The Skinny on Credit Cards is a wonderful new book explaining the functional basics of credit cards. Jim Randel does a fantastic job of taking a complex subject and reducing it to its simplest form. He unmasks some of the most egregious practices of the industry and shows how “revolvers” get addicted to credit in college and often never get off the merry-go-round. I recommend the book to anyone who uses credit and wants to learn how to use it more judiciously.

In their own words…

Stick People Books

Welcome to a new series of publications entitled stick people books™, a progression of drawings (stick people), dialogue and text intended to convey information in a concise fashion.

Most nonfiction books are 200 pages or more. Why? Because that is what worked 100 years ago. The problem is that people have less time to read than they did 100 years ago, and there is a lot more to read than there was 100 years ago.

The real substance in most nonfiction books can be conveyed in far fewer pages. We believe that less is more. As first said by French scholar Blaise Pascal in the 17th century when writing to an associate: “Sorry for the length of this letter, it would have been much shorter had I had more time.”

We invest the time for you. We do all the reading.We then summarize and synthesize it for you.

In learning any subject, there are hundreds, maybe thousands of bits of information you need to absorb. In writing our books, we address the most important points a reader needs to learn about a given topic. Once you have read a “skinny” book, you will have a good understanding of a specific subject. Our bibliography identifies suggestions for further reading, if you are so inclined.

Although minimalist in design, drawing and verbiage, we take our message very seriously. Please do not confuse format with content. The time you invest reading our book will be paid back to you many times over.

I was going to describe the book, but the section above from the front matter of the book is very good, and it typifies the writing therein. It is a quick read, and most will complete it in 2 hours or less, but the brevity of the work is not indicative of its content; the information is in there. The reader is spared the brain damage of a typical author’s flower prose. I highly recommend this book.

My soapbox

As many of know, I am not a fan of the credit card industry. Personally I think this industry is on par with drug dealers, or perhaps the somewhat more respectable tobacco or alcohol industries. I make this analogy because credit cards do not provide anything other than a short-lived pleasure of immediate consumption. There is no “product” produced by this industry, and if the entire industry disappeared tomorrow, nothing would be lost. It can be argued they provide a “service,” and this would be true to a point. They provide a pool of savings for people who do not have the self-discipline to save for themselves.

Think about how credit cards work. Let’s say you make enough money that you could afford to put $500 a month into savings; unfortunately, you do not have the discipline. You spend the money… and then some. After a few irresponsible spending sprees, the monthly bills start coming in from the credit card company, and you dutifully make the $500 minimum payment. What just happened? The credit card bill forced the discipline on you that you were unable to muster on your own. However, there is one very big difference: instead of earning interest on you money, you are paying it instead. Over the long term, this will sharply curtail spending power. The rich can spend like rich people because they are on the good side of compound interest; debt slaves are not.

The credit card industry addicts people to their product at a very young age (they start at 18 once people reach adulthood and are bound by their contracts). Once addicted, they drain them of every available resource through high fees, high interest rates and endless promotions of the sophisticated life credit cards enable. I know this through my own personal experience.

I managed to stay away from credit until I was about 22. By the time I was finished with graduate school, I had $2,500 in credit card debt. Then, I did something really, really stupid; I discovered Ponzi Scheme borrowing. Right out of school, I tried to begin a venture with an established businessman in Texas. While we were trying to get the venture off the ground, I needed a way to support myself, so I would use cash advance checks from one credit card issuer to pay another. For about 6 months, it worked. It worked so well that I had $10,000 in credit card debt by the time we gave up on the venture. That debt lingered for a long time.

I am not some morally superior person lecturing about a subject about which I have no experience; on the contrary, I know all too well what credit card addition can do. We use the term alcoholism to describe the alcohol addicted, perhaps we should use the term creditism to describe the credit card addicted. Getting over credit card addiction is much like being a recovering alcoholic; it is a daily struggle. I have not carried a revolving balance in over 5 years. I hope to make 50 more.

Kool aid intoxication is very strong because homeowners were so richly rewarded during the bubble. Will the crash cause mass detoxification?

Today’s featured property is a WTF award winner in Quail Hill–$444/SF is so 2006.

Asking Price: $1,375,000

Address: 132 Treehouse, Irvine, CA 92603

Ain’t That Just the Way — Lutricia McNeal

Ain’t that just the way that life goes
Down, down, down, down
Movin’ way too fast or much too slow
Gettin’ up, gettin’ high, gettin’ down
Gettin’ no, no, nowhere

I always find it interesting when I have a conversation about the real estate market with people who have no idea what my hobby is. I get to hear their untainted opinion about what is going on. Sometimes I get the “Joe Six-pack” version, but sometimes I hear the opinions of professionals with access to data I do not have.

