rather hard on cars) outside for most of a year. Aside from having to replace some rusted brakes, it ran perfectly after all that time.

        1. MetalSeagull says:

          I drive an Avalon I bought from my cousin. I knew it wouldn’t have been terribly abused, but it was 10 years old and had 90,000 miles on it. It’s now 18 years old and 170,000 miles and has never needed a major repair. I drove a Camry before that one that started needing more and more frequent repairs at 16 years. Still a pretty good run, though.

    3. Heh, Kremlin, this post made me laugh.

      But, yeah, it’s been my personal experience that (in America) cars, houses, and student loans are financial pits into which the unwary had best not venture. NO, there’s NOTHING WRONG with living with your parents into your 40’s assuming you can stand each other. Or living in an efficiency apartment and biking to work. Or a trailer park, if that’s what you can afford. It is a LOT better than finding yourself neck-deep in debt with no option but to keep this shit job you hate because you cannot afford the costs of a transition.

      I ought to get together with Shamus and write a book of financial advice for youngsters just starting out–I’ve been through much the same experience.

      1. X2-Eliah says:

        I suspect that America is just a big massive MMORPG game. And this housing and cars are the dedicated money sinks used to keep the game economy from hyperinflating.

        As for financial advice – yes, that book should be written. Because, frankly, unless one’s parents teach all this stuff, then there’s barely any info out there.

        1. Victor says:

          That would be a great book. An I find it interesting that something along these lines isn’t around already. But yes, I would definitely read it.

  4. Hal says:

    “Doofenshmirtz device”

    Okay, I had to look that one up. If you’re like me and had no idea what that meant, Dr. Heinz Doofenshmirtz is a character from Phineas and Ferb and he’s the consummate bumbling/evil scientist.

    The more you know.

    1. Adam says:

      Shamus made me so happy with that reference. So, so happy.

      1. krellen says:

        Likewise.

        But aren’t we a little old to be watching Phineas and Ferb?

          1. DaveMc says:

            Ah, a quotation from one of my favourite episodes, “Flop Starz”.

            SWARMY AGENT GUY: Aren’t you a little young to be pop stars?
            PHINEAS [absolutely deadpan]: No.

            (For the uninitiated, the joke relies on dozens of previous episodes where the question is “Aren’t you a little young to [X]?” (e.g. “be building a nuclear submarine” or “explore for Atlantis”, and the answer is generally “Yes, yes we are.” — except when they subvert it in some way.)

            I love this show. The kids are just an excuse, I actually love it my forty-plus-year-old self. Consistently whip-smart comedy.

        1. Dave B. says:

          I have so little time to watch it though. I need to build a machine to watch it for me, and call it something catchy…like a Phineas and Ferb Watch-inator!

          1. krellen says:

            You have now made my day twice, Shamus.

            1. MelTorefas says:

              It seems some people didn’t get the joke there, but high fives to both of you. *huge fan of the show*

          2. SKD says:

            No. No you are not.

            That show is one of the most intelligently written children’s shows I have ever seen. Unfortunately, me and my stepmother spend more time watching it than my niece (only member of the next gen so far).

  5. Thomas says:

    ‘ I have no idea how to solve this problem.’

    That’s in-character right? We’re still in 2008?

    1. KremlinLaptop says:

      I’m hoping there’s “Part 5: How I Fixed Everything like a Boss and Supermodels Flocked to me Due to my Awesome Money Skills (Who I told to bugger off ’cause I’m happily married)” bit of a long title but it should fit.

      1. Hal says:

        I hope that’s the title of his next book. I’d totally read that.

      2. Thomas says:

        ‘Who I told to bugger off 'cause I'm happily married’

        Glad you had that bit, because I was about to say, did you see the adorable pictures of family and kids (plus those straws. I’m jealous of those straws, drinking 4 drinks at the same time? Sign me up). The dude is sorted

        1. Hieronymus says:

          I don’t see any tint to The Straw Deviceâ„¢ at any point where you would expect the darker liquids to flow, so I think they’re blowing bubbles.

    2. Deadpool says:

      No. Weren’t you paying attention?!?

      We’re in 2009 ;)

    3. Oh, right, I hadn’t thought of that. And now I’m remembering that he specified earlier in the series that he didn’t want advice. And I just blorbled out a huge stack. Now I feel like a doofus.

  6. Drifter says:

    You left us on quite a cliff hanger. I bet Bernanke saved the day – i.e., you stayed in the house and refinanced to create some budget cushion.

    In any case, I look forward to hearing the rest of the story, thanks for sharing this.

    I am a little surprised that a 2001 purchase would be under water, but I suppose as you say it depends on the area.

    Only by sheer luck was I not in the house purchasing game in the 2000’s. I bought in the 80’s and had not moved since then when the real estate disaster struck, so I was Ok. But that was certainly not by design on my part. I recently sold my 1930’s home. Looking back, it was also the wrong decision. I got a lot of enjoyment out of it, but from a pure financial view it was a terrible thing to do as it required so much money on repairs and improvements. Most people don’t have a clue as to what a house REALLY costs.

    It kills me when I see these HGTV shows with people who can only buy if their closing costs are covered because they have no extra cash. So, what happens when the faucet needs to be replaced and it’s $300 for a mediocre faucet and $200 for a plumber to install? And that’s just for starters.

    1. Hal says:

      Man, my wife loves watching “Income Property” on HGTV, and it just boggles my mind. Who are these people? Every week it’s another couple who can afford to put down $500k+ on a second/third/umpteenth house and turn it into a rental property.

      1. Yeah, I’m always wondering where they find them all.

      2. X2-Eliah says:

        “Who are these people?” – the leeches of the society that create nothing, but exploit people for their own benefit. The true parasites among humanity.

        What? I’m not bitter at all.

      3. harborpirate says:

        Or “House Hunters International”. I get trapped watching that on occasion.

        One in particular stands out: a couple that decides to move internationally (something like Amsterdam or Copenhagen) because “it’ll be a great experience for the kids”. They’re in their 30s, and they need to keep their house price at half a million or something. I guess maybe the guy has some kind of cushy consulting gig where he flies all the time or something? Because otherwise I’m having a hard time figuring out what kind of job pays huge and lets you just up and move to some random place any time you like.

        All I can think is: You dumbass. You have young children. They don’t want to move to Europe. They won’t give a crap about Europe until they’re like 17 and itching to get out of your house and go spend your money bumming around in hostels, partaking of illegal substances, and shagging. You gave them the “gift” of being a complete outsider, who probably doesn’t speak the local language, and who now doesn’t have any friends. Yeah, great move for your kids.

        See also: episodes where people buy islands, episodes where a 20 something OhMacGod girl buys some tropical island resort condo, young people buying a vacation property in Hawaii or Fiji or some other far flung place, and so huge that it makes my reasonable house look like a mudhole.

        Where the hell do they find these people?

    2. Asimech says:

      I have never owned a house, but it wasn’t very surprising for me to learn that one of the mistakes that newly rich lottery winners do is buy a house that’s way beyond their ability to pay for it. And usually bigger than they need to boot.

      And it’s simply because they’re blinded by the amount of money and don’t consider the yearly costs of maintenance and heating.

      This would be in Finland, by the way.

      1. Hitchmeister says:

        You reminded me of the first multi-million dollar jackpot winner in the Georgia (US) lottery. Their quote upon winning about what they intended to do: “Gonna buy us a double-wide and move to Alabama.”

        Clarification for non-US residents, who may not be familiar with the term “double-wide.” That’s a mobile home that’s built in a factory and hauled trailer-style to it’s eventual location, except in this case it’s built in two halves which are parked next to each other and stitched together on site. Then in the more upscale trailer parks (Manufactured Housing Communities) the wheels are taken off.

        At least in this case the new millionaire should have had little trouble keeping up the payments. (At least until the tornadoes which are invariably attracted to this style of home.)

  7. Athan says:

    Re: “If you've never lived paycheck-to-paycheck”, particularly point 3. I have some advice for anyone who might be already in this situation or generally doesn’t think they’re very good with money. I offer this in no way as a “haha, Shamus, you fool, here’s what you should have done!”, but as a genuine offer of advice to anyone in this sort of situation. And I say this as someone who’s been living on state handouts since 2001 due to mental health issues, I am utterly medically incapable of even entertaining the thought of starting to try to look for work, let alone holding down a job. At one point I was budgeting down the almost literally to the last penny in my bank account.

    Download and install GNUCash (yes, it’s available for Windows and OS X as well as Linux) and get in the habit of reconciling it at least once a week. This is made easier with on-line banking access, but should still be perfectly possible just keeping track with receipts.

    Now note the main reason I recommend this is the ability to set up recurring items, so all of those regular bills won’t be forgotten. Also, that cheque (yes, I’m from the UK) for £100 (see?) you ‘forgot’ about. Well that you enter as soon as you write it, with a reasonable guess at when it will be cashed for the date. But then every time that comes up as un-cashed but “now in the past” in your weekly GNUCash updating you bump it to another week later. So it’s always there, taken into account for the next week’s expenses.

    If you have some variable cost bills then you enter a reasonably, highballing it a little, guess in the scheduler. The point is to err on the side of thinking things will be more expensive, rather than less.

    And of course if you do all of this then you have a solid record of where the money actually did go so you can perhaps more effectively target the best place to make savings.

