Sunday, August 9, 2009

The Lie of the American Dream

Many people have been led to believe that the American Dream is to own your own home. In order to assist Americans in realizing that dream, the U.S. Government has set up program after program to help facilitate the borrowing of trillions of dollars for the sole purpose of buying a place to live. The conventional wisdom is that we have to live somewhere, so why bother paying your landlord's mortgage when you can pay your own? After all, when it is finally paid off, it will belong to you. At least that's what we are told.

There was a time in America when you could buy a home on a 7 year note. After that note was paid off, you could sell it, if you desired, and move to a more upscale home. In those days there was a large supply of what was commonly called "starter homes." These homes were small, usually 2 Bedroom, 1 Bath homes; perfect for the young couple just starting a family. By paying off that mortgage, it was believed, they could then buy a larger home, perhaps 3 or 4 Bedrooms, depending on how many children they had.

As time went on, the banks became more and more greedy. Inflation, which was rarely heard of at that time, began to inch upward - at first slowly, then at faster rates of speed. This inflation was being caused by two things: 1) lower interest rates, and 2) the resultant additional borrowing.

With lower interest rates, more money was borrowed to buy homes. Government helped by offering programs where the home buyer would need less and less money as a down payment, and thus would require more and more to be borrowed. Mortgages also began to be offered for longer periods of time - first 10 years, then 20, and finally, the big 3 - 0. Thirty year mortgages were the standard rule. Factor in the 0 - 5% down that the government guaranteed, and interest rates dropping to as low as 4 - 6%, and the sellers saw a larger demand with a static supply of homes - thus, prices rose.

As prices continued to rise, so did borrowing. This was helped along by something called "equity." It's a bit of a misnomer to tell the truth. Equity means to treat someone or something the same as something else - e.g., treating everyone equitably. In the banking world though, it came to mean the value that you had in your home, based on the principal amount compared to what your home was "worth." This equity also became something that you were allowed to borrow against - without penalty. Alas, more borrowing.

What no one really thought of at the time (well, not the regular Joe on the street anyway) was that you weren't really gaining any value on your home due to the fact that if you sold it, you would have to buy another home of equal or greater value. In fact, tax law was set up to make you pay taxes on whatever amount that you didn't spend on the new housing.

So, it wasn't like the days of old, where housing prices remained stable. A young couple could start out with a starter home worth say $10,000, and later sell it for about the same amount. The intention was to purchase a larger home for a growing family. The second house might cost $25,000, but you were older, and presumably earning more money, being further along in your career. It worked quite well.
Lower interest rates kept housing prices high, but they could have been higher. You see, that scenario created more demand, but the housing industry was more than happy to oblige by creating a larger supply through building more houses. This kept prices somewhat stable for awhile.

The Americans got greedy. No one wanted a starter home, and so many older neighborhoods either went the way of the wrecking ball, or they became the government research project - how good is that low income mortgage assistance program working anyway? So, the starter homes were bought up by lower income people, sometimes very low income people. These people might possibly have been ignorant of how economics works - work, save your money, buy what you need. Instead, they believed the government and banking industry version of economics - get on the dole, borrow and live above your means.

This recent housing bubble was just another in a long line of housing bubbles. Every so often the equity bubble bursts, and all the value that we think we have in our homes disappears. Sadly, this is devastating when you consider that some people have spent two to three times the original price to pay the banks for the privilege of living in "my house." That also doesn't count how much we must pay in property tax for the same privilege.

They get us coming and going. Once we start down that home-ownership road, there's no turning back - unless you are gutsy enough to file bankruptcy and give your house back to the bankers. Anything short of that and you are enslaved for years to come - perhaps the rest of your lives.

With this revelation, what am I telling my children and my friends about buying homes? Don't bother. Rent. That way, if a better job comes along somewhere else, you can up and move. Paying off the remainder of a lease is a hell of a lot cheaper than having to keep paying a mortgage on a house you can't sell, and don't live in any more. And even if you were living in it, and could sell it, you'd have to buy one that is just as expensive anyway - so why bother selling?

In the next article I write, I'm going to talk about the great opportunity we all missed out on with this bursting of the housing bubble. Instead, we asked the government to bail us out, as well as our mortgage bankers. So the enslavement continues. And it will continue to do so until we smarten up and stop buying into their lies.

1 comment:

~Katherine said...

Yup. Thoreau talked about this whole thing.. how banks get the home buyers' money. You're never really a homeowner. That's such a misnomer.