Thursday, October 11, 2007

There would have been no housing bubble if we would have followed 2 simple rules . . .

Stumbled upon a blog called Everything Finance . . . good stuff, go read. The author had a simple, yet very truthful post on the 25 ways to grow rich (actually, to live comfortably). And he/she bolded rules 3 and 4.

3. Spend no more than 2 1/2 times your income on a home. For a down payment, it's best to come up with at least 20%

Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%
And I thought to myself, what the hell happened to good old-fashioned common sense? The above rules make utter sense. And if we would have held FIRM to that sense (by "we", I mean the collective population) we would not be in a housing bubble (or housing deflation) right now. How did this happen? Did greed really make this happen? "Greed" is really that powerful that we will set aside good sense to follow it -- to believe that gaining 10% - 15% - 25% appreciation in one year can carry on forever? Did people REALLY and truly believe this? Or were they just bull-shitting so the next guy would jump in the game and continue the "appreciation" run?

I mean, the people that bought a house for $600,000 put $10,000 into "renovations" and turned it over the next year for $750,000 . . . did they really believe that this would continue? Or in the back of their mind they said "Whoo, got away with it. Hope this crazy "appreciation" scam holds out 'til I sell my other three houses."

The two rules above are so common sense, so "fundamental" -- how did we get into the 5 and 6 times your salary for a house purchase is okay pot? Are we the simple minded frogs that get cooked alive because the heat was slowly turned up?

1 comment:

  1. here is a pretty good counter punch for the folks who still think it is a good idea to buy a house today...

    There are some limited conditions underwhich one should keep a house. but they are very limited. Worth a look
    -paul (your old YW workmate)


Let me know what you think! Really, I am interested.