Hacker News Reader

> i'd made sure I could pay off at the bank

> Then out of nowhere I lost my job, ..., and after about 3 months I was effectively homeless.

You absolutely, positively, need to have 6 months of buffer when you buy a home. If you're homeless in 3 months, then it means you're overextended.

You need to have six months of buffer to have a low risk of disaster.

Nevertheless, the vast majority of people purchasing their first homes in Canada and the US do not have six months of buffer. No bank has ever denied my application for a mortgage for not having six months of mortgage and tax payments in a savings account. My government backs certain kinds of loans for first-time buyers, and it does not require this buffer.

So while I agree with what you're saying in a logical sense, in a practical social sense, you are asking the vast majority of people who buy their first home to pass on buying a home, in the face of all social evidence that seems to contradict your advice.

It's good advice of a sort, but recognize that this is not accepted wisdom. It's highly conservative and contrarian. Which is smart, but if you want people to embrace it, you'll need to wrap it in a lot of justification and other mechanisms for explaining why they should zig while all around them, people are zagging.

(FWIW, My very first real estate purchase was a loft condo where I actually had cash for the entire thing, but took out a small mortgage to kick-start my credit rating. It was paid off in two years. From that point on, I have not had six months buffer in cash, but I have had more than the nose-bleed minimums in equity, and that's another kind of risk management. So I do empathize with your message, but I suggest it needs a lot of selling to get people to adopt it in the face of a trillion-dollar industry convincing people otherwise.)

This maybe speaks to OP's point.

I don't want to weigh in on whether they overextended themselves or not. 2008-2009 were rough years, and financial situations that didn't work out during that period would probably have been fine any other time. Also, let's cut some slack and presume that they were doing the best they could with a difficult set of circumstances.

With that out of the way, I think it bears mentioning that, while it isn't illegal to encourage people to overextend themselves, that's what everyone related to the housing industry seems to be doing. Realtors don't want you to be conservative with your money because they earn a percentage of how much you spend. Bankers don't (or didn't) because they don't (or didn't) give a rat what your chances of covering the mortgage are -- they just needed you to be able to make payments long enough for them to sell the loan to Fannie or Freddie or whoever. There are all sorts of do-gooders who have decided that homeownership is not a mark of prosperity, it's actually the path to it, and consequently have (or had) a tendency to get a bit too cheerleader-y. Even other homeowners, the victims of the housing boondoggle if ever there were any, are a part of it, because thinking of your house as an investment goes hand-in-hand with believing that of course home prices should be taking a one-way trip to the moon.

(Tangentially, that last aspect has me starting to suspect that the house and condo market is something of a Ponzi scheme that we are collectively pulling on ourselves.)

I don't know where I'm going with this, so I guess I'll throw one last thought out: The contrast does seem pretty stark to me. The rich are getting justice, and everyone else gets victim blaming.

> Tangentially, that last aspect has me starting to suspect that the house and condo market is something of a Ponzi scheme that we are collectively pulling on ourselves

In some markets, yes. I sometimes suspect that NIMBYism is an unconscious way to prop up the ponzi scheme.

Your comment it out of touch.

The overwhelming majority of first time home buyers do not have enough cash on hand for a down payment and a 6mo long emergency fund. It's just not possible for most first time home buyers to amass that kind of cash in any reasonable timeline while paying for the existing roof over their heads. You save for a down-payment, blow your savings on the down-payment and closing costs then rebuild your savings over the next year or two while putting up with the increased risk as a result of less savings during that time. People buying their 2nd through Nth home can generally roll the money made on the sale of their own home into the down payment and closing costs of the home they're buying without obliterating their savings. Sure, it would be nice if everyone were wealthy enough to have a down payment and emergency fund but so long as renting is the financial equivalent of lighting your money on fire people will stretch themselves as thin as they need to in order to buy.

> The overwhelming majority of first time home buyers do not have enough cash on hand for a down payment and an emergency fund.

The point is, then these people are not first time home buyers.

> The point is, then these people are not first time home buyers.

They manifestly factually are, whether or not by the standards you would prefer to apply to the decision they should be.

Thanks for restating the point.

If they're able to save up for a down payment they can wait a little longer and save up a six month reserve.

It takes most people a lot more than 6mo to save up a 6mo reserve. Delaying a house purchase by a year or two is not a practical option for most people. You have external things constraining your timeline to buy.

