Saturday, April 23, 2011

Enabling, Responsibility, Hunger and Insecurity


A couple of good comments on the last post that got me thinking- about complexity and reward and punishment and insecurity and hunger. This might seem like a tangent rather than a response. Let's see.

I'm reading "Life at the Bottom" and so far, it is brilliant. Brutal, dark...but important. I then went on Amazon and read the reviews of the people who hated it. That's always educational. The voices were pretty much universal: The author is blaming the victims.

Not at all, at least not as I read it.

People are lazy. So are all animals, especially predators. When life is marginal, you expend as little energy as possible. When you have excess, it isn't spent training or saving for a rainy day...predators toy with victims that squeal. It is entertaining. Excess energy is spent on entertainment. Watch animals.

The dream, for years, presented in many of the psychology and sociology classes that I took, was that if no was in want, if everyone had shelter and food and warmth, that they would then start creating art and bettering themselves. That's not the way it works in nature. That dream has crashed every time it has been tried, but some people still believe. It seems many of our institutions are set up with that belief. Look at nature.

There are few things in psychology that are rigorous enough to be called 'laws' but one of them is that behaviors that are rewarded increase; behaviors that are punished decrease.

So if you reward violent behavior and addiction by moving people up on the list for subsidized housing, you get more violence and addiction. If you move people down on the list for holding a job, you get less of that. (The idea behind it is to fill the greater need...which is a human ideal and noble and all that, but people are at least as smart as monkeys and even flatworms can be taught to run a maze with simple conditioning.) Noble ideas sometimes fail because nature trumps.

If you give people money for neither holding a job nor going to school you get more of that behavior...especially if you remove benefits from people who start taking classes.

People are not stupid, and if the rewards and punishments are blatant or extreme enough, even the most socially conditioned, hard-working good guy will come to feel like a schmuck for working hard when the reward is the same if he didn't work at all.

So, socially and talking about "Life at the Bottom," we have to be careful when our programs designed to solve problems become enabling. We also need to be aware that bad people can abuse any system, and will do so more when their bad behavior is excused and has no consequences. Personally, we have to realize that, again, the only person who can be genuinely interested in change for the better is the one who must change. Maybe it sounds like blaming the victim, but it goes back to the responsibility of necessity. No one can change your life for you.

Here's the bridge:
We are biologically designed to be lazy, and most of us are very comfortable. I've noticed that many of the most extraordinary people I know had very marginal childhoods. Whether hunger or violence or ostracism, all had time, moments to years, of tangible fear that they fought by gaining strength or skill or insight. These "children of adversity" or "compulsive competents" eventually attain or exceed the comfort and security of those around them... but they never quite feel secure. Part of them is always afraid of being hungry again...and so they use the intelligence and drive to get better and better and better.

And when we see the people around us put the same drive into the most passive entertainment they can find (drugs or TV or...) we think they are stupid. They aren't. They are just comfortable and lazy.

Which brings us to the Dunning-Kruger effect mentioned by Charles James in the comments on the last post. The basic idea is that smart people tend to underestimate their own intelligence and stupid people tend to over-estimate. In other words, stupid people think they're smart. Smart people think they are stupid.

I think the mechanism is simple. Laziness and comfort. Animals work to get out of bad situations. They don't work, generally, to improve good ones. If you are insecure (and it's not just an attention-seeking ploy of a codependent personality) you will do something about it. If you are afraid of the dark, you might get a flashlight.

When people get over the fear, they get comfortable. Laziness kicks in. People who are worried about being smart enough study. People who have decided they are already smart enough start entertaining themselves and lose touch with the world. People who are insecure in their fighting skills train hard and seek new teachers. People who are comfortable come up with reasons why this is unnecessary.

Even in relationships. Our relationship has been going for 24 years (in 13 days) because I know I am not worthy of K and have spent my life trying to be. If I ever decided I was good enough, it is a small step to taking things for granted...

I think you will find Dunning-Kruger everywhere, and I think the mechanism boils down to "People with a perceived need to increase competence will continuously improve. People with a perceived sufficiency of competence will cease to improve."
That was long and rambling. Anyone want to try to boil it down to one paragraph?

Arguments against buying a house

US Housing Crash Continues

What are their arguments?

