Double Journey

I often think that my generation is getting the very short end of the stick.  I’m sure lots of people feel that way about their respective lives, but it is an odd thing for me.  You see, I’ve always done very well, but I think I’ve done very well despite some pretty big obstacles put in front of people my age, 30.  Here is the quick list of what 30 year olds today have a right to gripe about

•  Tech Bust of 2000 -  Right before I graduated college and was about to enter the working world, the tech bubble was in full swing.  the Dot Coms of the world were producing millionaires for people with my exact skill set.  Of course, right when I graduated, tech mania subsided, the bubble burst, and lots of my peers lost their jobs.  I even technically lost my job.   So right when it was most important to have a job, since few, if any, of my peers had a safety net, we were losing our first jobs.  The jobs that would set a foundation for the things to come.
• 9/11 - One short year after I graduated, we had 9/11.  This changed the face of the United States and brought on an even wider economic slowdown than the tech bubble bursting.  Our lives became a little more frightening and a lot more inconvenient.  It brought changes to our government and our lifestyles which I frankly don’t really care for.  A few years down the road it even helped re-elect one of the biggest idiots we have ever had as President ….
• George Bush - Can you believe that this has been the man who has been President of the United States my entire adult life?  If that doesn’t show you how screwed my generation is, I don’t know what does
• The Housing Bubble - This one might just be the worse one of all.  My combined household income would, according to wikipedia, qualify me to easily be in the top 5% of households in the United States.  If we took into account how much I have in savings …  Well let’s just say I’m not doing half bad.  Yet I don’t own a home.  I don’t because ever since I was able to afford it, it hasn’t made any economic sense to buy.  Prices were just too high.  Most people my age probably could not even really afford it until about 2005, but by then housing prices had skyrocketed to unprecedented levels.  To make matters worse, many of my peers bought anyway!  So now, they are losing their shirts as home prices fall.  Since they just bought, they have no equity.  Many of them will be foreclosed on, ruining their credit for years to come.
• The end of Pensions and the Collapse of Social Security - Pensions as we know it are done.  My generation now faces the very daunting taks of an unsecure retirement.  Many of our parents have guaranteed income the rest of their life thanks to generous pension benefits.  My mom retired in her early 50’s and has a pension that will pay her 1/2 her salary for the rest of her life.  No such luck for me.  I’ll be saving for retirement by myself with no such guarantees.    To make mattes worse, my generation will be the one to have to deal with the Social Security mess.  Fantastic!
• Inflation - I’ve written before and I’ll say it again.  Inflation is very, very bad.  It has been dormant for almost my entire lifetime.  But right when it matters most, when people my age should be starting to accumulate wealth for retirement, it springs back to life.

I could go on and on.  These problems aren’t like the Great Depression or a World War (although we have had to deal with a very long, protracted war even though we reached “Mission Accomplished” years ago) but still.  While these problems haven’t really affected me personally, I’ve seen their effect on my friends.  It makes me think that things are even worse for us than I believe since I myself have never felt the pain first hand.  What do you think?  Am I part of generation screwed or am I making a bigger deal about this than it really is?
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Someone asked me the other day why I don’t own a house. Considering my age and income, its a pretty good question.

There are lots of reasons I haven’t bought a house yet. Some of it just goes to my lifestyle. I want it to be as flexible as possible because I really don’t know where life is going to take me. Three years ago, you could have never made me believe that I would move to Seattle. Just a year ago, I was prepared to stay in Washington a few more years. Each time an opportunity came, I grabbed it because there was nothing like a house holding me back.

But that’s not the real reason, or at least not the whole reason. It’s much more a convenient story I tell to people so they just leave me alone. I’m a traditionalist when it comes to buying a house. I want it to put down 20%, a 30 year fixed mortgage, and I want to only spend about 33% of my gross income a month. When I finally got to the point I could put 20% down on a place, the places I could afford just didn’t seem worth the money. I couldn’t understand how someone like me, who earns well above the average, couldn’t afford a decent place.

So I waited while the prices kept going up. I knew they would eventually come down because I just looked at my own situation. If someone like me, who saves like crazy, earns lots of money, and lives a understated lifestyle couldn’t afford something, how could everyone else. So I waited while all my friends told me I was being stupid. It was hard, believe me. Logic seemed to be flying out the window because prices kept going up and up. But I knew things would eventually come back to a sane level. They had to.

That’s why when I read articles about the problems in California housing prices, I just laugh. Just read the subtitle, “People in L.A. are coping in ways they never imagined with a crisis they never saw coming.”  How did people not see this coming?  I saw it coming five years ago when I refused to buy a house here.  I saw it three years ago as I left the state.  I saw it two years ago as the peak was finally hit and prices topped out.

