Home Ownership - Overrated???

latetoschool · March 6, 2007, 3:54pm

Bedhead, there are exceptions for everything. I do think it makes sense in certain circumstances to rent - I rent a home in another city, for example. But that’s a temporary situation where I’ve given myself a two year horizon. I don’t intend for it to be a perpetual situation. It also makes sense for people on the move, in transition, etc.

I can even see very limited application for the types of loan options I was offered - perhaps someone who urgently needs cash for some type of time sensitive issue.

Dstark, I’m intensely bothered when anyone, let alone congresspersons, form opinions and make decisions about socioeconomically challenged persons when they’d never, ever been in the position of steering their families out of dire poverty, or for that matter even seriously talked directly to people who have.

I almost have the sense that there are some people - and Frank stuck me as one of them yesterday - who desperately, urgently need to make sure that there are always poor, trapped people aplenty, because it makes them feel so much better about themselves, and gives them an ego accelerant and a self esteem positioning that they otherwise would not have, and could not possibly develop.

Frank will stand there and pontificate about how poor people aren’t candidates for homeownership, but, won’t lift a finger to rein in predatory lending, and will flat out run the other direction if someone raises the issue of CRA algorithms…

weenie · March 6, 2007, 4:04pm

latetoschool: Thank you for your story, and how laudable that you can now afford a “$1 million home,” but by your own admission buying a home is not what lead you to financial stability, given post #13 about your hard work.

To “climb out of poverty” one needs more - a lot more - than to simply buy a home. Clearly, jobs that pay fair wages (and don’t compete with illegal immigration workers), healthy workers, stable families, decent educations, and eliminating substance abuse problems are the foundation to many folks climbing out of poverty.

I have worked with more social service agencies than I care to recollect and I do feel somewhat qualified to talk about this. (Including a neighborhood association in our poorest community that had a seminar called “Why THE Dream might be your Nightmare” or something like that and it was about home buying - at the time the city was trying to offload foreclosed, crummy properties by the ton - they still do in fact.)

Many on CC see life from a very restricted, often white, suburban viewpoint. Barron’s comment that he doesn’t think many real estate markets are in decline highlight this point. Pick out nearly ANY city in this country and I’m certain you can find many neighborhoods that are, at best, risky investments. (And I’m not even going to start talking about rural poor - that is a whole different issue.) Well, guess where poor people buy houses? In general, they aren’t buying them in the same towns or neighborhoods as people on CC. To suggest that a poor family (let’s say a single mom, 4 kids, no credit or very bad credit, minimum wage job she’s had for 4 months) should simply go to better part of town to buy a house is ludicrous. And who exactly would give her a mortgage?

Anyway, my basic point is that sometimes things are not as they meet our middle-class-and-higher eyes. What works for the middle class (even the “working poor” with incomes in the $25K/year range) is not necessarily what works for the truly poor. Sadly, “the American dream” is more and more out of reach for the poor, for a number of complicated reasons.

To blast Rep. Frank for somehow wanting to keep people in poverty is absurd. There are plenty of government at forces keeping people in poverty, but his views on housing are probably irrelevant.

dstark · March 6, 2007, 4:23pm

I can’t talk about CRA algorithms, bcuase I don’t like to talk about stuff I don’t know about. ;)

"Dstark, I’m intensely bothered when anyone, let alone congresspersons, form opinions and make decisions about socioeconomically challenged persons when they’d never, ever been in the position of steering their families out of dire poverty, or for that matter even seriously talked directly to people who have. "

I don’t really like this either, but we all do form opinions on subjects we know little about.

As far as Barney Frank, he is a little too full of himself. I don’t know how much he is actually helping poor people.

This issue of housing is actually very complicated.

I don’t like the predatry lending practices. I don’t like people getting loans they can’t afford. But then, a part of me says, what do these people lose? The ones getting teaser loans that become unaffordable. They were going to be in financial difficulty anyway. They get to live in a nicer house than they can afford for a few years and they get a shot. If appreciation keeps going up, they might get to participate. It’s not what I would do, but for some people, maybe it works.

The buying vs renting argument. I don’t think that is so black and white either.

If rents are cheaper, or you are more likely to move, or you are a good saver, or you can rent a better house than you can own, or you don’t want to take care of a house, I can see many reasons to rent.

For most people, I think ownership is better, but it depends.

