Listen to your gut

I live in the San Francisco Bay Area and over the last several years my wife and I have watched housing community after housing community built in virtually every pocket of open space. We have watched friends upgrade their houses and even looked at many of the model homes ourselves for fun. And let me tell you these houses were beautiful! Granite floors and counter tops, massive entertainment systems, generous garages to accommodate a workbench and all of the tools I could find at Home Depot. Like everyone else we salivated like the modern Pavlov dogs that we are.

But in the end there was something that I just couldn't reconcile. The average new home in the bay area was upwards of $700,000 to $800,000 which meant of course that many we walked through were over a million. Yet as I began doing a bit of math I was startled to find that these houses required roughly a $4,500 to $6,000 monthly mortgage payment. Granted many of these were being purchased with exotic mortgages but I still couldn't get past a fundamental question, "where is the money coming from?"

Consider that $6,000 a month (net) means a salary just shy of $100,000 per year. This JUST to cover the house payment. When you add the cars, the vacations, the furnishings, the entertainment systems, the kids, the restaurants, you would need a pretax annual income of at least $200,000, especially since taxes increase with higher incomes. In other words you need a higher income to maintain your net spendable cash. The capper is that this assumes a significant down payment which of course we now know was a stretch.

$200,000! How in the world were so many people making that much money? After all not everyone can be a Vice President. So I started asking this question of people who would obviously know. I asked real estate agents who drove these clients around, I asked mortgage brokers who processed their paperwork, and I asked financial advisors who managed their money.

In the end, no one really knew. There were explanations about how some people made money in equity from their last house, or how their parents living in the upscale peninsula would pull money out of their equity to help their children, but in the end no one had a firm grasp on how this was possible across the board. Of course now we know. Interest only loans, fraudulent mortgages, and credit that was as easy to tap as your water faucet.

The question here is how did we let this happen? Sure there were the financially astute like Peter Schiff and Meredith Whitney that did see this coming, but while most of us are not well versed in economics or debt servicing, couldn't we feel it in our guts? While I am truly sympathetic to those buyers who were preyed upon, didn't they at some point ask themselves "If I couldn't afford a house last year, why can I suddenly afford one now?"

Why do we continually ignore our gut instinct; the human ability to sense when something is wrong or just not quite right? In nearly all cases of a system collapse something did not make sense on a layman level. Option ARM loans do not make sense on a gut level and now we know why. Spending far more than you make does not make sense on a gut level, and now we know why.

We don't need to be a financial wizard to see a crisis coming. Frankly most of the wizards never saw this coming and now seem to agree that more debt is the way out of our existing debt problem. They are the poster children for overthinking a problem.

More stimulus, more borrowing, more spending. Forget what the media and government says, does this make sense on a gut level?

If you're still not sure look below at the national deficit chart from the Treasury and ask yourself again.