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See how much the interest rate affects your affordability
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Fri Jan 02, 2009 6:45 pm GMT    Post subject: See how much the interest rate affects your affordability Reply with quote

http://www.bankrate.com/brm/calc/newhouse/calculator.asp

This website has an affordability calculator. Punch in your data and then toy around with the interest rate. You'll see that your monthly nut will remain constant but how much house price you can get for that monthly nut will vary quite a bit with the interest rate. In our situation, we could have afforded almost $50-80k more just by the mortgage rates dropping from 6.5 to 5.5.

I think that the market you're in isn't just the available housing stock, it also includes the available buyers. You have to be aware of how many people have that same affordability reach, that ability to pay that monthly nut. Lets do two things, add the house price drop on top of the percentage improvement in affordability due to the lower interest rates.

House Price drop savings percentage:

So, lets say you could afford a $500k house last year and you've decided to stay on the sidelines. If Case Shiller is right, on average that house would be selling today for $468k, or about 6.5% less than last year.


Mortgage Rate savings percentage:

Now Last year mortgage rates were about 6.2 percent say, and today you could get a rate of 5.3 say... For a round number, say you can afford a $4k per month mortgage, according to this calculator, last year, you could afford a house priced at $681k, and this year you can afford a house priced at $748k. That feels like a price drop of 8.75%.

Added together, that's 6.5% due to price drops and 8.75% based on increased affordability due to mortgage rate drops and that is a 15.25% difference in one year.

Guy's that's pretty heavy duty. Now think about your college graduation. We all thought we were special and unique individuals, but every year there was a class of the same size or bigger year after year after year. So if we have two or three years of people sitting on the sidelines and a 15% affordability drop and let's just say lots of people got a cost of living adjustment that makes buying a house even that much easier, so add 3%, that's a lot of pent up demand with a lot of ability to buy that house. Your competing with a lot more people for that house when more people can afford it.

My last point is selection. In a down market, you can negotiate with the pick of the litter. The pick of the litter is usually worth more obviously, meaning for whatever specifications you have, one will be a much nicer place and meet your tastes. These pick of the litter houses get picked up quickly in a healthy market so while the numbers may align better in the future, the selection might not be there so you have to factor that in.

Trumping all of this is the massive amount of layoffs we're seeing. We are at unemployment levels not seen here since the early 80's. You might very well find that pick of the litter because someone with a big job gets laid off. More people on the sidelines might stay safely on the sidelines so house prices might continue to drop.

All I'm saying is that with most of the buyers on the sidelines, and that group of pent up buyers growing, and this savings due to the low mortgage rates on top of a 6.5% drop, on top of the prior years drops, on top of all those people on the sidelines getting cost of living adjustments and being able to afford more, I'm saying you've got to consider this. If Obama does lower taxes, people will be able to afford even more for a house payment. If we spend a ton of money on these infrastructure projects it will stimulate local regions and you'll see the construction laborers with the Caddilac Escalades again like the Big Dig. If we dillute the US Dollar we'll see inflation, higher mortgage rates and after a few years, wage inflation.

I'm asking you to weigh all of this. If you bought today with this low mortgage rate prior to the potential inflation, you'd save.

Now go back to that calculator and punch in an 8% mortgage rate. For a $4k a month nut, you can now only afford a $575k house.

Let's recap: $4k monthly nut buys you- just based on mortgage rate:

$748k house at 5.3% (today)

$681k house at 6.2 (last year)

$575k house at 8% (future if we get inflation).

If you can afford a $4k mortgage, according to this calculator, you can afford a house selling last year for $796k. Now compare that with what happens if you wait and mortage rates go up with inflation when they over borrow and dillute the US Dollar.