However “mean” it sounds, I just don’t feel sorry for any of these people.  I really don’t.   People bought something they could never afford.   Now that sanity is returning to the world, people are looking for others to pay for their mistakes.  The sad part is, it will happen.  The government will step in and help.  That’s just how things seem to work around here these days.  Not sure what that does to moral hazard or how people like myself, people who don’t get into these types of problems, will react.  What are your thoughts?  Did you see it coming?
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Congress met today to discuss a plan to try and save owners who might be foreclosed upon because they have a loan they can not afford.  I find this somewhat laughable but then again, I find most of what our government does laughable.  This one in particular sticks out because I find it to be a strange circumstance of Congress moving too slow and too fast at the same time.

If Congress was going to do something, it should have done it years ago when it was clear to any rational person that housing prices were going up too quickly.  Of course, they wouldn’t have done this, despite today’s predictable situation, because too many people were getting rich quickly and nobody wanted to stop that gravy train.

Now, they are moving much too quickly.  In reality, they should not be moving at all.   People need to lose their homes.  Banks need to lose money.  Those banks that took the worse bets need to go bankrupt.  The alternative is what happened in Japan during the 90’s, decade long stagnation which is probably worse than a quick correction.

Of course, our government isn’t smart enough to do something like that.  They will slap together a plan that doesn’t make any sense, helps the wrong people out, and in the end only makes the situation worse.  The worse part about it is that it will create incentives for the wrong people.   Think about this for a second.

There are a large number of families who would love to be first time home buyers. However, the decided, prudently, that they would only buy something they could afford.  Novel idea I know.  There is another group of people who don’t do that.  These are the people who, when they want something, they just buy it and don’t worry about if they can really afford it.  These are the people who have twenty credit cards and always pay the minimum balance.  Since they could do it with credit cards, these people took out two mortgages and decided that they would have it interest-only for the first few years and worry how they would pay the priciple later.  After something magical would happen to save them.

That something magical is the US government.  They will prove the idiots right.

I keep imagining the scene in Atlas Shrugged as Hank Rearden asks, “There’s no way to make the irrational work.  What can save you now?” To this James Taggart cries, “Oh, you will do something!”  And he is right.  The government will save those who should have known better at the expense of those that did.
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For the most part, I haven’t talked too much about the housing mess that is causing a ripple effect in the rest of the economy. This despite the fact that I actually have pretty strong feelings on the subject. Government plans to help troubled borrowers are growing by the day. Local news story are constantly featuring poor borrowers who were “tricked” into buying a house or worse yet felt they have a right to own their house despite the fact that they could never afford the payments.

Despite all the sob stories, I will admit I feel very little sympathy for most people. If you count my girlfriend and I as a household, we are in the top 5% of households in terms of income. Yet we have deliberately stayed out of the housing market these past few years because it was very clear to any rational person that housing prices were over inflated. If we could barely afford payments on a standard loan on a regular house, how was anyone else affording it?

The answer is they couldn’t. These people took out loans that they would eventually not be able to afford or could never afford in the first place. That’s why I don’t feel bad for most people. The people I really don’t feel sorry for are

• Anyone who took out a stated-income (liar’s) loan.
• Anyone who refinanced their house and took equity out to pay for consumer goods they didn’t need like a new car or vacation.
• Anyone who didn’t read the fine print and who uses it as an excuse
• Anyone who bought a 2nd house as an investment (Investments lose money.  They are risky, it is the nature of investing)

How anybody can feel bad for someone who took out a liar’s loan is beyond me. They are called Liar’s loans for a reason. There is a reason that banks require documentation of income for loans. They want to be sure that you can actually pay the loan back. Most people’s income is documentable. So the only reason for most people to use a stated income loan is that they in fact can’t afford the loan they are applying for. How much common sense (or maybe it is lack of common sense) does it take to not get into one of these loans?

As for the third one, people who argue they didn’t read the fine print. Can’t really feel bad for those people either. It is the biggest purchase you will ever make. You need to take the time to understand what you are getting into. If it is too difficult for you to understand, find somebody who can understand it. You can not trust your real estate agent or mortgage broker on this one. They have a vested interest in making sure you sign the loan and structuring it in a way that makes them the most money.

So while it may sound harsh and somewhat cruel, I really do hope our government does nothing to help people out of a mess they got themselves into. While I’m sure there are rare and isolated cases where people were deceived, I believe this not the norm and there are avenues of recourse for people who were legitimately deceived. But anything close to a wholesale bailout for those who should have known better is akin to rewarding stupidity. It makes me think of the movie Idiocracy where stupid people breed the smart people out of existence.
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