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PostPosted: May 3 17, 6:04 am 
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You'd be able to afford it if $60k was take home pay and not base salary.

Back when I was buying both of the places I've owned, the bank told me they would have preapproved me for a $300k loan if I had wanted one. It is easy for me to imagine someone who is less savvy about money, or just less good at math, buying a $300k house because they could.


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PostPosted: May 3 17, 8:23 am 
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Yeah. When we bought a house back in 2014, well after the crisis, I was amazed at how little banks cared about the size of the loan. My wife had been working for a grand total of 3 months and granted was making decent money....but, uh, that's not a long time with a lot of history.

The ratio I used was a 2.5:1 total debt:total income. We had about $90k in student loans at the time so I said we could afford (Mortgage +90k) = 2.5xTotal Income.

Solving the equation gives Mortgage=(2.5xTI)-90K. Then, I discounted it even further and divided that number by 1.2.

For simplicity sake, let's say our combined income was $ 100k. Hence the max mortgage we should look at financing was $160k/1.2=~$135k.

I was really surprised at how much higher the bank(s) was(were) willing to go than that equation. I was telling my friend in KC about how the banks were still willing to write seemingly blank checks with no way of us ever being able to repay the loan and he said he had 3 friends within the past year say the same thing.

tl;dr: Not sure banks have learned anything.


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PostPosted: May 3 17, 8:42 am 
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AWvsCBsteeeerike3 wrote:

tl;dr: Not sure banks have learned anything.


Sure they did - they learned they can get away with anything.


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PostPosted: May 3 17, 8:45 am 
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People rely on experts for home buying. It's something you do once or twice. Everyone knows years of debt is involved, so if the experts say a given price is normal, they're going to believe that.

When we were first looking my wife was frustrated about the kinds of houses we were getting in our price range. She had a good job and I didn't, so I think I was more cautious simply because of that. I really had no idea what we could afford, or what was normal. But we went to one lender who was recommended by our real estate company, and I think they gave us a pre-approval amount. My wife was wanting to stretch a bit more and I remember the guy being on the phone with our agent and talking to us and saying "well, I can definitely get you more." We didn't end up going with him because we found a cheaper house and I wanted to keep things at USAA, where all our other accounts were. But he was ready to put us in what could have been a big hole.


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PostPosted: May 3 17, 8:57 am 
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It really is amazing how little the banks care about what they are loaning out. Back when I bought my shop which was not long after the crisis they pretty much asked "how much you need." I thought there was going to be this strenuous process where I might have to answer questions, give a business plan presentation, etc. Nope none of it. I filled out about two piece of paper and they called the next day and said ok when do you want the money.

Even the last year or two I've had a couple pieces of farm ground come up for sale by me and I've thought about buying. Went to the bank before the auctions and they basically said "if you think it's worth it buy it." We aren't talking about a few thousand dollars, this would be like a million dollar loan. It's a little scary.


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PostPosted: May 10 17, 9:53 am 
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PostPosted: May 10 17, 12:34 pm 
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pioneer98 wrote:


This sounds like a moderate but troubling stage of debt load, in which farmers are rolling over the debt--that is, regularly making interest payments, but unable to pay off the principal.

That's not good. Eventually, if interest rates rise, or there's some farming disaster or economic shock, those farmers will default.


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PostPosted: May 10 17, 12:45 pm 
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Does the article explain where the debt load came from--financial speculation, or farm values that remain under water since the last recession?

The end result is the same, but it could be bearing out Hyman Minsky's financial instability hypothesis: that the longer an economic expansion occurs, the more speculative finance occurs (and increased debt loads).

Minsky argued that there were three kinds of debt: hedge, speculative, and Ponzi finance. Hedge is when you borrow, but can pay off principal and interest. Speculative (such as the tweet was describing) is when the debt is simply rolled over (the interest is paid, but not the principal). Ponzi finance is when the borrower can neither pay off the interest nor the principal.

Minsky believed that financing became more and more speculative during an economic upturn--that is, that capitalist economies tended toward instability and economic crisis because of debt speculation.

Long story short: I'd like to know the cause of farmers' borrowing.

By the way, here's a useful discussion of Minsky's ideas: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=161024


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PostPosted: May 10 17, 1:07 pm 
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I found the article that quote was from. Most of the article is about commodity prices, and how they expect them to stay low for the next 10 years. It doesn't explain the debt problem in much depth.

http://www.kansasfarmer.com/marketing/u ... ity-prices


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PostPosted: May 10 17, 1:47 pm 
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The problems farmers face are many. Commodity prices are basically the same they were when my Dad started farming 40 years ago. Our input costs are many times that now. For example seed bags used to be $20 a bag, now they are $200. Let's not talk about farm equipment. My Dad tells the story of his first $100,000 dollar tractor. This was in the early 80s. Now it will take a half a million to get one. Fuel is another place we get crunched. Diesel used to be $.50 a gallon back when my Dad started, now it's about $2.50 and during harvest we go through a thousand gallons a day.

Then there's land. In 1999 we passed on $4,000 an acre of ground. It was too much and it would never pay for itself in corn. My neighbors ground just sold for $17,400 an acre last month. Now the price of corn and beans are basically the same as they were in 1999, but the land is over 4 times more? The math doesn't work there.

If you want to farm it takes a huge amount of capital. Chances are if you are farming you have huge amounts of debt to go with it. I know farmers 10s of millions in debt.


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