The New York Times suggests that the problem is the mortgage brokers; immigrants and African Americans don't trust banks for a variety of reasons. And they did trust mortgage brokers who were members of their communities, and steered them to expensive loans that earned fat commissions.
I don't say that this isn't the problem--I'm sure it's a least some part of it. But there's a problem with this sort of analysis. There are a number of different metrics that go into loan quality, and therefore what a buyer should pay for their loan:
- Income
- Expenses, especially outstanding debt
- Credit score
- Assets
- Loan-to-value ratio
Bluntly: Most poor people are dumb. Not all, of course, but most. This is, in fact, the key reason why they are poor, have children out of wedlock, etc.
Smart people, on average, find a way to make more money than dumb people; thus they are typically more credit worthy. They are also, because they are smart, willing and able to take the time to read contracts before they sign them, choose the best loans, etc.
Some people call this "life." Deny it to your heart's content, but it is a universal truth.
Do smart people exploit dumb people? The dishonest ones do - particularly when the US Government mandates it as policy.
DC fed these people to the Bankers and Mortgage Brokers, who then feasted on the bones of the ignorant and just plain dumb. We can sugar-coat this for 100 years and pretend that there are other causes, but at the root of this thing we have social engineering gone horribly awry. As it pretty much always does.
So what you're saying is that women and minorities are generally less intelligent than White Males?
First: Are you disagreeing with my posted hypothesis that dumb people tend to be poorer than smart?
yes.
That's not what Megan is talking about, as you well know. She's asking: Why are minorities disproportionately affected by foreclosures?
Your response was Most poor people are dumb..
Which leads to my question:So what you're saying is that women and minorities are generally less intelligent than White Males?.
I'm limited by the depth of stringing, so assume this is at the end.
I never mention white, or male, but I do mention dumb. Are most minorities dumb?
Most poor people are dumb, zic's fascinating rebuttal notwithstanding. Most of the people preyed upon by the bankers during this debacle were (are) dumb. Megan posts an article that says that they were (are) mostly minorities as well.
Fascinating... perhaps there's a link there? I'm not saying that there is, but a lot of you seem to have made that link.
What bigots you are. Or are you just logical?
And, btw, I'd like to see what minorities, precisely, are being discussed. Japanese-Americans are certainly a minority. So are Korean-Americans. Yugoslav-Americans are definitely a minority, as are Phillipino-Americans. And Finnish-Americans? I don't know if I even know any.
Any data on how these particular minorities are faring in the subprime meltdown? Did most of them get taken by "unscrupulous bankers?" Do we even CATEGORIZE these people, or are they all just "white," or "non-white?"
One of the more entertaining things that American liberals refuse to accept is that the rest of the world don't generally use words like "Caucasian," or "Asian," or any of the other cute terms we arrogant Americans have to categorize "races" and ethnicities. These are US-constructs, to help us avoid the obvious truths. They are PC, and they help people like Zic sleep at night.
But to the rest of the world:
Tell a Greek that he's the same as a Spaniard and see what he says. Tell a Japanese that she's the same "ethnicity" as a Korean and see what she says. Tell a Pakistani that to an American he's in the same exact ethnic category as an Indian and see what happens, if you're foolish enough to hang around.
Even that bastion of US-style liberalism, Britain, wouldn't generally agree that Britons and Gauls are the same people - and NEITHER would accept that they and the Teutons to the east are all just "white."
And, for bonus points, tell a Syrian that to America he and an Israeli are all just "Middle Eastern" to us. Have fun with that one.
And vice-versa for all of these, btw.
Thank you for noticing I'm a liberal.
At least I'm not an economic Darwinist.
What's wrong with being an Economic Darwinist? If you are a Darwinist, and I've never met a liberal who wasn't, you're a Darwinist. You can't claim that it worked from primal ooze to, say, Homo Erectus but then it stopped.
If we evolve, we evolve - why does it bother you to see what that means? Why does it bother you to see that some people are genetically superior to others?
It doesn't bother most liberals that Tom Cruise and Natalie Portman (and thousands of others) aren't bright but they are very attractive - and they make a killing from it. Surely this is genetics at work, right?
It doesn't bother you that athletes are typically not too bright, but they sure can run/throw/etc. - and they make a killing at it. Again, 100% genetics.
This doesn't bother you, and yet poverty does? Is it because you are hypocritical, or have you simply not taken the time to consider just what "evolution" means?
Darwin was very big into Eugenics, btw. Huge, actually.
