Home Ownership - Overrated???

Parent Cafe
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<p>So, I was at lunch yesterday, and Rep. Barney Frank was the speaker. (He’s chairman of the House Financial Services Committee). He was quite entertaining, but, the question came from the audience re the House agenda on some matters, particularly subprime lending, and mortgage loans going into default. </p>

<p>His response wasn’t what I would have hoped to hear - some legislation to rein in predatory lenders. Instead, he said “home ownership is largely overrated. It shouldn’t be the goal of every American to own a home - not every American NEEDS to own a home. And the tax benefits are overrated too - many homeowners are so poor that they cannot take advantage of the tax benefits. So we shouldn’t be encouraging people to buy homes - and that takes care of the subprime problem”. </p>

<p>Then, he said “spending time focusing on helping poorer people buy homes diverts attention away from spending time on fixing rental problems”. To my amazement, two gentlemen from the Italian embassy sitting next to me started nodding vigorously in agreement. (Outside of everything else, why do THEY care??? They’re here for their four year assignment or whatever it is and then back to their home country…)</p>

<p>What’s wrong with this man? How could anyone - other than perhaps those who are single, mobile, and undecided as to their career path - or perhaps those who want to invest in other things and stay as fluid as possible - NOT want to own a home? </p>

<p>In my opinion, it’s one of the key anchoring positions in the climb out of poverty. I bought my home as soon as I could - when D was still in grade school. The first year of ownership, some months I couldn’t afford to eat very much, and we didn’t have any furniture in the main rooms for the first couple of years - we had minimal, cheap bedroom furniture and a place to eat meals and that was it. But it was an important stake in the ground along the way towards financial stability and then later financial comfort and today towards potential affluence, and, the mindset and social positioning are critical life building blocks. </p>

<p>I cannot get my head around this man’s thinking. So his position is that poorer Americans should pay their money to slumlords, and rent forever? As opposed to having a piece of property that is theirs, to care for, potentially improve, build equity, and pay off, and perhaps even have something for their children to inherit? </p>

<p>What am I missing here?</p>

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<p>Barney Frank comes from the school of politics I most despise. He seeks to disparage home ownership because he prefers a constituency of helpless, needy people who have had their independence & initiative sapped out of them by reliance on the nanny state to meet every need. Home ownership is so much more than simply owning property. It facilitates setting down roots, building communities, taking a more active role in citizenship, and being a goal-oriented, financially aware person who can appreciate dellayed gratification. </p>

<p>I’d ask Mr. Frank how much property he owns & why that dream shouldn’t be achievable for everyone.</p>

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<p>Actually statistically he is correct. Homeownership creates a huge drag on the truly poor. The poor who own homes pay more for their housing needs than those without homes (even holding constant housing quality). Few realize the “investment” because they are unable to buy homes in areas that appreciate. In fact, they more often end up in foreclosure or abandoning homes, or selling at a loss. They end up paying more in utilities (again, poor quality homes), more in maintenance, more in property taxes (living in areas with poor tax bases), and rarely see a tax advantage.</p>

<p>See, we picture them buying a cute little starter home in some sweet suburb. That is not what home ownership for the poor amounts too. (Unfortunately.)</p>

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<p>Weenie, you are probably including the poor who have been taken advantage of by predators. There IS a problem with home brokers in poor areas filing false income papers so a poor family qualifies for a mortgage they can’t swing. Also, problems with “quick & dirty” cosmetic fix-ups that hide serious problems with many homes. I call those brokers poverty pimps.</p>

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<p>But see, therein lies the problem. Poor people often have bad credit and uneven job histories. Additionally, they are often unable to hire legal representation to even close on a house (to say nothing of an engineer inspection!). The realtors they are dealing with are often simply trading in slumlord cast offs, and aren’t about to offer worthwhile advice. That’s what makes them “victims” of predatory lenders. Mainstream lenders simply will not lend to them.</p>

<p>It’s all part of the true picture of “homeownership” for the poor.</p>

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<p>My city of birth is filled with houses owned and not cared for. It’s pitiful.Why don’t some folks invest in a couple of hours of labor and a can of paint?</p>

<p>My brother did not own a home , after his wife got their joint home in the divorce. Problem was today mechanical engineers cannot count on living in the same place their entire working career! He has had employment in Chicago, N.Y., Philly and Maryland over the last 10 years! And as for my boys I don’t know what to say. Suppose their employment history becomes a series of lay offs, buy outs and bounced pay checks like my brother the engineer?!</p>

