mortgaging our future
why the best thing we can do about the housing crisis is nothing
by jonas foster
As a Manhattanite and someone who has constantly bent the rules to get to where I am today, I'm in the enviable position of being both a renter and the kind of successful investor who has seen his share of financial debacles on the way to relative comfort. I get to sit on my high horse for this one. And I can tell you that if we start bailing out the banks and/or the people of questionable credit who now find themselves on the verge of foreclosure, we'll be making a mistake the size of which we haven't seen since the Great Depression.
This isn't about playing by the rules. I'll be the first to tell you that the rules were made for suckers. But I'll also tell you that if you wake up one day and decide to play loose and fast, you have to be able to go to sleep at night while putting aside concepts like loss and penalty. You write off a lunch that wasn't a business lunch, and there's always the odd chance that an audit and a fine are coming your way. You buy too much house, you might find yourself staring down the edge of a sinkhole.
And the issue here is too much house. It was always kind of cute when we tossed around the idea that the bank was going to pre-approve you for three times the amount of money you could actually afford to borrow. And since I've been out of the real estate game for so long, I can only imagine what they were approving when those people lined up to, essentially, follow the American Yuppie Dream. Five times? Ten times? Were they just writing blank checks?
Don't get mad at them. The banks knew the rules and how to bend them to make the consequences fall in their favor. You get cozy with banks, government officials, or organized criminals, and you can expect that at the end of the transaction you're going to have less than you were promised.
The problem here, like all good tales of marcoecomnomic success and disaster, is that of trickle-down. This is where it all went wrong. While the upper-middle class was mortgaging their future to get into McMansions and West Side condos with rooftop pools, they were flooding the market with McSingleFamilies and six-story walk-ups. The equation changed.
Look, everyone needs a place to live, and everyone should have the opportunity to own the patch of land on which rests the building which contains the room where they keep their bed near which they hit their American knees at night to pray to the God of their choosing that they don't get hit by that proverbial bus and lose it all the next day.
Not everyone needs a sunroom, a breakfast nook, or 24/7 concierge service.
Why, oh why, did we suddenly decide as a society to have 2 more bedrooms and at least one and a half more bathrooms than we could ever simultaneously use? When did location become more about the type of plan that went into the community than actual, physical, GPS that sucker and make sure it's not in the flood plain location? Did our commutes get shorter? No. Were we speculating on the potential to strike oil in the backyard? No. I've seen $250K houses on two acre lots a stone's throw from $650K houses on .20 acre lots. Are those houses made of gold? Are they edible? Do they at least have a built-in hot and cold water with a third tap for perfectly chilled Chardonnay?
And as upper-middle America got fast and loose with their living arrangements, prices skyrocketed. The people in those $250K 2-acre has-beens realized that all they had to do was knock down their perfectly good house and put up eight reasonably good ones. Who needed all that land anyway? And somehow, even though you usually can't put up a bigger mailbox with signoffs, votes from homeowner boards, countless municipal insepctions, and calls to all the utility companies, including any broadband and diaper services in the area, this conversion became possible.
But you can't blame them either. You can't blame Johnny and Susie TwoIncome for cashing in on a speculative trend, and you can't blame the contractors, the zoning officials, or the diaper services, because they're just giving the people what they want.
And when your average Joe came along and saw the - I don't know - what's more disposable than a McMansion - WalMansions going to people like him, he decided it was his turn to take part in the glory of homeownership.
Ah, but there's a real difference between the hardworking middle-class demo with no credit and the hardworking middle-class demo who has been through the credit ringer on a smaller scale. This is the household you've been hearing so much about that is carrying the five-digit revolving credit card debt lapping up McHDTVs, McLexuses, McStairMasters, and McJetSkis.
A good rule of thumb is you don't put a $2,000 television in a $60,000 home. This isn't elitism, this is just good math. But again, our society with it's lack of being able to find the brake pedal, chose not to back off of the $2,000 television, but rather upgrade to the $300,000 home.
The battle cry resounded. "Bad credit? No credit? No problem."
However, that should have immediately set off all the warning signs and been instantly edited to "No credit? Let's talk. Bad credit? Get out of my bank." But what did you expect the banks to do?