Nice article below...


http://www.pimco.com/LeftNav/Global+Markets/Global+Credit+Perspectives/2007/U.S.+Credit+Perspectives-+5-2007.htm
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john p



Joined: 10 Mar 2006
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PostPosted: Fri Jan 02, 2009 7:18 pm GMT    Post subject: Reply with quote

Don't forget to try it punching in 4.5%.
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Sun Jan 04, 2009 12:21 am GMT    Post subject: Reply with quote

Also keep in mind that if you don't stay in your house for the duration of the loan term, then now is a terrible time to buy. Using your numbers, if you buy a house today for $748k at 5.3% (or even more with 4.5%) and then sell in 5 years when it is back up to 8%, then you'd lose $200k, assuming that housing prices follow mortgage rates. Rising debt thanks to education inflation and stagnating or falling wages an unemployment offset the increasing population of college graduates I think, not to mention that I think inability to acquire debt for school will probably also stop or slow the rising number of college graduates. Buying a house is like buying a bond - you want to buy when rates are about to fall, not when they are going to rise.

I know that an article showed that rents rose earlier this year but I think that the trend won't continue despite inflation in other goods. My complex had crazy high rents this summer but they fell sharply this winter. Unless the economy improves, I'm guessing they will stay around here for a while and perhaps fall even further. But assuming a 3% raise every year, the rent vs buy calculator states that buying will not save you money and this is the most important reason not to buy. Just because buying is discounted now compared to what it will be in a few years, which I dispute above anyway, does not imply that one should buy.

I'm currently paying $1870 to rent my very nice 2br 2ba 1250sq ft apartment in Waltham (current rent is actually $1770!). Comparable places in the area sell for about $370k - $430k. The NYTimes rent vs buy calculator shows that buying now under even the most optimistic circumstances is a terrible idea.

Assuming you are an average buyer right now, put in for the most likely scenario 0% home appreciation, 0% rent inflation, $1770 current rent, $400k purchase price, mortgage rate of 5.5%, and 1.35% property taxes and you get that buying is never better than renting, and that's ignoring the opportunity cost on the down payment (4%/year on $70k)!

Now maybe I'm being grim here. Let's try some very optimistic numbers: 1% home appreciation (average upcoming losses + gains over time horizon), 3% rent inflation, $2000 current rent (summer price), mortgage rate of 5.25%, $370k purchase price, and 1% property taxes (Waltham has $100k exclusion) and you still get that it's better only after 8 years! And I still haven't even included the opportunity cost and other things that this calculator likely ignores (like that my rent includes heat and hot water and a gym membership). Including those things I think that you'll find that it jumps up to 14 years. So the range is from 8 years to never, with the most likely scenario somewhere around 15 years and up to the 20's if you are frugal like me.

At what point does buying make sense? There's a few possible scenarios. One possibility is if the price of a comparable unit drops to about $250k. Another possibility, and the one which makes the most difference, is for housing prices to start rising again. We can simply the rules and state that until housing prices are expected to start rising in absolute terms at least 3%/yr (still below inflation), then one should not buy and at that point you're time horizon should still be at least the traditional 5 years.

Considering that Boston has a heavily pipelined housing market (stay in 2br for 2 - 5 years, then starter house for 5 - 10 years, then bigger older house for 5 - 10 years, then nicer house for 5 - 10 years, then retirement home for the remainder) it is unrealistic to expect to come out ahead buying and for the reasons that I listed above I also don't agree that one is better of buying now rather than waiting, if intent on buying.[/url]
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Sun Jan 04, 2009 12:39 am GMT    Post subject: Reply with quote

On an unrelated note, I just got back from seeing family in San Antonio and continue to be amazed at the difference from Boston. I think that the disparity is getting even worse with time. I visited the houses of two friends. Both graduated within the last 5 years or so and, though two income families, have very middle class careers (office supervisor, preschool teacher, etc). Both of them bought ~$200k "starter" homes which are ~5 years old, ~2700 sq ft, 4 bedrooms + family room, ~1/3 acre lots, in the "hot" part of town with great schools and gated neighborhoods, and lots of high end features like walk-in showers, granite countertops, stainless steel appliances, etc. From public records, looks like the land cost about $40k with structure $150k - $200k. Looks like a comparable property in Boston now runs about $800k - $1 million.
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Boston ITer
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PostPosted: Sun Jan 04, 2009 5:48 am GMT    Post subject: Reply with quote

Quote:
From public records, looks like the land cost about $40k with structure $150k - $200k. Looks like a comparable property in Boston now runs about $800k - $1 million


Boston's housing market is simply not sustainable. It's better to rent here and save that money, trading smartly (not just buy 'n hold), for that retirement pad in Northern Vermont. Otherwise, be ready to move to Texas, as soon as your job gets sent over there and use your savings for a 20% downpayment on that TX mansion. Companies are not staying in the region; I'd been saying this for the past no of years.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Sun Jan 04, 2009 3:47 pm GMT    Post subject: Reply with quote

Those are all valid arguments.