Sometimes people do get put into situations where buying earlier than optimal seems like the only option. However, people often use a variety of excuses to buy a house simply because they want to buy a house (even if they don't have the necessary funds for risk management).

-We are having a baby, so we need to move out of our 2 bedroom apartment and get a 3 bedroom house -Our rent is increasing so we need to buy a house (even though the mortgage is often more than rent) -We need a garage for our cars, so let's buy a house -We have money in our savings that isn't earning anything for us, so let's buy a house and put it to work. -We don't like sharing walls with neighbors, so we need a house. -Our parents say we are throwing money away at rent and should buy a house so we can build wealth.

Each excuse has some validity to it, but none of them really mean you need to buy a house RIGHT NOW.

6 month reserve is not 6 months of income. It's 6 months of making basic expenses; and is much easier than most people think.

- We (US) loose about 1/3rd of our income to taxes. These aren't paid when you have no income.* - A certain portion of income goes to retirement and saving for a rainy day... Well, you don't save for a rainy day when it's a rainy day. - Major purchases can be deferred - Major expenses, like vacations, can be skipped. - Some banks will let you switch to interest-only in hard times - ect

So, roughly speaking, 6 months of reserve is much less than 6 months of pre-tax income.

* If you have the misfortune of an extended unemployment, it will shift your tax bracket and you pay even lower taxes.

In an upmarket, In the meantime, the house goes up in price and you're even further away from owning the house and even more over-extended if you decide to bite-the-bullet and buy.

It's an immutable law of the internet that if you share a story of misfortune, someone will come along to tell you it's your fault.

6 months emergency fund is for normal economic situations. When you get a situation like the financial crisis where companies aren't hiring for more than a year, then 6 months doesn't help much. Especially when businesses in your town shut down or your entire industry is suffering. The financial crisis wasn't your normal recession. It hurt a lot of people who followed the rules.

I see what you mean and I agree, but those buying overpriced homes with too good to be true mortgages should bear no responsibility? Especially in a country like US where people don't like to be limited/controlled (read protected) by laws.

Most people don't have the financial wisdom to judge "too good to be true" on a macroeconomics basis. Specially not before the bubble burst, when even most experts regular people had access to thought there was nothing wrong with it. Someone offered them a great deal and they took it, simple as that. If a bank offers me a loan with very low interests should I consider the state of the whole economy and the impact of my loan on the country in 10 years before I take it?

Compounding to that the fact that these people weren't even benefited by the whole scam. They lost their houses, their savings, everything. If they knew what was at stake they might bear some responsibility, but they didn't.

I don't think it's fair to say that people who defaulted during the 2008 mortgage-backed securities crisis did so because they lacked sufficient macroeconomic knowledge to make prudent financial decisions. Some were offered loans (for a variety of bad reasons) that they could not repay if they encountered even the slightest setback in their current financial decisions. Those people should bear some responsibility for that poor choice as should those who offered them the loans for which they shouldn't really have qualified. Others exploited the process by strategically defaulting on mortgages after extracting money due to appreciation on the underlying property. IMO, that's unfair and borders on the fraudulent if they never intended to pay back the mortgages they took out.

There were other problems that contributed as well, but none of the causes are so easily characterized that anyone who lost money should expect to see someone jailed as a consequence of their misfortune.

The greatest recession since the 1930s, caused by the similar wild west speculative innovation, and the victims on the lower end get depicted as strategic wolves somehow.

The people buying the houses they couldn't afford took a bath financially. The companies did to a degree. The people running the show whose malicious actions an idiot could have predicted would lead to eventual collapse got a bonus.

You can say people bear responsibility and they do but we rely on our professionals to use their greater education, and their expertise to manage systemic risk by making informed choices and creating systems that manage not create risk.

No degree or number of idiot customers could have created the collapse because banks wherein the bank intends to hold the loan isn't insentivized to give out loans wherein it has a poor chance of being paid. Foreclosure is unlikely to yield but a fraction of the face value of the debt. In order to crash and burn you need an entire mechanism whereby banks can originate bad loans, get paid, and sell them off en mass as securities by outright lying about the nature of the loans being sold while securing this whole endeavor with insurance that can't possibly afford to pay for the collapse you are engineering. Then you need to pump the gas on the stupid until you run the economy into a ditch.