"You know this is a loan, right?"
"You know we will take your home if you default, right?"
"You see here where it says your interest rate is tied to..."
Yes, the banks were greedy. but at a certain point, the buyer has to beware. The word bubble actually floated around housing for a much longer warning period than it did the Internet stock fiasco. And just as those investors in Worldcom and Enron and all the other rip-off artists needed to shoulder the blame, those individuals now facing foreclosure...
Yes. Those are the ones to get mad at.
And it sucks, because of the circumstances, but not because they don't deserve the blame. With great risk comes great reward. BUT WITH GREAT REWARD COMES GREAT RISK. No one goes into a transaction like that blindly, and no one has to purchase a home. It's an opportunity, not a right, and a lot of times it doesn't make sense. Like Manhattan for example. I can't imagine paying upwards of a million dollars to own a chunk of glass and steel that I now also have to maintain.
So you ask. Why? Why did all these people with middling credit and only the means to barely make the payments under the most favorable conditions get into more house they could afford with no money down and a predatory loan?
I don't have the answer for that.
But I can tell you this, when we start bailing them out, we send that message, that motivation and inspiration killing message that with great risk comes great reward unless it really is a risk, at which point, you may or may not get your ass handed to you based on how many other idiots jumped off the same bridge. We might as well just print licenses for thievery and idiocy at the same time. Hell, print one on each side and laminate it.
After all, precious metals are about as overpriced as they could possible be right now. I'm sure there are tons of people with no experience in metals investing and a highly leveraged nest egg looking to start an exciting new gold rush.
Having spent most of the eighties in and out of various colleges, Jonas Foster ducked the 9 to 5, wrote a book, and then made a mint selling the right information to the right people. He once dated a supermodel, although he refuses to offer which one, and now habitually combs Manhattan in search of the next.
ABOUT JONAS FOSTER
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3.10.08 @ 3:11a
I see this as more of a reenactment of the French revolution. Our government duped the people into a false sense of security, and now the government back pedals then ignores what's going on. I think the American people are getting what they deserve because they don't rise up in unison and take down the government, revolt, drag our leaders out into the streets and simply shoot them like the lying dogs they are. I'm in favor of anarchy. Unfortunately the majority of Americans care more about Britney Spears and her life, or Paris Hilton and her simple life, then they do their own lives.
We're already in a depression, but the government refuses to use the word "depression". The news anchors keep saying "recession" instead of telling the truth. The banks are never going to make back the money owed them, and the properties foreclosed on will sit vacant for years.
As a Realtor I see banks will have to sell short on every house foreclosed on, and the losses will probably wipe out several banks which will be bought up for pennies on the dollar by some bigger more stable banks. This might work but there are going to be a glut of properties that are unliveable after only a few years vacant, properties that will have to be razed for the simple fact that no township inspector will issue a certificate of occupancy in their condition and banks don't want to come in and make maximum repairs to make properties liveable.
Remember, not everyone forclosed on will be a greedy person who was trying to outwit the banks. Some of them were people trying to make ends meet and needed an economic break that the filthy rich and even worse government rich such as Dick Cheney, whom I blame for everything wrong in this country, wouldn't hear of because they wouldn't get even more money from their investments such as Halliburton, or be able to drive up the cost of oil even more to line their own pockets with lovely money.
When some of those foreclosed on individuals leave their houses, those houses will be vandalized and stripped bare. Granted this will most be in cities, but I've seen houses stripped of siding, all copper plumbing, entire kitchens, baths, moldings, electrical wiring, all of which gets sold or resold to junk dealers and the likes who resell it again.
I've seen people pour cement down sinks and toilets before leaving their houses, rendering them useless and costing more money for the banks. I've seen walls bashed in with bowling balls, hammers, axes, all as a final lashing out at those who force them from their homes.
All of this in America isn't because of selfish people wanting more, but because of a generation of grifters and flim flam men who run our corporations into the ground and then get some amazing deal for leaving the companies they've run into the ground. Whenever I've left a job I didn't get three or four years salary handed to me for l
3.10.08 @ 3:19a
I hadn't realized I ranted this much. The previous got cut off. Here's the rest.