    1. Asimech says:

      I think I’ll check GNUCash. It would be nice to have a perspective on how much I might actually have at the end of a month beforehand so I’ll avoid optimistic purchases.

    2. Noumenon72 says:

      I also like how Money/Gnucash gives you sort of a diary of your spending. Like “Where did I buy that?” “How long have I had this computer?” “What did my last car insurance cost?”

      Also, I just like watching the net worth go up like it was my high score.

    3. MichaelG says:

      What you really need to do to avoid the overdraft cycle is pretend the last $500 of your money does not exist. Keep that in the account and treat a $500 balance as zero.

      1. Abnaxis says:

        Respectfully, Athan (and Shamus) are talking about situations where that isn’t possible.

        While I have never had my own personal finances in that state, I grew up in a household where we didn’t get to keep a buffer like that, because on any given month there’s an even-odds chance there was at least one organization that wasn’t getting a payment from us. My aunt would call them to rearrange, we would make sacrifices elsewhere, we would wheel and deal to scrape by just the skin of our teeth. That type of accounting doesn’t leave room to have $500 just sitting in an account not doing anything. That’s a month of groceries right there. That means you get to eat and don’t have to get the water shut off to do it.

        1. MichaelG says:

          Sorry, but I disagree. You get the $500 loan from a relative or friend and you never touch it. It’s there just to prevent overdrafts when your checks and deposits cross in the mail. If you aren’t writing big checks, even less will do. It’s ridiculous to let the banks rip you off like that.

          1. Abnaxis says:

            True, it is ridiculous. But we are talking about priorities here. These priorities usually run:

            1) Anything you need to keep your job. If your car breaks down and you need it to drive to work, everything else takes second seat.

            2) Any supplies you cannot do without. Medicine if you have a condition, just enough food for sustenance (Ramen and hot dogs). Yes, these things get dropped (or rather, obtained from alternative sources) if you have to sacrifice them to obtain the #1 priority.

            3) Anything that will land you in court if you don’t pay. Child support, speeding tickets, mortgages if the bank is getting antsy.

            4) Any utility you can afford to live without, but the health department will evict you if they find out. Water and sewage fit here.

            5) Any utility you can afford to live without, but will charge you to turn it back on.

            6) Some more basic “necessities.” Food that costs more than 20 cents a plate, critical dental and medical visits that have been languishing. Phone and internet service, so you can reestablish contact with the outside world.

            7) Sanity necessities. Some sort of entertainment and release from the drudgery of being poor.

            From month to month, the costs of living will fluctuate. As they do, you eliminate costs, working your way from #6 down to #1, and manage without anything you can’t afford. Now, I would rate a $500 buffer somewhere about #5 on that list, and once it’s gone, it’s gone. As I said before, when it comes down to a choice between that $500 pad and keeping the lights on, the pad doesn’t have much chance. If I can bum money off of a relative or a friend, that money is going toward something with more utility than a number on an account book eventually.

            1. MichaelG says:

              But the background assumption here is that there’s nothing in your life you can do without. No way that you can pry loose that $500, even if you had a year to do it in. I understand people don’t like to cut back on their lifestyle. This kind of thing is the price for not doing that.

              It used to be you could get overdraft protection on checking accounts, but perhaps that’s all gone. High interest rates meant the bank could give you all kinds of goodies along with your checking account, and just not pay you much interest. Now that interest rates are low, there’s no easy way to pay for those services.

              1. Deadpool says:

                It sounds logical, and reasonable, and wonderful and… As someone who has gone hungry so I could afford the gas needed to go to a job interview I gotta tell you: Doesn’t always work out.

                1. CraigM says:

                  ^^^^ THIS!

                  I’ve been there. It sucks. If you’ve never personally experienced the pure terror, stress, and gut wrenching desperation of such a situation it might seem impossible, but it is true.

                  Having been there I know how it feels. I used the last $40 I had in my bank account to buy groceries (which I made last 2 months) before I sent in a rent check late, that I knew would overdraw my account, then refusing to go anywhere I couldn’t bike to because I had half a tank of gas in my car that I would only use to drive to and from interviews.

                  This is the reality of someone who got screwed. Who lived within their means, who had a good savings built up, and rented a small apartment. Shit happens. Regardless of Michaels arguments merits, there is a lack of compassion that I disagree with. True people should plan carefully, but compassion to people who did, and still lost out is beyond a courtesy, it is essential.

                  That’s the crux here, no plan survives first contact with the enemy. Michaels advice is largely valid. The problem is that there is no flexibility or understanding that it can, and will, simply fail many people through no fault of their own.

              2. Abnaxis says:

                But the background assumption here is that there's nothing in your life you can do without. No way that you can pry loose that $500, even if you had a year to do it in.

                That’s kinda the explicit definition of “living paycheck to paycheck.”

              3. Jan says:

                The fact that there is such a thing as overdraft or that checks (with the above mentioned problem of having a unpredictable cashdate) is an indicator that the US financial system is horribly outdated. After moving to the US from Europe, I was aghast how antiquated the banking system here seemed to be. Transferring money from a bank account to an account on another bank was way more involved, paying bills automatically is cumbersome (and sometimes not possible, or involves hacks like sending out checks automatically), and the whole fact that checks are still in use boggles the mind.

                The whole mortgage thing is just as bad in my home country though, perhaps even worse, thanks to the proliferation of interest-only mortgages. Way to go when the housing prices go down…

                1. DP says:

                  Here’s how my rent gets by paid automatically in America: Each month a computer at my bank prints a check in my name and has it mailed it to my landlord. My landlord collects all of his checks and takes them to his bank. His bank then scans the checks and sends pictures of the checks to a server for processing. The server then runs the pictures through optical character recognition (presumably easy because most of the checks where printed by machine) and actually then sorts out the transaction with my bank’s computer.

                  And in Australia: every fortnight my bank transfers money from my account to my landlord’s bank. Cheques are things your parents used to write.

        2. Abnaxis — you are right. People do not understand what it means to live on the edge financially.

          It is interesting to see all the posts that just do not get it.

      2. Jarenth says:

        Amusingly, that’s more or less the plan I figured out for myself not this week.

    4. Matt K says:

      Another thing to remember is that sometime an overdraft charge can be removed. I had this happen a few times (until I started using a spreadsheet to keep track of my checking account) since I keep most of my money in a savings account. If you go down to the bank and it’s your first overdraft or even if its some sort of cascade failure, you can ask the teller about possibly removing the charge and sometimes they will. Also, my bank at least was only charging ~$10 for overdraft so it pays to look at that when picking a bank.

    5. Peter H. Coffin says:

      How do you schedule the dentist expense of a broken tooth, the emergency appendectomy, the transmission the Mitsubishi needs in order to maintain the paycheck you’re living each from each? Bear in mind that “Well, just save $300 from every pay period to build up a buffer of cash” is the actual definition of “not living paycheck-to-paycheck”….

      1. Athan says:

        Yeah unpredicted expenses will still bite you firmly in the ass…

        … but you can at least attempt to ameliorate that by taking advantage of easier planning by squirrelling away whatever spare money you can. If I have anything left in my current(checking in USAian) account when the next money comes in I transfer it to savings. Some months there’s £2.03 and I’ll leave it where it in the current account. Other months the non-matching (some monthly, some every 4 weeks, others fortnightly) periods of things, or other factors, will mean I can transfer £50 into savings safely. I might have to pull it out again a month or two later when the periods match up less favourably, but maybe it earned a tiny bit of interest in the meantime.

        At risk of bringing politics into this, I also live in the UK where we do still currently have a working NHS, including basic dental stuff being free for someone in my situation. I can see it being more difficult in countries with fewer or worse social programs.

      2. Yes — Peter gets it. I buried three children in five years. I still remember the guy who called up and badgered my wife about not planning better, when the third, unexpected (and unrelated death) finally broke through the reserves and buffer we had accumulated.

        Sometimes you just can not plan well enough. You just can’t.

  8. Drifter says:

    Is it just me ? I can’t see the pictures. I assume it’s just me and the latest version of Internet Explorer not working again.

    1. swenson says:

      I can’t either, but I’m at work and the filter might be eating them for some odd reason. (IE8, by the way.)

    2. SteveDJ says:

      NO pictures for me, either. IE10, on Windows 8 (yea, I know, that’s a recipe for disaster in itself) :-)

      But, I opened up Chrome, and pictures showed up just fine.

      I thought Shamus was tinkering with the website recently, so that is probably the cause… :-)

    3. Lord Nyax says:

      I can’t see the pictures either, running the latest IE.

    4. Tony says:

      Also on IE 10 and can’t see pictures. It’s a problem with the image properties. The width property says:

      width=’ width=”600″

  9. Brad says:

    I feel for ya Shamus, the true “rock and a hard place” if ever there was one.

    Granted we’re talking about stuff that 3-4 years ago so it’s history, and as you’ve said you’re fine financially now (oh, and you’re somewhat older and more experienced than I), so this may be superfluous, but I guess a couple of pieces of advice for people who read the blog:

    1) Buy new cars, not used. You may have to sacrifice on size/features, whatever, but you can buy new sub-compacts or small sedans from companies like Hyundai (or maybe kia, their reliability has improved substantially since the 90s) for pretty cheap and get something more reliable (and covered under warranty!) than you’d get buying used, because you just NEVER know what you’re going to get. Granted, this is coming from someone who has the worst luck with used vehicles: I’ve replaced more transmissions and head-gaskets and everything else than you can imagine, so take that as you will. In my experience, it’s just not worth the risk. If anything goes wrong a with a new vehicle, you make it the dealer’s problem, not yours.