The economy collapsed because a bunch of dumb people bought houses they couldn't afford is a myth that conservatives and the financial industry is retconning in hopes that we are too stupid and uninformed to read. There have always been idiots willing to sign on the dotted line for dumb financial products. There are a million idiots now. We expect the adults in the room not to sell them the same way we don't expect the invisible hand of the market to keep people from eating melamine in their food.

Then to add insult to injury quantitative easing to fix the problem was simply a fancy way of saying “let’s give those banks that profited from this situation trillions of dollars so they can trickle the wealth down”.

On one side you have the finance companies.

They can lobby the government to change laws. They hire PHDs in the thousands develop attractive, tricky products. They hire million dollar marketing firms to influence us to buy.

On the other side you have busy people trying to get by in a confusing world. They dont hire anyone to help them, but they trust the rules that allowed their parents to get by (how credit is allocated). Many of them are essentially innumerate, especially when compared to a quant at a bank or even an engineer.

We’re talking about taking candy from a baby here. Is it the baby’s fault it can't defend itself?

We dont live in a fantasy of every human having 100% self reliance where every person can handle every tricky situation thrown against them. We need laws and moral standards- and when those are revoked it is not enough to understand the consequences as “the victim’s fault”

I completely agree with you, but the parent's comment is saying that the very people who need to be protected are the very ones who don't want government involvement.

> Especially in a country like US where people don't like to be limited/controlled (read protected) by laws.

Not sure what a good solution is, but it's difficult to help those who don't want to be helped.

I vividly remember banks running mortgage scam paper mills that would try and foreclose on anyone and everyone, legally or not.

https://www.vice.com/en_au/article/yvxajb/what-happened-when...

Individuals have a responsibility to act realistically. But the ultimate responsibility for due diligence lies with lenders. And when banks commit fraud on an industrial scale, and get away with it, it stops being a problem of individual misbehaviour and becomes a problem of institutionalised corporate corruption.

Good reference for a shocking read: https://en.wikipedia.org/wiki/2010_United_States_foreclosure...

Thank you for sharing this with us.

Well at least you aren't mad enough to revolt because then change might occur. Ah right, revolt is impossible due to economic conditions.

I always wondered how large federal lawsuit helped the actual victims.

"not one person responsible for crashing the economy"

https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Mi...

The incentives in capitalism "crash the economy". Yes, there was bad behavior. However focusing on individual behavior misses the forest for the trees.

Here's how it works.

Banks start off conservative. Banks only offer loans that pay themselves off. There's a run of good years. The incentive in capitalism is to make more money, and based off the recent history of good years, Bank A realizes they can offer more aggressive loans (e.g. interest only), take market share, and make more money. So Bank A does that.

Bank B now has the choice of matching Bank A, or losing market share (and maybe their business). So Bank B matches and maybe also offers less money down. This cycle continues with progressively more aggressive loan offerings until there's a run of bad years and things and people are stuck with too aggressive financing.

Indeed and also wrap up other financial products into byzantine structures, like CFDs

That sounds like an evasion of agency and responsibility that wouldn't be accepted from a lowly soldier, burglar, or even athlete for why they massacred a village, robbed houses, or cheated to get ahead respectively so why the hell should we accept that excuse from the privileged who had myraids moral alternative options?

Yes, you would have been prohibited from being in a Madoff fund by LAW, the literal no peasants allowed law (Reg D)

So whats your point?

The US housing market is a ponzi scheme. It isclearly unattached from economic reality, and is just Vegas, as is the stock market. Gambling is about all they got, those money folk.

That isn't what a Ponzi Scheme is at all. An investment bubble certainly in many areas but merely earlier holders benefitting from new traffic does not a Ponzi Scheme make. A Ponzi Scheme is a fraud first off. Estimates may be wrong for value but they are getting what they (over)pay for.

If tommorow the housing market had a massive collapse in value people would still get the house promised and would need to keep paying to avoid repossession - if they could pay say $2.5k to get a comparable house and move they could voluntarily default and their liability would be limited. Given such extremes and shaky risk curves many if not most banks would ageee to a middle ground if they thought the crash would endure. One can argue ethics of all parties but there is no inherent fraud here.

Continuing to sell shares beyond 100% of a gold mine and using sales proceeds to make prior customers think they are getting returns is a Ponzi Scheme. If people stop buying it collapses and when the dust settles a 20% share is only a share of 1% rationalized to true percentage. That is fraud.