August 23, 2010

Dream House

In the wake of the mortgage meltdown, a dangerous theme is emerging. On its face, it seems perfectly reasonable and even attractive, especially to the youngest generation of workers, who is already mired in student loan debt, credit card debt, and struggling to find a job. It goes like this:

The U.S. has long seen home ownership as an unquestioned virtue, dating to a 1918 government "Own Your Own Home" campaign. Herbert Hoover, Franklin Roosevelt, Bill Clinton and George W. Bush all talked as if owning a home was the only way to join the middle class. Not only did it promote social stability—recall Mr. Bush's "ownership society"—and build well-maintained neighborhoods, home ownership became a hedge against inflation and a way to save for retirement. Until it didn't. [read more...]

And also:

Some of those new homeowners, including those sold outrageously inappropriate subprime loans, should have remained renters. Many couldn't afford to maintain the houses they bought. Others were dependent on refinancing to keep their homes, an approach that worked only as house prices kept climbing. They didn't. At last tally, the U.S. home ownership rate was at 67.2% and sinking.

Even NPR has jumped on the story.

"The world we live in today is not quite the world that existed in 1950," he noted. "The nature of households and the rate at which they dissolve and reform, the nature of work and its transient nature across geographies are all things that suggest that maybe, just possibly, a middle-class American shouldn't stake themselves to an illiquid, very large, concentrated, leveraged asset —- that is to say, a house." [read more...]

Everything old is new again. Both of these articles blame Fannie Mae and Freddie Mac for the mortgage meltdown, when the opposite is true. It isn't the middle class, minority or lower income buyers who caused the meltdown. In fact, the wealthy walked away from their mortgages when they found themselves upside down in a weak housing market -- not the middle class.

The subprime market made a lot of money for a lot of people. Easy credit and low interest rates enabled homeowners to sell for prices far above a realistic market price, while misleading buyers into believing they could actually afford a home at a price that was two to three times the value of the property. It drove developers to build at a record pace and in some cases, to self-finance their developments so they could pull more profit when the developments sold.

Now that particular market has collapsed. Real estate -- even prime real estate -- can be had at a bargain if there's a lender and income to sustain a reasonable mortgage, and suddenly the financial market leaders are saying, well, hey. Let's rethink this whole home ownership thing.

Make no mistake, someone will be an owner and someone will be a renter. The owner will make money and add to his wealth and portfolio. The renter will have a roof over his head for the time he or she pays the rent. The renter will be at the mercy of the owner -- will rents fly sky-high when property takes off again?

There was always more to property ownership than some pretty political platitude about white picket fences and the American dream. Home ownership is one of the best ways for the middle class to accumulate some assets for retirement, to not have to worry about where they'll live or what they'll have to pay to live in their retirement. It puts the individual in charge and in control.

I suspect the reason for this current whisper campaign against home ownership has two motives. First, this is a great market for real estate investors who have a lot of cash on hand. There are bargains galore for those future landlords of America to snap up. Second, by discouraging home ownership, workers with some savings or extra cash will have to invest in the stock/mutual fund markets in order to have any potential for asset growth at all.

If they're lucky, they might even see some. But it's far more likely that investments in corporate stocks and bonds will be of far greater benefit to the corporations, not individuals. One look at 401k balances tells the tale.

Home ownership isn't a boom-or-bust proposition. It can actually be approached sensibly, with moderation and common sense. This whole push against home ownership strikes me as another way to disenfranchise and de-fund the middle class.

Update: Robert Samuelson comes out in today's WaPo with the same meme.

Unfortunately, we let a sensible goal become a foolish fetish. Not everyone can become a homeowner. Some are too young and footloose; some are too old and dependent; some are too poor or irresponsible. Some don't want a home. Even with these gaps, homeownership is virtually universal among the middle-aged middle class: almost three-quarters of Americans ages 45 to 54 and four-fifths ages 55 to 64.

I am not arguing that home ownership is right for everyone. But I will reiterate what I said earlier: Someone will own and someone will pay the rent. If you trust the landlord, no problem renting. But remember that landlords are not particularly interested in anything beyond deducting expenses and depreciation on their tax return and breaking even as a general rule.

What I am saying is this: There is a media campaign afoot right now to undo Fannie and Freddie (who were not the cause of the mortgage meltdown), and discourage the middle class from even considering home ownership. We are in a period right now where people are paying down credit and saving more. Those savings are going to be put somewhere (unless you believe in keeping money in a mattress). Why discourage home ownership in a market where values are low and interest rates lower? I can't think of many reasons other than to keep it available for the bargain vultures who profit much and have plenty already.

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