If only I were a Darwinist, like you...
"It doesn't bother most liberals that ... Natalie Portman [isn't] bright...."
Didn't she attend Harvard College? Given the competitive entrace requirements, that makes you intelligent by about any standard. Just saying.
Portman graduated in 2003, many years after she had already made a name for herself in Hollywood.
Harvard, like other name schools, loves having celebrities in the student body. Brooke Shields went to Princeton, if memory serves - do you see a huge intellect there?
But, to make the point, let's talk about whichever Victoria's Secret model you'd like. Or the fine scholarly writings of Rob Lowe.
Hey, it applies even when people are smart. Does anyone believe Ann Coulter would have the same popularity if she looked like Helen Thomas? Coulter's plenty bright, but those aren't the genes that made her famous.
I don't begrudge the guy who is trapping F-18's the fact that he was born with an amazing blend of eyesight, coordination, steel nerves, etc. But I don't think that nurture had anywhere near as much to do with it as I do nature.
While I agree your main point, Rob, I must say that Natalie Portman was an exceptionally poor example for you to choose. Among just about any group, Hollywood celebrities included, there's significant variation in intelligence and any other trait not ruthlessly selected for or against. Wikipedia may not be the final word in biographical references, but I see plenty of evidence there that Portman really is somewhere on the right tail of the human (and Hollywood celebrity) intelligence distribution.
You can't claim that it worked from primal ooze to, say, Homo Erectus but then it stopped.
Oh, but that's exactly the multi-culti position. In point of fact people on the left (or, "liberals" as they are incorrectly called in the US) don't believe in evolution any more than the creationists do - it's just a signifier of tribal identity.
I don't believe any of the material mentions women in the foreclosure equation. I think Megan just cites women in the title because she uses the stock NYT joke "World ends, women and minorities affected most."
First of all, before we even get into defining "smart" how do you define "poor"? I have no doubt that you could take a village in China or South America where everyone makes less money than I do and you can find people "smarter" than me.
I tend to agree with some of the generalities of your blunt and rude suggestion, but only in a vague way.
Because simply put, "poor" depends on your surroundings. If you take a poor rural community, the people there are not dumb. But more than likely the people who are of below average income for that region are also of below average book smarts. But likely they could all hunt for food, grow food, build a house much better than you or I. So how "dumb" can they be?
Let's avoid a loaded term like "smart" since a PhD in nuclear physics might have terrible money management skills and live hand to mouth as a result. This is really about "financial smarts" and for the most part, those in cyclical poverty don't have it. I'm talking about people who will finance a more expensive car that they can't afford the loan terms for, rather than buy a cheaper car; people who will rent furniture rather than buy used; people who will run up expenses they don't need because they won't delay gratification. (There are obviously other reasons why many are poor, having to do with desperate circumstances like health problems or lack of opportunity, but for a good portion it's a matter of poor financial decisions that prevent them from climbing the ladder).
I'm not avoiding that loaded term, because pussy-footing around it is the heart of the issue.
What I *am* avoiding is making the exceptions or the anecdotes into the rules. My statements are macro, and at the macro level I've yet to hear anyone refute them.
Most poor people are "below average" IQ (or whatever other yard-stick you'd like to use). Not all, but most.
What % of home mortgages have gone into foreclosure? You all know that it's well over 90%. Thus you don't need a Ph.D., on average, to be smart enough to read the contract, understand it, compare it to other things, etc. *before you sign it.*
And here's another fun question to mull: if these people *had* read the contract and *did* understand that they were betting everything on their house never depreciating and/or interest rates not rising... how many of them were smart (or disciplined) enough to not sign?
In other words, what % of this fiasco isn't due to predatory lending at all, but to greed or (to be kinder) a "hope for a better future?"
Economics doesn't blend well with Political Correctness. The fact that we've force-fit the two is one of the big problems we have to un-do.
Correction, I should have written *not* gone into foreclosure.
Many of the people discussed in the article are neither poor (they have middle-class incomes and credit scores that would qualify for lower-interest conventional loans) nor are they stupid (they have professional jobs in some cases).
So what's going on? For starters, most people are rationally ignorant about a whole range of issues -- they don't (and couldn't) take time to study everything personally, so they rely on others. OK, so why didn't these homeowners do a search on bankrate.com for the best rates? Because they are members of minorities who, for historical reasons, are much less willing to trust outside their communities and more willing to trust within them. So they rely on recommendations of friends and relatives more heavily and are much more willing to buy from somebody who's a community member (even if that person is offering a lousy deal -- they don't do the research to find out).
