Economic and Real Estate Truth One-Liners

I saw this on BoingBoing the other day, and thought it was interesting…

Debt is not a good product

I just had a great hour-long phone conversation with an old friend, Will Dana (now editor of Rolling Stone), who has strongly encouraged me to come up with one-liners that tell the truth about the economic/banking fiasco – but that do it in almost zen-koan fashion. He thinks this might be the only way to penetrate ongoing confusion and resistance to moving beyond our falsely held assumptions about money and business.

So, I figured I’d start with the generally unrecognized fact that finance is America’s biggest industry – our biggest business sector. How does banking make its money? In short – over-simplified, yes, but ultimately true – interest. It sells debt. And, like I’m arguing in my book, this whole scheme was arranged by 14th Century monarchs as a way of making money by having money, rather than providing value. So “Debt is not a good product” helps encourage that line of thinking, sound-byte style.

I like this idea. Let’s apply it to real estate. Here are my entries:

  • Your house is not an investment.
  • Falling home prices are not abnormal.
  • House debt is not wealth.

I’m sure some of the commenters here can do better. Let’s hear it.

[Update]
Great comments, everyone! My favorite one-liners from the comments (so far):

  • If you can’t pay cash, you can’t afford it. – Scotsman @ 17
  • Debt and interest steal choices from a future that is uncertain. – Scotsman @ 17
  • A recession is a terrible thing to waste. – Greg Perry @ 25
  • Declining home prices creates affordable housing. – Dave0 @ 32

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

56 comments:

  1. 1
    NoMoreWork says:

    DEBT, n. An ingenious substitute for the chain and whip of the slave-driver. – Ambrose Bierce, The Devil’s Dictionary

  2. 2
    b says:

    Despite the prices you see, Ballard is still full of shitboxes.

  3. 3
    aerojd says:

    Baking cinnamon rolls for your open house is not a product. But they smell a lot better than most loan products.

  4. 4
    S-Crow says:

    The problem about a ‘home is not an investment’ is that everyone here, including yours truly, is treating it as an investment because:
    1) we are reluctant to sell in a down market, thus trying to preserve equity.
    2) we are reluctant to buy in a market that has already corrected over 20% in many areas locally to reduce the probability of losing money if the markets decline further.

    It is one of the ironies of this blog and participants.

  5. 5
    Kary L. Krismer says:

    There’s a time value component to money. A dollar today is worth more than a dollar a year from now. That’s what interest is based on. Nothing more.

    Beyond that though, the banking system allows more money to be lent, which in turn allows more things to be done today.

    The problem wasn’t that lending or banking is bad in and of itself. The problem was failing to account for risk properly, or ignoring risk altogether. That’s what needs to be fixed.

  6. 6
    Your Friendly Realtor(tm) says:

    Now is a great time to buy!

  7. 7
    Kary L. Krismer says:

    RE: S-Crow @ 4 – Stated differently, it’s ironic that everyone wants to buy in a sellers’ market and no one wants to buy in a buyers’ market. Herd mentality wins out.

  8. 8
    The Other Ben says:

    RE: Kary L. Krismer @ 5

    A dollar today is worth more than a dollar a year from now. That’s what interest is based on. Nothing more.

    Well that’s not true…they had interest before fiat money. They just called it “usury” and it was illegal. :)

  9. 9
    Jonness says:

    The stress tests were a form of pre-engineered hype.
    Shadow inventory is artifically inflating home prices but can’t do so forever.
    Fence sitters jumping in early are losing money.
    The unemployment rate will continue going up.
    25% of all subprime loans in WA will reset in 2009.
    Option/Alt ARM loans will peak in a year and continue through 2012.
    When interest rates go up, house prices will go down.
    Now that the foreclosue moratorium has lifted, we are experiencing record NODs.
    WA house prices are still far higher than historical ratios to rents and incomes.
    Unlike during the bubble, people can’t get loans without qualifying with extremely strict standards.
    A downward market correction will occur before the end of the year.
    Instead of allowing yourself to feel greed and fear, study numbers and data.
    The fundamentals don’t match the rally; it’s based on hype and greed.
    Use common sense.