I don't think during the bubble that people considered being "stuck" in their property as Baylor rendered out. Sure that is possible, especially if the memo Boston IT'er gets out (the nice pad for $200k). I do think it is wise to think about an exit strategy and game out all those scenarios. Admin talks about waiting for house prices to drop despite the most likely scenario that for the lowest prices to be possible, you've most likely got the highest interest rates. He says, correct me if I'm wrong, that it is best to buy at the lowest principal and hope to refinance when rates go back down. I think that if you've got the time, that's a great strategy. Some people don't want to be renting when they are in their late 30's or 40's unless their career affords them more opportunities if they are flexible to relocate... The other warning I say is that if enough people break the fundamental rules, they will deform the fundamentals and the government will bail them out. In our political system, what is right is based on the number of votes so if the irresponsible people have more votes the government will penalize the responsible.

When you look at the numbers think about water and temperature. If water isn't boiling at 100 degrees and you're scratching your head, maybe it is because the government has been adding salt to the water and has changed the property of the water.

Just the government interaction alone has got people worried about making long term commitments. It's kind of like dating someone that is a bit unstable, you wouldn't want to marry them right? People need a sense of stability before they make a long term commitment. It's kind of like how the nature of the job market has changed from people being a "lifer" at a company to, in some industries, people acting like independent contractors getting gigs. Will the nature of housing be affected by the magnetism of better cost of living areas, the potential downside of being caught and stuck in an investment and the government getting too involved in the market and rewarding the irresponsible because they get safety in numbers in a political value structure.

My belief has always been that we have guiding principles, values that create prosperity and order. When people root one way or another for their own self interest we get bizarre bubbles. We will get a stable consistent environment if we put values first.

The three big things I think have affected Boston are first, we have a big financial market here. As the babyboom has built their nest eggs, we have amassed the largest amounts of capital at the end of their peak earning years, prior to them beginning to live off of and drain their savings. Boston has done well with billions in assets under management. Second, our industries are not hurt by globalization as much. For example, take a look at the price of a new Honda Accord in 1999 and today. They are essentially the same price. If you compare that to the price of a house in 1999 and today or the price of my next point, the price of college tuition, Boston being a college town, tuitions have gone through the roof. Compare the costs of running a university with running an automobile manufacturer. Car prices have been held in check for a decade due to the fact that it is a global product. So as the unions got their pay raises, the prices of cars stayed about the same. This is why Detroit is under such strain, they sold a global product and experienced the drift of the US cost of living outpacing their top line of how much they could sell in cars. Is this the canary in the mine?

Boston It'er, I'd say take another step back and ask yourself, why would someone pay $38k to go to Boston University when they could go to University of Kentucky for less than half? I think we might get limited amounts of buyers simply because a kid coming out with $90k in debt can't buy a condo here. I think some who pay for that BU tuition hope that with this babyboom retiring, more big job openings will be available and they want to be positioned in the power centers like NYC, Boston, etc.

Guys economists, politicans want housing to bottom right now. What do you think they need to do to sweeten the deal for new buyers?

Part of this turbulence is the fact that people have been trading on margin. People looked at their credit as an asset. If they could borrow capital for say 4% and put it in the stock market and get 10%, that was a 6% yield and that was much more than they'd make if they worked hard at work and just get a 3% raise year over year. Lots of people in the affluent towns are living on margin and playing the risk game. People play fast and loose and get in and out quick. Would Weston and Wellesley have the money they have if Boston didn't have hundreds of billions of dollars in assets under management? What if other cities could manage those assets just as well? People in the Big Dig made their money and got out quick and left others holding the bag. We have companies that have recently bought other companies to get the same yields. They borrowed with cheap money to buy companies that had good profits. The problem is that people were buying brands and the talent that was once at the companies that created the profits have long gone and they have really bought the molted shell of a company.