Something similar happened to all Madoff's Jewish victims who trusted him implicitly because he was a member of the minority group. And those people were neither poor nor stupid.
Ummh, the phrase applicable is:
"You're damned if you do, and damned if you don't."
Don't fret the details, as you will be excoriated if you loan the money ... or don't. Our wondrous "leaders" in Congress will gladly vilify you for either reason in order to gain political advantage.
What's new? The only thing new is how brazen they have become in using the disadvantaged to their own ends.
tom
None of this should be surprising. Obviously the poor are going to get worse loans, their income and assets are lower, their credit is often worse (which just creates a cycle, because then with worse credit you get worse terms, therefore more likely to default, get worse credit, etc.). The only way to really get out of poverty is with good financial smarts, and anyone with good financial smarts isn't going to stay in poverty for long.
Rob,
Question for you - is it more because they are dumb or because they are ignorant. It's not that they can't know, it's that they don't care to know.
In my case I have a deep sypath for the less intelligent - those who can't know. I have no sympathy at all for those who don't make an effort to know.
From a politial perspective - Liberal vs. Concervative I wonder how much of that is driven by the view that the people affected were willfully ignorant rather than stupid.
While perhaps not your intention, you do bring up a good point. Financial skills are not taught in our public education system. While most schools offer a home econ. class it is most often a non required elective, and lets face it, one of those blow off classes that teaches nothing.
Figuring out the cost of a loan is beyond the skills of the average layman.
For once, I wholeheartedly agree with you.
Balancing a bank account, a household budget, planning for retirement, reading contracts are all things young people should learn before spreading their wings. It's right up there with learning about their reproductive systems and proper nutrition.
I've thought for years that the credit card industry puts a fair-sized swath of our population into a form of legalized slavery. Without the ability to easily pile on credit card debt, a lot of people would buy a lot less junk, and as a result they wouldn't be compelled to work nearly as much to stay financially afloat.
I imagine that the marginal work we get out of these folks is of more real value than what their additional consumption costs us, and this is a big reason why there are powerful forces arrayed against any real increase in financial literacy. I hope I'm not right about this... but it's consistent with my observations.
I suspect that status competition and desire for material comforts would drive a lot of people to work quite a lot. Without easy credit, the competition baseline would just be lower, is all.
Slavery? The industry is actively putting people into a form of legalized slavery? It's very hard for me to see it that way. From where I sit it looks more like a fair number of people are abusing the opportunities they've been given as adults in our society. Shall we take away everyone's ability to borrow money because a few people can't do it responsibly?
And how do bankruptcy laws square with your view of the financial world? Did the slaves of yore become free after a bit of paperwork, losing their freedom again only when they sold themselves back into slavery?
Oh, no. I agree with your point, and my use of the term "legalized slavery" was intentionally hyperbolic.
But I'm quite sure that if we really wanted to, we could change our education system (and, perhaps, a few transparency-related regulations concerning the credit card industry) in a way that resulted in far fewer people getting into deep credit card debt. Unfortunately, that appears to work to our economic disadvantage. More often than not, we all statistically suffer a teeny tiny bit when a stranger makes a bad decision; but I think this is an exception.
Is that question directed at me? I'm not sure I'm the Rob in question. If not, sorry for butting in.
The most common reason for being poor is youth. Young people haven't had time to accumulate job skills and savings, and they are apt to be impulsive.
Most young people grow out of it. Those that don't (see the story about the guy with the $120K income and expensive wife) stay poor through adulthood.
The non-white population is younger on average than the white population in this country. In the case of Latinos, a lot younger. If any given study compares 30-year-old Latinos with 45-year-old non-Hispanic whites, they will find disparities even if all else is equal. This isn't to say all else is equal, but age IS something that often gets left out of these discussions.
It's especially important in this case because it may explain why some people bought for reasonable prices pre-boom while others bought for inflated prices during the peak boom years.
Meghan, Steve Sailer also has some statistical data on this topic.
http://isteve.blogspot.com/2009/05/r-089.html
It may be worth checking out.
Flip it around, folks. The most common reason for purchasing a home with a sub-prime loan was the expectation that your property would increase in value, building equity so that you could refinance to a fixed rate in a few years.
The assumption was property values would continue to increase, providing the equity for a better loan that the buyer did not have going into the purchase.
Given that more women and minorities are poor, it's no surprise more are now facing foreclosure. It's the demographics going into the game that we're seeing reflected in the foreclosures coming out.