I recently had a conversation with a title officer from a major title company. Title officers are the guys who handle real estate closings. There is no profession that has greater insight into the process. This gentleman told me the following:

Prices in Orange County are going to crash very hard due to the adjustable rate mortgages. Since the vast majority of properties in OC were not conforming loans, they are not going to be eligible for the government’s loan modification program. When these borrowers need to refinance when their loans recast, they will not be able to, and most will end up in foreclosure. Even if these borrowers had enough equity to qualify, very few of them have the income. People added so much to their mortgage debt that they do not have the income to support it. Also, since many ARMs were being written up until the credit crunch in August of 2007, and these ARMs have 3. 5. 7 and 10 year terms, the foreclosure problem is going to be with use until 2017. Don’t expect any meaningful appreciation until then.

As he was telling me this, I felt like I was reading from the IHB. When I asked him if he read blogs, he said he didn’t. Although, he did say he reads many closing documents.

{book1}

Asking Price: $1,375,000

Income Requirement: $343,750

Downpayment Needed: $275,000

Monthly Equity Burn: $11,458

Purchase Price: $901,500

Purchase Date: 11/24/2003

Address: 132 Treehouse, Irvine, CA 92603

When I first perused this description, I read “for that prick buyer who wants it all.” Only after I reread it did I see what was actually written.

A dream kitchen with dark espresso cabinets and
Seafoam Green Granite Counters. Are the color descriptors really necessary? dark espresso? Seafoam Green? This screams of pretentious poppycock (isn’t poppycock a cool word?)

liivingroom?

Today’s featured property interested me not only because it is
ridiculously priced but because it reveals how kool aid pickles the
brains of people in our real estate market.

• This property was purchased on 11/24/2003 for $901,500. The owners used a $650,000 first mortgage, a $161,000 second mortgage, and a $90,500 downpayment.
• On 1/10/2005 they opened a HELOC for $175,000.
• On 8/29/2006 they refinanced with a $837,500 first mortgage.

These people were not major HELOC abusers, but they did take out $26,500 for whatever. They did not pay down their mortgage while occupying this house.

Now these people want the $473,500 that is their due for owning Irvine real estate for five years. WTF? At least they are waiting until they sell the property to spend that free bubble money.

This is typical of a pattern I see in how Irvine homeowners manage their finances. They buy a house, extract some equity for spending money as prices wildly appreciate, and then they want to take a big pile of money with them when they leave. Many of the houses I profile show this behavior in previous owners who were lucky enough to sell out in 2005 or 2006. Of course, many of those fortunate sellers “doubled down” on their next house and lost it all. Why wouldn’t they? The free money was going to keep coming in forever, right?

The people who behaved that way are not bad people. Many of the routine security measures we encounter in our daily lives are there to keep the honest person honest. If you make it ridiculously easy for people to steal, they will. The lenders made it too easy to spend too much money. Although we chastise these people for their lack of self control, the lenders do bear some responsibility for the problem. Both parties are suffering; people are losing their homes, and our banking system is insolvent.

Despite the fact that house prices are
crashing, most California residents remember how much free money came
through home ownership. Most of these people do not realize that the
rules have changed. After losing a trillion dollars, lenders are not
going to hand out HELOCs
like ecstasy at a rave. Until it becomes common knowledge that the free
money associated with home ownership is not going to be there, the
psychology of kool aid will keep an addicted population high on real
estate. We will not bottom until this kool aid is purged from our
system.

I write much about the change in psychology associated with a bust, but it has been happening slower here in Irvine than it has in other communities. As you can see from today’s post, the kool aid is very strong. I was thinking about how difficult it is to reason with the kool aid intoxicated, and the following video came to mind. Enjoy.

{book6}

Now he’s in another place and I can’t reach him
And I feel as though I’m guilty of a crime
I took all he had to give and gave him nothin’
And all it would have taken was some time

Gettin’ up, gettin’ high, gettin’ down
Gettin’ no, no, nowhere
Gettin’ up, gettin’ high, gettin’ down
Gettin’ no, no, nowhere
Gettin’ up, gettin’ high, gettin’ down
Gettin’ no, no, nowhere
Gettin’ up, gettin’ high, gettin’ down
Gettin’ no, no, nowhere

Ain’t That Just the Way — Lutricia McNeal