High schools should teach about mortgages

2010-10-19

in Canada, Economics, Rants

In high school, every year I had to take a course called ‘Career and Personal Planning’ (CAPP). For the most part, it combined invasiveness with uselessness. Most memorably, in my final year of high school we were all asked to prepare binders full of personal information: bank statements, medical records, etc. These were to be submitted for grading, and were kept in heaps in unlocked classrooms. For mine, I submitted a bunch of documents that were heavily redacted in CIA style, along with a copy of British Columbia’s Freedom of Information and Protection of Privacy Act. I admit that it was a good idea to encourage high school students to collect copies of important documents in a safe central location, but it was definitely inappropriate to them gather all that information.

The course also featured a number of methodologically dubious exercises designed to help people choose a career, along with some more useful segments on things like resume preparation.

One thing CAPP never discussed – as far as I can recall – is mortgages. This seems like a rather serious omission, given how most Canadians will probably be associated with a mortgage at some point. It seems like common sense to teach people about interest rate options, down payments, and matters like what happens if you decide to move before paying a mortgage off.

Generally speaking, I think people put too much emphasis on home ownership. As the recent economic crisis has demonstrated, houses are not assets guaranteed to appreciate in value at all times. While it is true that ‘at least you have a place to live’ if you invest most of your savings in a home, I think it is smarter overall to invest in a more diversified way. Of course, the decisions made by each person reflect their preferences and personalities. Given the high proportion of Canadians who will deal with mortgages, it just makes sense to teach about them in high school. That is, after all, the last stage of compulsory schooling in Canada, and meant to convey the basic skills necessary to function in Canadian society.

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{ 37 comments… read them below or add one }

Tristan October 19, 2010 at 9:41 am

“As the recent economic crisis has demonstrated, houses are not assets guaranteed to appreciate in value at all times.”

Ideology plays a huge role here. Property values tracked inflation since the 70s, and then in 2000 jumped radically:

http://mysite.verizon.net/vzeqrguz/housingbubble/

And yet, rather than wonder whether something strange is happening, everyone for the most part defended this house appreciation as normal, as not simply another bubble. This included yourself:

“Low interest rates certainly played a role. That said, I do think housing is an area where it makes sense to spend more money as you grow richer. The neighbourhood where you live is especially important – it affects everything from the length of your commute to the level of anxiety in your life to what kind of food you have convenient access to.”

For reasons I don’t entirely understand, figures on the left and right were able to see this aberration and predict the crisis, whereas the “mainstream” was almost entirely blind. That’s something to think about when we are dismissing figures as “fringe” – fringe figures may have more intellectual freedom than those who’s prestige relies on the support of the mainstream.

Milan October 19, 2010 at 10:03 am

You’re the one who said: “Those related factors are both just implications of low interest rates.”

Obviously, a lot more than just interest rates needs to be considered, to understand the filling and bursting of the housing bubble.

. October 19, 2010 at 12:23 pm

Housing & Mortgage Market

$138,000: The average Canadian mortgage

55%: The percentage of Canadians who think it’s a good time to buy a home right now

5%: The approximate number of Canadians who actually expect to buy a home soon

9.1 million: The number of homes that are owned in Canada

5.35 million: The number of homeowners with mortgages (i.e., 5.35 million people on title to a home who have a mortgage in their household)

$739 billion: The total of all outstanding mortgages on these homes

$150 billion: The estimated volume of new mortgage approvals in 2009 (including new mortgages, transfers of existing mortgages between lenders, and refinances)

Tristan October 19, 2010 at 1:53 pm

“Obviously, a lot more than just interest rates needs to be considered, to understand the filling and bursting of the housing bubble.”

Really? What else do we need to know? Lower interest rates=cheaper money, people can afford to spend more on houses=people spend more on houses.

Your fallacy was to assume because people had more access money, they are richer. But, they were not – they have more money because banks were willing to allow them further into debt.

The bursting of the housing bubble corresponds with the end of easy access to credit.

Tristan October 19, 2010 at 1:56 pm

“The neighbourhood where you live is especially important – it affects everything from the length of your commute to the level of anxiety in your life to what kind of food you have convenient access to.”

This was always true. Ergo, it can’t be used as a triggering reason for the event of the housing bubble. Of course it can be used as a sustaining reason – but so could the fact people breathe. If people didn’t breathe, easier access to credit would not result in a housing bubble.