  10. 10
    The Tim says:

    By S-Crow @ 4:

    The problem about a ‘home is not an investment’ is that everyone here, including yours truly, is treating it as an investment because:
    1) we are reluctant to sell in a down market, thus trying to preserve equity.
    2) we are reluctant to buy in a market that has already corrected over 20% in many areas locally to reduce the probability of losing money if the markets decline further.

    It is one of the ironies of this blog and participants.

    Hmm, not sure I really get #2. My reluctance to buy before the large declines are over has less to do with reducing the probability of losing money and more to do with just trying to get a good deal. Note that as I’ve said numerous times, I don’t really care if I hit the absolute bottom, I just want a fair price.

    When I shop around for the best price (or as close to it as I can get) on a used car, am I treating the car like an investment, or just bargain-hunting? I don’t think the two are synonymous.

  11. 11
    vision says:

    sell now or be priced in forever!

  12. 12
    Jeff says:

    Something is only worth what someone else is willing to pay.

    (I learned this at a young age with baseball cards and comic books.)

  13. 13

    How about:

    “Join the ownership society: get a bank-owned home like everyone else!”

    The SNL/Steve Martin “don’t buy things you cannot afford” skit is masterful in reinventing the obvious, too.

  14. 14

    Never believe people who say an area is special and how recession resistant it is.

  15. 15
    voight-kampff says:

    ” honk if Im paying your mortgage “

  16. 16
    Jonness says:

    “When I shop around for the best price (or as close to it as I can get) on a used car, am I treating the car like an investment, or just bargain-hunting? I don’t think the two are synonymous.”

    That’s an excellent point. Upon contemplation, I think I am both bargain shopping and trying to make a good investment. The investment part comes from an analysis of how much it will cost me to borrow an extra $100K as opposed to allowing the market to go lower or tread water as I continue to save. It’s that extra $100K of house that really costs the buyer money. It means a 30-year loan instead of a 15-year, and the bulk of the interest is paid toward the front of the loan. A decade-and-a-half later, when you finally get $100K equity into the 30-year loan, some of the payment actually starts going toward the principle.

    Taking on debt makes some sense in an upward market, but it’s financial suicide in a falling market. The only smart thing to do is save a bigger downpayment until the market quits falling.

    OAN:

    Credit card debt is rapidly rising.
    Commercial real estate is about to take an enormous hit.
    Housing debt is highly leveraged, thus future losses are magnified immensely.
    Pink ponies abound in the national media.

  17. 17
    Scotsman says:

    ”Oh what a tangled web we weave when first we practice to deceive” … ourselves.

    If you can’t pay cash, you can’t afford it.

    Debt and interest steal choices from a future that is uncertain.

  18. 18
    David Losh says:

    Real Estate is only an asset if you own it free and clear.

    In Real Estate there are both assets and liabilities.

    The purpose of getting a 30 yr fixed mortgage is to budget enough to pay it off quickly.

    Over the 30 year cycle you are paying today’s debt with future inflated dollars.

  19. 19
    Ray Pepper says:

    David millions view their real estate holdings in the same relation to this cow in one of my ALL TIME CLASSIC flicks.

    They are coming back David…not a question of if….just when………

    http://www.youtube.com/watch?v=MG91VCdK_vw

  20. 20
    David Losh says:

    RE: Ray Pepper @ 19

    I’m not sure but:

    In order to retire you need to own five properties free and clear: one to live in, one to pay the tax and insurance, and three for living expenses. It helps if the four, other than your own, are rented out. There again I know a guy who get paid $600 a person to have foreign exchange students live with his family.

  21. 21
    jon says:

    RE: Jonness @ 9 – “Now that the foreclosure moratorium has lifted, we are experiencing record NODs.”

