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January 11, 2004
Wouldn't it be great if we all owned a home!
Many people think I'm too cynical. I do not believe most people are cynical enough and furthermore that they are being taken advantage of because of their naivety. One of the longest standing, most prominent elements of The American Dream is owning your own home. For most, this is not an optional thing like being rich and not having to work. They MUST own their own home. Why? For most it is the biggest success indicator. "I worked hard and the fruits of my labor have paid off, I own my own home." No one wants to go to their 10 year reunion without being able to confess to be a home owner. I understand the nesting instinct, or at least I admit its real, but I still don't understand the importance.The impetus behind this entry was this article entitled "Fannie Mae Distorts Markets ", by Robert Blumen. Its rather terse, but still a fascinating article that deserved a re-read. Thanks to Obigabu for finding this telling piece. For starters, I did not know that Fannie Mae was anything other than a private company, when in fact it is a government sponsored enterprise (GSE). It does not have to follow the same rules as other companies, even other lending companies like banks. Their claim is that they are in the American Dream business, which itself is poignant. The author goes talks about financial theories and the claims of Fannie Mae's CEO Franklin Raines.
"Fannie gives banks the ability to lend potential home buyers funds that they could not otherwise qualify for, with which they may purchase a home that they could not otherwise afford." FM claims that this artificially increased demand does not raise home prices, it lowers them if anything. The article talks about why this isn't true, but I have my own explanation which is based more no class polarization. A year and a half ago while I was sitting in the Mariot Hotel in Oakland waiting for Sarah to finish he pharmacy board exams, I started thinking about this very issue. A year later, I wrote about my ideas in this entry. Its kinda in the middle of that entry if your interested. It deals with economic class equilibrium. It explains why the poor never get any closer to being rich and in fact only distance themselves in trying. There is no true incentive in our economic system for everyone to have enough money to live the way they want. Taking home ownership. There was a time when those who would buy homes had to pay for them in cash as there was no way to finance them. Before the 30s, only 2% of home owners had a mortgage. Today, only 2% do not. All of a sudden, you can borrow money to buy a home. As a result, homes can be more expensive. Some argue that the fault is with the consumer buying homes bigger than they need. This is obviously part of the problem, but it is also true that ALL house prices have gone up dramatically until it just isn't possible for most people to buy a house without financing most of it. We see it today in how much people put down for their home. 100% financing is becoming more and more common, whereas 20% was the minimum not 20 years ago. 10% was the minimum not 10 years ago. The price of goods inflates to the maximum possible price consumers can afford. Debt artificially increases this price.
The article goes on to talk about the looming disaster that Fannie Mae might be directly causing. I mentioned that FM does not have to follow the same rules as other lenders. Specifically, they can offer better rates and incur more risk, ie lend more to riskier people. They do not need to have much in reserves to cover people defaulting either. Why? Because they are covered by tax payer money. If a lot of people suddenly defaulted, the govt would have to foot the bill. So here we are. Home prices are at an all time-high. Raines himself said, "From the demand side, we know that consumers will need twice the mortgage capital to own their homes." People are buying homes further and further from what they can afford and they are being encouraged to do so to continue fueling the economy. It only requires a small critical mass of people defaulting on a portion of the projected $14 trillion in home mortgage debt to cause financial chaos in this country. So many things are tied to home ownership as collateral that when a person defaults on their home it causes a chain reaction of collections, all of which the government has promised to secure. American's themselves are increasing their debt, even given the widespread information on the destructive nature of debt. Why should a population listen to a hypocritical government that relies heavily on debt itself. All it takes is a major dip in the economy and/or home prices.
We are headed in a bad direction quickly with no signs of turning. Maybe I'm being pessimistic, but it doesn't seem like a matter of if, only when.
Posted by wonko at January 11, 2004 07:13 PM
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Comments
An interesting point, but I still think owning a house is a good thing. After all, you're going to pay to live somewhere, so at least when you own a house you can pay your self to live there.
Posted by: Will at January 12, 2004 07:26 AM
I agree with Will. Owning your own home gives you greater control of your destiny. If you rent your rent continually rises and you have nothing to show for your money. As you know personally, rental homes are bought and sold constantly so you can be kicked out any time. Also, you are less apt to enhance your surroundings as you can be kicked out any time.
Posted by: guidedog at January 12, 2004 07:44 AM
I think one of the strongest points of this article is: "Fannie gives banks the ability to lend potential home buyers funds that they could not otherwise qualify for, with which they may purchase a home that they could not otherwise afford." I don't think wonko means to say that buying a home all together is wrong, rather he is saying that you should buy one you can afford to own as much out right as you can. This quote from the article just goes to show that they're screwing you in the open. They're not hiding anything. They're encouraging you to buy behond what they can qualify for and to buy beyond what you can afford. If you weren't qualified in the first place, do you think it's a good idea to buy it. And, if you couldn't afford it, doesn't common sense suggest that you don't?