  1. Houses always increase in value in the long run.
    FALSE. Price is what you pay and value is what you get. The value of a house is constant. It just sits there. You get shelter, but you have to pay property tax and maintenance and the loss of alternative uses of capital. A house is a dead asset. The price of a house rises with salary inflation, but house prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.For example, prices in the Netherlands are about the same as they were 350 years ago, in terms of how many years of work it takes to buy a house. Warren Buffett and Charles Schwab have both pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite - the house drained cash from its owners for 100 years of maintenance, taxes, and insurance - costs that never go away. The price of the house went up about as much as salaries went up.
    My grandmother always used to complain about the cost of milk. "Why, when I was a girl, a gallon of milk cost a dime! Just look at how much people are overcharging for milk now." I asked her how much people got paid back then. "Oh, about $15 a week", came the reply. Hmmm, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that inflation and salaries rose a proportional amount.
    I don't see any salary inflation in our future for years to come, and that's the only kind of inflation that boosts house prices. Inflation in everything else (food, energy, medical) just takes away from the money people have to spend on housing.
  2. As a renter, you have no opportunity to build equity.
    FALSE. Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing. Renters can get rich much faster than owners, just by saving the money that owners are wasting on mortgages, taxes, and maintenance. Renters are getting paid to wait, both by the monthly savings and by watching the value of their savings increase relative to housing.
    • Owers are losing every month by paying much more in interest than they would pay in rent. The income deduction does not come close to making owing competitive with renting.
    • Owers are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of "owners" who actually own only 20% of their house. Remember that the agents will take 6% if they possibly can.
    • Owers must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.
    • Owers must insure a house, but not most other investments.
    • Owers must pay to repair a house, but not a stock or a bond.
  3. Renting is just throwing money away.
    FALSE, renting is now much cheaper per month than owning the same thing. If you don't rent, you either:
    • Have a mortgage, in which case you are throwing away money on interest, tax, insurance, and maintenance.
    • Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income could be 50% to 200% beyond rent costs forever, and for many is enough to retire right now.
    Either way, owners lose much more money every month than renters. Currently, yearly rents in the San Francisco Bay Area are about 3% of the cost of buying an equivalent house. This means a house is returning about 3% rent minus taxes and maintenance, bringing the landlord's return down to 0%.
    Landlords are loaning a house to their tenants at a 3% interest rate, called rent. This is a fantastic deal for renters. When it is possible to borrow a million dollar house for 3% yearly rent at the same time a loan of a million dollars in cash costs 6.5% interest, plus 1.3% property tax, plus 1% maintenance, something is clearly broken. Renters are enjoying an extreme discount at the owner's expense.
    If someone tells you that you are throwing money away, you can reply "The landlord is giving me a huge gift. He's subsidizing me to live in his rental. I'll take free money any day."
    If someone tells you that you are "Not building equity", you can reply you are not LOSING equity, which happened to millions of people, and is still going on right now.
    To add insult to "owners", their property is declining in value. Renters are completely protected from the massive losses owners are experiencing. Here's a great quote from NPR:
    Underwater owner: "We would do it [pay the mortgage] if the equity was there, but in a case where we're already so behind... Imagine that for five years, say, we're gonna pay four grand a month and then we're just gonna be back up at what we bought the house for. We feel like we're throwing away money."
  4. There are great tax advantages to owning.
    PARTIALLY TRUE. It's true for high-income couples with expensive houses and big mortgages, but not for modest-income couples in modest houses, especially if there is no mortgage.Every married couple filing jointly automatically gets to subtract an $11,400 deduction ($5,700 for singles) from their adjusted gross income to arrive at their taxable income. Alternately, you may add up modest deductions in seven categories: Medical, Taxes, Interest, Charity, Casualty and Theft, Job Expenses, and Other Misc. If the total of your expenses in these categories exceeds the standard deduction, you can itemize them on Schedule A of your tax return to reduce your taxable income.
    Let's assume that your only deductible expenses fall into the Taxes and Interest categories. Taxes mainly include the income tax you pay to the state (or its sales tax) and the property taxes on your home or other non-investment real estate. In a high-tax state like New Jersey, you might easily pay $7,200 in property taxes and $200 in income taxes, for a total of $7,400. So the first $4,000 of interest expenses just brings your deductions up to the standard $11,400, without reducing your taxable income.
    For a high-income couple, let's assume they can itemize their state income tax of $3,400, contributions of $1,000, and medical expenses of $1,000. These deductions use up $5,400 of the $11,400 standard deduction. So the first $6,000 of property taxes and interest save them nothing. After that, their savings depend on their tax bracket, which could be as high as 35 percent.
    For couples with modest incomes and mortgages, the first $11,400 of taxes and interest save them nothing.
    Evaluate your situation before making a buy-rent decision based on potential income-tax savings. Be sure to consider the deduction limit imposed by the AMT, too. Interest is paid in real dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest. You don't get rich spending a dollar to save 30 cents!
    Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
    If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.
    Even if you pay outright, you're still renting the house to yourself, losing alternative uses of that money, and taking the risk of falling house prices.
    Compare the cost of owning to renting.
  5. All real estate is local, so you cannot say anything about the national market.
    FALSE. Lending is global. All loans are harder to get. This will push prices down everywhere.
  6. OK, owning is a loss in monthly cash flow, but appreciation will make up for it.
    FALSE. Appreciation is negative. Prices are going down, which just adds insult to the monthly injury of crushing mortgage payments.
  7. As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
    FALSE. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing.No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.
  8. House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
    FALSE. It's true that house prices do not fall to zero (except in Detroit), but your equity in a house can easily fall to zero, and then way past zero into the red. Even a fall of only 4% completely wipes out everyone who has only 10% equity in their house because agents will take 6% if they can trap the seller with a contract. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.
  9. The bubble prices were driven by supply and demand.
    FALSE. Prices were driven by low interest rates and risky loans. Supply is up, and the average family income fell 2.3% from 2001 to 2004, so prices are violating the most basic assumptions about supply and demand.The site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the population decreased: year units people
    • 2000 580868 / 1686474 = 0.344 housing units per person
    • 2001 587013 / 1692299 = 0.346
    • 2002 592494 / 1677426 = 0.353
    • 2003 596526 / 1678421 = 0.355
    So housing supply in Santa Clara County increased 3% per person during those years. There is an oversupply compared to a few years before, when prices were lower.At a national level, there is a similar story in the years 2000 to 2005:
    • 2000 115.9M / 281M = 0.412 housing units per person
    • 2005 124.6M / 295M = 0.422
    At a national level, there is 2.4% more housing per person now than in 2000. So national prices should have fallen as well.A for-sale sign in a yard instantly increases the supply of houses on the market. There is no need to wait for builders.
    The truth is that prices can rise or fall without any change in supply or demand. The bubble was a mania of cheap and easy credit. Now the mania is over.
  10. They aren't making any more land.
    TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren't making any more buyers, either.Japan has a severe land shortage, but that hasn't stopped prices from falling for 15 years straight. Prices in Japan are now at the same level they were 23 years ago. If we really had a housing shortage, there would not be so many vacant houses.