    It’s only up by 1% from March. With supply very tight at the low end, that doesn’t sound like a big problem overall, not that it won’t be nice for everyone concerned to get past this. I don’t know if the effects of the end of the moratorium have not been observed yet, or it is not really going to be a big thing.

  22. 22
    Joel says:

    Wealth = assets – liabilities

  23. 23
    Cheap South says:

    RE: The Tim @ 10

    Absolutely; why buy today when trends show it’ll be cheaper tomorrow. Completely irrelevant to seeing a home as an investment (which I don’t). Same psychology applied in the boom years, trends showed that prices would be higher tomorrow (“buy now or be priced forever”). Even though some people (flippers) saw it a different way.

  24. 24
    Mama says:

    By voight-kampff @ 15:

    ” honk if Im paying your mortgage “

    LOL, can we vote for a best quote? I’ve never had a bumper sticker but I’d put this one :)

  25. 25
    Greg Perry says:

    “A recession is a terrible thing to waste.”

  26. 26
    rent for now says:

    There aren’t making any more land.

  27. 27
    VK says:

    To me, at least, in appears things will get worse in the short term before they get better.
    Just saw this today on the net:
    http://finance.yahoo.com/news/RealtyTrac-April-foreclosures-apf-15225719.html

  28. 28
    Cheap South says:

    “Who cares about retirement, when you have granite counter tops and stainless steel appliances?”

  29. 29
    Caveat Emptor says:

    By rent for now @ 26:

    There aren’t making any more land.

    That’s the thing, whether you’re being facetious or not. Also, as we are populating the world exponentially each year, someone will value my house in 30 or so years.

  30. 30
    patient says:

    – Borrowed money is costlier than saved money, treat them accordingly.
    – Everyone has and agenda and priorities, don’t take advice from those who differs from yours.
    – Never trust insiders.

  31. 31
    One Eyed Man says:

    Consumers buy on personal desire.

    Traders buy on anticipated market trends and momentum.

    Investors buy when fundamental analysis determines that estimated present value exceeds price, the investments risks are within acceptable parameters and the investment has a favorable opportunity cost compared to other investments.

    Know who you are, understand and apply your decision making discipline, and take action accordingly.

    _______

    Don’t think you’re an investor when you’re really a lemming, or just someone who wants a big house.

    _______

    Homes can be investments, but only if they meet the requirements of the decision making discipline for an investor.

    _______

    One line sound bites are to wisdom as mica is to gold. They attract many, but often lack utility when scrutinized.

    _______

    OK so I didn’t follow the rules for the thread. My stuff above is really about buying decisions and not necessarily about how the economic/banking fiasco happened. It may be too long, but it’s the best I could do to help summarize a solution for people to follow within the framework of a capitalist system with a fractional reserve banking system. Sorry for being a little critical about one liners and houses as investments The Tim, but I gotta call’em like I see’em. As always, don’t be afraid to say my heads so far up my ass I can remove my own polyps.

  32. 32
    Dave0 says:

    how about

    “declining home prices creates affordable housing”

    It seems like the same people who are trying so hard to keep home prices from falling are the same people who say they want more affordable housing.

  33. 33
    Ras says:

    Tracking foreclosures is this guy’s business? He didn’t think foreclosures would keep rising, yeah, either he thought the bezzle would still continue with the banks continuing to lie and steal until the completely implode or the next bubble scam ensues keeping them alive or he doesnt have the skillsets needed to do the job he has been assigned to do.

    Anyone who thought things were going to get better after the end of the nearly-industry-wide moratorium from roughly late November to March are smoking some good sheeiiit!

  34. 34
    One Eyed Man says:

    RE: One Eyed Man @ 30

    Sorry, that last word should be polyps. Where’s my head at? I guess that sphincter is getting a little too tight around my neck.

  35. 35
    Denny Retrograde says:

    How about:

    A Realtor’s duty toward you may be less than you think.