Actually, it’s worse than that. Even if people didn’t care where they lived, a housing bubble could easily happen. Even if where you lived had no implication on your quality of life, you still would have to live somewhere – and so long as the market is under conditions of moderate scarcity, you are competing with other buyers when you purchase a house. So, if both you and the other buyers have access to more credit, the prices will go up.

Milan October 19, 2010 at 2:19 pm

When people get richer, they are likely to spend more of their income on important luxuries.

There is a basic amount of money you need to stay alive. When you get richer than that, you start spending more on things that are important to you. Housing is important. Where and how you live has a big effect on how happy you are with life. As such, it is very plausible that as people become richer they will spend a larger share of their income on housing, regardless of what interest rates do.

That said, low interest rates and access to financing are clearly factors that can drive increases in house prices, as well.

Milan October 19, 2010 at 2:20 pm

In any event, high school mortgage courses would probably be more practically and less theoretically focused. For instance, it would be useful to know what happens if you have a mortgage and decide to move before it is paid off. I, for one, have no idea. Perhaps you sell the house back to the bank and thereby earn back part of what you paid in?

Tristan October 19, 2010 at 3:05 pm

Ok,

So, did people get richer starting in the year 2000, after a 30 year period of not getting richer?

Tristan October 19, 2010 at 3:12 pm

“When people get richer, they are likely to spend more of their income on important luxuries.”

This really doesn’t appear to be true. The amount of money people spend on food has drastically decrease – but it would be insane to say your quality of life is not related to the quality of the food you eat. But, look at these numbers (which took me 30 seconds to find):
http://www.ers.usda.gov/briefing/cpifoodandexpenditures/data/Expenditures_tables/table7.htm

Since 1929, spending on food at home as share of disposable income has dropped from 20% to 5.5%, and spending on food away from home has increased, but only from 3 to 4%.

Why is housing a better thing to spend more money on than food? There is a major difference between food and housing, however – food isn’t something we borrow many times our yearly salary to afford and pay back over time – thus spending on it will not be drastically affected by access to credit.

Tristan October 19, 2010 at 3:25 pm

“As such, it is very plausible that as people become richer they will spend a larger share of their income on housing, regardless of what interest rates do.”

This really is nonsense. The amount of money you have to spend on housing radically fluctuates with interest rates. When my parents bought their first house, interests rates were high and they could not even borrow two times my father’s salary. Now it is normal to be able to borrow ten times your salary. That means you have access to five times as much credit, but you have literally not one cent more money.

If interests rates rise significantly, as has happened before, no amount of amelioration of wages will offset the smaller amount of money you will be able to borrow. For instance, even someone in the early 80s making 100,000$ a year could not borrow as much as someone in 2006 making 40 or 50k per year.

Tristan October 19, 2010 at 3:26 pm

If anything, getting wealthier should, regardless of inflation, increase the amount you spend on luxuries access to which do not depend on access to credit. Such as food. But, the data shows the opposite – as we get richer we spend less and less on food overall, although we do spend a larger portion of it on eating out.

Milan October 19, 2010 at 3:28 pm

Saying that only interest rates and access to financing affect house prices shows the same inappropriate rigidity of thought as saying that only interest rates affect the rate of inflation.

It’s worse, actually, since it is obvious that other factors influence house prices. Did the rise of the automobile not affect the prices of houses? Quite probably, the world’s dwindling oil supplies will eventually affect them again, cutting the value of suburban homes while increasing the value of those close to places of business.

I am not saying that interest rates and access to credit have no effect. I said the opposite. That being said, their impact cannot be easily disentangled from other things happening at the same time. That’s what makes bubbles hard to identify, while they are still inflating.

Milan October 19, 2010 at 3:30 pm

Food prices would be an interesting thing to study in more detail. I think it’s likely that North American food prices have been significantly affected by the level and nature of public subsidies (which encouraged massive, intensive farming operations) as well as technological change.

Several of Michael Pollan’s books discuss the push from the U.S. government for farmers to make massive amounts of food – especially corn – available at very low prices.

Tristan October 19, 2010 at 3:38 pm

The food example stands – people on average eat very low quality food, yet, if they simply spent what they spent in 1920 on food, everyone could eat extremely high quality food.

The corn example is good, but incomplete. You also need to understand why people desire so much lousy food. And, to figure that you need to do the history of fast-food in North America, and understand the role of public relations in the production of consumer desire.