That assumption obviously turned out to be wrong. I'd go farther and say that most people that gambled on that assumption to the point of taking a loan they could not otherwise afford, were not especially bright.
When I was younger, the loan terms offered to me were not as favorable as they are now. As a result, I bought cheaper cars, and rented an apt. I did not run up debt I could not pay on the expectation that my future income will rise, thus making that debt level affordable.
Yes. But had the assumption proved true, as it had for 30 years, they would have been dumb not to get into the market while prices were at a level they'd be able to afford with the growing value of the home, else risk being priced out of the market forever.
Hence, Megan's bloggingheads from a few months ago in which the guest had looked into a few laboratory studies for simulating markets and learned that the simulated markets also produce bubbles, and the only way for the traders to avoid a new bubble is to have seen the same thing before. Get burned, get learned.
Just because Megan is usually pretty savvy about such things, and because the implication is there in the last paragraph, I think most of the commenters are way off base:
It's not about being poor, it's about being a Minority.
The studies she's citing control for "one or two of these" where "these" include income/assets. Controlling for these, Blacks were still getting much worse loans. Why would poor Whites get better loans than poor Blacks? One hypothesis is that distrust of banks made some groups vulnerable to in-group exploitation. Another hypothesis, Megan's, is that the poor Whites in these studies (in terms of income and assets) still had better credit scores or lower loan-to-value ratios than minority borrowers, leading to better terms. It's an empirical question, but one that has nothing to due with poverty or intelligence, per se.
You also have to consider downpayments. One of the easiest ways to get bumped from a conventional mortgage is to lack the necessary downpayment, which is always a percentage of the home's cost.
Sub-primes often allow a buyer to purchase with a smaller, or no, downpayment. In turn, that allows people to buy more than they can reasonably afford. How many of the people in the Times article perhaps bought a house for $450 grand with a tiny downpayment and a sub-prime mortgage? Could they have come up with a bigger downpayment for a $300 grand house and gotten an FHA mortgage?
The ease of getting loans, drove up values in some of these minority areas much more than in some non-minority areas. That meant higher downpayments or sub-prime mortgages. I happen to live about 3 minutes from one of the Long Island minority areas mentioned in the article. The values there, as a percentage, rose much higher than in my area.
"Financial skills are not taught in our public education system."
No, they are not. But, they have books and the internet and any number of other resources available for people to learn. Yet, they most often chose not to avail themselves of these resources.
If you were going to buy a home, is it that unreasonable to read a few articles by people who think buying a home is a great idea and a few articles that say buying a home is a bad idea? Then you can weigh the different opinions and come to your own conlusions.
Or do I expect too much?
Before I do that, can you point me to a couple of sites that say it's a bad idea to read a few such articles? It would be irresponsible of me to research the pros and cons of home-buying without some dissenting opinions regarding the efficacy of researching based on the he-said/she-said model.
jason,
There is an entire book on the subject:
http://www.amazon.com/Blink-Power-Thinking-Without/dp/0316172324
Jason,
Seriously dude - did you not know about the whole "intutive decision making" movement?
The only thing less funny than a joke that bombs is explaining why at some point in the past you thought it would be funny...
When intuition and/or consensus point squarely in one direction, we will usually find that it is because there is an obviously correct direction, and it/they are pointing you that way. The really interesting stuff involves the cases where the truth is counter-intuitive, and the almost-as-interesting stuff is where the truth seems intuitive, but only after you've heard what it is. The intuitive, common sense stuff is boring, primarily because it represents the default circumstance. Exploring all of your options in all situations is not only impractical, it's inefficient (and even dangerous in some cases). It should be noted that consensus opinion does encourage research and exploration in some situations (e.g. buying a new car).
What you're asking for is that people should intuitively know when they should trust their intuition and when they should not, and that this first intuition be more accurate than the second. And that, in fact, is a bit much to ask.
In the wake of this crash, consensus opinion is that owning a home is not worth the destruction wrought by taking on a mortgage you can't pay back, so you should be sure that the house and the terms make sense for you in your current situation, knowing as well that the future is uncertain. Asking people to do research now is easy, especially as most people now will do so without your individual prompt. That's not the same thing as asking that people five years ago to have done the research. I could still be wrong about the wisdom of getting out of bed this morning, but either way, I wasn't going to research the question. I just assumed that there wouldn't be any persuasive counter-arguments. I think people can be forgiven for not realizing that there were good arguments against home-ownership out there, given the weight and consistency of public opinion and messaging.