  11. Your calculator says the house I'm interested in is worth far less than the asking price. That's not very helpful in coming up with an offer. FALSE. It's very helpful to be able to document that you could be paying much less to live in the same location and same quality house, just by renting. It's a great negotating point.
  12. It is hard to find a rental that is the equivalent of this home. PARTIALLY TRUE. Sometimes there just is no equivalent rental available in the same area. Placing an ad saying you're looking for a rental in that area in a certain rent range is often enough to bring new rentals out of the woodwork though.
  13. Attractive areas will not follow strict economic laws of their worth. If I keep bidding what a home is strictly worth, I will always lose to someone who simply wants to live there, even if their money could be better invested elsewhere. FALSE. You can't lose by winning. Renting the same quality house in the same area for much less money every month than an owner pays is winning. Maybe others get the intangible feeling of ownership, but you get the cash that they are losing.
  14. If you don't own, you'll live in a dump in a bad neighborhood.
    FALSE. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.Some people want the mobility that renting affords. Renters can usually get out of a lease and move anywhere they want within one month, with no real estate commission. On the other side, if you can get a long-term lease, you will probably find it worthwhile to repair the place to your taste. The average time of owning a house is only seven years anyway.
    It is cheaper to rent a house in a good school district than to buy a house in the same place. In fact, children benefit in several significant ways from living in a rental. Aside from having a choice of school district, kids in a rental benefit from better parks in nicer neighborhoods, more living space, and less stress in their parents' voice -- all because it is still so much cheaper to rent than to own in bubble areas.
    A fun trick to rent a good house cheap: go to an open house, take the agent aside, and ask if the owner is interested in renting the place out. Often, desperate sellers will be happy to get a little rental cash coming in and give you a great deal. Sometimes they will rent to you for free ($0) as long as you keep the place up and pay the utilities.
    The biggest upside is hardly ever mentioned: renters can choose a short commute by living very close to work or to the train line. An extra two hours every day of free time not wasted commuting is the best bonus you can ever get.
  15. Owners can change their houses to suit their tastes.
    FALSE. Even single family detached housing is often restricted by CC&Rs and House Owner's Associations (HOAs). Imagine having to get the approval of some picky neighbor on the "Architectural Review Board" every time you want to change the color of your trim. Yet that's how most houses are sold these days.In California, the HOA can and will foreclose on your house without a judicial hearing. They can fine you $100/day for leaving your garage door open, and then take your house away if you refuse to pay. There's a good HOA blog here.
  16. The house down the street sold for 25% over asking, and that proves the market is still hot.
    FALSE. agents have been known to create the false impression of a hot market by deliberately "underpricing" a house, especially in California. I personally have seen this happen repeatedly. Say a seller's agent knows that house will probably go for $400,000. He places ads asking $300,000 instead, a price lower than the buyer would accept. (Bait-and-switch is illegal when selling toasters, but apparently not when selling houses.) The goal is to first of all prevent buyers from knowing what a realistic price is, and secondly to get buyers to blindly bid against each other. There are four players in this game and three of them are against the buyer -- the seller, the seller's agent and the buyer's agent. Yes, the buyer's own agent works against the buyer, because there is no commission if there is no sale. There's a saying in Las Vegas: "There's a patsy in every game, and if you don't know who the patsy is, you're it."If you want to prove your agent is not on your side, ask to see houses "for sale by owner" or houses listed by discount brokers. If the agent cannot make a commission, you will not be told about the house.
    There is a way around the conflict of interest inherent in being a buyer's agent: let the seller's agent be your agent too, just for that one house he's trying to sell. Then the seller's agent has a big motive to lower the price, because he will get double the commission if you buy it rather than some buyer with his own agent.
    Note that you are free to bid far lower than the asking price. You might be pleasantly surprised to find out how desperate the sellers are. Another good reason to start low: you can easily raise your offer, but it's awkward to lower it. A suggestion from a reader: have all your friends bid extremely low for the house before you, then your own low bid will seem more reasonable.
    Another suggestion for dealing with underpricing:
    Get over it, and just beat them at their own game: Beat out all other bidders by bidding unrealistically high, and just be sure to have your offer contingent upon financing & house inspection. Since the bank won't finance you above the appraised value, you're then in a very strong position to re-negotiate the price far lower during escrow. The other bidders will be long gone.
  17. I was lucky that my agent told me to increase my bid by $50,000. Otherwise I would have lost, because my agent knew about a secret bid $40,000 above mine.
    FALSE. Your agent gets paid nothing if you don't buy the house, and he gets more if you waste more money by bidding too high. It is unwise to take at face value "secret" information that costs you money.
  18. The MLS proves things are great.
    FALSE. The MLS (Multiple Listing Service, a private network of databases controlled by real estate agents) is a used-house sales tool designed to restrict access to critical market information to prevent the free market from working efficiently.I have been told that all sorts of funny things happen in the MLS. For example, if a house just doesn't sell, that agents can remove its record in the MLS so that you cannot see that it failed to sell. Then the house comes back on the market at a lower price, and unsuspecting buyers think it's on the market for the first time. Their agent can "prove" it's a new listing by showing the MLS record to the buyer: "See, here's the listing date, just came on the market. Better hurry and buy it, this one is hot."
    There is no government agency checking that the MLS shows true transaction prices.
    Furthermore, the MLS will not list any house for sale by owner, and will resist listing property for sale through a discount broker, or bank-owned property, or extreme discounts from builders, or many other cases where you could save huge amounts of money. Those cheaper prices are often not in the system, because if you save money, they lose money. Even if some cheaper properties are listed, your agent is not likely to tell you about them if they require more work on his part, or get him a smaller commission.
  19. I'll just amortize the commissions and other transaction costs over 30 years and they'll be OK.
    FALSE. The average length of ownership is seven years, not thirty. That means the 7% or so that you'll pay in commission and closing fees comes out to about 1% per year, and that's actually a lot of money. You may think you're different and will actually stay put for 30 years, but statistically you're not, and you won't.
  20. Rich Chinese (or Europeans, or Arabs) are driving up housing prices.
    FALSE. The percentage of US houses bought by rich foreigners is tiny. Furthermore, American housing is clearly a bad investment at this point. Foreigners can just wait and watch American housing continue to fall, and then buy for much less in a few years. Rich foreign investors are not dumb enough to buy into a badly overpriced market, but your agent is hoping that you reader John H. points out that when the Chinese property bubble implodes, there will probably be sales of property in California and British Columbia to cover their losses at home.
  21. Local incomes justify the high prices.
    FALSE. Most bankers use a multiple of 3 as the maximum "safe" price-to-income ratio. We are well beyond the danger zone, into the twilight zone. The price to income ratio is still around 10 in the SF Bay Area.
  22. Prices were always way beyond equivalent rent in San Francisco (or whatever expensive town)
    FALSE. Price to rent ratios were normal in San Francisco and other the other expensive towns in 2000. That ratio more than doubled by 2005. See page 34 of John Talbott's excellent book called "Sell Now!"
  23. Higher-income people can afford to spend a larger portion of their income on a mortgage, so your 6% rule of thumb does not apply to them.