    2) When buying your first house, take that number the loan agent gives you and reduce it by a quarter, or some other significant number, if you can. They’re just not realistic. Plus, it’s in the Real Estate Agent’s best interest to sell you the highest cost property they can to get a bigger commission. They will show you things right at or above your spending limit before they take you to the ones you can actually afford so they look crappier by comparison. Do the research, and look for homes that maybe the agent wasn’t planning on taking you to, but you’re interested in, because it’s possible they don’t want you to buy that house because they make less money.

    IDK, just a few things I’ve learned after a lot of cars and a few houses. Hopefully, it helps someone out someday! :)

    1. bloodsquirrel says:

      A quarter? No, no, no…

      Figure out what you need, figure out what you can afford, then reconcile the two as necessary. Use that as your basis, not a number given to you by a loan officer.

      1. MichaelG says:

        No, no. Buy as small a house as you can stand. It’s just a box to keep all your stuff in, not an investment.

        1. Epopisces says:

          Which is perfect, because all I can afford is a large cardboard box!

          It’s difficult to own a home when ‘a career’ is more and more coming to mean ‘moving from one job to another 4 to 5 (to 20) times in your life’, and the kids just move out anyway–it’s not even an asset most would hang on to instead of just selling when they inherit.

    2. Neil D says:

      Yes, my wife and I did that when we bought our first house together — we took the number they gave us, subtracted $100K off the top, and considered that our absolutely top-end number. We wound up with a place that we both love (could have a little more storage space, but really that just keeps us from accumulating a lot of crap), and we don’t have to deny ourselves the little pleasures or purchases.

      I think I was fortunate that I was the last of my friends to get married and buy a house. I saw all them go practically overnight from us always going out to dinner, movies, etc., to them suddenly not being able to do anything because they didn’t have even $20 to spare. That situation has improved for them over the years, but it made a very strong impression on me at the time and so I made sure that we did not wind up living that way (at least not yet… I fear what a kid or two might do to us, if that should happen).

      1. rayen says:

        the thing to understand about children is this. If you are living comfortably within your means a child isn’t going to screw that up to much. Especially after the first two years when you aren’t going to be buying things specifically for toddlers. No, if your money is good your money will be good. people with kids don’t go out not because of money, it’s because children are a worse time sink than WoW. you simply cannot leave them alone. First it’s illegal (sorta), second children left to their own devices are incredibly destructive. there are walls that will be colored and stuff that will be broke.

        Example; i had a call of nature, 5 minute bathroom break if that, when i left my youngest son (2 at the time), watching TV. when i returned he had pulled a chair to the shelf where we keep our DVDs. He needed the chair because the DVDs are up high specifically so he can’t get to them. He had already gotten through one shelf and was working on the second of three, opening every DVD case throwing the disc on the floor in one direction and the case in another. I am still short DVDs and cases.

        1. Peter H. Coffin says:

          Never had to buy groceries for a teenager, much less many of them, have you? The idea that the second child doesn’t really add much expense to that of the first just doesn’t bear up except for the period between having the birthing bills paid and the starts school.

        2. Dunno where you’re from, but where I’m from daycare for young (1-3 or so) children is in the $1800/month range. A bit less further out in the suburbs.
          That can take you from “your money is good” to “your money is deeply inadequate” pretty dashed quick before you even get into diapers clothes and whatnot.

          1. Sabredance (MatthewH) says:

            Was actually just reading something on this. You will occasionally hear the $1.1m to raise a child through college. Around $800k of that is foregone wages, another $200k is regular expenses, and the balance is college tuition.

            So, the marginal cost is around $10k/year, plus college savings.

            Additional children are comparatively cheap because you can only forego wages once.

    3. KremlinLaptop says:

      1) I TAKE ISSUE WITH THIS ONE.

      You can… save, err– Save, you know, money? Yeah, by buying used and doing-it-yourself. Probably.

      Oh alright, my post up there pretty much points out how buying used and doing it yourself is also a horrible idea and this comes from a man who does it regularly.

      However, if you insist on buying a used car? Buy something old enough that it’s simple as a screen-door to fix and common enough that you can still find parts for it. In Europe that would mean this: http://en.wikipedia.org/wiki/Mercedes-Benz_W123

      Old as sin but incredibly easy to keep running. Also the 2.0L diesel variant is frugal (AND SLOW). You can still get spare-parts for it basically off the shelf and at laughably low prices. (They built 2,3 million of the four-door variant.)

      Personally I shy away from everything electronic in new and old cars. That is what will eventually cost you as many arms and legs as you have to spare. ALSO? If you must take it a shop and it’s out of warranty? Find a reliable local mechanic for the stuff you can’t do yourself. Easily half the price and the same quality of work (or you get screwed over).

      I hate cars– Oooh, that ’56 Buick for sale looks interesting…

      1. 4th Dimension says:

        It’s Golfs here in ex-Yu that loose least in price and especially for older series 1-2 and maybe 3 parts are abundant. Also this probably is valid for Fiats since Fiat sold licenses to some factories to produce their cars. Zastava (the manufacturer of infamous Yugo (basically re skinned Fiat)) from Serbia was one and it’s ex workers are building parts that they made while employed.

        Second problem is that in some countries like mine (Montenegro) in most cases you simply can not afford a good (reliable, fuel efficient and something that our hammer mechanics can repair) new car, so in most case you have to buy a used one.

    4. swenson says:

      Don’t buy new cars, buy cars with salvage titles and have a dad who’s an excellent mechanic.

      The difficulty with this one is that if you don’t really know cars, you can’t tell by looking at a particular wreck if it’s something fixable or just not worth it… and this only works if you can fix it yourself. If you have to pay to have it fixed, the cost is just going to be too high.

      But if you can swing it right, you end up with a nice car only a few years old, about a thousand in parts (go to junkyards, DO NOT buy them new) for maybe $6-8k total, and there you go. You can’t sell them for much (people do NOT like salvage titles), but if you drive them for fifteen years, you’re probably not going to be able to sell them for much anyway.

      1. Peter H. Coffin says:

        And if his father-in-law was a building contractor, then having a house wouldn’t be nearly as much of a money-pit. Sadly, my old man sold specialty papers, so I would have been all set if I needed something to wrap photographic film with, or line potato chip cans, but right out of luck with regard to anything that didn’t require a fabrication plant to use.

    5. Nick Lester Bell says:

      Your #1 point is interesting. My general advice is to NEVER buy a new car. They lose a significant chunk of their value immediately upon buying them. It is similar to buying a new house when you KNOW the housing bubble is about to burst.

      My advice is to always buy used, but to be selective about it. In particular, focus on cars coming off leases. These cars are usually 2-4 years old, have had single owners, and low mileage. Their prior owners kept the car in good condition and with regular maintenance, as required by their lease. It also gives time for any regular problems with a particular years car to come to the surface, something a new car can’t reveal. It has been an good method for me over the years.

      1. Austin Middleton says:

        Unless I’m mistaken about new cars, the original buyer can’t transfer the dealer warrantee to someone else. That warrantee represents a reduction in maintenance costs and service coverage. Secondary buyers cannot enjoy this benefit because the dealer offers the contract to the buyer and not the car.

        When you buy a new car, you’re buying two things: the car, and the warrantee. As soon as you drive it off the lot, the value of the car doesn’t drop by half; the value of the car doesn’t drop at all: it is the value of the service plan that you cannot transfer which drops to price $0.

        So you pay $25,000 for a new car. That represents $15k of car and $10 of service that *only you* can take advantage of. A month later some guy pays you $15k for the car.

        I could be wrong about this, but I’m fairly certain this is why cars allegedly depreciate so quickly off the lot.

        1. Daimbert says:

          My previous vehicle I bought used while it was still under the factory warranty. The warranty was transferred with the car, so I still had the warranty for a few months. On this vehicle, which I bought new, that was the understanding as well; the warranty belongs to the car, not the owner.

      2. Torsten says:

        Pretty much this, although one thing with lease cars is that they tend to get a lot of mileage in short time because they are mostly used by companies or people who have to drive because of their work.

        Also the basic maintenance and regular inspections can work wonders in keeping a car running. Sure the annual check is 200€ but it can save you from the 2000€ repairs.

      3. Mistwraithe says:

        Don’t ever buy a new car if money is tight!

        If you want a newish car and want to avoid repair bills then at the most buy an ex-demo or perhaps 1 year old used car. You still get most of the warranty, you still get a reliable car, but you save up to half the purchase price of the car for a minimal increase in potential repair costs. You can even buy extended warranties if you must to give you longer before you might need to pay for repairs (on average you will lose money on this like any other insurance but if you really can’t afford a big repair then it is a reasonable idea).

      4. Brad says:

        The thing is, a car is NEVER an investment. At least never a good one (unless you’re talking about classic cars I suppose). The value is always going down. Whether you buy a new, lightly used, or heavily used vehicle, you’re always losing money year over year thanks to depreciation.

        Now, this is just my opinion, but if you’re looking at buying a car as an investment, you’re doing it wrong, because you will always lose in the end. You might lose less than if say, you bought new, but you still lose.

        Plus, that hit in value of a new vehicle only really affects you if you’re planning on selling that new vehicle in the first 3-5 years. After that, the market normalizes the prices so it isn’t relevant anymore. And if you’re the type of person who is looking to get a new vehicle every 3-5 years, you shouldn’t be buying anyway, you should be leasing.