StickerShock · March 6, 2007, 4:32pm

I am not suggesting that a poor family jump into home ownership blindly. It is a wonderful goal, however. I object to Frank’s condescending attitude toward the poor. They are not stupid. Uneducted perhaps. Unsophisticated in the realm of financial decision making perhaps. But not stupid. Not incapable of improving their situation. Teaching them about the need to steer clear of easy credit, explaining the importance of paying off debt, and stressing the need to resist luxury purchases will start them on the road to home ownership. I worked with many poor, inner city workers when I was in nursing. What I found most distressing was the almost universal obsession with lottery tickets. Maybe an early math lesson for inner city kids should be “The Improbability of Winning the Lottery 101.” Next moving on to “How Putting My $50 Weekly Lottery Money in a Savings Account Earning Compound Interest Can Change My Life.”

Weenie’s Dream or Nightmare program is exactly the kind of first step that is needed. The poor can make informed decisions if they are given the chance.

marite · March 6, 2007, 4:44pm

LTS:

I don’t know if we can conclude from Frank’s remarks that he will do nothing to rein in subprime predatory lenders. It seems to me he expressed a philosophical opinion that has some merit. I do hope, however, that he WILL do something about predatory lending practices, whatever the merits of home ownership for low income people.

As for Italians, there are far more renters in Europe than in this country. Europeans did not experience the huge surge in homebuying that the US did after WWII (remember Levittowns?). In Britain, Margaret Thatcher campaigned quite successfully on the desire of people to own their own homes. This increased the proportion of homeowners; but it’s still lower than in the US.

As for the merits of owning vs. renting: I dunno. It assumes that houses will increase in value–not always the case, as we found out. It assumes that housing is the best investment. Maybe yes, maybe not. If we were to sell our current house now, we would be able to afford a house less than 2/3 its size after we’ve paid off real estate agent, second mortgage, etc… Meanwhile, we could have invested the money we put down as deposit. A cost-benefit analysis might conclude that we did not necessarily do any bette buying than renting. I don’t know.

JHS · March 6, 2007, 4:49pm

Barrons: I am appending a link to a site that profiles a bunch of Philadelphia neighborhoods where poor people live (although some have undergone sporadic gentrification). As you will see, quite a number of them show negative absolute appreciation in real estate values 1975-1999; almost none of them show appreciation in excess of inflation over that period. If you took as your start date 1985 or so, only one neighborhood would have shown absolute appreciation.

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It’s all well and good to talk about how great home ownership has been for lots of us – and it has been – but there are lots of (less affluent) people for whom it is an economic and financial disaster.

latetoschool · March 6, 2007, 5:59pm

Weenie - home ownership is a VERY sizable component of events that propelled me (and zillions of others just like me, but, it’s probably easier and far less threatening to pretend we don’t exist) to be successful, for reasons to complicated to drill into here. There’s a useful analogy though in “Millionaire Mind” - balance-sheet millionaire clusters and the impact of one’s environment on financial, social and professional success.

I don’t expect you to understand (and as an aside I consider the overwhelming majority of “social programs” useless, if not demeaning), but, I do hold elected officials in the position of addressing an audience on the topic of predatory lending to a far higher standard: I expect them to have at least some small clue.

As to where poor people buy homes, when we moved in? I arranged with friends to move our things in the middle of the night. It took < 30 minutes. The small amount of furniture we had was so shabby, and in such poor condition, I did not want my new middle class neighbors to see any of it.

For the record, this is not a political opinion - the minority leader spoke later in the afternoon, and his statements were only slightly less acceptable: he said that the “strong arm of market forces” will drive predatory lenders out; no need for congress to do anything. That’s not exactly true, considering that such enterprises are simply parasites with business licenses. But at least he didn’t dress it up and trot it out as the poor have no need to be considered as potential home owners.

JHS: can you serve up a link that displays appreciation in excess of inflation for renters? Just curious…

Obviously, if you own a home, you have at least a shot at appreciation. And if your neighborhood is in decline, you at least have the power to align with like-minded persons, and try to rescue it. When you rent as a default position because you cannot buy, you buy a roof over your head in 30-day increments, and you have no power to do anything, except trade up through various slumlords.

latetoschool · March 6, 2007, 6:02pm

Marite, thanks for the explanation re Europe, I totally didn’t understand why the Italian embassy people were nodding so vigorously in agreement.