Posted by: obigabu at January 12, 2004 10:51 AM
Actually, I was directing my comments to WONKO to ease his angst a tad.
Posted by: guidedog at January 12, 2004 11:57 AM
And I was directing MY comments towards you and Will.
Now that we have that tied up with a little bow, should we go on?
Posted by: obigabu at January 12, 2004 12:28 PM
To set the record straight. I do not think it is wrong to own a home, nor do I think owning a home is right for everyone. However, I do think we are being screwed in the open (as Obigabu put it) by the lenders who, by lending so much to those who otherwise wouldn't qualify, are artificially inflating home prices to where homes are just unafordable. In this sense you have to ask yourself, which is better, making payments you can afford on a place that isn't yours, or teetering on the brink of financial collapse to have a place that IS yours. One of the big issues we have today is the notion that home prices always go up. It has been a while since there was a big home value correction. Lower interest rates, combined with almost no barriers to getting more money than you can afford, have only postponed an inevitable correction. Inevitable because that is the cycle, things go up, then they go down. In this case the correction could be bad since so many people are so over borrowed and so much other debt is secured on those over borrowed homes. If you justify buying a home that is too expensive because you got approved and it will only increase in value, you may be in a very bad spot one day when home prices in your area fall by 30%. One might argue that houses, like mutual funds, always go up eventually, so one only needs to hold on to them to see a profit. There might be an argument there if more and more people weren't getting 100% financing with short-term, interest only payments on their 2nd. In 5 years, if the place isn't worth more and you couldn't afford the full payment on the 2nd in the first place, you may be in over your head.
Maybe I'm being pessamistic, but I still think its not a matter of if, only when. I should also mention that I am one of those people who might end up in a bad spot if the value of the place we bought doesn't go up a good amount over the next 5 years. Only time will tell.
Posted by: Wonko at January 12, 2004 01:55 PM
Im really glad that I have found your forums. I have always felt exactly the same on these issues, its reassuring to know that there are others who can see the destitute sittuation our society is in and the probabilty of its demise/and or decline within our lives or within the next generation.
On the issue of owning a home, I believe that the age old tradition of building your own home, although it is likely not a viable option, is something that we should return to. It was once believed that a man was not truly successful unless he owned land, but now that the greater expanses are now simply lots the only option is to invest in a home. Why have we moved away from sustainable living in just a centuries time? Ultimately, I must agree with your statement that the inflation is the cause of the debt, and the debt is the equally the cause of the inflation, and noone wants to admit it. As the home owners market grew larger, lenders wanted to capture a larger and larger portion of the demographic which led to a lax in their policies towards available funds towards the proposed home owner. What influenced the lenders? I can not understand how they would not forsee this eventuality of their habits. Their own greed is creating a sittuation where business for them is going to be unaffordable for the average american. How is our economy ever going to stabilize with corporations practicing inflation producing policies? I can't see how it will ever turn around without an event as you described happening.
Posted by: liberatinggreed at January 12, 2004 06:10 PM
I like this guy/gal liberatinggreed, and I agree with his thoughts as well. I too wish that we could return to the time when we built our own homes and then passed them to our decendents. I often think about the hundreds of thousands of Real Estate Agents that existed 2000 years ago. Oh wait a minute, they didn't. Why? Because families sought out their own land, built their own houses, and passed their estates on to their families. It was common that families would maintain their living arrangements at home, living with their parents, and wife for many years. That is, until they were ready and able to build their very own home.
Why not build now? First off, we can't. We can't, because at some precise moment in history we quit passing this valuable trade through the ranks of our families and started trusting others to build or homes. When these builders learned that potential homeowners would rely on them for their new home, it bacame a supply and demand issue. Then eventially credit made it's way to the forefront of America in the 50's and 60's. Although, the great CREDIT CAMPAIGN of America wasn't successful unitl the early 80's, and when it came, it spread like wild fire. It spread across America with such speed and success that today the people don't even conscider purchasing without it. 100% Financing!! - 90 Days Same as Cash!! - 0% Interest For the Term of Your Loan!! Yea Right!
I SAY SCREW THEM!
Anyhone want to come over and help me build my house? I'll provide bread and hops. Let me know, because I'm ready to make a stand.
Posted by: Obigabu at January 12, 2004 06:39 PM
Ditto Obigabu, truer words were never spoken. It's guy by the way. Damn credit! Damn it all to hell!
I've taken quite an interest into sustained living these past years and if you throw in a few goats and/or cows I'm in for the home building! If only it were that simple huh?
Posted by: liberatinggreed at January 30, 2004 10:50 AM
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