        1. Nick Lester Bell says:

          I did not mean to imply that a car is an investment. That comment was about the fact that the value of a car generally drops faster than the worth of the car in the first few years. Assuming a car is well taken care of (which a leased car generally is), you get “more car” per dollar in a slightly used car.

          For example, assume well-maintained car will last 15 years. A brand new car costs $20,000 – that works out to every year costing $1,333. In my experience, an off-lease car 3 years later is worth about half (obviously dependant on mileage and such). At $10,000, the remaining 12 years of use only cost $833 per year, 63% of buying new.

    6. This is what my family does with cars (and most other things). Do a massive amount of research (3 months for my first new car), paying particular attention to durability. Buy the best you can afford and take as much care of it as you possibly can. Find a damn good (and honest)repairperson (worth their weight in gold) if possible, and keep that thing till a) it breaks beyond repair or b) insurance totals it for the 3rd time.
      We bought cars in 84 and 85 (volvos) and they lasted until 2002 and 2003. One was totaled (when a car’s worth less than 500, not hard to do that) and the other was sold as is (with major starting problems). Now we’ve got a 2002 cr-v (mine) and a 2004 forester (mom’s), and will be driving those into the ground if at all possible. It helps that neither of us drive that much (damn economy and my very poor mental health), so neither car is over 100k in miles (mine’s closest at 93k).
      This philosophy might also explain why we still use a wood grain TV. If it isn’t broke, or you don’t HAVE to replace it, don’t.
      As for houses, I have no clue. I’ve lived my entire life (except college) in the same house, and am still there. Sure, it’s not always the greatest thing to live with your mom (especially when you can’t have people over, ever), but I console myself with the facts that a)she can’t live alone anymore and b) I couldn’t afford to live where I do otherwise.

      1. MelTorefas says:

        As a high functioning autistic I can relate to your post, there. I actually cannot stand living with other people, but I recently had to move back in with my folks for a few months to get some serious (IE requiring multiple surgeries) health stuff taken care of. Thankfully that time is coming to an end and I will soon have my own space again, but I know the value of having family member support when your only income is welfare because you can’t work.

    7. BuyCars-UsedRental says:

      Actually, my family has had very good luck buying used cars from rental companies. Rental companies do regular maintenance with actual mechanics, and the cars get checked reguarly. We’ve done this twice and both cars are still ticking – one’s nearly old enough to drink, and the other’s creeping up on the voting age. We’ve had a few problems, including some expensive ones, but nothing like the constant issues some people have with used cars.

      I would definitely avoid buying a used card from the classifieds, you never now what you’re getting.

  10. Jack V says:

    That was really moving :( Thank you for talking about it.

    I was recently cataloguing the ways I’ve fucked up my life, but I fortunately didn’t do anything while having three other people depending on me. I’m very familiar with that tone of confession, that yes, if you’d _thought_ about it, you might have said “no, we don’t have to spend all the money we have”, but you don’t normally _realise_ what assumptions you’re not questioning.

    And the description of living paycheck to paycheck like walking along the edge of a cliff was really good. Everyone makes mistakes, usually quite a lot of mistakes, but it doesn’t matter. But if you’re stuck in a situation when any mistake is a disaster, it’s easy for people to say “she/he ruined her/his life by making a stupid mistake”, ignoring that lots of people make similar mistakes, but only those forced to the cliff edge suffer for them.

    1. MelTorefas says:

      “you don't normally _realise_ what assumptions you're not questioning” -This is the big thing, really. You don’t know what you don’t know. If you don’t know you don’t know something, you can’t educate yourself (or even know that you need to). You can research something and never find all the salient points, and end up making a bad decision due to elements you didn’t even know existed. And there isn’t an easy solution for that.

  11. kmc says:

    *gasp* That’s a carpet? Looks more like a curse. Reminds me of some wallpaper in the house I grew up in.

    Second, true story. When I moved here, I was by myself making a good salary, so I bought a very small house. Met husband, got married, he moved in, and I got pregnant. We had been planning to stay but as soon as we actually evaluated the place, we realized it was way too small for us, the pets (4 by this point) and a baby if we weren’t going to store some subset of us by cables from the ceiling. So we had my small mortgage, but when we applied for a loan, we discovered that husband’s previous house with his ex-wife was still on his credit, even though she got it in the divorce–and the mortgage on that was more than three times the mortgage of our current house. So when the bank approved our loan, guess how much they approved it for? That’s right, they *still* approved it for nearly twice what we’d already calculated we could afford based on our salaries and fairly reserved expenditures. The lesson to learn, for anybody who intends to ever buy a house, is, the bank is absolutely going to approve you for way more than you should spend, and ABSOLUTELY NOBODY will tell you this. Fortunately, we were both pretty well established and had a fair amount of common sense about the whole matter, it having been just after the bubble burst and we saw lots of loved ones lose homes (including my afore-mentioned childhood home with the horrible wallpaper). I’d gotten some good advice a few years before that a good guideline is to look in the range of your yearly salary. You’ll probably have to go up some, but that’s a nice conservative estimate.

    1. Peter H. Coffin says:

      I think that’s the floor UNDER the carpet. The big roll in the background looks a lot like carpet to me. It looks like they’re at the “scraping old adhesive off the previous 1960s vinyl floor tiles” stage.

      1. Abnaxis says:

        OHHHHHH! That was driving me crazy–I just kept looking at it, thinking “Boy, that’s some shiny carpet…”

        1. Jeff says:

          I was thinking “Wait, is that really a roll of puke-green carpet?”

  12. andy_k says:

    Hi Shamus, you write the good word things :p

    Regarding loans – probably a bit different here (down under) but when I first went for a loan with my partner it was exactly as you described it, “Welcome to BIG_4_BANK, based on your combined salary, assuming you don’t fall pregnant, and that you like eating baked beans and ramen noodles for most meals, don’t celebrate *anything* – you can easily afford $BIG_NUM mortgage. Please sign here.”

    All 4 of the big banks (we only really have 4 big banks in Oz) were exactly the same.

    We were really lucky in that we had already picked out the house based on what *we* thought we could afford, not what we could theoretically pay – at least according to the seemingly very optimistic banking sector.

    1. Humanoid says:

      And in context, Australia is one of those places where the bubble hasn’t burst – the median multiple (median price of a dwelling divided by median annual income) is still damn close to seven, as opposed to an OECD norm of about 3x.

      Now it might eventually burst US-style, in which case many of the difficulties seen there might transfer over, but the other school of thought proposes an extended plateau over a long long time, such as Japan has and is apparently experiencing.

      Still, as someone with no real experience on the matter, all I can do is look at the prices and think “nah, never going to happen.” There’s a bit of a cultural issue at play here – Australia is pretty similar to the US in terms of the housing culture, right down to the terminology: the American/Australian Dream. Both family and friends try to encourage me to get a place to own, but I know full well that’s not happening as a singleton.

      Rationally I think I might be best off just living more in the manner of western Europe, where home ownership is something not generally aspired to, and where renting for life is not only common, but is the norm (indeed I’ve heard of rent terms spanning multiple generations). However, to really be comfortable with that, there would need to be some significant legislative changes to add a lot more tenant protection. Still, I fall for the cultural trap and I’d still like to eventually have my own place, if solely for removing the responsibility of maintaining someone else’s place. It’s irrational, but eh.

      1. Austin Middleton says:

        Out of curiosity, has the Aussie government been subsidizing home purchases, or keeping interest rates down with expansionary monetary policy?

        1. andy_k says:

          There are two parts – one is that supply is limited in the places people actually want to live, the other is that Australia still allows ‘negative gearing’ – a regressive tax system that allows you to borrow money to buy an investment property then claim any and all expenses (including interest!) as a loss to your taxable income. In this way you take out a loan, buy a property and rent it out at a loss (compared to the interest repayments) and that loss offsets your taxable income, so you pay less tax. Then you can sell the property at a profit… Which is great if you are an investor but terrible if you actually want to buy a house to live in.

          Aside from that, Australia has had historically low interest rates for a long time, introduced a first home buyers grant to encourage young people into the market and never really pushed the sub prime mortgages (with teaser rates and so on) arguably because of regulation, and possibly also because of a lack of competition.

          There are lots of other factors as well (cultural and economic) but in broad brush strokes this is why the bubble has not yet burst, and a prolonged plateau is the generally agreed scenario among economists.

          1. Humanoid says:

            There’s a lot of political gain to be had by appeasing home-owners (alongside other emotively charged terms like “working families” and “Aussie battlers”). Aside from the Negative Gearing tax break mentioned, there are also things like the First Home Owner’s Grant, which provides a lump sum bundle of cash just as the name suggests, with amounts varying (both the state and federal governments pay a portion) from a base $7000 up to $21000 at one point.

            More locally, in my city there’s also a stamp duty concession, where purchases properties under about $380,000 only pay a nominal $20 in stamp duty to the government, instead of the thousands, or even tens of thousands it would cost normally. However that threshold is low enough such that only pretty basic homes qualify (yes, property prices here are so high that $400,000 only buys a pretty mediocre place)

            Primary residences are also exempt from Capital Gains Tax, which is normally paid when you sell a property for a profit.