<p>On the other hand we have a friend who was happy to rent in high end apartments into his 40’s. Then what happened? He hit his 50’s, was let go and after 3 years is STILL finding it impossible to talk another employer into hiring him full time! And look, he could have had that house paid off and now be rent free if he had bought when we did in our early 30’s!And he could have done that.</p>

<p>Moral of the story to me is, have a place to hang your hat by your 50’s because there is the period there when you look less attactive to new employers if you need to find a job 50-up. Age discrimination does exsist.</p>

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<p>I think I understand (and maybe even agree with) what Rep. Frank is saying.</p>

<p>There are a couple of reasons why home ownership has been so good to people in my generation and previous generations. There’s no question that it has been a source of stability, a conservative influence, something that gives people a stake in their neighborhoods, etc. But most importantly, it has been a form of savings and investment: people buy a highly leveraged asset, and then gain equity as they pay down the loan. The bank essentially ensures that a huge portion of their income is “saved” in that manner.</p>

<p>This has worked really well because real estate appreciation has far outstripped inflation plus real interest rates for most markets over any decently long period in the past century or so. So people have wound up building real wealth through home ownership – I know I have.</p>

<p>But it’s an open question whether that historical trend is likely to continue, or whether it will be as widespread as it has been, or apply to all market segments. Certainly, in my city there are plenty of neighborhoods where real estate values have declined long-term, versus inflation, and of course those are the neighborhoods where the less affluent are most likely to own homes. For many people, their home represents 90%+ of their savings, and it is a portfolio-theory disaster: completely undiversified, difficult to liquidate quickly, volatile in price, and with a value that can be negatively influenced by factors that can affect the home owner’s other income as well (plant closings, local economic conditions, etc.). And, on top of that, it is often highly leveraged (a mortgage over 50% of value, sometimes over 100% of current value). Except for the fact that most people have been lucky, you couldn’t design a less rational savings and investment program.</p>

<p>In addition, any homeowner knows there are tons of hidden costs to home ownership. It costs a lot of money to maintain a house, especially an older one, and if it isn’t maintained it’s not going to hold its value well (and it may drag down the values of neighboring properties as well). One can budget, but things happen sporadically, and sometimes a wad of cash is unexpectedly necessary. There are plenty of urban neighborhoods that testify to the difficulty the poor have negotiating this.</p>

<p>Home ownership can also trap people in declining neighborhoods, bad school districts, places from which jobs are inaccessible. The “market” doesn’t work as well as it should with such things, because the market is actually pretty inefficient with respect to homes versus almost everything else.</p>

<p>As Rep. Frank points out, home ownership has also traditionally been heavily subsidized by tax incentives, chiefly the deductibility of mortgage interest and real estate taxes. However, those incentives do very little for low-income home owners – except perhaps to drive up general real estate demand. And the incentives have been chipped away even for affluent owners, as rates have come down, and as more people are affected by the AMT (which excludes the deduction for state property taxes).</p>

<p>There IS, however, one other important government subsidy of home ownership that has been historically valuable for the relatively poor: home owners tend to get lots of advantages under bankruptcy law and state foreclosure law. Especially in the past, but less so today, a poor person who owned a home had a lot of bargaining power in a bankruptcy/foreclosure situation, and that allowed them to preserve some equity and stability when hard times hit. Congress has chipped away at that, too. I’m not really expert in this, but my impression is that homeowners still have some advantages but nowhere near what they had 15 or 20 years ago.</p>

<p>On top of all that, you have the problem of “abusive” subprime lenders. Subprime lenders aren’t actually beating the market with their overall performance (in fact many have trailed the market), so they’re not in fact charging more than the risks and costs of servicing loans to less creditworthy borrowers warrant. If you love universal home ownership, then you have to be willing to tolerate the subprime lending industry – they are two sides to the same coin.</p>

<p>So . . . on the whole I think Frank is right to question the conventional wisdom that universal home ownership is a panacea.</p>

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<p>JHS hit the nail on the head. The picture is far more complicated for the poor than it is for the middle class. Sometimes it works, but it’s not the universal right answer the way it is for a household with a middle-class income.</p>

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<p>Yep. Thanks JHS. I have family that lived in Houston during the crash in the 80s. They lost more than $200,000 on their home when they had to move after my cousin lost his job.</p>

<p>Homeownership doesn’t always pay off.</p>

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<p>I need to read the information - it’s well outside my field - but it seems to me that the Senate Banking committee and the House Financial Services just gave some nice big favors to subprime lenders. </p>

<p>In addition, Frank’s entire demeanor struck me just as StickerShock said - he LIKES people stuck in poverty. The answer isn’t to suppress people into renting forever and ever amen, surely.</p>