I really don’t know the subject matter well enough either, but, do not like what I perceive to be Frank’s automatic, judgmental blanket indictment about home ownership and the lower socioeconomic sector.

barrons · March 6, 2007, 6:05pm

As I said ghettos in some older cities (I did not try to list them all but North Philly would qualify) will not be wise investments. So you do what my parents did–get the heck out of the Bronx and buy a little house in NJ in a good area for $5000 in 1955. That house paid for a comfortable retirement for my mother with some left over when she passed a few years ago. Like in every investment you have to use some sense.

weenie · March 6, 2007, 6:08pm

Barrons: But do you understand that your parents’ model just doesn’t fit the reality of many poor people today?

latetoschool · March 6, 2007, 6:13pm

Dstark, home ownership directly impacts the CRA algorithm, which of course in turn impacts credit worthiness and credit granting decisions, interest rates, and in some states, automobile and health insurance rates. It also impacts career acceleration, and professional positioning.

But congress - both parties - ignore this. The most they have even bothered to try to accomplish was passing the law that now permits us to run a free credit report once a year, but, even this legislation grew up out of identity theft - it had nothing to do with fairness to persons of all income ranges.

Even at that - you still cannot get your actual, real credit score - you can get a report, but, you have to pay to get your score. But the score the CRAs sell you isn’t even your real score - it’s merely an approximation.

Imagine the abusiveness of a system where a CRA (1) collects information about you from whoever wants to report it; (2) makes no effort to make the information complete; (3) makes no pretense to even make sure it’s accurate; (4) keeps the algorithms so secretive it takes months to figure it out, if you even can; and (5) most horrific of all, charges you money to buy the incomplete, inaccurate information about yourself.

That’s what we have, and congress does nothing, regardless of which brand is in power.

But Frank’s play is that the poor don’t need to own homes…

dstark · March 6, 2007, 6:27pm

Ok. I see.

The borrowing and lending system is not set up for the borrowers.

It’s set up for the lenders.

latetoschool · March 6, 2007, 6:32pm

Actually, the lending system works perfectly and is usually mutually beneficial to both parties - at least in my experience. It’s the predatory lenders interacting with unsophisticated or unqualified borrowers that muck it all up.

dstark · March 6, 2007, 6:40pm

“the lending system works perfectly and is usually mutually beneficial to both parties - at least in my experience. It’s the predatory lenders interacting with unsophisticated or unqualified borrowers that muck it all up.”

That’s the way it is supposed to work. ;)

ucsd_ucla_dad · March 6, 2007, 6:41pm

IMO one of the best investments the average person can make is to purchase a home. Not just any home, but a home with some potential in an area not in decline. Buying a house generally ‘fixes’ the monthly costs for housing whereas costs for renting generally go up every year. I’ve seen too many people chose to rent versus buy in their 50s on up whose rents for a 1 or 2 BR apartment are orders of magnitude higher than my house payments for a large house on a large property (yet they usually have a nice car that they’re making large payments on).

In some areas, such as California, some people have had to move out of state since their rent continued to increase while their income was fixed or declining. The people who purchased a home generally don’t have this problem and can plan their retirement.

It’s certainly possible to make an unwise choice and purchase a degenerating house in an area of decline and lose one’s investment. The choice needs to be wise. It’s also possible to lose one’s investment if they planned to purchase and then sell within a couple of years where the costs have exceeded any gains. One should avoid this. And it’s possible to be tempted by the many offers for equity loans and go blow the cash on consumables. Again, this is simply an unwise choice.

Contrary to the rep’s statement, I think most people should seriously consider purchasing a home but they need to do it wisely with their eyes wide open.

weenie · March 6, 2007, 7:20pm

ucsducladad: I don’t think anyone from the middle class up would disagree with you at all. But my understanding was that the OP was specifically talking about the poor, for which, as I have argued, the “rules” are not quite the same.

Tarhunt · March 6, 2007, 7:21pm

Sorry to be so long getting back. I had real work to do.

Implicit in your question are the following:

<ol>
<li> All people live in major metro areas</li>
<li> All people buy houses for 20-30 years</li>
<li> Metro areas are homogeneous</li>
<li> Wealth gains from housing outstrip wealth gains from other investments</li>
<li> Past performance predicts future performance</li>
</ol>

First, I don’t know where to find that data. But if I had to guess, I’d say one should look at Flint, Michigan, Rochester, NY, Muncie, IN, and Gary, IN for some possible housing value declines. All those places had major employers shut down or go through substantial layoffs.

But, to your issues.

<ol>
<li> Not everyone lives in major metro areas, contrary to popular belief. The issue is about buying a house, not buying a house in Palo Alto. For instance, my parents bought a house in rurual Florida in the 60s on some land. They rented it out for less than the payments and got some income from selling their tobacco rights. When they got divorced, my mother called me home from college to go over the numbers, since that was far from her strong suit. What I found, going over the numbers, was that they had shelled out around $100,000, after income and tax benefits. They sold the property with $20,000 of equity in it. So, they might as well have set fire to that $80,000, not to mention the opportunity cost of not investing in, say, an S&P index fund.</li>
</ol>

It’s true that out-migration from rural to urban areas has driven up housing costs in urban areas, overall, which simply means that buying a house in a rural area might be a bad idea.

