Sunday, July 13, 2008

Big Mac Housing Index

So, weird title... Got to THIS on Calculated Risk via Krugman's conscience. A lot of conservatives (some of whom I know well as friends and relatives), whose convictions are sometimes unencumbered by inconveniences like facts, like to blame huge million-dollar McMansions and yuppies getting in over their head for both the housing bubble and the POP. The rationale is that the high-end houses had more money chasing them, and at the same time had farther to fall, and it was a fairly logical argument.

But there are convincing theoretical rationales to suggest the exact opposite, and in fact the Data for LA and Minneapolis suggest the opposite. Lower-quintile housed seemed to have a larger proportional increase AND a larger proportional decrease during the crash. Basically, what was happening on this end was that complicated loan scheems that perpetuated the bubble, and led to the subsequent forclosures and crash, were almost exclusively offered (and accepted) by lower-income borrowers who otherwise couldn't afford to buy.

An example is the Payment-Option ARM - Borrowers got their ARM with an option EACH MONTH (not at the outset of the contract, but EACH MONTH) to pay: the normal amortization payment; the interest-only payment, or; the "negative amortization" payment, which kept adding on to the principle. Holy SH..neikkies! This didn't just give people one chance at a bad desicion, but a seemingly neverending sequence of monthly opportunities to display their inexperience with finance.

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