    FALSE. Even if you can spend more than 6% of the purchase price each year on a mortgage and other costs to own a house, that does not mean you should. In fact, gross rents are almost always less than 6% in richer neighborhoods, making it an even worse deal for the buyer in these places. The renter living in the same quality house next door loses far less money per month.
  24. You have to live somewhere.
    TRUE, but that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the crash. A renter could save hundreds of thousands of dollars, not only by paying less every month, but by avoiding the devastating loss of his downpayment.
  25. Newspaper articles prove prices are not falling in my neighborhood.
    FALSE. The numbers in the papers are not complete and have murky origins. Those prices are "estimated" from the county transfer tax and making that tax public record is optional. A buyer who does not want you to see how little he paid has only to ask to put the transfer tax on the back of the deed and it will not show up on computer searches of the deed, which show only the front. Others voluntarily pay more tax than they have to, in order to inflate the apparent price to fool the next buyer. At a tax rate of about $1 per thousand of sale price, as in San Mateo county, you have to pay only $100 extra tax to make your purchase price look $100,000 higher.Even though you can in theory go to your county building and get sale price information, in reality the county will give it to you in a painfully slow and inconvenient way. For example, in Redwood City's county building there are PC's where you can look at data for any particular house, but you cannot print, you cannot save to a floppy disk, you cannot email data out. All you can do is write things down manually, one at a time. And that's how real estate interests like it. Your elected representatives are serving them, not you.
    Supposedly impartial sources like Dataquick are paid for entirely by people with a large financial interest in "proving" that prices are not falling. This makes it unwise to take their numbers at face value.
    For the obviously biased sources like real estate agents, you should assume that their sales price numbers do not include the effective price reductions from "incentives" like upgrades, vacations, cars, assumed mortgages and backroom cash rebates to buyers.
  26. My appraisal proves what my house is worth.
    FALSE. "An appraisal in its typical residential real estate form is little more than a comparative analysis conducted by someone with no skin in the game offering confirmation that other lemmings are paying too much for their houses as well." -from an article on morningstar.comAmazingly, government house price measures do not include houses with jumbo mortgages. This excludes well over half of all houses in California. So the government can report a slight price rise, but fail to mention that prices actually fell for the other 60% of houses in California.
  27. Foreclosures destroy neighborhoods, so we should stop foreclosures.
    FALSE. Empty houses destroy neighborhoods. Houses remain empty only because the prices are too high. "Anti-foreclosure" programs just keep prices too high, and keep houses empty. In areas where there are jobs, if prices were allowed to fall enough so that salaries can easily cover the cost of owning, people would move in and take care of the houses. In areas without jobs, the first priority should be jobs.
  28. It's not a house, it's a home.
    FALSE. It's a house. Wherever one lives is home, be it apartment, condo, or house. Calling a house a "home" is a manipulation of your emotions for profit. Don't let them push your buttons.A house is a wooden box that sits out in the rain and slowly rots. No one would buy in this market if they really thought about how much pain it's going to cause them in the long run. That's why they sell you a home, not a house.
  29. If you don't own, you're a failure.
    FALSE. Maximizing your savings and escaping the slavery of debt is success. Most people have a hard time understanding this, but they do understand cash. You could show them your bank statements to prove you're way ahead of the game as a renter, but then they would probably just ask you for a loan!The use of the status card is another well-known button that agents push to trick people into making foolish purchases. Don't let them do it.
  30. Property in the San Francisco Bay Area is a luxury good, and so will be less affected by economic downturns.
    FALSE. Most San Francisco Bay Area mortgages are ARMs, and ARM loans are not taken out by the rich. People on the border of bankruptcy take out ARMs because they can't afford fixed rate loans. The rich don't have loans at all.Many of these ARM loans have exceptionally deadly repayment terms, and so are known as "neutron mortgages". Like the neutron bomb, they destroy people, but leave buildings standing. They are also known as "suicide loans".
  31. House ownership is at a record high, proving things are affordable.
    FALSE. The percentage of their house that most Americans actually own is at a record low, not a high. We do have a record number of people who have title to a house because they have dangerous levels of mortgage debt, but that is no cause to celebrate.
  32. Rents could shoot up, making it a better deal to buy.
    FALSE. Rents are limited by the money people actually earn, not by how much they can borrow. Try walking into a bank and asking for a loan to pay your rent. For rents to shoot up, salaries would have to shoot up first. Salaries are not likely to rise at all given the current unemployment rate.
  33. You failed to factor in emotion. More houses are sold on emotion than will ever be sold based on perceived value. They buy all they can afford plus.
    FALSE. Buyer emotion doesn't matter at all to the lenders, not on the way up or on the way down. Most people will borrow as much as the possibly can. The limiting factor is lending, not emotion.
  34. It's unpatriotic to talk about mispriced houses. It might drive down prices.
    FALSE. Lower prices are better for America, especially for new families. Aren't lower food and energy prices better for America? Housing prices are the same: lower is better. Most Americans directly benefit by a decrease in house prices. Only the banks benefit from increased mortgage debt.If you own a house, lower prices have very little effect. If you want to sell and buy another house, higher prices mean you'll just have to pay more for the next house, while lower prices mean you will get a discount when you buy. If you want to buy a bigger house, you come out ahead with lower prices.
  35. My wife will divorce me if I don't buy a house.
    FALSE. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won't divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month each spring, which you can do just by avoiding that suicidal mortgage.If she's religious, you could also point out Proverbs 22:7: "The rich rule over the poor, and the borrower is servant to the lender."
  36. My new baby needs a house.
    FALSE. If you're pregnant and desperately want to buy a house for your new child, that's a perfectly normal feeling called "nesting". It is also the leading avoidable cause of financial fatalities! You most definitely do not need a house for a baby. A baby is utterly unaware of whether it lives in a rental or not. Babies also don't need much space.Your baby will do better if you're not stressed out about a mortgage. You have five years before school quality becomes an issue, and at that point you can more easily move into the best school district as a renter than as an owner. Avoid debt and save your money so your child has a better start in life.
  37. I just want to own my own house.
    TRUE, most people do. There's nothing wrong with that. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great - unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise. If you can save 50%, then you can easily take a ten year vacation and still come out ahead. Great quote from "People want to buy a house, they want to have someone tell them it is the smartest decision they are making in their lives, and they don't want to hear about any downside risk."Housing is the biggest expense in nearly everyone's life, far more expensive than food, gas, energy, even more expensive than education or medicine. To reduce the time you spend working to pay for housing is to increase the time you have for everything else.
    Cheap housing is good for us all! High housing costs take away from families' ability to save for retirement, fund their children's education, travel and lead a quality life.
    How can we make lower house prices our official government policy? How can we completely eliminate the mortgage interest deduction which drives up housing costs and discriminates against renters? How can we wipe out Fannie Mae, Freddie Mac, the FHA, and other agencies whose job it is to enslave Americans to mortgage debt?
    As reader Sean Olender put it: "Many people have forgotten that the number one restriction on their future freedom to do what they want, when they want, and to go where they want isn't the Iraqis, or Iranians, or North Koreans -- it's their mortgage lender."