            And while interest rates are at historic lows, it’s still relatively high at 3% compared to most of the developed world right now. (Incidentally, next interest rate decision is due in a few hours, probably 50:50 on whether it’ll be cut by 0.25% today)

      2. 4th Dimension says:

        Now I understand why Japan has high housing prices since their cities are squashed to the shore by the mountains so they don’t have much flat terrain to build living complexes. But Australia to me seems pretty flat an open, so I don’t see why would such high prices stay that high.

        1. Humanoid says:

          Yep, rationally it doesn’t make sense. However land release for development is controlled by state governments, who are interested in keeping supply at a rate that maintains prices on current dwellings, and of course a typical dose of NIMBYism so there’s a lot of suburban sprawl and a high degree of resistance to high-density housing.

        2. Blake says:

          My understanding is it’s currently:
          Lots of people moving from the country to the city.
          Lots of immigration.
          More new people coming in than there are houses for them being built.

          In 10 years it’ll be very different, as the baby boomers all move into nursing homes (or die), there will be a lot of houses re-entering the market.
          As long as our government doesn’t change in September we will have our ubiquitous gigabit fibre, allowing much more teleworking (reducing the number of people needing to move as close to the city).

          The other things that could have a big impact are how many young people keep living with their parents (I know a bunch of people in their mid 20’s still living at home to save money or wait for cheaper houses), and whether or not more people choose to be perpetual renters instead of taking on a 30 year debt.

          1. Humanoid says:

            That’s very optimistic though, since we’re odd-on for a change of government, and that regardless of the victor, I don’t expect teleworking to be a big thing – not for our traditionally conservative (in the literal, not political sense) businesses, and certainly not for the public service.

            With Mayer banning teleworking at Yahoo, there does seem to be a bit of a swing against the idea for the short term at least.

    2. Daimbert says:

      Yeah, when I went looking for a house I didn’t go for a pre-approved rate, but instead went looking for a house I wanted and thought I could afford, and then went to get the mortgage for it. Unless you’re way off on what’s affordable for you, here at least you can tweak the length of the mortgage until you can get your monthly payments reasonable, at the expense of paying more interest over the length of the mortgage.

      But once you get that number from the bank about the maximum you can borrow, it’s really hard to not just take that number and use it. But the loan officer is calculating the highest they are willing to loan you so that they think that either you’ll pay it back or that you’ll pay back enough so that they’ll still make money on the loan if you default. They aren’t calculating it so that you can live well and save enough to live a good life.

      1. Hitchmeister says:

        It helps to go in with a cynical bent of mind and remember that they can schedule a mortgage such that “they'll still make money on the loan when you default.”

        Okay, I changed the quote slightly. But I wanted to emphasize that point.

  13. silver Harloe says:

    You can absolutely get in a similar circumstance with renting. When I moved to Seattle I got a two bedroom place for what I thought was fairly cheap on my Amazon salary (said Amazon salary being what I moved to Seattle for). Because I’ve always had a two bedroom place – but each move the rent goes up a couple hundred dollars… and then when my time at Amazon was done, I started living on less money, and after a year I had eaten through my buffer and back to paycheck-to-paycheck. Looking back, that year was when I should have moved, but I’ve always been able to get a good job before, why not again, right?
    Well, I do have a good job, but a good job in this economy is different from a good job six years ago and I’m making 75% what I was and I have a very small buffer after bills and rent. One disaster from losing everything. I could sell off and throw away many things I own and get a smaller place for half the rent, but I literally can’t afford to move because renting a place requires upfront cash – usually a deposit and a couple months of rent (and it’s not like I can stop paying rent where I am the moment I spend that) and moving requires time (and I get hourly, not salary – so every day packing and moving is a day I’m out more money). So I can eke out a paycheck-to-paycheck with no savings living where I am, or I can produce a bunch of money by magic in order to cut my rent in half and actually be comfortable.

  14. Humanoid says:

    I see the problem, you obviously bought a cheap knock-off Gallant instead of a genuine Mitsubishi Galant.

    I also see that it’s been discontinued, alas too late.

    1. I owned a Galant. It was a huge mistake.

      Mitsubishi makes really bad cars, especially when it comes time to repair them. Who makes a car engine where you have to take the top of the engine off to get at the fuel filter? The car is also heavy enough that it cracks at least 2 axle boots per year (letting your wheel bearings get loads of gunk in them where grease is supposed to be), and the engine makes this constant ticking noise as if it’s got sticky lifters.

      I later had a friend that owned a Mitsubishi Diamante from 3-5 years after my Galant was built, and it made the same ticking noise, so whatever it was, it was a flaw that became tradition.

      So far, my best cars ever have been the Toyota Tercel and a ’96 Honda Civic that I’m still driving to this day.

  15. Abanxis says:

    I have to ask, and hope someone here knows more about these things than me: where the hell do banks get their pre-approval amounts from? My wife and I got a house year-before-last. We sat down with a calculator, did massive research, and making a few assumptions about much exactly she would be making and I would be making, came up with a number of $90-100k comfortably with our massive student loans, $120k if we really pushed it for a house. Bear in mind, we were estimating what we considered to be a high, because we are generally good with finances and DIY when things go wrong, so we figured we had plenty of room.

    We go to the five top-rated banks in the area we were moving to, armed for bear in case they wanted to turn us down, only to find that the most conservative of all of them still approved us for $200k. Seriously? We went for a $120k house (I wound up getting a job with $5k more a year than we had planned, so we had more wiggle room), and we still occasionally have to dip into our financial padding when clustered expenses happen. How the hell did the banks think we could afford $200k, when they knew full well how much our student loans and travel expenses take up, as well as how much I expected to make? If we weren’t as careful as we are, we would in as bad a situation, if not worse off than past Shamus is.

    1. Jamey says:

      Well, it does vary, but the very short answer is that for quite some time banks assumed that you could spend 40% (yes, .4 times) your monthly income on your mortgage. That’s assuming that mortgage payment was going into an escrow account that also accounted for homeowner’s insurance and property taxes. Having any amount of debt up to about half of your annual income was disregarded. If you had more debt than 1/2 annual income, the estimated monthly cost to maintain the amount of debt above that 1/2 mark was deducted from the monthly payment amount. This was, in practice, absolutely batxxxx crazy. No one with a good chunk of debt could realistically afford those payments and stay afloat and ever have a car problem they could afford. This lead to Shamus’ and many other’s problems, unfortunately.

      Now after the housing crash, this policy has changed. Most banks start with an initial factor of .36 now (down from .4) and reduce the approved payment amount based on any debt you have at all (there are some exceptions, if you have good credit a small debt allowance can be factored in, but it’s nowhere near the old 50% of annual income level; also student loans are counted somewhat differently if I recall correctly). The point is, if you were to try to buy a house right now, the approval amount would be a lot more realistic than it would have been 5 years ago.

      1. Abnaxis says:

        Even with their estimates the way the are now, there’s no room for disaster. I had to sink a grand in my car last month–there’s absolutely no way I could have done that with a $200k mortgage (along with proportional property tax and mortgage insurance–because of course it doesn’t matter how good you are about paying your bills, you have to pay the bank to cover their own asses on your account if you are a first-time home buyer)

    2. Paul Spooner says:

      Yeah, when we bought our first house I never found out what we were approved for. We pretty much just found the cheapest house we could live in and then made an offer. The bank officer kept telling me “Oh yeah, no problem. You can get approved for a lot more than this.” But the limit was intentionally never a topic of discussion. Those guys would loan you up to 300% of your income if they could, that’s their job after all. Can’t fault them for trying to loan as much money as possible.

      1. Hitchmeister says:

        Sounds like you followed advice I’ve been formulating reading the rest of the comments here, “Shop for a house like you’re spending your own money.”

        Look at your bank account and paycheck and ask yourself, “Can I afford this?” Don’t ask a loan officer what you can afford.

        1. burningdragoon says:

          “Shop like you’re spending your own money” seems like a good mindset regardless of what you’re actually buying.

      2. guy says:

        Yes you can. Their job is to give you the largest loan you can afford and not one cent more. Banks hate foreclosing. They’re not in the business of house retail and foreclosed homes rarely sell for full value.

        Even with the massive relay of mortages through securities, the original lender has to eat the costs if above a certain percentage of the loans default.

        1. Daimbert says:

          Yeah, but note that it turns out to work like insurance: banks don’t really want to foreclose, but if they can overall make money by doing so, they’ll still be in business and will calculate what and who they load to to take that into account.

          Of course, a massive economic downturn — causing a lot of defaults — and sinking housing prices will be … problematic for that sort of calculation.

        2. Paul Spooner says:

          Well, yeah, but loan officers don’t pay for that. They are given strict rules by the banks and then (in essence) told “go loan as much money as possible!” That they would push right up against the limits of those rules is really quite admirable. No one is forcing me to borrow money. If anything, it’s the bank’s lack of foresight in de-coupling responsibility for solvency from sales. If loan officers were individually penalized when a loan they had approved defaulted, they would be much more hesitant to push out as much money as possible. As it is the failures are distributed and the rewards are concentrated. The resultant behavior is pretty straightforward.

    3. andy_k says:

      In Australia they went to the Australian Bureau of Statistics (a government body) and get costs on the average household weekly spending of groceries, electricity etc, take that out of your after tax income and that is what you can spend on your mortgage. If you have a car they add a weekly running cost to the number, kids they add school and so on.