<ol>
<li> Which brings us to the next point, which is that all people don’t buy houses for 20-30 years. Houses are sold because of divorce, but I’d venture a guess that most houses are sold because someone lost a job. Often, jobs are lost because an employer closed down or had substantial layoffs. Naturally, a lot of families put their houses on the market just when no one is moving in because there are no jobs. And just as naturally, the housing market takes a steep nose dive. This happens in metro areas (especially in neighborhoods), small cities, and most especially rural areas. </li>
</ol>

My wife has a friend who spent years trying to get rid of a house in Cosmopolis, WA after the bottom dropped out of the wood products industry for a while. She lost her shirt.

I also referenced Houston, where an acquaintance of mine bought a 6,000 square foot house around 1989 in the suburb where the astronauts live (can’t remember the name) for $190,000, complete with pool and helipad! But the guy who sold it to him had to bring a lot of money to the table just to unload it.

<ol>
<li>Metro areas are not homogeneous. Some neighborhoods decay. Others gentrify. Often, there is not a good way to predict this. For instance, the Denny Regrade area in Seattle is now gentrified, but there are other parts of the city one might have thought would gentrify that haven’t done so. Neighborhoods can quickly deteriorate when an employer that drew heavily from the locality closes down, housing prices drop sharply, and many houses are abandoned or rented for songs.</li>
<li>Wealth generated from a house is often heavily leveraged, so a small percentage increase can be significant when compared to the initial investment or, for that matter, the total real cost. As I’ve said before, however, that works both ways. A 3% increase on a $200,000 house generates $6,000 in wealth, and a 3% decrease generates a $6,000 loss.</li>
</ol>

But what if the difference between rental costs and buying costs had been invested in an S&P indexed fund at, say, 12% return (historically average)? The first house I bought cost me a net of $7,200 more per year than renting. That’s money I could have invested at 12% compounded yearly. It takes a fairly good return on a house to match that. I didn’t care. I wanted to own. But I didn’t go into the deal thinking it wasn’t possible to do better, elsewhere.

<ol>
<li> As you know, past performance never predicts future performance. It’s not a bad place to look for trends, but assuming that a trend will continue into the future without doing some due dilligence is foolish. Looking at the long term, I’m not at all sure that we won’t see suburban houses lose value as energy/transporation costs increase. Someone buying a nice house in a suburb that tradionally has had increasing house prices might be in for a nasty surprise.</li>
</ol>

Hey, I’ve owned four houses. I like owning a house. But that doesn’t mean that I think owning a house is the be all and end all of building wealth. For many people, that is probably not true.

weenie · March 6, 2007, 7:22pm

dtark: Bingo. And it is NOT that they are necessarily “unsophisticated.” It is often simply that they are unqualified to borrow from reputable lending sources.

Tarhunt: Well, I’ll vouch for Rochester NY. As well as the virtually all the other “upstate” cities in NY.

latetoschool · March 6, 2007, 7:41pm

Weenie, I do not see how you could possibly be more off-base and incorrect.

First, exactly which part(s) of UCLAUCSDDAD’s post does NOT apply to poorer people? In what measurable way exactly are poorer people so drastically different?

Second, the financially challenged prospective homeowner usually DOES have the gross means to purchase, or at least make the payments - often in fact they’re often already paying MORE in rent, especially when calculated to square footage, and they’re also paying higher utility bills thanks to poorly maintained heating/cooling systems than they will owning a home, and they’re almost certainly paying a LOT more for auto insurance and other types of credit owing to how home ownership is calculated into credit scoring by the CRAs.

What they lack is the knowledge, time and negotiating skills to (1) correct inaccurate credit histories; (2) strategically improve credit scoresl (3) shop for and negotiate with lenders for favorable interest rates; (4) shop for and negotiate for intelligent real estate investments; (5) when and if they do actually get into a home, they often do not have or do not know how to get the information and resources to properly take care of the property.

At least Tarhunt’s post contains some empirical data that I can get my head around and understand, and as such, makes a credible argument for an opposing point of view.

Tarhunt · March 6, 2007, 7:45pm

latetoschool:

I own some rental properties. Because of the rental market in the area, the actual difference between renting and buying similar properties (in real dollars and including hidden homeowner costs) is about $500/month.

Home Ownership - Overrated???

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