Toxie’s dead: A nice intro to toxic assets

Toxie — a “toxic asset” purchased by NPR’s Planet Money program, and dissected and discussed over the last few months — has finally died. For those unfamiliar with the series, NPR has a personal finance show, which bought a $500 “toxic asset” during the massive post-crash dump.

As an liberal artsy English-French major, my understanding of most financial instruments was cursory. Like many, I had a grasp of basic macro- and microeconomics, but was not well-versed at all in the world of high finance and the like.

With the financial world collapsing around us, it seemed like a good time to bone up on my knowledge of such topics, and one story that helped was Planet Money‘s series on “Toxie.” They tracked the mortgages contained within, finding out what happened to the people behind the asset, as well as the long-reaching effects of the assets themselves. If you click on the above link, you can hear the stories from the beginning, which I found useful in a different way than, say Too Big To Fail or The Big Short.

Similarly, for those wondering why toxic assets went so bad, check out this post from a few months back on Marginal Revolution. The small differences in the risk of failure in individual homes makes the overall risk much higher, turning a seemingly safe investment into an unsafe one in a hurry.

Read Full Post »

Don’t buy a house. Ever.

Kevin Drum has an amazing chart of the day in response to news that Americans still seem to believe that houses will magically increase their value over time, so that all you have to do is buy a home, and if you sell it at ANY point in the future, you will turn a profit. Of course, this is false. You would think that the housing bubble and subsequent market crash would have taught that to a few people, but perhaps not. So check it out; housing prices don’t generally change much when you account for inflation:

Drum goes on to suggest a few reasons for the misconception. The NYT reports how:

“In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.”

Yglesias has a nice chart showing how fantastically absurd this expectation is:

Take the two charts in this post together and you can see the problem. If people actually think this will happen, then I don’t blame them for taking huge loans to buy houses they can’t afford. Now, my opinion on this matter is obviously biased. I am young, unmarried, without children, likely to move multiple times over the next decade as I take new jobs, and currently am employed an in area where almost every home is old and on a small lot and yet still, according to Zillow, fetch average prices of $700,000. Which is, you might guess, more than just a little out of my price range. But still, when you take all those factors together, it’s difficult for me to imagine buying a house for any reason.

Read Full Post »