What should you do?

First of all, both sides should avoid using agents, especially Realtors(R), who are corrupting our laws in Washington with lobbyists. Agents suck money out of the deal and monopolize the critical information of exactly how many bids there are and at what prices. Just find a property or buyer on your own, have the property inspected, and get a real estate lawyer to draw up or review the offer. If you make an offer, mail the offer to the seller yourself so that your agent or the seller's agent can't block it. If you are accepting or rejecting an offer, mail that information to the bidder yourself so that your agent or the bidder's agent can't block it. agent have been known to block offers that don't give their own agency both sides of the commission, or that exclude some other buyer they want to favor.
Never sign any contract with any agent! Agents try to trap you with a contract so that you cannot know for sure what is going on or make independent decisions. If you don't want to sell a house yourself or negotate a purchase, hire a lawyer or someone else by the hour to do the work for you. You're likely to save many thousands of dollars by avoiding commission fees.
Post on the Addresses Forum to get uncensored feedback about a particular property.
If you own an expensive house, sell now so you can actually keep some of that funny money that appeared out of thin air. Otherwise, it will be painful to watch it vaporize back into thin air. Investors in mortgage-backed bonds subsidized the increase in the price of your house. Now they want their money back, and your challenge is to prevent them from getting it. The only way is to sell before your neighbors do. Time is not on your side.
If you can't sell without a loss, it's probably best to just walk away and free yourself from mortgage slavery. It depends on whether your loan was "recourse" or "non-recourse". In the latter case, the deal is simply that you can stop paying the loan and give back the house at any time. It's perfectly legal and moral according to the terms of the mortgage. Now that the government has temporarily stopped taxing forgiven debt, you can do it without owing anything! But talk to a lawyer and accountant first. If you refinanced, you may have given up your non-recourse status.
A long-term rental with a multiple-year lease is a good way to get stability with the economic benefits of renting. Many landlords are desperate, and you'll probably find them quite willing to negotiate a long term lease. Make sure they can't raise the rent much during the lease term, and make sure there is only a small penalty for ending the lease early. Even if you sign a normal 1-year lease, most landlords are happy to keep good tenants as long as possible.
If you want to buy, look around and see that house prices are falling. Why hurry to buy into a falling market? Time is on your side. Save your cash and buy for much less in the future. All your savings on the price of a house are tax-free earnings! For Californians: buy after the earthquake, not before.
Good advice from reader Stephen G. Bishop:
Signing a 30-year commitment is absurd. Can you guarantee your income will be uninterrupted for 30 years? It worked in the previous generation, when Dad worked at the same factory for 40 years and retired. Those days are gone. 80% of all mortgages are never kept to maturity. Triple the price of the property when you add interest for 30 years in. It's only worth it if the property doubles in value every ten years. Those days are gone.
Do not buy anything that wasn't built properly, no matter how cheap it gets. Many foreclosures are houses that weren't built properly, and these houses tend to be foreclosed over and over again. Lots of houses are ugly, but an ugly but well built house is often the best deal.
The way to win the game is to have cash on hand when others cannot get a loan. You do not want to be bidding your hard-earned savings against people who are bankrupting themselves with debt. It will be time to buy when lenders once again demand a 20% downpayment from everyone and get serious about checking ability to repay. You'll know prices are reasonable when it's cheaper to own than to rent the same thing. We're not there yet, not even close. Find a nice cheap rental, invest your savings every month, and enjoy the show till then.
Please tell friends about, because people need to know the arguments against buying a house.