So, the joke was: It seems obvious to you that I should do research before deciding that home-ownership is good, but if you expect people to ignore what seems obvious and research opinions that are contrary to the obvious before engaging in any activity, than I can't justifiably do the research you suggest without actually seeking out anti-research opinions. Personally, I realize that there is a hypothetical possibility that a persuasive anti-research opinion exists, but I don't think the probability is high enough to waste resources on.
No, you are not expecting too much, at least not from my point of view.
There is no reason why:
a.
"People who are about to sign a 30 year commitment should do some research on exactly what it is they are committing to"
and b.
"The public school system should do a better job of teaching students financial skills"
should be mutually exclusive.
zic,
"they would have been dumb not to get into the market while prices were at a level they'd be able to afford with the growing value of the home, else risk being priced out of the market forever."
But such a thing can never happen in the long run - when you start to price the median income family out of the median home you get an eventual correction.
"But this time it's different!" "You just don't understand the New Economy!" Some very bright people were saying that.
Totally.
We could have the same discussion about dot.com stocks a decade ago, any stock half a year ago.
I'm not justifying purchasing more than you can afford, I'm only trying to understand it. We've been looking for a new house for a couple of years, and we can afford quite a bit of house. And a year ago, we frequently had realtors trying to talk us into more. Everybody was doing it.
When that "more" is a basic home in your neighborhood, and the trends at the time put next year out of reach, I can understand why people got in over their heads.
Their gamble proved wrong. But to understand this better, you'd have to go look at the demographics of people who took the gamble say four or more years ago, who successfully built up equity and refinanced based on climbing prices. Were they predominately white families, and were minorities/single women caught up in the end of the cycle?
zic,
But we knew we were in a bubble because the price/rent ratios got too high. People knew they were renting a place for $1000 a month and to buy a place costs $2500 a month, what sense does it make to buy? Just rent and save yourself $1500 a month.
I would need to see data on that, because I haven't heard about $1000/month apartments/houses in NY. And I've read lots of stories lately of folks moving to NYC, looking at rents of $2,000 and up, and considering them a bargain, though that's anecdotal.
So I'm not convinced you know what you're talking about. Rents in Portland, Maine for $1000/month for a two-bedroom are even uncommon. And I know prices are cheaper there than in New York.
There are some big differences between the dot-com bubble and the real estate bubble. One of them was, as I noted elsewhere last year, that,
Another difference is that there was a lot less leverage involved in the dot-com bubble. A stock speculator with a $100k brokerage account might have bought another $50k in dot-com stocks on margin, but that's a far cry from a real estate speculator borrowing $360k-$400k to buy a $400k house.
The more you spend, the more money your realtor makes. In theory (and, I believe, legally) your realtor is supposed to be yours in the sense he/she is looking out for your interests. In the real world the realtors on both sides of the transaction are acting as agents of the seller.
I bought my first house almost twenty years ago, and my realtor was pushing me to spend more. This is not at all new. What changed was the willingness of banks and mortgage brokers to go along with a loan you couldn't pay back, because they were planning on selling it off.
People who get over their heads in debt are dumb/ignorant, for the most part, and a great number of them aren't even poor. Megan blogged about two dumb, ignorant high income white people just at the end of last week.
>immigrants and African Americans don't trust banks for a variety of reasons
Now why would that be?
There is a small community locally of people from a specific ethnic/religious background. In the 50's they were the target of government for educational reasons. They came to this country to flee persecution. Good reasons not to trust anyone. Banks, government, the railway, whoever.
Individuals within that community worked on the fear for their own benefit. A rallying point to gather followers. In spite of the dramatically improved situations for individuals within the community, the meme was of being oppressed, someone out to get you, mistrust. I've experienced that in an odd way, but that's another story.
A decade or so ago someone came along promising a great way to get rich. Long story short, it was a ponzi scheme, and those who got in early did very well, and when they reinvested and lost later in the game the whole thing came to an end with criminal charges etc. The individual played on the specialness of the group. Not too different from Madoff.
I posit that groups like this are quite common, quite commonly victimized by people who take advantage of them. Ultimately they are victimized by the individuals who become community leaders by playing on the fears, and who maintain their influence by nurturing those fears. Jeremiah Wright comes to mind.
Golly gee. One of his disciples is now president.