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<p>He’s right and he’s wrong at the same time. </p>

<p>Home ownership is not the cure all if the person cannot afford to keep it. A home when you consider ownership costs is roughly below a bond return over time. I’m not knocking that, I bought my first home at 23 and I encourage my kids to do the same. But, that also comes with the knowledge that it isn’t a garanteed money machine. I mean I bought a foreclosed home and fixed it up. It was somebody else’s dream until they lost it. </p>

<p>What Barney should be working on is affordable housing. Builders should get tax breaks for building quality small homes for low income families. Everything anymore seems to be MC Mansions with price tags that are out of reach for starters. </p>

<p>But people also have to stop buying the maxium loans available. Two incomes should not be the baseline for a family’s ability to live somewhere. One income is.</p>

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<p>The real issue is return on investment. That’s rooted in several factors:</p>

<ol>
<li> The differential between rental costs and home ownership costs</li>
<li> The differential between reasonable return for the renter between investing the difference or buying a home</li>
</ol>

<p>A home is not always the pathway to wealth, even if one can afford to keep it. It is a highly leveraged investment, which is GREAT when home prices surge. When home prices stay level, equity increases in tiny increments in the early years, and all that increment is about the same as putting the money under your mattress. When home prices decline, that leverage works in reverse to trap you into substial debt.</p>

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<p>Weenie, the problem isn’t the poor people, and foreclosing them from stability and upward mobility could only be a madman’s solution. </p>

<p>Please view this through my lens - 20 years ago, homeless, living in a car with infant girl, then in a homeless shelter for 90 or so days, to today, owning one home that I can pay off any time I decide to write the check for the full payoff, and now shopping for a new home in the $1 million price range. Oh, and the only problem I face buying a $1 million dollar home today is deciding WHICH one of the many available that I want. I made this journey through very hard work over very long hours, years on end and VERY careful management of time and money - and not one single dollar of public assistance - or for that matter, any other kind of assistance, not even one dollar borrowed from a friend. Every dollar from wages paid in exchange for my skill set and core competencies, which includes being a high school dropout, as I have posted here many times. </p>

<p>Here’s one example of the many, many things that came my way along this journey: first, in trying to buy a home, a realtor spent I cannot even count how many Saturdays taking me around to every horrible, smelly, ruinous home that she could not sell to anyone else. Hard to fault her there - she was a salesperson, and there were plenty of homes to sell, so, why not sell the stuff no one else was stupid enough to buy to the poor person, the single mother with marginal credit history and first time home buyer who doesn’t know any better?</p>

<p>So I gave up on the realtor, and looked for properties for sale by owner. Finally found one, and worked a deal to rent it first, lived in it for six months, then closed. It took every dollar I had to close on it. </p>

<p>Prior to buying the home, I bought a VERY used car, financed at a high interest rate through the subprime arm of a global Tier 1 institution, which, at the time, I thought was a great idea: borrow money for a car through a large, credible bank, make the payments on time, improve credit, graduate to a better loan with a prime provider and a lower interest rate.</p>

<p>One day I get a call from the bank holding my car loan. Basically, the pitch was that all payments were made on time, why not let them run my credit, see if they can help me out, offer me a lower interest rate on my loan?</p>

<p>I asked “why would you do that? What’s the business case? You already “have” me for the usurious interest rate, so, why would you intentionally reduce money you already have me contractually bound to pay you?”. </p>

<p>Guess what they said? “Well, if we treat you well, you’ll borrow from us in the future, right?”. </p>

<p>I thought about this, and said, “that’s it? That’s your angle? You are inviting me to apply to reduce my interest rate on an existing load, reducing your own revenue, and the only thing in it for you is that I might borrow from you again? That’s it?” </p>

<p>And they swore that was it.</p>

<p>I still didn’t believe it. I didn’t believe that they would intentionally reduce their own guaranteed revenue, so, I made them repeat it, and they kept saying, nope, that’s it.</p>

<p>So I let them run my credit. They called back, said, “we have your credit report, let’s set an appointment, have you come in, we think we can help you with your interest rate on your car”. </p>

<p>I repeated the prior discussion substance, they confirmed what we already said, and I show up for the appointment. </p>

<p>Guess what these cretinous fools said to me in person? “Well, we’ve looked at this, and, we cannot really offer a lower interest rate on your car. However, you own a house, and it has equity, and we are delighted to offer you a mortgage, and you can borrow 125% the price of your home; you’ll have a check in the bank by the end of the week, and …”</p>

<p>Oh, and the interest rate they quoted me was higher - horribly higher - than my existing mortgage…</p>