All of this in America isn't because of selfish people wanting more, but because of a generation of grifters and flim flam men who run our corporations into the ground and then get some amazing deal for leaving the companies they've run into the ground. Whenever I've left a job I didn't get three or four years salary handed to me for leaving. This is the mindset that truly destroyed our country.
While it's nice to take the mindset that if you can't afford it don't buy it, then how to do you handle people who have 4 or 5 children and can't afford them? I guess they shouldn't have the children and should be punished for it with poverty? Most people don't view or understand the economy the way you do. In fact, I doubt the majority of people grasp the concepts of the economy the way the it is explained to them in schools.
I was taught that your rent/mortgage payment should be no more than 1/4 of your monthly income. Unfortunately that isn't possible in today's economy, and people still need places to live, and renting in my area (New Jersey) is not an option because rent is as high or higher than mortgage payments. If a rent is low it's because the house is a dump that the landlord doesn't do anything to fix up, and let's face it, a renter is a fool if he does anything to fix up a property to make it more to his liking if the landlord doesn't reimburse him; or because the property is in an area where most people won't feel safe living. The option of moving out of state is not possible because there are no other states in any better shape. There are some up markets, but the average Joe can't or won't willingly uproot a family and move the way our ancestors did. That pioneer spirit is long dead in the majority of Americans.
One more thing, you can't expect Americans to embrace personal responsibility when the example set for us these past eight years by our government was to deny any responsibility for anything. The kind of changes that would have to be made are mindsets, and a mindset is not as easily changed.
I'm actually surprised anyone wants to run for president to inheriet this economic mess.
Haven't said all that, I will say you're right. It's just not something that will happen easily, or will end this kind of financial devastation. It happened in the 1930s, again in the 1980s and will happen again.
3.10.08 @ 12:29p
Just finished reading this story in USA Today and if you get past the emotional first few paragraphs, you get a sense of what I'm honing in on.
I'm not advocating people don't take risk, far from it. However, people forget that there's a downside to risk. And bailing those people out will just open the door for the next bubble/crisis.
3.10.08 @ 1:05p
You can say there's a downside to risk, and there is, but we're not talking about day-trading here. A lot of these people really didn't know what they were getting into. Interest-only loans, that sort of thing. Was it a good idea? No, and that's why I for one didn't do it, but when you marry up one of the tenets of the American dream with an easy fast way to get your hands on it, I don't think a lot of people ran the math to say "But what if absolutely everything we're depending on completely reverses itself?"
Anyway, I don't know if a bailout is a good idea or not. But it's not all about living way way beyond your means. Sometimes it's being wrongly informed that your means are enough to get you what you want.
3.11.08 @ 12:02a
Speaking as a person who has an interest only option on my loan, I can say I never gave thought to the what if scenario of worsts, but I've always hated the what if game, and my reasons for doing what I did were very different from the reasons the majority of people did what they did.
We will always have bubble crises. One of the next disasters in waiting will be the reverse mortgage effect on the gullible children of parents who took those reverse mortgages. Those children are banking on getting money out of their parents properties, and while in generalization you can say those children have no right to just expect to get anything from their parents, the truth is the rude awakening that people get, the kind of awakening that makes children rethink their emotional attachment to their parents. Money is a huge factor in how people react to anything. I was lucky in the fact that my property is not in that mess.
As for a bail out, if we don't bail them out as needed we are facing a much larger problem. There will be a huge increase in homelessness. People will lose their jobs because they can't afford to live in a particular state or area, and in order to have a roof over their head they will be forced to move to a location making it impossible to commute. Another factor will be increased divorce rates, more single parent families, and a greater drain on government funding for public assistance throughout the country. A forgiveness or bail out will preserve some relationships, some jobs, and give people the break they should've had years ago.
You can't remove emotions and just look at the cold hard facts, because the chaos factor has to be considered. Heightened emotions lead to instability and disaster on other levels. The second section of the article you reference explains it all. People just walk away rather than struggle. Our government has asked too much of the people.