Distinct readers per day

Plus about 4,500 email subscribers.
And a little comic relief (illustration courtesy of Rick LaForce,
Annual income twenty pounds, annual expenditure nineteen six, result happiness. 
Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
--Charles Dickens, David Copperfield, 1849
Saying it is "good" for housing prices to rise is saying that it is good for housing to take an increasing share of salaries each year, forever. There's a limit, and it is somewhat shy of 100%. --Bryce Nesbitt
If you need a mortgage, you can't afford it. --Stephen G. Bishop
From anonymous: The Mexican Dream is to escape from debt peonage. The American Dream is to get into debt peonage.
Lowering interest rates will help the housing and stock market for about as long as peeing your pants will help when you have to go. It will give a warm feeling for a minute.
Everybody hates house-agents because they have everybody at a disadvantage. All other callings have a certain amount of give and take; the house agent simply takes. -- H. G. Wells
Nick Naylor, in Thank You For Smoking: "99% of everything done in the world, good or bad, is done to pay a mortgage. Perhaps the world would be a better place if everyone rented."
From The Politics of Life by Craig Crawford: "Beware the boss who encourages you to buy a house or new car. Mortgages and car payments enslave you to the paycheck that your boss controls."
From Benjamin Graham, in The Intelligent Investor: "The outright ownership of real estate has long been considered as a sound long-term investment, carrying with it a goodly amount of protection against inflation. Unfortunately, real estate values are also subject to large fluctuations; serious errors can be made in location, price paid, etc.; there are pitfalls in salesmens' wiles."
Why do the buy side idiots ALWAYS fall for the FALSE CHOICE FALLACY????
Choice 1: Buy today, right now, this second.
Choice 2: Rent until you die.
Um, I'll take door #3: let prices fall another couple hundred $K on a home
like this, and buy it in a year or two. What did I win?
--Roberto Aribas
What the public believes, or can be induced to believe, no matter how wrong, is reality to politicians.
Subsidies simply increase prices by increasing demand. Subsidies benefit the first few recipients, but the sellers quickly catch on to the new source of revenue and increase prices to negate that benefit for all subsequent recipients. Ultimately, all subsidies flow directly to businesses as excess profit at public expense. This is true especially for housing and health care subsidies, and the businesses that benefit from these subsidies spend lavishly on lobbying and campaign contributions to make sure the subsidies continue, in the name of the "public good" even though subsidies are obviously a public harm. The true solution to shortages is to increase supply of houses, doctors, or whatever. But increased supply harms profits, so business interests squash all public talk of increasing supply.
Republicans think the rich are not rich enough, and the poor are not poor enough.
Just as an unobserved tree falling in the forest makes no noise, a big beautiful home out in the lonely woods does little to increase status. The key to appreciating status is to have an audience-and there is no bigger audience than that of our major cities and the playgrounds of their wealthiest residents. -- John Talbott
They hang the man and flog the woman Who steals the goose from off the Common;
But let the greater criminal loose Who steals the Common from under the goose
Interest never sleeps nor sickens nor dies it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you. -- J. Reuben Clark
It is better to get a poor interest rate than own a depreciating asset. -- Michael Surkan
I'll repeat that the best approach [to buying a car] is to use the Internet, have the car delivered and avoid going to dealerships altogether. --
Everyone in Western Europe, Japan, Canada, Australia, Singapore and New Zealand has a single-payer system. If they get sick, they can devote all their energies to getting well. If Americans get sick, they have to battle two things at once, the illness and the fear of financial ruin. ... And don't believe for a second that rot about America having the world's best medical care or the shortest waiting lists: I've been to hospitals in Australia, New Zealand, Europe, Singapore, and Thailand, and every one was better than the "good" hospital I used to go to back home. The waits were shorter, the facilities more comfortable, and the doctors just as good. --Lance Freeman at
The first truth is that the liberty of a democracy is not safe if the people
tolerate the growth of private power to a point where it becomes stronger than
their democratic state itself. That, in its essence, is fascism -- ownership of
government by an individual, by a group, or by any other controlling private
power. ~ Franklin D. Roosevelt
From Our Lot by Alyssa Katz: "The secret, he was learning, was to trigger buyers' emotions, specifically women's emotions."
50 Ways To Leave Your Mortgage
You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don't need to discuss much
Just drop off the key, Lee
And get yourself free
I don't think I'll get married again. I'll just find a woman I don't like and give her a house. -- Lewis Grizzard
Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite period of time.

The End

Monday, April 18, 2011

Is your brain really necessary?

Is your brain really necessary?

