Quote, August 21 2012 — Some unpleasant thoughts

The first point is that many US households have the inability to save for an adequate down payment on housing. Forget about the historical 20 percent down payment but many households cannot scrimp up even a modest 10 percent down payment. The second point is the American economy is still living on leverage. Debt is an elixir best served in moderation but as we are seeing with the low mortgage rates, the country is now setting a threshold where low rates are expected.

– Dr. Housing Bubble, “The resurgence of the low down payment market – The number of FHA insured loans has doubled from Q2 of 2007 to Q2 of 2012”, Dr. Housing Bubble, August 12 2012 (site last accessed August 21 2012)

Years ago I read the book Emotional Intelligence by Daniel Goleman [1]. One of the things I remember is an experiment with young children where the kids were rewarded for self-control. They were given a toy or candy, and then left alone a room for a few minutes with another piece of candy. They were told if they ate the candy, nothing bad would happen — but if they waited and didn’t eat the candy, they would get a bigger reward than just the candy.

This requires self-control and an ability to plan beyond the next impulse. Children who were able to resist the immediate temptation statistically did better in life than those children who were not able to resist the immediate temptation. Some kids would help themselves resist the temptation by hiding the candy under a pillow or piece of paper so they wouldn’t see it. This required an ability to recognize their own emotions — “I want to get the bigger reward, if I don’t see the thing in front of me it won’t be so hard to resist it.” — was an example of emotional intelligence.

As has been noted by many writers — Michael Lewis and Charles Hugh Smith immediately come to mind — there is a tendency in current culture to focus on immediate rewards. Self-control and delayed gratification are no longer rewarded and in many ways no longer even respected. Super-low interest rates are an example of this, they penalize people who saved their money and have said money either bank accounts or invested in sensible things like bonds; however, people who are impulsive and/or overoptimistic and are willing to take on far more debt than might be advisable are rewarded by current super-low interest rates (this article from Dr. Housing Bubble goes into more detail on how low interest rates hurt savers and others).

FHA [Federal Housing Administration] loans require a miniscule 3.5 percent down payment . . .

. . .

FHA loans in 2007 made up 6 percent of all loans and are now up to 16 percent of all outstanding loans. We should be concerned about the delinquency rate because we will be on the hook for this. Of course it should come as no surprise that many that can barely save 3.5 percent to buy a home are more likely to encounter financial problems

Link originally found on Zero Hedge.

[1] As often happens, a lot of people read their own interpretations into that book, especially with regards to education of children. People who believed self-esteem and talking things through and making sure nobody feel bad about themselves ever is the key to great education and the way to inspire children to become lifelong learners were convinced Goleman’s book proved that teaching by rote and teaching to the test were handicapping kids. People who believed that kids need to come out of school having certain basic critical thinking, reading, writing and arithmetic skills were also convinced Goleman’s book was an attempt to dilute educational efforts with more feel-good touchy-feely let’s-hug-it-out fluff – fluff which produces kids that are completely unprepared for real life where employers, merchants, landlords, tax collectors and the world in general do not care how much it hurts your feelings when they tell you your check bounced, twice. So, if you look up the book and find a range of very strong (and often contradictory) opinions, that could be why.

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