Some insight as to why people (and politicians) can be duped into supporting things like bailouts

Recently, my fiance and myself have begun watching more shows on HGTV in lieu of NCIS, Law & Order, CSI, etc (but not Family Guy – hell no I’m not gonna miss Family Guy – Giggidy). The other night, a show called Property Virgins was on. The premise of the show is that it concerns.. well, I’m lazy, I’ll cut and paste:

Property Virgins takes viewers inside the intense world of house hunting through the eyes of first-time buyers. The series focuses on the roller-coaster journey of property virgins’ first foray into real estate, offering tell-it-like-it-is entertainment and practical take-home advice. Part realtor, part therapist, friend and financial advisor, host Sandra Rinomato helps new buyers see the difference between their hopes of acquiring the out-of-reach dream home and the hard reality of what it takes to find the right property.

The person on the show was a single, who knows how old (probably late 20’s), female pilot who had been living with her parents so she could afford to put herself through flight school. She decided it was time to buy a house, and I guess she stumbled on a $70k+ inheritance, so she was able to put down a sizable down payment. Ok, doing good so far.

Fast forwarding to her looking at the place she decided she wanted to get, I started making this correlation of money-isn’t-an-object-because-I-really-want-this place and just pure financial ignorance. She ended up wanting this condominium in Boulder, CO (I think that was the location). The thing was going for $265k or somewhere around there. Needless to say, it’s something I would never look at, but whatever. Anyways, this girl tried getting the seller to knock off $10k, but they wouldn’t budge. The girl decides she’s in love with the condo so she decides to eat the extra $10k under the premise that “It’s only going to be about another $30 per month”. Is that just it, $30 a month? The payments may be, but look at it over the life of the loan. In the following examples, let’s assume an initial price of $265k with a down payment of $70k – our loan amount then comes out to $195k. I recall the interest rate being something like 5.6%. Assume 30 year loan. Here’s the table:

As you can see, she would incur a monthly payment of $1119.45. At the end of the loan, she would have paid a total of $208003.42 in interest.

Now let’s take a look at what would have happened if she didn’t keel over and got the buyer to cut the $10k. Same as before, 5.6% interest, 30 year loan, but now it’s only $185k:

With this loan, monthly payment dropped to $1062.05, $57.40 less than the first loan amount – so much for that $30 she predicted. But even more importantly is the sum of interest paid: $197336.57 – a difference of $10666.85!

Obviously, what was at play here was both emotional attachment and financial ignorance. How ironic it took a show on HGTV to get me to make the connection. For example, people claim that “We can’t let the financial markets (or automakers) to fail! Damn the cost!” – the emotional argument. Then of course they get suckered into thinking that “We might be able to make money on this!” – ignorant of the, what I consider anyways, simple fact that if business botched it up, the government sure as hell won’t make it work.

At least, that’s my take on why people and politicians get suckered into this crap.

3 comments for “Some insight as to why people (and politicians) can be duped into supporting things like bailouts

  1. Jaded
    December 10, 2008 at 9:22 am

    I love that channel as well but you are correct in the “emotional” part those property virgins always feel they NEED that one house no matter what…silly!

  2. December 10, 2008 at 5:46 pm

    Ugh. Whatever happened to buy what you can afford? My parents, when purchasing a home, always looked at what they knew they could afford, then usually went a little cheaper with the home they actually bought. They bought not just what they could afford, but what they could afford if one of them suddenly wound up without a job. They managed to buy four houses this way (each one a little better than the last) and made money with each when they sold them.

    The last one my mom sold after my dad died. They bought the home and 5 acres in 1979 for around $30,000. From 1979 to 1990 they bought some of the surrounding land adding the total acres to 40. When my mom sold that land it was 6.7 times more than what they paid and my mom sold the property for a little over $200,000, then bought her final home with that money and had change left over. Again, she bought what she could afford.

    They managed to do this because they started out with what they could afford, not what they really wanted. The last house my mom sold with the forty acres was an accumulation of decades. As they paid off what they had they were able to accrue a little more each time while leaving room for the day that might come when when one might not be working. That day did come when my dad got cancer. Eventually he had to retire from his job due to the cancer. When he died, my mom had no problems (financially) keeping the house for a year before she sold it. At that time she was living on forty acres alone and sold it because it was too just much work for her.

    Today, people want their American dream NOW. They don’t want to wait for the home of their dreams, they don’t want to save up money for 10, 15, 20 years before making the move into their dream home. They want it now no matter what the cost.

    Gotta have it now.

  3. December 10, 2008 at 5:50 pm

    BTW, Love NCIS

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