I think the smart money is in the newly emerging companies that are formed by the individuals with a good track record. I think the age of audacity, trading on the achievements of others and empty branding is over.
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PostPosted: Sun Jan 04, 2009 7:13 pm GMT    Post subject: Reply with quote

Quote:
why would someone pay $38k to go to Boston University when they could go to University of Kentucky for less than half? I think we might get limited amounts of buyers simply because a kid coming out with $90k in debt can't buy a condo here. I think some who pay for that BU tuition hope that with this babyboom retiring, more big job openings will be available and they want to be positioned in the power centers like NYC, Boston, etc


I think the truth of the matter is that most students haven't thought through all those scenarios. When I was growing up, some two decades ago, the notion was that public colleges were the equivalent of Belushi's "Animal House" whereas the Brandeis's and the Colby's were the halls of academic excellence, Nifty-Fifty corporate placement, and such.

Unfortunately, much of the above doesn't hold true. Outside of the northeast, very few middle class families would opt to send their kids to BU over let's say the Univ of North Carolina (not just the Chapel Hill campus but any of them) unless they had a near full scholarship (sans loans).

And finally, the only real power center jobs are in management consulting a/o investment banking and those coveted positions tend to be filled by children of fortuitous pedigree, not the typical middle classer trying to get through college w/o too many loans. Realize, with globalization, the amount of cronyism, to keep those elite societies more *ringknocker*-like, will increase. The idea that an average, brilliant kid from North Carolina State will make partner at an XYZ financial corp will be less and less unless he's one of those super traders but if that were the case, he'd be self-employed and then be running his own firm then in working for let's say Goldman Sachs with Hank Paulson's cousins.
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balor123



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PostPosted: Sun Jan 04, 2009 9:37 pm GMT    Post subject: Reply with quote

There are plenty of good public schools and we need to get over the idea that Boston has insurmountable schools. There are a few widely recognized schools like MIT and Harvard that will always have a good name and people will always be willing to pay a premium to attend those schools. The other schools, however, are largely only known in this region. There are plenty of very good public schools in other parts of the country. UT Austin - the largest school in the US - is a top 10 engineering university. Also very good: Univ of Mass, Univ of Illinois, Berkely, Virginia, and Stonybrook. Many people don't realize but Cornell, where I went, is actually largely public as well (depends on your department).

I recently visited India and I can tell you that the need to attend Boston schools will decrease at a rapid rate over the next few decades. They are building schools at a significantly faster rate than most people realize. Many, but not all (ie IIT), aren't comparable but eliminate the need to travel overseas and are significantly cheaper. I haven't been to China yet but I've read and seen pictures. If Boston's cost of living doesn't adjust and tuitions remain high as a result, Boston will be at a significant disadvantage. Our universities also heavily relied on endowment earnings and will suffer nonetheless, which may cost us prestige. Business in Boston follows the universities so we need that research and venture funding.

The cost living doesn't just affect our ability to compete on cost but affects businesses in a much more significant way. The world population is growing and there is a greater need for goods and services every year. With our strong aversion to growth and development, we can't keep up with business needs. Adobe is building a new office off 128 in Waltham to hold up to 600 employees but the city didn't make any effort to ensure that there is additional housing for those 600 employees. The free market will solve the problem but not in a desirable way. Adobe just won't be able to fill those positions.