<p>And, since I’ve been a homeowner? I have had many, many subprime approaches over the years, though not any in the past four or five - and it’s all the same pitch - borrow far more money than I could ever need liquid, pay a very high interest rate for it, etc. </p>

<p>Regarding poor credit ratings, that’s a whole new thread (or maybe not). I have studied the CRA algorithms for YEARS; I’m probably one of the few people who obsesses over credit scores (the REAL scores, not the fake scores that CRAs sell at stupidly high prices to the uninformed), and, trust me when I tell you that no one is more disadvantaged than persons who started out of very modest means to begin with, and who are desperately trying to climb and claw their way out of it. I could write so many long accurate posts about CRAs and the fraudulent methods of rating the socioeconomically challenged that CC would have to buy ten new servers to make room for the flood of text. </p>

<p>THIS is the sort of thing Frank and his ilk should be focusing on, vs. just assuming that an entire class of persons should forget all about home ownership.</p>

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<p>Tarhunt, how often does it happen - by percentage - that homes lose value and people end up trapped in debt, vs., say, just flatlining?</p>

<p>For example, if someone rents? It’s like flushing money down the toilet, AND, rental prices ALWAYS increase, no matter what. Basically renting is helping someone else buy their property…</p>

<p>BTW I told the subprime bait-and-switch lender that only a very stupid person would do such a thing, and, they looked at me like <em>I</em> was the crazy person. That meeting lasted < three minutes, but, I have never forgotten it.</p>

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<p>latetoschool, nice posts.</p>

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<p>Tarhunt–over the last 20-30 years please name any major markets that have not seen substantial gains in value. Outside of some ghetto areas in Detroit, Cleveland and the like and some smaller midwest downtrodden cities I cannot think of any even potentially losing money or not gaining at least with inflation.</p>

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<p>LTS:</p>

<p>I don’t know enough about the topic to take one side over another, just want to point out that in MA, renters get a tax break so that they are not so disadvantaged in comparison to homeowners, so that may color Frank’s perspective on things.
Several years ago, the idea was floated that mortgaged deductions should be eliminated because it advantaged the middle-class homeowners. But it was shelved because the self-same middle-class homeowners are such a huge group that it would be political suicide.
I had to sell one house in a slumping market and took a huge loss.</p>

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<p>But people get themselves into situations where they need to accept the deals that you so wisely rejected often because they fetishize home ownership. Frank is just pointing out that this mantra that owning is always better is silly, and he’s got a real point.</p>

<p>People are overly emotional about the need to own a home, for example: When I sold my home to become a renter over a year and a half ago (and precisely at the peak), people thought I had made an incredible mistake. They kept telling me I was crazy. A year and a half later, who’s laughing now? I didn’t even like the house I was living in, but no one ever asked me that. I could get much more for my money renting. Now, to be sure, I do intend to buy again eventually, but the point is people shouldn’t think its important wherever, whenever, no matter what situation to own a home – and yet they do. Thus, as Frank says, it’s overrated.</p>

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<p>But, Marite, if you’re renting? You’re taking a “loss” every single month when the check goes to the landlord…all you’re accomplishing is buying shelter for 30 days. </p>

<p>I don’t know enough about the topic either, really. But I do know that I was shocked at (my perception of) Frank’s blase attitude that “poor people don’t need to be homeowners”. I don’t even know where the man comes from, but, I noticed that the folks to my right were horrified as well (private industry). I still don’t get why the Italians thought he was brilliant on that point, but, I do not think it is appropriate or right to assume that persons of modest means should be discounted as potential home owners. Actually, now that I think about it, it was the process of owning a home that gave me the critical psychological lift, fueling us the rest of the way out of financial problems. It brings a whole different perspective to one’s world to own a piece of property that one cares for and manages, and employers, creditors, professionals in the community, etc. tend to view the homeowner a bit differently than a renter. (Perhaps this goes too far - perhaps it gets to be discriminatory against renters.) I know for me, if I needed to be able to serve on a board or something because I needed to add something to my resume, owning a home got me a LOT further down the path toward acceptance as a peer. </p>

<p>Next I suppose I’ll be hearing that high school drop outs shouldn’t be considered eligible for economic success, or single parents should bother to aspire to provide college educations for their offspring…after all, six figure incomes, college educations, well, Frank would probably say “they’re not for everyone”…</p>

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<p>Selling into a good market and taking a gain is far form the attitude Frank was selling that it is way overrated. For one thing, if you live in a bad market area for whatever reason you are not chained to buying in that area. You can still invest in better areas and do very well with a bit of effort.</p>