  36. 36
    Robert says:

    RE: Kary L. Krismer @ 5

    Debt is a good thing as long as it is an investment that increases productivity. If you go into debt to make some process more efficient so you can make more money than debt is a good thing. Debt is a bad thing if you just consume sthg. You consume more now but you have to give it back. If you do not earn more money you basically have to consume less in the future.

    Loans for education are good. You get education and you can earn more money and thus provide more value to the society. Infrastructure are kind of good projects. The problem is with consumption – this one is a killer.

  37. 37
    Robert says:

    RE: Scotsman @ 17 – That is if you consume – just eat the loaned money. If you buy a fishing rod – you can then catch more fish.

  38. 38
    Scotsman says:

    RE: Robert @ 35

    Agreed. I should clarify, all apply only to personal consumption. Self liquidating debt
    is a different issue. To my mind, buying a home at this time is somewhere between
    basic consumption and a personal luxury depending on the amount of depreciation
    you end up eating.

  39. 39
    Kary L. Krismer says:

    RE: Robert @ 34 – Agreed. I always wonder for people carrying $20,000 of credit card debt, how much of that was charged for food and drinks eating out. People who do that are making long term payments on past entertainment. Not a good thing.

  40. 40
    Brad says:

    How about the final question the prof asked of my father’s Econ 101 class in college 40 years ago?

    Prof: “When should you buy a house?”

    Students: “When interest rates are low.” “When carrying cost is less than rent.” “When inflation is high.” etc. etc.

    Prof: “No. No. No. You should buy a house…when you need a house.”

  41. 41
    biliruben says:

    If you buy a house at a bargain that no one else wants, is it really a bargain?

    I made sure I waited long enough to buy a house so that I wasn’t competing with developers who could afford to pay more than the house and land were worth to those of us willing to actually make it a home.

    But I didn’t fool myself into thinking I was bargain-hunting. I was buying the best house I could buy, for the price I was willing and able to pay, without unduly sacrificing security.

    Happiness and security are two ends of a teeter-totter. I try to balance that teeter-totter right in the middle.

  42. 42
    Kary L. Krismer says:

    RE: biliruben @ 41 – It depends on why no one wants it, and your comments touch on something I was discussing in the FHA downpayment article comments I linked yesterday.

    Bank properties tend to be ugly, but with the state’s 8k bridge loan for the first time home buyer credit, someone could buy an ugly home and fix it up (carpet, repaint, etc.) prior to moving in. If you’re really looking for a bargain, but not wanting to compete, I think those bank owned ugly houses could be a good option (especially for first time buyers). I saw one last week that was in a rather nice neighborhood where the bank was asking 200k and although I didn’t do a CMA, I’d guess other houses in that neighborhood are going for at least 250k. 8k should be more than enough to fix it up.

  43. 43
    rose-colored-coolaid says:

    By S-Crow @ 4:

    The problem about a ‘home is not an investment’ is that everyone here, including yours truly, is treating it as an investment because:
    1) we are reluctant to sell in a down market, thus trying to preserve equity.
    2) we are reluctant to buy in a market that has already corrected over 20% in many areas locally to reduce the probability of losing money if the markets decline further.

    It is one of the ironies of this blog and participants.

    I don’t know that I entirely buy this argument. For instance, when I “need” a new car or computer, I put off the purchase for as long as I can because I anticipate losses in the perceived value of that object.

    When Tim says “home is not an investment”, I think he really means a home should not be viewed as a profit generating venture. Bonds are an investment, a gift card isn’t. A truck (for FedEx) is an investment, a sports car is not (though an affordable passenger car for many people would be). A house is not an investment unless you intend to run a business out of it.

  44. 44
    daz says:

    The study of history is a powerful antidote to contemporary arrogance.

  45. 45
    k2000k says:

    All the time in the world will never turn a bad investment into a good one.

  46. 46
    biliruben says:

    My momma always said “Life is like a Ballard Chocolate Box, you never know what you’ll get for it.”