      But notice the lack of incidental expenses? Saving for holidays? etc etc

  16. =David says:

    This might be the most gripping tale I’ve ever read. Partly because it’s true.

    Shamus, I’m a 28-year-old Christian coder who likes to play and DM RPGs. I have a wife I love very much. And while we’re mostly out of the woods, we ran into some pretty major money problems early on. So I guess what I’m saying is, this story hits pretty close to home for me. It’s like you lived a darker version of my life twelve years before I did. I can’t wait for part 5 so I can see my future.

    I have read through DM of the Rings three times, guffawing heartily, but this story has held my attention more than anything I’ve read on the internet in years.

  17. Ravens Cry says:

    Ouch, my heart breaks for you, Shamus. While I do not have the family responsibilities you do, I also was hit by a bill while on a very, very, to the power of very tight budget. I found a way to make it, but I was paring my budget to the bone.

  18. Conlaen says:

    My girlfriend lived in a house like that for a while. Too expensive in rent, too expensive in heating. It was this bad experience that made her a little overly cautious in the price range that we would afford when we moved in together. Even the place we moved into back then, even though it was very cheap compared to everything else, seemed too expensive to her.

    But from that apartment we lived in, we were easily saving up 500 a month, each. We moved to another place that was a little bit more expensive but we still managed to save a good sum.

    Now 6 years later we’ve just gotten the keys to a house we bought. This in part paid by the 60-70k in savings we’ve built up together while we’ve been living together. Had she not been as cautious, we’d still be looking in the slightly lower price class. We tried in that range before, but with us living in essentially a student city, the cheaper houses are very hard to get a hold of.

    We still have a bunch of very expensive moths coming with buying furniture for the new house, but we’re both comfortable enough that we can afford living in this house.

    1. One nice thing about owning a home. If you bought it within your means and you actually bought it to live in (instead of flipping it or what have you), eventually your mortgage payment becomes far less than you’d pay in rent for an apartment a fraction of the size.

      Yeah, you pay maintenance costs, but I’ve lived in apts. where the maintenance was supposedly part of the deal and it never got done.

      1. Peter H. Coffin says:

        “Eventually”, yes. It may take a very, very long time. It’s usually on the far side of 20 years, often more than 40 years once you factor in insurance, taxes and mortgage interest. If you don’t die in it, you may be able to take 20 year back out selling it.

  19. Ross says:

    Damn it Shamus! I’m one of the many long time readers of your blog. I’ve read basically everything you have posted since forever.

    I bought my house at the beginning of this year and now you get around to writing this?

    Well, joking aside, it just once again goes to prove the adage; you don’t have the answers until you have made the mistakes!

  20. Kdansky says:

    The explanation of late fees and bouncing checks shocked me. Not only is it really out of whack in numbers, when your late fees are 20% or 40% of your actual bill, but also the way checks work feels like the middle ages. I’ve never written a check in my life.

    I just log in to my banking site, and click a few buttons to transfer money to the right accounts. It’s obvious when I overdraw (and there are no actual fees, just horrendous interest rates of ~15% yearly), and the late fees for most bills are trivially small, and generally you can just pay the original bill and ignore the late fee, as the debitor would have to prove you’ve gotten the late fee bill.

    1. MetalSeagull says:

      When 1999 turned into 2000, I was working for the local school system, which paid us at the end of the month. I was itinerant, so I didn’t have a particular school I was assigned to (a “home” school.)

      The school system was so concerned that Y2K was going to be a disaster for electronic banking, that they decided to stop all direct deposit for the month of December. Your home school was supposed to inform you of this change, but since I didn’t have one, I didn’t hear about this.

      January 1st came and went without incident, and I paid out my bills as usual with no idea there was no money in my account. I found out on January 6th, when the first overdraft notices began coming in. I picked up and deposited my check on January 7th, way too late to stop the cascade of overdraft fees. It was terrible. At the time I would often end up with only $50 in my account at the end of the month. This was such a drain on my already tight budget that it took months of juggling bills to get back to normal.

  21. MichaelG says:

    If you read my posts above, you might think I’m scoffing at Shamus’ decision to buy a house. Let me correct you. You see, I botched it even worse.

    I couldn’t stand the housing prices in Silicon Valley, so I did the smart thing — I bought land to build on… (don’t laugh!) I should have known this was a mistake when listening to the buying and selling realtor have a little chat about how insane prices were getting — while I’m sitting there thinking about the lot!

    But I knew nothing bad was going to happen because I have modest tastes. I wasn’t going to overspend on the house. In fact, I was going to buy one of those kit houses that get assembled on site. Then there would be no uncertainty about price at all.

    A year later, the kit house people had taken my deposit and still not found a builder. I finally gave up on them and tried to back out of the contract. Their response: “We’re suing you for the balance of the contract.” $30,000 in lawyer fees later, I’m out of that, with of course, no house.

    And the lot? The county requires a 20 ft setback from the street, and enough area for two septic system leech fields (for 30 years from now when the first is dead.) And you have a seasonal creek running across the property. Did we mention the setback on a “riparian corridor” is 50 ft on each side? Of a diagonal running across the lot…

    Finally sold the property at a loss. 10 years later, I don’t think anyone has built there.

    Shamus, I feel your pain!

  22. BenD says:

    When we started out, we were terrifically close to being in the same position financially, but with only a rental that was $75 more per month than the cheapest rent we could have got (and that $75/month bought us security from criminal activity, closeness to one of the workplaces, and a second small bedroom, so – money well spent). I will always feel like it was nothing more than dumb luck (both mine and my parents’, frankly) that saw us through our ‘mistake’ (that I can’t imagine how we’d have avoided making) into solvency.

    That it takes two generations of dumb luck to create a middle-class household that can pay its bills without a lot of anxiety and handle problems when they arise (like leaky roofs, which you find out quickly are not a problem that wait!) is, in my non-economist’s opinion, a sign that our economy is borked. Badly, terribly borked, probably beyond repair.

    1. BenD says:

      Also, we too had a Galant. POS car~

  23. Dreadjaws says:

    I have light financial problems that can only be attributed to me spending my money in useless stuff like DVDs, games or collectibles. I more or less solve them by not spending money in more mundane things like food, medicine or house cleaning.

    Of course, I live alone, I wouldn’t even dream about entertaining the idea of considering doing such a thing if I was married… Or had a girlfriend… Or visiting friends… Or a pet…

    Damn, now I’m depressed. Time to get uplifted by purchasing me the new Iron Man 3 action figure and the soundtrack for Man of Steel!

  24. Kavonde says:

    That’s really a shame about the Gallant. I had a 2002 model for over a decade, driving it cross-country twice, and never had to do anything more than routine maintenance on it. I still kind of regret trading it in.

    I realize this statement isn’t helpful in the slightest, but… I dunno. Had you posted something about your car search at the time, I would have vouched for the Gallant, and then I could have taken partial credit for that disastrous lemon masquerading as a Mitsubishi that you bought.

    1. BenD says:

      Ours was a 2002! Why was it so much worse than yours? D:

      1. Kavonde says:

        Mine was dark gray. I think that’s the secret.

  25. Daemian Lucifer says:

    I was incredibly lucky to have my father teach me a lot about finances when I was barely an adult.Write everything down,plan months in advance,keep the receipts forever(almost),what to look for when buying stuff,etc.Even with all the crap that befall my country and my family,we still managed to survive without major problems.Though,he had the misfortune of having to learn all that fairly early,being a post WWII child.

  26. Victor says:

    Just wanted to say thank you for sharing the story with us. Having not entered the “Housing Market” myself yet, I find the whole process pretty mystifying, so reading someone else’s experience with the process at least gives me some idea of some of the things I’ll have to worry about….. Also kind of scares me, especially once I read the comments………….

  27. SlothfulCobra says:

    I bet you could make a video game where all you do is balance your budget. There’s already loads of games that boil down to excel spreadsheets.

    All you’d have to really do is keep it from becoming crappy edutainment.

  28. Tony Kebell says:

    That fence post (hehe, it’s a post, about fences, fence-post) Was a t the end of was about after a year of me reading you… It’s been like, 8 years…I found you when I was like 10. Wow. This makes me feel old… ( makes you look even older but, hey.)

    Thanks for being entertaining for like 8 years.

  29. Geoff says:

    This story is sounding suspiciously like life at the moment. Bleeding money and not sure where the leaks are. Part of me is hoping the fifth (final?) installment is a “And then I learned how to make an extra $5,000 a month at home in my spare time!” ad. ;)

  30. Retsam says:

    I’m confused. The word “protip” was used, but then was followed by something that wasn’t snarky or condescending at all. Are you even allowed to do that?

    1. Hieronymus says:

      Yes*, it is allowed.

      *Warning: Tropes link.

  31. X2-Eliah says:

    Hm. Interesting.

    The typical “american dream” factors: Get a house, get a car, go through college.

    The main reasons why people go in finanacial hell: College (insta-debt), House (massive debt), cars (expensive + regular costs).

    Ever think that you US-folk have been *massively* set-up?

    1. Gudlerian says:

      I mean, when the alternative is not having a degree, a car or a house, I don’t see what the heck you’re getting at.

      1. BenD says:

        I’m not sure what to make of the OP comment here either.

