A look at the historical price of gasoline.

Today I will examine a major contributor to the subprime mortgage crisis. It has nothing to do directly with mortgages unless you consider the ability to pay your mortgage important. I'm sure you've heard the saying a picture is worth a 1000 words. Look at this chart of the historical cost of gasoline courtesy of Inflationdata.com. It is worth 10 fold a picture. Notice that the annual average cost of gasoline in 2002 when many of these subprime adjustable rate mortgages were written was less than $1.50 a gallon!! By 2006 when these subprime mortgages had to be renewed the price was $2.50 a gallon, an increase of 66%. In 2007 the price increased to $2.75, that's 10% in 1 year!! Even if mortgage prices remained stable or even decreased 2%-5% these increases in gasoline would challenge most people's budgets.
Another interesting fact is gas prices ranged between $1.00 and $1.25 throughout the '90s. During this same period SUVs, few of which got better than 15 mpg, were selling like hotcakes. The Lincoln Navigator, one of the biggest pieces of automotive metal available to consumers, gets 12 mpg city 18 mpg highway. This behomoth was developed during the 90s and first produced in 1998. Does the price of gasoline affect car buying decisions? you bet it does!!

P. S. I definitely recommend you visit inflationdata.com. It has charts on historical costs of many items such as oil and gasoline. It is an eyeopening experience to behold. It also has tutorials on subjects to give us a perspective on inflation and money. If you don't want to live a hand to mouth existence until the day you die, this website will help you avoid this.

Just another primer on subprime lending

For the last couple of years there have been lots and lots of articles on the (alleged) subprime mortgage crisis. I disagree with about 98% of these articles which can only mean 1 thing. 98% of the articles have it wrong. So I have decided to put my thoughts on this crisis into the blogosphere to try and lower the error rate on this subject.

The first issue I have with subprime lending is the misconception that it is the major cause of rising foreclosure rate. These mortgages are 3-5 year adjustable rate mortgages (arms) with a lower "teaser " rate designed for people who otherwise could not get a mortgage. When the 3-5 year period for this teaser rate expired, the arm would be readjusted to reflect prevailing interest rates. If % rates are lower, the borrowers get the same payments or even a lower one. If interest rates are higher, the new payments are higher. This oversimplified explanation is partially due to journalism's need for a brief attention getting headline to grab people's attention. The real cause of the increase in foreclosures is a confluence of several changes in the american economy. No editor would ever allow a headline which read "Foreclosures on the rise due to subprime mortgage's expiration of "teaser" starter rates when interest rates are increasing along with overall increase in the inflation rate, especially food and energy." Do you think all of these mortgages would be at risk of foreclosure if gasoline costs were lower when these mortgages had to be renewed? What if interest rates had stayed the same or food costs had lowered? Do you see my point here? Good, I'll expand on this as well as other misconceptions about this crisis in future posts.