On another topic mentioned in earlier posts, one can consider debt to be a tool for time-shifted consumption. No one is buying anything right now because they are too busy consuming things that they bought in the past. There is no free money in this world and little the government can do to solve the problem except prevent downward spirals. They can lower the mortgage rates but then investors become poorer, the same people that we are trying to help. The best the government can do is stretch the time for recovery so that life is just difficult for a long period of time. The best estimates seem to be about 5 - 10 years right now. I believe that was also a recent report showing that in 10 years the US may not be the dominant economic superpower in the world anymore. That will hamper any future recovery and make it difficult for housing to continue to grow. Retiring baby boomers are another problem. They will downsize, move to lower cost areas, and sell investments over time. They are expecting that their savings will buy the same goods and services that could be purchased when the US labor workforce was larger and more productive. They will be in for a shock and so will anyone who thinks that jumping in to the bottom of the housing pyramid that they will be leaving right now.
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PostPosted: Sun Jan 04, 2009 10:30 pm GMT    Post subject: Reply with quote

Quote:
There are plenty of good public schools and we need to get over the idea that Boston has insurmountable schools. There are a few widely recognized schools like MIT and Harvard that will always have a good name and people will always be willing to pay a premium to attend those schools.


Yep. I've been telling people this for years. In terms of real educational value, Boston's heyday is over. It's priced itself out.

Also, realize that MIT, w/o a Ringknockers appeal, will also lose prestige over time as Tsinghua Univ in Beijing, the IITs, and the St Peterburg Polytechnics start to attract international R&D collaborations. Harvard, being a place with direct ties (ala Ringknockers) to elitist Wall Street, Management Consulting, and Govt-to-Law firms will maintain a sense of propriety but as we all know, they can only be Cambridge's feudal lord, not all of eastern Mass's welfare distribution king.


Quote:
I haven't been to China yet but I've read and seen pictures.


I have and I'd be scared. Imagine what it was like when DEC was first starting out, TX-2/Lincoln Labs, long before we were born, and then the state of technology in Massachusetts by the mid-80s when we had wall-to-wall technologies companies on both 128 and 495. Well, China is in those early days of Ken Olsen and his ARDC friends.

Quote:
Adobe is building a new office off 128 in Waltham to hold up to 600 employee but the city didn't make any effort to ensure that there is additional housing for those 600 employees. The free market will solve the problem but not in a desirable way. Adobe just won't be able to fill those positions.


Well, given the upcoming layoffs at Fidelity, State St, Gillette, Intel @ Hudson MA, etc, it might not matter. Adobe will have a slew of applicants, willing to take whatever is needed, just to maintain some semblance of employment. At the same time, there'll still be the entry level/co-op types from MIT, WPI, NEU, UMass, etc, so it won't just be re-treads from failing companies.
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PostPosted: Sun Jan 04, 2009 10:31 pm GMT    Post subject: Reply with quote

Forgot to sign the post above.
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balor123



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PostPosted: Sun Jan 04, 2009 10:49 pm GMT    Post subject: Reply with quote

How come you don't have an account by the way?
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john p



Joined: 10 Mar 2006
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PostPosted: Sun Jan 04, 2009 11:52 pm GMT    Post subject: Reply with quote

Remember this article?

http://www.boston.com/news/local/articles/2006/01/01/in_boston_nearly_1_in_20_households_are_millionaires/

With all these nest eggs the fee for assets under management can feed a lot of wealth managers.

I wonder if some in the investment class are refinancing as an alternative to selling equities? I wonder if high net worth people are refinancing to draw out capital from their homes?

I am also wondering how long people will remain being liberal when their kids are long graduated and they get the out of control property tax bills.

Another dynamic is as Deval Patrick shifts some of State's Costs to the Town's by reducing State Aid to towns, the elderly, who don't pay income taxes typically will now see new surcharges because the expenses will be paid for in property taxes which don't come from income, they come based on property value. So a little old lady living in a house in Belmont who doesn't work will have to pay increased property taxes because Patrick has spilled the cost of the State to the Towns.

As far as infrastructure is concerned, as a member of a town's finance committee I can see how if the overall budget can only grow outward 2 1/2 percent and slices of the pie within grow at a greater pace than 2.5%, they will eat into the other slices. Typically governments neglect one slice of the pie or another like building or road maintenance. Roads don't vote, but a town employee who doesn't get a cost of living adjustment can get pissed. So infrastructure gets pulled out of the pie. Governments invent new revenue streams like tolls, gas taxes, lotteries and now casinos. Even though these are cannibalistic, politicians do it because it pushes the problem to the next generation. I have even heard of people wanting to float municipal bonds to just catch up on maintenance neglect.