Derek
"I would need to see data on that, because I haven't heard about $1000/month apartments/houses in NY. And I've read lots of stories lately of folks moving to NYC, looking at rents of $2,000 and up, and considering them a bargain, though that's anecdotal.
So I'm not convinced you know what you're talking about. Rents in Portland, Maine for $1000/month for a two-bedroom are even uncommon. And I know prices are cheaper there than in New York"
Who said I was talking about New York? We are talking about minorities all over the US. In addition I was using the $1000/$2500 as a US generic amount.
For specifics please see this chart: http://4.bp.blogspot.com/_pMscxxELHEg/SMAGJbFYWKI/AAAAAAAADak/cQUwiM1ccV0/s1600-h/PriceRentNationalQ208.jpg
How hard is that to read and figure we're in a bubble? And even if you don't read the chart - you can still notice that if you rent you will have considerably more disposable income at the end of the month.
And looking at the graph you linked to reinforces what I said: If you wanted to own a home, the trend lines were putting the potential out of sight for many.
Had the trend continued up, as they had for 30 years, rents would have followed.
Again, I'm not excusing taking a financial risk that depends on your investment growing to succeed. But I can understand why people did it; and as I said earlier, you'd have to go look at the demographics of the folks who purchased houses on a sub-prime and were able to convert to standard mortgages because of the the increased value of their homes before prices crashed. Were they stupid and irresponsible or just lucky?
One thing I do agree with -- the easy money likely spurred an increase in values that would not have happened else.
Since some of the "savviest" bankers in the world got caught with their pants down on this one, bashing poor women and minorities for their lack of financial responsibility seems pointless; particularly given the climate of the time, which may have made the purchase seem both reasonable and responsible. For that's the other problem with a bubble -- you never know when it's going to pop.
Zic, you have the math skills of a girl.
That's a graph of price/rental cost. Rental costs are the denominator, so even if the trend continued there is no reason to believe that rental costs would go up.
http://www.calculatedriskblog.com/2008/03/real-case-shiller-house-price-index.html
Seriously, look at the CS Index for the last 20 years. Prices had not been increasing like that for 30-years. The last housing bubble/bust was in 1990 and real prices declined for seven years. Especially the last few years of the bubble '03-'06 were the exception and not the norm. House prices had never risen like that before, which was a huge warning sign.
It looked like a bubble to you because you both knew where to find that kind of data and how to interpret it. Meanwhile, the reason for that bubble's existence is millions of people who were either not finding/understanding that kind of data, or were banking their quick riches on the Greater Fool theory.
???
zic,
"Had the trend continued up, as they had for 30 years, rents would have followed."
But that can't happen! If it had - in 30 years rents and mortgages would have consumed more than 100% of peoples incomes.
Yes. In some places, we were/are probably close to that.
But you're looking at what happened with the benefit of hindsight. At the time, it was the assumption. And our whole economy teeters on the verge of collapse because of it; but even Greenspan didn't think the growth would stop.
When I lived in Virginia, there was a series of TV ads that went roughly like this:
Scene: kitchen table, apparently owned by a black woman in her 50's.
Enter: Old White Guy with double chin and Young Black Guy (good looking)
OWG: Hi, Mrs. So-and-so, we're here to talk to you about your loan. This is Jerome. You can trust him because he looks like you.
YBG: Hi, let's just look at these documents...
Voice over: predatory lending isn't always this obvious. If you have questions about banking practices in your area, call [Government agency].
So apparently whoever was in charge of predatory lending in Virginia between 2003 and 2007 or so believes (rightly or wrongly) that the black community there is primed to be exploited by bankers using black brokers/agents/sales reps to build trust based on fake racial solidarity.
If nothing else, this sort of thing is an excellent argument against any notion of in-groupiness.
Just out of curiosity, what was the theory behind the boom? I can understand why a few neighborhoods would have a boom at any given time. New development or gentrification near existing "good" areas could cause rapid price increases locally as formerly undesirable areas became more desirable.
But why so many places? Population was growing, but not THAT fast. Incomes did increase as more women entered the workforce, but that happened long before the silly real estate boom of this decade. Overall inflation for other things wasn't that high. I don't see any explanation for the real estate bandwagon effect except groupthink -- doing it because everyone else is doing it.
The tech boom was somewhat more respectable in that there was actually a new technology with unknown potential in play. But the housing bubble was just silly, not to mention extremely annoying to those of us who refused to join in. And yes, we do vent some of our annoyance at the buyers who participated in this nonsense. I reserve most of my wrath for the ones who made killings flipping properties, but I do have some left over for people who were just foolish and got burned. Or at least I do if they expect ME to do anything about their predicament.