Do you really have to have a brain? The reason for my apparently absurd question is the remarkable research conducted at the University of Sheffield by neurology professor the late Dr. John Lorber.
When Sheffield’s campus doctor was treating one of the mathematics students for a minor ailment, he noticed that the student’s head was a little larger than normal. The doctor referred the student to professor Lorber for further examination.
The student in question was academically bright, had a reported IQ of 126 and was expected to graduate. When he was examined by CAT-scan, however, Lorber discovered that he had virtually no brain at all.
Instead of two hemispheres filling the cranial cavity, some 4.5 centimetres deep, the student had less than 1 millimetre of cerebral tissue covering the top of his spinal column. The student was suffering from hydrocephalus, the condition in which the cerebrospinal fluid, instead of circulating around the brain and entering the bloodstream, becomes dammed up inside.
Normally, the condition is fatal in the first months of childhood. Even where an individual survives he or she is usually seriously handicapped. Somehow, though, the Sheffield student had lived a perfectly normal life and went on to gain an honours degree in mathematics. This case is by no means as rare as it seems. In 1970, a New Yorker died at the age of 35. He had left school with no academic achievements, but had worked at manual jobs such as building janitor, and was a popular figure in his neighbourhood. Tenants of the building where he worked described him as passing the days performing his routine chores, such as tending the boiler, and reading the tabloid newspapers. When an autopsy was performed to determine the cause of his premature death he, too, was found to have practically no brain at all. Professor Lorber has identified several hundred people who have very small cerebral hemispheres but who appear to be normal intelligent individuals. Some of them he describes as having ‘no detectable brain’, yet they have scored up to 120 on IQ tests.
No-one knows how people with ‘no detectable brain’ are able to function at all, let alone to graduate in mathematics, but there are a couple theories. One idea is that there is such a high level of redundancy of function in the normal brain that what little remains is able to learn to deputise for the missing hemispheres.
Another, similar, suggestion is the old idea that we only use a small percentage of our brains anyway—perhaps as little as 10 per cent. The trouble with these ideas is that more recent research seems to contradict them. The functions of the brain have been mapped comprehensively and although there is some redundancy there is also a high degree of specialisation—the motor area and the visual cortex being highly specific for instance. Similarly, the idea that we ‘only use 10 per cent of our brain’ is a misunderstanding dating from research in the 1930s in which the functions of large areas of the cortex could not be determined and were dubbed ‘silent’, when in fact they are linked with important functions like speech and abstract thinking.
The other interesting thing about Lorber’s findings is that they remind us of the mystery of memory. At first it was thought that memory would have some physical substrate in the brain, like the memory chips in a PC. But extensive investigation of the brain has turned up the surprising fact that memory is not located in any one area or in a specific substrate. As one eminent neurologist put it, ‘memory is everywhere in the brain and nowhere.’ But if the brain is not a mechanism for classifying and storing experiences and analysing them to enable us to live our lives then what on earth is the brain for? And where is the seat of human intelligence? Where is the mind?
One of the few biologists to propose a radically novel approach to these questions is Dr Rupert Sheldrake. In his book A New Science of Life Sheldrake rejected the idea that the brain is a warehouse for memories and suggested it is more like a radio receiver for tuning into the past. Memory is not a recording process in which a medium is altered to store records, but a journey that the mind makes into the past via the process of morphic resonance. Such a 'radio' receiver would require far fewer and less complex structures than a warehouse capable of storing and retrieving a lifetime of data.
But, of course, such a crazy idea couldn’t possibly be true, could it?

Sunday, April 17, 2011

Theory U and Theory T

Published: August 24, 2010
 / Autumn 2010 / Issue 60

heory U and Theory T

Thoughts on the 50th anniversary of one of the most influential contributions to management theory.

Management theory books and disaster films have something in common. Both confront the prospect of the near-total destruction of life as we know it. In the movies, the hero invariably realizes what must be done and saves the world just before the credits roll. In management books, the chosen manager masters the correct theory just in time to avert business catastrophe. On screen, happy endings are unremarkable — it’s just entertainment, after all. But in the real world, real companies make real decisions based on the theories authors propose in their management books. Why should one assume that things always end well?
This question about happy endings comes to mind on the 50th anniversary of one of the most storied contributions to the management literature, Douglas McGregor’s famous distinction between Theory X and Theory Y. In his hugely influential 1960 book, The Human Side of Enterprise (McGraw-Hill), McGregor made the simple yet powerful observation that managerial practice often expresses some very deep assumptions about the nature of human beings: Two competing theories about human nature, he claimed, dominate the managerial thought–world.
Theory X says that the average human being is lazy and self-centered, lacks ambition, dislikes change, and longs to be told what to do. The corresponding managerial approach emphasizes total control. Employee motivation, it says, is all about the fear and the pain. Theory Y maintains that human beings are active rather than passive shapers of themselves and of their environment. They long to grow and assume responsibility. The best way to manage them, then, is to manage as little as possible. Give them water and let them bloom, say the Y-types.
McGregor named his theories after letters of the alphabet in order to avoid prejudicing the discussion in favor of one or the other, and he further insisted that both theories have value in the appropriate contexts. Fortunately, not many of his readers heeded that part of his message. The X-managers, as everyone could see, are basically Stalinists. And although quite a few employees are eager to liken their bosses to autocratic mass murderers, not very many managers are willing to identify with that ugly self-image, and no management theorist to date has been interested in promoting it. By contrast, the Y-vision — in which freedom and self-realization beget massive leaps in productivity — looks gorgeous.
In McGregor’s wake, one management guru after another rediscovered Theory Y, packaged it in new language, and claimed it as his or her invention. Tom Peters, Rosabeth Moss Kanter, and Charles Handy, to name three, launched their highly successful careers on the basis of McGregor’s wisdom. Peter Drucker — a special case — could be called a Y-man avant la lettre, since he began to promote a version of the theory before McGregor gave it its name.
There can be little doubt that Theory Y is a good thing, and that McGregor did an even better thing in bringing it to the attention of managers. The huge and impersonal bureaucratic machines of the modern economy are often very hard on the soul, as was apparent even in McGregor’s day (see, for example, Sloan Wilson’s novel and the subsequent film The Man in the Gray Flannel Suit). We need the gurus to remind us that business is all about people; that if you trust in people, they’ll trust you back — and that if you don’t, your most precious assets won’t show up tomorrow morning. Many managers and many firms took McGregor’s message to heart and learned how to help themselves by helping their people flourish. The glittering pot of gold at the end of the Theory Y rainbow is the fact, now a commonplace, that many of the most successful companies in the world are routinely rated the best places to work.