        Theoretically there are alternatives to these things or to the costs associated with them, but those alternatives would require massive infrastructural and social change, not just the revising of the “dream.” Sure, we could have socialized or industrially-sponsored higher education. We could have massive transit and shared-travel systems nationwide. We could all live in condos or communes, or have socialized landsharing and homebuilding. Making any of that happen would not be less costly than the realization of the ideals we currently have.*

        If there’s a set-up at play, it’s got to do with the borked economy and the borked interests that control the economy – the actual factors that put the dream out of reach. If we all woke up tomorrow and aspired to a different dream, we’d find out in short order that the new dream was just as far away.

        *In the short term. In the long term, some environmental-impact improvements might offer a cost savings, but that’s not how our society makes financial plans.

      2. Jarenth says:

        While I won’t claim to understand Eliah any more than you do, a degree isn’t really mandatory to get anywhere, there’s other transportation options than cars (though that might be more viable in Europe) and houses can be rented instead of bought, which is still expensive, but doesn’t carry the large risk/reward element of buying.

        1. Ithilanor says:

          Going without a car is sometimes possible, but usually not optimal – the US is simply too spread out, and mass transit’s often pretty poor. It’s better in the few big cities, but then you’re adding higher rental costs. As for a college degree, while it no longer guarantees you a job, it’s still usually necessary.

        2. X2-Eliah says:

          basically, this.

          A degree is seen as a “must-have”, and for what? Hoe many people do the whole college/university bit just to get a paper in some field they care nothing about, only for the supposed thinking that “you got to have one”? How many people end up making their own enterprises, or working freelance? Or working somewhere that’s quite unrelated to what their degree is about?
          With the perception that a degree is needed, why’s there so much talk about how the entry-level degrees have become useless, and whole areas of academia that supposedly are worthless for finding work (i.e. a degree in literature, etc). Of course, the setup is that you’re supposedly required to have a degree to have a job. But I mean, realistically, there’s plenty of cases when a degree ends up being meaningless for what the job actually is about – short of being that arbitrary entry checkbox filler.

          Cars – again, are they *really* must-haves? Far as I can tell, in the states the unspoken assumption is that you simply must have a car, end of story. Wonder why your public transport system is in such shambles? because everyone has a car, duh. A self-fulfilling feedback loop with little grounding, imo – there’s nothing intrinsic in a car that makes it a must-have life accessory for a human being. It’s just perception layered on top of neglect caused be ever-presence of said perception.

          Houses – a) Get a condo. b) Rent something. Just as with a car, there’s really nothing explicit about “a house” that makes it a must-have for a human – and yet again the belief is that ‘you have to have one of your own’.

          I mean, when the alternative is not having a degree, a car or a house, I don't see what the heck you're getting at.

          That’s EXACTLY what I am getting at. You don’t see any alternatives? Well that IS the problem! None of those three things should be considered as must-haves, or things that are assumed as granted. Nor are they the only options in a binary state (or rather, nor should they be). Typical faulty thinking that’s indicative of the problem… Don’t get me wrong – I see how circumstances make it look like all those are mandatory – that’s the set-up I’m talking about.

          1. Shamus says:

            The US has about half the population of Europe, while spread over a MUCH larger area. http://goeurope.about.com/od/europeanmaps/l/bl-country-size-comparison-map.htm Public transportation doesn’t work because the place is too spread out. People live in the suburbs. Is there supposed to be a subway station in every neighborhood?

            Public transit is really, really sensitive to population density, and outside of the really big, famous cities we don’t have the critical mass to support it. (Unless you include busses. We seem to do okay on buses. I mean, my town has a multi-route system that runs from points downtown out to the mall. And we only have 13k people.)

            In any case, you’re making the case that one person doesn’t need a car because if everyone gave up their cars then we’d have more public transit? Like, should I sell my car and wait for them to start digging? How should my wife get to work without a car? Her job is fifteen minutes out of town. (Fifteen minutes by car, mind you.) Should she spend hours walking every single day along a busy highway? In the sleet and snow? What if someone else calls in sick and they need her to come into work in a hurry? “Oh, no problem. I’ll start walking now. I’ll see you in three and a half hours if I’m not frozen to death or hit by a car!” And when she works late? I’ll bet walking home along the highway at midnight is a special kind of exciting.

            Yes. You NEED a car in this country unless you have unusual working situation or you live in one of the major cities. I’ve never held a job that wouldn’t be physically dangerous to reach without a car. (Except for the whole work-from-home thing, heh.) No car means no job.

            1. CraigM says:

              Sniped by Shamus. That’s what I get for writing a long winded response ;)

              But in addition to my points, this. Also I’ll get ahead of the ‘Well bike to work then’ counter. I do, often. I’ve also been hit by cars, on a bike, more than once. I don’t even live or work in a city, this is suburbs. Alternatives are fraught with peril.

            2. I feel your pain dealing with the blind and the ignorant.

              On the other hand, I am very much enjoying your writing.

          2. CraigM says:

            I would grant you the house is more of a ‘good idea’ rather than a need. In many cases though owning a house vs. renting cost the same. Plus there is a decided lack of effective renter protection laws which can lead to many unsavory outcomes. It’s a byproduct of the relative availability of land, and the low population density of most states, renting is often not a value proposition.

            The degree is another argument I’ll even acknowledge has merits. Many people will do jobs where a degree provides little, if any, real improvement. Now this implies the value of an education lies strictly in the employment prospects it provides. I’d argue this isn’t true, pointing to the value of having a population with broader cultural, scientific, and political literacy. A person may not have a day to day use for the application of algebra, but the logical thinking it engenders is more valuable than literal application. Knowing Shakespeare is equally inapplicable to every day life, but exposure to items of cultural significance certainly has value (bonus points if the item is from a different culture than yours). Whether these are worth the rapidly exploding cost is another matter, but to say getting a degree is pointless if you don’t have a job that uses your specific degree is disingenuous, inaccurate, elitist, and wrong.

            The car is the one where non-Americans really have little room to judge. Outside a few limited locations public transportation is impossible. The corridor from Boston to Washington DC is the only truly well developed public transportation corridor in the country. Beyond that if you live outside of a downtown area then public transportation isn’t simply available in a workable manner. It’s simply scale. Now you identify the fact everyone has a car as the reason for lack of public transportation, I posit that it’s lack of density.

            Public transportation needs to be extensive to be useful. If you can’t provide reliable, flexible, and swift travel to nearly 100% of a region then it simply isn’t viable. I don’t care how good your buses are at going east-west, if I need to go north they do me no good. The practical upshot is that in Chicago’s suburbs if I need to go from the southwest to the northwest suburbs I have to spend an hour going into the city, an hour going back out to get somewhere that might only take 30-40 minutes by car. This in essence is a tax on time. Without an expansive public transportation network you are taxing (at double or triple rates) those without access to private transportation, further reducing their capacity for improvement.

            In order to get such a network though you need a certain density. Building such a network of rail and bus transport is expensive and capital intensive. In order for such an investment to work there will need to be a certain volume of usage on all aspects. To get said volume you need population density. This is what many Europeans fail to grasp. You are simply not equipped to consider such things, because it is a far cry from the reality in Europe. Our population density is 1/12th of England, 1/4 of France, and 1/6th of Germany. We simply do not have the closely packed population centers (for many reasons) that you do, and as such can’t build the public transportation network you Europeans can. So while you may view a car as not needed, for most people that simply is not true.

            1. X2-Eliah says:

              to say getting a degree is pointless if you don't have a job that uses your specific degree is disingenuous, inaccurate, elitist, and wrong.

              And saying that you *must* have a degree isn’t? And last I checked, human beings have the capacity to learn outside of academia as well. I doubt that, e.g. Shakespearean literature and analysis thereof is *only* available from a 25k-per-year university.

              1. Abnaxis says:

                Something I think you’re missing, is the fact that cost cutting initiatives from business actually do make getting a degree required (or a trade certification, which a lot of people seem to pass over even though they pay more and are cheaper). See, a large proportion of workplaces have start taking “has a degree” to be a proxy indicator for work ethic, and subsequently, they put a check-mark on their application forms to that effect. Any prospective resume goes through an automated system for processing, which puts any application without the box checked in the garbage and culls the rest based on other check-boxes and the presence/absence of key words before forwarding the pared list to the (usually outsourced) staffing department for final selection. If you don’t have a degree, odds are a human being will never see your resume regardless of your qualifications.

                We can sit around and talk about whether college actually makes someone a better worker, or whether the cost outweighs the individual benefit, but a degree is necessary because companies use “must have bachelors degree” to filter their applicants, and more often than not, they don’t care what area the degree is in.

                Case in point, I am much, much more qualified than my education suggests, and I have yet to obtain a position that actually lets me contribute as much as I am capable of contributing. And even among the positions I have managed to obtain, I have only been able to do so by personally calling business owners/managers to advertise my abilities–formal application systems always, always ignore me for positions I am perfectly qualified for. Saying “you don’t actually need that degree” is misleading, because the bots are going to disregard you on the basis of a lack of degree whether you actually need it or not.

    2. Ithilanor says:

      This would be part of the general turmoil and unrest the current generation’s going through…

  32. Felblood says:

    I know this is 4 years too late to be helpful, and is actually a lot different now than it was in those bad old days, but many companies that collect bills will actually waive a late fee here or there, if it was an honest mistake and you don’t do it very often.

    Even today, most people will wait for you to ask, and take steps to intimidate you into not asking, but the program is usually there anywhere except for on overdraft or overlimit fees, whihc many bank executives seem to think of as a brilliant racket.