Milan October 19, 2010 at 3:40 pm

Another factor affecting the market for food could be seriously diminishing marginal benefit. If my income doubles, it may not make sense to double my food spending. I could eat expensive foods more often and buy better versions of foods I like, but the additional welfare I derive from doing those things may not exceed the opportunity cost of the money being put to that end.

Imagine someone who goes from being a student to working progressively more lucrative jobs. Say they go from having $800 a month for food and personal spending as a student, and that rises to $2000 and then $4000 as they get promoted. If they spent $300 a month on food as a student, would they plausibly spend $750 as a junior employee and $1500 as a manager (keeping the proportion of income spent on food constant)?

Housing, by contrast, seems like something you can always derive a fair bit of benefit from improving – largely because of the importance of location. It’s nice to have a good apartment, and far nicer to have the same apartment in a good neighbourhood near where you spend more of your time. It’s even nicer to have it in a desirable (and hence expensive) city like Toronto, London, or Paris.

It is easy to imagine a student paying $600 in rent going on to pay $1500 and ultimately $3000 as they move into bigger, better places in more desirable locations.

Tristan October 19, 2010 at 3:46 pm

As for housing prices – did you look at the graph?

http://mysite.verizon.net/vzeqrguz/housingbubble/

As for the “difficulty of seeing bubbles”, plenty of people saw it. Dean Baker saw it, Robert Shiller saw it, and the entire far-right monetarist crew saw it (and that crew is interesting – they may be racist conspiracy theorists, but they are, or at least were before the tea-party emergence, not acting under the whip of big business).

Your arguments to obscure the data tend to take the form “people were getting richer” – but, if you look at the data, they were not getting much richer. The wage share has stayed quite stagnant since the 60s, actually decreased despite rampant increases in productivity.

Milan October 19, 2010 at 3:54 pm

It’s a fallacy to point to that graph and some predictions and say that the bubble was entirely comprehensible, and that it popping could be predicted. If you collected graphs on the values of all sorts of things, some of them would show upward trends that didn’t later turn into sharp downward ones. Likewise, people have made all sorts of predictions that turned out to be wrong.

In retrospect, it is easy to pick out the people whose predictions proved correct. What is harder (often impossible) is determining who is right before the outcome is known.

My specific claim is less expansive than you are representing it to be. I have repeatedly said that interest rates are a factor that has importance to housing prices. I am simply saying that other factors are also important.

. October 19, 2010 at 3:57 pm

“While many explanations have been suggested, it has been recently shown that bubbles appear even without uncertainty, speculation, or bounded rationality. It has also been suggested that bubbles might ultimately be caused by processes of price coordination or emerging social norms. Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears. Such a drop is known as a crash or a bubble burst. Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate erratically, and become impossible to predict from supply and demand alone.”

Matt October 19, 2010 at 3:59 pm

What was the resulting grade of your CAPP project with the CIA style black marker?

Milan October 19, 2010 at 4:02 pm
Milan October 19, 2010 at 4:03 pm

What was the resulting grade of your CAPP project with the CIA style black marker?

The CAPP teacher failed it, but I got the grade overturned. She actually tried to change the grade back to a fail on the last possible day for changing high school grades. If she had, I would have failed CAPP and not graduated that year (setting back my admission to UBC).

Tristan October 19, 2010 at 5:16 pm

“It’s a fallacy to point to that graph and some predictions and say that the bubble was entirely comprehensible”

Nothing is entirely comprehensible. Things are more or less comprehended by different figures. You should go read what Baker and Schiller were writing back in the early part of the decade.

Schiller’s concern was less about the idea of a “bubble” persay, and more about wanting to insure against the risk of the property market collapsing. He tried to start a market which would price the risk of property values going down – it’s actually a pretty interesting idea, something that still might be a good idea today.

It’s really important that we build systems that tend towards stability rather than instability. The problem is, stability isn’t always profitable. We need to be willing to force powerful actors to give up some profits for the overall welfare. Otherwise, we run the danger of moving farther into failed-state territory.

Milan October 19, 2010 at 5:19 pm

Short selling is a financial mechanism that counters the inflation of bubbles. It’s a shame that it often becomes a political target, after they burst.

Tristan October 19, 2010 at 5:20 pm

“The CAPP teacher failed it, but I got the grade overturned. She actually tried to change the grade back to a fail on the last possible day for changing high school grades. If she had, I would have failed CAPP and not graduated that year (setting back my admission to UBC).”

Did you follow up on this? Were they disciplined?