Every boom is "just silly". Housing is a perfect candidate for a boom because it's all being financed by OPM. If I buy a million dollar house for no money down and it goes up ten percent, I've conjured up a hundred grand out of thin air (assuming I sell it, of course). This is the only large, heavily leveraged transaction most people will ever make.
It's a pretty rational decision, too. In California, where I live, housing loans are non-recourse. I'm kicking myself for not buying a giant mansion when I had the chance. Of course, I would have sold at the height of the market (ahem), but if not the cost of getting out of the loan is the stamp I use to mail back the keys. Hell, banks were (are?) paying people to leave without trashing the place - I could have gone a million dollars in the red and still walked away with extra money.
The part I still don't understand in all this is how the ultimate investor (bank or hedge fund, I suppose), didn't look at this and say "whoa, I keep hearing about these liar loans and here I am buying CDOs. Maybe I should look into this." And of course he was buying, if not liar loans, at least crappy loans that had been repackaged as AAA.
The information was out there. These people had the background to figure it all out - I mean, seriously, that's why they make so much money. So where is the disconnect? I used to think maybe they knew and didn't care since they were pulling down these huge bonuses and figured to just retire when the shit hit the fan. But were CDOs so profitable they couldn't have moved the money into something that wasn't an obvious Ponzi scheme and made almost as much? The benefit being you look like a genius when the CDO market falls apart.
Just out of curiosity, what was the theory behind the boom?
My theory:
The alteration of the capital gains rules (1997) made "flipping" after 2 years of residency dramatically more profitable, securitization made it easy for anyone to become a mortgage lender, and lots and lots of foreign money was looking for a "safe" investment, and found it in securitized mortgages. Plus, once it gets started, there's a rush to grab the easy money.
Of course, you'd be an idiot to trust anything I say about macroeconomics or finance.
It would be nice to think that the title refers to a very old joke. Long ago when the world was young the New York Post was a very liberal newspaper...reliably and comically liberal. Imagine a newspaper in which Bob Herbert wrote all the news and edited it all as well. It was imagined that come Judgment Day, the headline would be
WORLD ENDS: Jews and Negroes most affected
Truly there is nothing new under the sun.
You know, doing some basic fact-checking might help. What are the unemployment stats? Why don't we check the BLS site:
A bit hard to read, but the 'recession' has hit minorities a lot harder than it has hit whites; by the end of April, unemployment was 15% for Blacks vs. 8% for Whites, and further, rate of change of unemployment for Blacks from March to April is 1.7% vs. 0.1% for Whites, that is, 1700% higher.
If you want to consider second-order effects, fine. But you might want to consider these stats first. [sarcasm]Yeah, I know, those minorities losing their jobs at 17 times the rate of whites just goes to show how dumb they are. Obviously, if they were smarter, they'd still be employed.[/sarcasm]
The above is irrelevant to Times article that is the basis of Mcardle's post. The Times article specifically mentioned minorities making the same as whites but having more sub-prime mortgages.
The Times article also talked of specific people. None of the mentioned people lost their jobs.
The Times article was based on sub-prime mortgages and never mentioned unemployment rates.
Now, now. Don't you hassle SOV about not actually reading the original story.
Just out of curiosity, what was the theory behind the boom?
Here is my theory - people drew the wrong conslusions based on past experience.
A. For example - in 1981 mortgage rates were 18% so $1500 a month could buy you a $100,000 home. Today with interest rates of 4.5% that same $1,500 a month can buy you a $300,000 house. People assumed that since homes that were 100k in 1981 were 300k in 2001 in 2021 they would be worth 900,000.
B. Here is another reason - stocks split houses don't. MSFT went public in 1986 at 27.75 a share. Today it's at 20.46. People look at that and say look MSFT went nowhere while home prices trippled. However, 1 share of MSFT stock in 1986 is now 288 shares today.
Add A and B along with some inflation and people came to see houses as a far better investment than they actually were and therefore bid up the price - the same as with any bubble.
One theory was that "They aren't making any more land" therefore prices will always go up because the US population is increasing (same supply + more demand = higher prices) Of course, drive 5 minutes from the latest development and you typically see square miles worth of undeveloped land.
This is just a variation of the well researched and verified "people are stupid" theory.