    Sadly, this is one of those things that is often only known of and used by people who are financially savvy and personally invested in their finances enough to not really need it.

    1. Decius says:

      I worked Nextel customer care for over a year (>90% of agents quit before their 1-year). Lots of people that bounce checks know exactly how to negotiate fees and even balances away. Not most of them, or even a large fraction, but a large number.

      Quick tips: Be polite, tell a very short sob story, and ask for the agent’s help in figuring out a plan of action. “Is there any way I can reduce this balance?” is a good generic line. DON’T threaten, complain about service, or act entitled to anything. Typically the agents are armed with a lot of discretionary powers in your favor as well as very good excuses for choosing not to use them if they just don’t like you.

  33. Jarenth says:

    Oh. So this is the Mistake, huh.

    I recently moved to a place way closer to my primary work spot. As in, turning a two hour commute into a thirty minute bike ride closer. I figured the studio was a little more expensive than what I’d been paying, but this one was utilities included, and adding the lower travel costs I should actually come out ahead a little. And while the move (and assorted bullshit brokerage costs) wiped out my modest savings account, I figured I’d actually be able to start rebuilding that now.

    And, well, in theory, the numbers work out. In practice… let’s just say I’ve had to force myself into the realization that for about the past year, I’ve been living on the boundaries of my means. There wasn’t just no room for saving money because of set costs, but also because I pay horrible attention to grocery costs. Your bit about living paycheck to paycheck hits somewhat home because (with my savings annihilated) that’s what I’m really close to doing myself. Locking myself out of my new studio two days ago set me back like €130, and that number made me cringe.

    I suppose the good news is that (assuming I pass a mandatory evaluation) my raises for the next three years are contractually guaranteed, and that I should start seeing the results of those lower travel costs soon. The bad news involves a set contract length of three years, and looming student loans.

    1. Abnaxis says:

      Wow, that is one expensive locksmith.

  34. I just finished making a call to my employer telling them I quit because my car died and I have no way to get to work. It was the only job I was able to find in two years, offered minimum wage and less than 10 hours a week and I haven’t been there long enough or been paid enough to qualify for unemployment insurance. After paying for a parking ticket, a fix-it ticket and the auto repair guy for calling the time of death, I will have no money and no transportation.

    This blog post is the most depressingly accurate portrayal of how I feel right now…

    1. OuchAskFriends? says:

      Oh no! I’m so sorry to hear that. Do any of your friends have cars and are willing to drive you? When I didn’t have a car, church members helped me out by driving me to the grocery store regularly, sometimes for other stuff also. It might be a long shot, but you might be able to find someone who’s willing to help out.

  35. Stephanie says:

    So this is a somewhat petty comment given the dire financial situation you’re describing, but looking at the picture of your wife – or rather the background of that picture – you could improve your heating profile for not much outlay by fitting pelmets and better curtains on your windows. The idea is to put a seal around the edges of the curtains so that you don’t get warm air circulating over cold glass and chilling the room. So floor length curtains, and you can get sticky velcro dots to stick the edges of the curtains to the wall and still be able to take them off to wash, and the pelmets over the top to stop the vertical air engine. Not so big a deal if you’ve already double glazed, but a heck of a lot cheaper.

    1. HuzzahForCurtains says:

      Curtains can help a lot. Even without tacking them down, just having heavy curtains can insulate enough to make a difference.

      We used to have heavy, moldly-gold colored curtains from the 70s. They looked like the misbegotten offspring of quilt batting and space blankets, but they insulated really well. The temperature difference from one side to the other was noticeable.

  36. ENC says:

    ‘That $100 check to pay the electric bill doesn't clear because you only have $95 in the bank. The bank punishes you for this by charging to a fee, which ranges from $20 to $100 depending on the bank. So not only do you not have enough to pay the bill, but now your bank balance is actually negative. They charge you another fee for that. So your bank balance is now -$50 and you still haven't paid the bill. A bunch of angry notices are sent out.’

    That makes the American banking system seem really poor.

    In Australia (already ridiculously expensive to live her; Melbourne and Sydney are both in the top 10 most expensive cities to live. The PPP also heavily outweighs out minimum and median wages so we pay comparatively more than yanks for everything anyway) it’s quite easy to get a bank account with less than $20/month fees. If you look around for an hour tops (especially these days) it’s quite reasonable to get a fee-free transaction account.

    Although I hear that savings accounts in the USA don’t even earn above inflation interest so that sucks; hear I can get 1-2% above interest depending where I go, and that’s without even using a term deposit or getting into bonds or shares.

  37. Kevin says:

    It’s a shame that in all the education that we receive in school we never get taught how to manage personal finances. I am a numbers guy and got some financial training early on but I still had to rack up some credit card debt when I was young before I learned the lesson.

    When my wife and I bought our house 5 years ago, it was scary what the bank was willing to offer us for a mortgage. We went for something well within our means and have reduced our original 25 year mortgage to just over 10 years left in only 5 years.

    I wish there was a way that I could pass what I’ve learned on in a way that those new to managing finances would listen to.

  38. Brian says:

    “If your solution to a problem is “don't make mistakes”, then it's not a solution.”

    I am going to start repeating this everywhere I can. And that is a lot of places. Thank you Shamus.

  39. Mischa says:

    I bought my home right before the crash. They were still pushing ARMs and I got approved for mortgage payments equal to half my monthly gross income. When I went to the bankers to see how much loan I could afford, there was definitely a thought going thru the back of my head that bankers knew what they were doing and you could trust them to accurately tell you what you could afford.

    Luckily for me I’d only stopped having to pinch pennies a couple years earlier. I liked not having to worry about money and wasn’t willing to put over half of my monthly paycheck, after taxes and insurance, in a loan payment. Plus I had my mother talking my ear off about needing to set aside a couple hundred each month to start building up a nest egg big enough to pay 4-6 months of living expenses in case something happened. (I’ve already been laid off twice.) So I only looked at houses in a much lower price range and am happy with the one I picked.

  40. Yavine says:

    As someone who worked for debt collectors, I have to say this: you’re awesome for noticing exactly where the problem was and for solving it.

    I’m a temp worker and I take the missions as they come and go. I’m not proud of doing that, but those two missions were probably the most enlightening of all about the society we live in.

    The first one was for a big firm – back in 2010, when everyone closed shops in France, they were the only ones actively recruiting. So the first thing I learned is that when debt collectors are healthy, the society as a whole is in bad shape. My job there was to open the incoming mail and to enter payments in the database.

    People don’t get it because it’s counter-intuitive, but the poorer you are, the more you pay. It was insane. Some people owed a total debt with our company alone of 15.000 euros, paid 15 euros per month and they had been forbidden from owning a bank account, a credit card or a checkbook. The only legal way they had to pay was to go to a Post office and pay for a Money Order, that each costs at least 6 euros. Those people live in drafty houses so they pay more to heat them up, they buy old cars so they pay more to repair them, they can’t build quality products so everything around them breaks as fast as they can repair/replace them, they can’t buy the bigger sized products so they pay more per kilogram, etc.

    Once, I talked with a coworker about children during a lunch pause. I told her I don’t want any (it’s a personal choice). She started preaching about how GENEROUS it was to have children, that it was the most GENEROUS gift a woman could give, that I had to be an effing egoist to refuse to give life to a baby. That still counts as the most surreal moments in my life.

    The second job was with an “huissier”. Debt collection isn’t the only thing they do, but it is a big thing for them. I didn’t take part in it there and I still thank the gods for that. Some of my colleagues, on the other hand spent their days calling indebted people to push them to pay, pay, WILL YOU PAY OR DO I SEND A JUDGE ON YOUR IRRESPONSIBLE ASS?! The way they treated adults like children made me want to scream on a daily basis.

    People usually pay, of course, sometimes even if they don’t have to means to. When one of those guys call, you know you’re in trouble.

    Once, one of those colleagues hang up her phone, looked at another colleague and said: “Well, she said that she wouldn’t be able to buy Christmas gifts for her children if she starts paying now. Should I care?”

    Yes, you should.

    But hey, that’s the wrong answer in a place like that…

    1. Dork Angel says:

      Christmas is a big part of the problem. Technically she shouldn’t be spending money she needs to provide food and shelter for her kids on gifts they don’t really need. But a massive blackmailing industry has been built up around Christmas. Santa’s message is good kids get gifts and bad kids don’t. Who get’s all the best gifts – rich kids. Who gets the least – poor ones. Ironically the parents who bust their asses to get their kids gifts don’t even get the credit (bar the interest on the credit they’ll be paying off for the next six months), some imaginary fat guy in a red suit does. But no-one can speak out about it for fear of “ruining Christmas for the kids”. Kids got on fine before Santa spoiled Christmas, the only people we’d be ruining it for would be the banks and corporates who profit from our misery. Rant over.

  41. Dasick says:

    Near the top.

    “When the Mitsubishi turns out to be a financial disaster, people say helpful things like, “A Mitsubishi? You should have known better than to buy one of THOSE!” Of course, if this was true then nobody would ever buy Mitsubishi. The problem is that data on auto reliability is incredibly noisy, as well as being both politically and emotionally changed.

    “Politically and emotionally changed

    You should fix that. Perhaps you mean ‘politically and emotionally charged”?

    Oh, and just a heads up – your writing is awesome. It’s a fun ride and your conclusions are incredibly valuable and insightful, from life advice to programming to game design (all of which are relevant topics for me). Keep up the good work :D

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