Milan October 19, 2010 at 5:21 pm

It seems like the best way for individuals to protect themselves against house price volatility is to invest in a range of assets. You are probably much safer with 1/3 of your savings in home equity, 1/3 in index tracking mutual funds, and 1/3 in GICs than you would be with most or all of your savings embedded in a house.

Tristan October 19, 2010 at 5:22 pm

Can you tell me what’s wrong with that idea?

Matt October 19, 2010 at 5:23 pm

I find this interesting, so please forgive my further questions:

Whom did you appeal the grade to? How was the CAPP teacher thwarted by in trying to change the failing grade back to a fail?

It seems to me that the teacher was simply being vindictive. You did the work that was asked of you (but censored the information). Still, in completing the project you obviously learned the material being taught, which is the entire point of school. Any reasonable teacher should have passed you.

Milan October 19, 2010 at 5:23 pm

Did you follow up on this? Were they disciplined?

High school was all about bad teachers doing inappropriate things. The shop teacher at my high school got suspended for a few days for throwing a hammer at a student; another teacher apparently got suspended for videotaping girls who were sleeping on a school trip.

Public school teachers are very hard to discipline.

Milan October 19, 2010 at 5:26 pm

Whom did you appeal the grade to? How was the CAPP teacher thwarted by in trying to change the failing grade back to a fail?

I appealed the grade to the school principal. He objected to me sticking the lyrics to Radiohead’s Fitter Happier onto the side of the binder, but otherwise agreed that the work as submitted was acceptable.

As I recall, the people in the counselling office let me know about the attempted grade change. That said, all this happened nearly ten years ago, any my recollection of the situation is not perfect.

Milan October 19, 2010 at 5:35 pm

There was a lot of protest from members of my graduating class about the binder project. I remember a mandatory early morning assembly being called, numerous objections being raised by students, but no actual changes in the assigned work being made.

Tristan October 19, 2010 at 10:04 pm

Back to the issue of mortgages – I actually think economics, political economy and finance should be taught in high school.

oleh October 20, 2010 at 2:57 am

I agree with Milan regarding mortgages and Tristan regarding economics and finance as suitable subjects for high school. considering how much change has occurred in the world in which we live, it is surprising how the courses taught have generally remained the same.

. October 20, 2010 at 10:04 am

“And I knew that the credit departments of the major banks would have documented this shoddy analysis. This is why I encouraged all the investigators with whom I spoke to begin by demanding access to the documents that the credit departments of the banks examined.

Some of these documents have emerged, and they tell quite a fascinating and appalling tale: These documents, from Clayton Holdings, a due diligence company retained by the banks, reveal that Clayton, after analyzing more than 900,000 mortgages, told the banks that about 30 percent of the loans being packaged into securitized products did not satisfy the banks’ own underwriting standards. This meant that the securitized products were almost bound to blow up.

So what did the banks do? They essentially ignored this information. We all know why: The process of securitization shifted the risk to others, and the banks were making too much money by continuing to push the deals through the pipeline. But the critical aspect to this information is that it puts to rest the banks’ argument that they merely fell into the same econometric mistake that others had made in believing that the housing market was bound to keep rising. It wasn’t just that the banks were wrong about their forecast of the housing market; it is that they intentionally ignored critical information given to them by the very people who were supposed to perform due diligence. And then they apparently withheld from investors that critical information about the quality of the bonds they were selling.”

. October 20, 2010 at 3:12 pm

At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.” Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.

. October 20, 2010 at 3:16 pm

The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

. October 22, 2010 at 4:46 pm

[A]ccording to Robert Shiller, an economist and bubble-spotter, house prices were virtually unchanged in real terms between 1890 and the later 1990s, before almost doubling in the ten years between 1997 and 2006. Because buying a house usually involves taking on lots of debt, the bursting of this kind of bubble hits banks disproportionately hard. Research into financial crises in developed and emerging markets shows a consistent link between house-price cycles and banking busts. The Economist has been publishing data on global house prices since 2002. Our interactive tool enables you to compare nominal and real house prices across 20 markets over time.

R.K. October 22, 2010 at 5:25 pm

That is, after all, the last stage of compulsory schooling in Canada, and meant to convey the basic skills necessary to function in Canadian society.

This seems like an important point. According to Canadian law, high school is the highest level of education you are required to have. As such, it seems natural that by the time people leave they should have all the knowledge necessary to participate fully in Canadian society.

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