Bill Totten's Weblog

Monday, March 26, 2007

Amazing Mental Rot

by Jim Kunstler (March 19 2007)

From the Florida Sun-Sentinel:

Retired Federal Reserve Chairman Alan Greenspan, speaking at a Futures Industry Association annual conference here on Thursday, said the problems of the subprime mortgage market had more to do with home prices than easy credit.

"If we could wave a wand and housing prices go up ten percent, the subprime mortgage problem would disappear", he said.

What kind of a rock does this fucking idiot Alan Greenspan live under?

The median price for a house in my region of the US (northeast) was $380,000 in the third quarter of 2006. Median annual income, meanwhile, was about $46,000. If, by some miracle (in a land of negative savings) someone with an income of $46,000 had managed to save enough to make a twenty percent down payment ($76,000) on the aforesaid median-priced house and got a thirty-year mortgage for the remainder ($314,000) at seven percent interest, his monthly payment would be $2089. Add to that $250 a month in local property and school taxes and insurance and that brings it up to $2339. That adds up to $28,068 a year in house payments. Let's say the poor bastard pays $8,000 a year in combined income tax and FICA witholding. That leaves him with a grand total of $9,932 for everything else. Then there's the yearly cost of owning a car, including installment payments, insurance, gasoline, and maintenance: around $6,000 a year. Oh yeah, if he's a prudent fellow, he's got health insurance, let's say a practically useless high-deductible policy costing $3,000 a year. That leaves approximately $57 a week for groceries, laundry, the collection plate at church, and everything else. (Too bad he can't afford cable TV and the Internet.)

So, if housing prices went up ten percent, how fucked would Mr Median Income be?

Of course, the scenario above was based on the most conservative type of mortgage. If Mr Median Income had gotten a creative mortgage, let's say a no money down, interest only, payment option, adjustable rate mortgage, he would have been a little more solvent until the re-set. Then after enjoying the place for a year or so, he'd either have to sell it pronto, or default on his payments. And because all his payment option shortfalls would have been back-loaded onto the principal, the mortgage obligation would be more like $400,000 now. This is a bummer, selling into a down market.

I guess Alan Greenspan is right. If the price of houses only went up ten percent a year, or every half a year, or maybe every month, guys like Mr Median Income could stay ahead of the game. Of course, sooner or later under conditions of perpetually rising house prices, houses would have to be priced out of everybody's range except for Donald Trump, Paris Hilton, and a handful of other lucky, beautiful people who dwell in the perfumed ethers above the pathetic lumpenprole median zone. Perhaps by then, Mr Median Income would have won the grand prize on American Idol - or better yet, crapped out and won an Oscar for best supporting actor instead - and then he would be a beautiful, rich-and-famous celebrity with the ability to buy as many houses as he ever wanted.

I wonder if the new Fed Chairman, Mr Ben Bernanke is as wise as Mr Greenspan? Let's hope so.

See also "Subprime bust forces families from homes" by Adam Geller, Associated Press (March 25 2007)

Bill Totten


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