The Triumph of Y

We are all Theory Y people now — at least when it comes to delivering or receiving motivational talks — and yet, truth be told, we all have our doubts that the world has caught up with our wisdom about it. It will have already occurred to many people, for example, that quite a few of those companies are great places to work because they are successful, rather than the other way around. (I mean, any old company can offer free haircuts and on-site medical care if it has a market capitalization of US$200 billion and a fast-growing market.) There is also plenty of anecdotal evidence to suggest that firms change their assumptions about human nature after their fortunes change, rather than before. The dot-coms, for example, were all exuberantly convinced about the merits of self-realization in the workplace as long as the market-valuation bubbly was pouring. In the gloomy aftermath, many of the surviving firms transformed themselves with impressive speed into gulag archipelagoes, imposing harsh, X-style discipline on employees who were doing all those jobs that the dot-coms did not outsource.
Perhaps the most disconcerting fact about the world as McGregor left it, however, is that it isn’t at all obvious that self-realization in the workplace has increased in proportion with all the talk about the importance of self-realization in the workplace. On the contrary, one does not have to spend much time in the cubicles these days to appreciate how the jargon of Theory Y has evolved into an Orwellian Newspeak that often serves as cover for the kind of exploitation and manipulation that would make even the most chauvinist X-ist quiver. “You will be self-actualized!” the new humanist organization tells us. “And then you will be ‘counseled out’! We believe in trusting individuals with responsibility, so good luck dealing with your own health, pension, and training needs!”
Unraveling the tangled web woven by the human relations movement in the real world over the past half century would certainly make for an interesting subject of study. But we can get a grip on at least some of the confusion by going back to the source. There is a simple and obvious obscurity in McGregor’s distinction between X and Y — a congenital flaw, perhaps, that sheds light on some of the developments that followed.
In the story as McGregor tells it, and more especially as his successors resell it, the world of X is in a state of conflict. Workers and managers eye one another across the ragged front lines of suspicion and mistrust. The world of Y is in a state of peace. Workers and managers embrace one another as partners on the journey to personal fulfillment. And all that is required to change from one state to the next is making a simple change in one’s assumptions about human nature. But is this really true? Does all conflict dissolve in a higher state of consciousness?
The confusion results from the fact that McGregor himself confounds and overlays his distinction between Theories X and Y with a second, very different distinction. This is a distinction not between theories of human nature, but between theories about the nature of human relations — or, more precisely, about the sources of human conflict. In honor of McGregor, I call them Theory U and Theory T.

Utopian or Tragic?

Theory U, for Utopian, says that conflicts among human beings always originate in misunderstanding. Eliminate the false assumptions that individuals carry around in their heads, the theory says, and a human community will return to the natural state of peace. McGregor — like just about every management guru you’ve ever heard of — is a U-man at heart.
Theory T, for Tragic, says that conflict is endemic to human relations and arises from real divergences of interest. Peace is therefore a temporary state, and its endurance depends primarily not on the attitudes of individuals but on the system of their relations. Shakespeare and the framers of the U.S. Constitution are classic T-types.
Both theories put crucial emphasis on the concept of “trust,” but in strikingly different ways. Theory U says that you build trust by relaxing your control over people — by showing them that you trust them. Theory T says you build trust by demonstrating that things are under control — by creating a system in which good deeds regularly receive due rewards and bad deeds are appropriately punished.
It should be clear that the distinction between U and T, just like the distinction between X and Y, is not intended to imply the logical superiority of one alternative over the other. U and T represent distinct viewpoints or approaches, each valid under the appropriate circumstances, rather than genuinely exclusive scientific hypotheses.
It should also be clear that my pair of alphabet theories is orthogonal to McGregor’s pair. That is, it is perfectly possible to believe that human beings are the active, self-realizing wonders of Theory Y and to believe that, if given a chance, these amazing beings will actualize themselves by slitting one another’s throats and plundering company resources in accordance with the dictates of Theory T. Conversely, one may believe that human beings are by nature X-like slugs, and yet that with appropriate conditioning, they will work together in perfect U-harmony. Each of the four combinations of the two pairs of theories gives rise to a distinctive approach to managerial problems. I summarize the possibilities in the Human Relations Theory Matrix. (See the exhibit above.)
With the benefit of the matrix, it is possible to see that much of the debate about Theory X and Theory Y has taken place along the diagonal between the controllers and the freedom lovers, and that it is for this reason that the debate has been somewhat confusing and unedifying. Critics of Theory X generally focus their ire on the controllers. But the tyrannical behavior of this unprepossessing group arguably owes less to its theory of human nature (X) than to its beliefs about the non-eliminable sources of human conflict (T). Critics of Theory Y, conversely, complain mostly about the freedom lovers. The dangerously anarchistic creed of these managerial flower children, however, stems less from their high opinion of their fellow human beings (Y) than from their utopian ideas about human communities (U).
Once we get clear about the real issues of the debate, it also becomes evident that the hard work for managers lies less in the transition from X to Y than in the transition from U to T. If it requires a more thoughtful approach to management to accept that people are active by nature rather than passive, it requires a still more thoughtful approach to grapple with the fact that they can be active and destructive at the same time. Of the four types of managers in the Human Relations Theory Matrix, it is the constitutionalists who must expend the most mental energy and governance effort.
The difference between U and T, in the final analysis, is that one is easy and the other is hard. Theory U assures us that our problems can be solved by changing our view of the world. Theory T says that the solutions may require actually changing the world. U tells us that we can bring everyone together with the right words. T replies that we’ll probably have to make some compromises, too. U rests its case on the fairness of its schemes. T emphasizes the fairness of its processes. U guarantees a happy ending. T promises only the temporary postponement of disaster.
One theory is like going to the movies. The other is like living in the real world.
Reprint No. 00029


  • Matthew Stewart is a former management consultant and an author whose most recent book is The Management Myth: Why the “Experts” Keep Getting It Wrong (W.W. Norton, 2009).