  47. 47
    mukoh says:

    RE: The Tim @ 10 – Tim, don’t worry there is a good deal around the corner for you in Kenmore, new plat starting 2100 sq ft at $375k. Is that fair for a cholocate box?

  48. 48
    Racket says:

    “A house is not an investment unless you intend to run a business out of it. ”

    Sure it is if you buy with the same mentality as an investor. Buy cheap fix it up sell it for a profit. People do make money off of this stuff from time to time.

    People here are starting to talk like poker players that are running really bad. They start to talk like winning a hand is impossible. It’s still possible to make money in this game, we are on the downside of the variance and there will eventually be an upswing. You just have to pick your spots, and hope the cards fall your way.

    The “Rush” that was 05-07 will not be around for a while, but there are still people making money out there.

  49. 49
    Jonness says:

    “It’s only up by 1% from March. With supply very tight at the low end, that doesn’t sound like a big problem overall, not that it won’t be nice for everyone concerned to get past this. I don’t know if the effects of the end of the moratorium have not been observed yet, or it is not really going to be a big thing.”

    I haven’t seen the numbers for WA, but CA is experiencing record NOD’s so far in the month of May. I expect WA is also way up.

    Just when we thought it was safe to go in the water.

    http://www.cnbc.com/id/30687618/site/14081545?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

    “Mark Hanson of the Field Check Group, who works with ForeclosureRadar.com, writes, “there is a Pigzilla the size of a freight train in the python and it has worked its way to the lower intestines.” Hanson claims that foreclosures did not surge in April because the banks simply didn’t have the capacity to process all the distressed loans after all the moratoria had caused a backlog. Specifically, he points to Chase and its WaMu loans.

    Beginning on May 4th the properties taken to foreclosure in CA surged. For the past few months, WaMu had been on near full foreclosure moratorium. As of May 7th — only 5 calendar days into the month — WaMu already has 10% MORE foreclosure-related REO’s than in all of April. At this run rate, WaMu will have a record foreclosure month of 3300 foreclosures in CA alone or 7000 nationally worth approximately $2.5 billion. “

  50. 50
    One Eyed Man says:

    RE: Racket @ 48

    I’m with you on this one Racket. Obviously, everyone’s house isn’t necessarily an investment, but houses certainly can be an investment, even if it’s used as the owner’s personal residence. Rose-colored-coolaid and The Tim, I hope you’ve got more than the one liners to support your position? I’ve got an argument worked out in my head on this one but I’m too lazy to write it up right now and I figured everyones tired of my long rants anyway. I can wait and I know the issue will come up again. As they say on the basketball court, “Don’t be bringin that weak shit in here.” ;-)

  51. 51
    BillE says:

    Wealthy people ask, “How much?” Poor people ask, “How much per month?”

  52. 52
    David Losh says:

    This turned out to be a good thread.

    A home is an investment. We do foolish things from time to time for the kids and family, but that should be an investment of personal growth.

    Over all though every one should buy well.

  53. 53
    Alan says:

    I love poker analogies. Poker players have have long deep swings in luck. Doyle Brunson once remarked that he had a year long bad streak. The flip side of this is someone can have a year long good streak. That person will think he is a good player and will think the streak ending is a bad streak instead of just bad play.

    We may still be on the upside of variance in the housing market.

  54. 54
    Racket says:

    Thats’ what I liked about online poker, the ups and downs seemed to be alot closer together.

  55. 55
    economist says:

    Your house is not an investment.

    Well of course it is. An investment is an asset that is expected to provide a future marketable return. The future return on a house is its yield (rental value) and its sale value. It is possible for the yield to be negative or the sale price to be less than the purchase price. It’s still an investment – just a bad one. Like like pets.com or whatever.

    The problem is that almost all of the public uses a bogus definition of “investment” – “something which is guaranteed to make me money”. No such thing exists outside government guaranteed securities, and even those have risk on a real if not nominal basis.

    But is it any surprise that in the age of Madoff people think this way?

  56. 56
    wreckingbull says:

    Suzanne researched this.

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