I fear Obama's Infrastructure Plan is based on politicians telling him that they need money for infrastructure beause their State's can't afford it from their general revenue. Infrastructure is a symptom of government overspending and it is one of the first outcasts from State Budgets that has no revenue stream. The problem is if we fund infrastructure through borrowing, we add to the debt and what's next, what is the next slice of pie that State's can't afford? They can't fund their pensions? Why did they roll the dice and let their money ride in the markets? That was their risk, not the tax payers. The problem is government spending. If State's can't afford their road maintenance it is because they haven't restrained spending. Can I get a bailout for not painting my house? I mean if government can't provide the basics like fixing the roads, we should not be in the business of these socialist feel good policies. I mean what is government's job for God's sake?
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PostPosted: Mon Jan 05, 2009 12:49 am GMT    Post subject: Reply with quote

To balor123:

I guess in some ways, I either don't see myself as a true board denizen (like John) or I have too many account/passwd combos out there and wanted to minimize them, whenever possible.

To John:

Do you think that the 2006 article about the landed rich in Boston has changed since the market crash? Realize, a slew of local foundations (Elie Weisel, M Zuckerman, Robert Lappin, etc) were wiped out by the Bernie Madoff scam and I suspect, along with it, a lot of multi-million dollar portfolios of certain local families. And this doesn't even take into account the recent market crashes. Realize, not every well off Mass resident is an active trader and had bought put options on the S&P and Nasdaq in '07-'08. Yes, I'm one of the aforementioned latter but I'd only kept it, a sliver of my portfolio, so I still have to work for a living.
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john p



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PostPosted: Mon Jan 05, 2009 2:32 am GMT    Post subject: Reply with quote

I do think a lot of wealth might of evaporated in the past year. I'd wonder if stocks went down "X" percent last year, does that mean that we'll lose "X minus something" percent of jobs in the financial industries?

Most of the well to do people in my age group from Wellesley, Weston, Marblehead, Cohasset, Andover are in the financial industry. When people tell me that these towns won't suffer during a downturn, I kind of scratch my head.
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john p



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PostPosted: Mon Jan 05, 2009 3:07 am GMT    Post subject: Reply with quote

Like the vocab word, denizen... http://dictionary.reference.com/browse/denizen

I just told my bulldog I'm a denizen and she's happy for me.

It is quite amazing that this side interest in the housing market has given me a deeper understanding to the causes of our current recession. It is amazing that our generation hit ground zero in the most turbulent time in the housing market and are facing the worst economy since the Great Depression. I think my attention reflects the severity of the reality we're in. There are some very bright people on this blog, and after several years of the Real Estate Industry controlling the information surrounding the Markets, it was time that people started to spend time and talk about the situation.

The Alt-A wave is coming. Alt-A's are loans that aren't subprime, but risky nonetheless. I'm now trying to get my mind around how many people will go belly up with the ARM resets.

The new dynamic in the mix are the new lows in mortgage rates combined with a new President that has promised change but hasn't offered specifics so many are sitting on the sidelines in uncertainty. I think of William F. Buckley's quote that said he'd rather have the first 100 names in the Cambridge Phone Book to run the State than the Faculty at Harvard University. I have heard a lot of flowery and well intended rhetoric, but I haven't heard one creative idea that will work.

Think of the decades between WWI and WWII, how much we progressed in technology. With all we know and now all these great universities in emerging nations as you mentioned, isn't it possible that one person will find a better way to heat homes or power automobiles? I asked my grandmother what the best invention was in her lifetime and she said when they put the toilets in the house. I think the problem is that these egg head universities get great students and not great creative problem solvers. When we put the carrots out for these techology types to get MBAs as you talked about, their not wired in problem solving mode. We're in a real fix and I think we need problem solvers not flowery speaking politicans or CEO's that write books about themselves. I love those books were people have their picture on the cover. If I ever write a book I hope on the cover is something cool I invented or designed. I invented a mixed drink but later found out it was called a Dark and Stormy.
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