True, most people are stupid most of the time and it is precisely when everyone that is going to adapt the belief that real estate prices only go up has done so that that proposition ceases to be true. There is a long cycle of about a human lifetime from global financial crisis, to Great Depression to Great Recession when everyone with a little bit of caution learned in the previous crisis/depression/recession has died out and the belief in the ever inflating value of real estate reaches 100%. That is when conditions are set for the next Great Recession and the word used acquires such negative connotations that it becomes unusable and a new euphemism must be coined. So "crisis" became "depression" and after 1930 Great Depression came the new word "recession". We are now well in to the Great Recession of 2009 a new word is due, what will it be? "contraction", "reversal" ...?
Sigh. Did you read the top of the post:
Note that 'specific people' are not 'statistics'. Neither are anecdotes. Do you have a problem with the notion that people who have lost their jobs are more likely to be facing foreclosure than those who don't? Or that someone who loses their job for an extended period is quite possibly more likely to be foreclosed upon - even if they got the prime rate - than someone in a subprime mortgage but reliably employed.
This schtick about 'irresponsible minorities' is so far past its sell-by date that the tomato crop growing up in the compost is already thigh-high.
jason,
I think people can be forgiven for not realizing that there were good arguments against home-ownership out there, given the weight and consistency of public opinion and messaging.
I feel that people should be held responsible for what they believe. I don't care if your parents told you, or the church told you, or the government told you, you are ultimately responsible for your beliefs.
Ditto jmo. Goes with zic's line of
"Again, I'm not excusing taking a financial risk that depends on your investment growing to succeed. But I can understand why people did it;"
What does understanding have to do with it? I understand why someone would get into insane debt by throwing cocaine fueled parties with lots of hookers. Hookers and cocaine are fun, I get it. There are very few mistakes out there, that I find myself unable to understand. Understanding should not be used for some sort of quazi get out of jail free card.
Why are minorities disproportionately affected by foreclosures? There's a lot of quasi-anecdotal evidence along these lines that indicates they're more likely to currently be in arrears on an unaffordable mortgage.
I will give 10:1 odds that some minorities (I'm looking at you Asians and Arabs) are less likely than the general population to be in foreclosure than the general population.
Of course, we don't hear much about the quiet, hardworking, studious minorities who are doing better than the general population. It doesn't fit the whole "America is racist" narrative.
Minorities are disproportionately affected by foreclosures because the banks lowered lending standards to comply with anti-redlining statutes. It helps to look at the data the press has been trained not to look at.
"In 2006, lenders handed minorities 77 percent of subprime dollars. Hispanics alone got a majority: 53 percent."
All forced on them by lenders greedily attempting to lose money, I'm sure.
The statistics indicate it's actually men that are being hardest hit by the recession.
http://www.reuters.com/article/economicNews/idUSN1450507420090518
Someone who you have an unfavorable opinion of posted NYT: "World Ends, Women and Minorities Hit Hardest" on Saturday.
Apparently "crypto-racist" minds think alike...
The fact is that when the Banks go on a lending binge, all of them do it at the same time and it is very hard for borrowers to keep there heads when the conventional wisdom is that property values only go up and that those who don't borrow to get on the price escalator are fools. Remember borrowers are not expected to be as financially sophisticated as the brokers and bank loan officers, so if they are persuaded to take out stupid loans more of the blame should fall on the latter supposed professionals.
Somewhere I have read that more than 60% of colored borrowers whose financial conditions made them eligible for prime loans were steered into sub-prime instead because for the bankers and brokers this was more profitable while the ratio was only 20% for whites with the same financial conditions. This is a case of both racism and mortgage brokers favoring their own interests over those of their clients.
We need to separate the different factors in the overall problem:-
People buying property when the prices had peaked and huge losses are inevitable for them;
People buying property at whatever price with loans that they could never service;
People who could qualify for cheap loans that they could have serviced getting expensive loans that force them into unnecessary default;
Banks and ratings agencies defrauding the buyers of the "AAA" bonds based on unsustainable sub-prime mortgages by lending the money to people who could never repay to buy real estate that was already overpriced
There is a meme being pushed by right wingnuts that Government mandated lending to poor people by Freddie Mac and Fanny Mae was the cause of the sub-prime crisis. In fact most of the bad lending was by Banks acting on their own exploiting poor people buying expensive real estate with unaffordable loans as dummy buyers so they could defraud the unfortunate buyers of the packaged bonds. Make the loan then sell the bonds and if the bonds become worthless because the loans all default then caveat emptor, that is not the bank's concern, they go on and sell more bonds to make more bad loans.