Of course, leveraging yourself to get into a house is nothing new. When we bought each of our houses, we tried to stay within our means. On the ownership ladder of each neighborhood, we were near the top in overall financial stability. But in each community, we also saw a lot of people hanging on by their fingernails to that bottom rung.
They used all their cash or borrowed enormous amounts just to move into their at-the-time dream home. Then they had to face that issue of keeping it.
What happens when you have no money left for maintenance or repairs? Or your mortgage goes up because your lender has to escrow more to cover your increased property tax bill? And did you forget to factor in that a bigger house generally means bigger utility bills?
We watched some neighbors who scraped to get into their homes be forced out of them because they just couldn't afford to live in them. This was addressed in the Times story — owners were able to work around the affordability issue to get a house, but they had problems keeping it.
These articles sure punch some holes in some longstanding beliefs. Isn't owning a home supposed to be the culmination of the American dream, not to mention one of the best financial and tax moves a person can make? How did the economy and the housing sector in particular get so out of whack in just a quarter of a century?
I'm not an economist or mortgage expert and I don't play one here on my blog, so I have no magic answers to these distressing questions.
But I do know that while trickle-down economics doesn't work, the reverse is true — what's bad for the least among us is definitely not good for any of us.
Article comments
1 - Brian Sorrell
This is a good piece Kay.
I work as a programmer for a bank and mortgage company in Southern California and so I get to see first-hand what's going on with pricing and rates. It is my feeling that you are absolutely correct in the analysis that higher prices = barred entry to the market.
Our house, three years ago, was $200,000. It's a decent house in an historically middle-income neighborhood. I make just above median income and this was at just about median price at the time and it was "affordable."
Houses like it on our street are now selling for over $400,000. Median income has not doubled. What this means is that regular people with regular jobs can't break into the housing market. I could not buy my house right now, and only 35% of the homes in my zip code are priced lower. I'm starting to see the metaphorical walls of which you speak with friends who did not buy soon enough (we're all 30-somethings trying to start families and such).
Furthermore, the rise in home values does not mean that you're *making* money -- unless you downgrade. For example, I have "made" $200,000 on my house. So if I sell it and want to carry the same mortgage on a new place, I can afford a $400,000 house. Um, that's my house.
Yet furthermore, your point about taxes is worth noting. Yes, there is a write-off for interest and that's lovely. And here in SoCal, we have caps on how much the property taxes can increase from year to year. But it is correct that in the long run, the tax collector will profit most from this boom.
One more thing: the re-fi market, which has also slowed down considerably, suggests that lots of people have needed to draw on their "equity" to pay off bills and big toys. I know of many folks who have had to re-fi and cash out in an effort to erase credit debt. It's a vicious cycle. And now with the plateau and possible decrease in value... well, it's not a good situation.
Ok, I'm no economist either. These are just observations from inside the mortgage industry and as a homeowner. I'd love to hear from the economist-minded about what the heck is going on in the market....
Cheers!
2 - Kay Bell
Thanks, Brian, for your very thoughtful remarks. I hope some sort of discussion can at least get started in all areas -- business, government, NGOs -- to deal with this splitting of the country into such disparate groups. Your comment about your home's pricing really hit home (no pun intended) with me. When we sold out house in South Florida to move back to Texas, I told the Realtor that as much as I loved that place, there was no way if I were buying then that I would pay what he suggested we ask for it. But we asked, and he was right. Scary!
3 - RedTard
Good article. I think at a point supply and demand kick in and prices will stabilize or decline in those areas, or everyone will simply move to Texas.
Owning a home in those high appreciation areas has produced a great reward for many people, $200K for the above poster with essentially no work.(that takes years of hard labor for many folks) Along with that reward comes risk. Somebody will have to take the risk of paying $400K or else that gain will never be realized.
The spiraling prices will end when federal guidelines start requiring downpayments again.
4 - hawaiian_son
There are a lot of people wanting homes here in Hawaii. But the one real problem as to why there is so much homeless families, especially among the working class, is that prices here are too high.
I know of families that are working 2 to 3 jobs just to pay the mortgage. There is no real family life as married couples struggle between jobs just to keep their home. And when married couples struggle with their jobs, the family starts to fall apart. Without parental guidance, some kids are left to tend to themselves. And when that happens, sometimes it can lead to trouble (drugs, sex, etc.).
In Hawaii, you have to be rich enough in order to buy a home. For someone like me, an average person who's trying to survive paycheck to paycheck, I will never obtain my dream of owning a home. And our state government wonders why most families are moving away and living on mainland USA? Because it's cheaper to do so. We'd all like to stay close to home, but when you can't afford to buy a home here, why stay?
If our Hawaii Legislatures want to do something to end homelessness in Hawaii, then something has to be done to stop home prices from soaring sky high out of reach of the average consumer. Open your eyes and look at the real problem out there. But then again, most of our legislatures probably own properties themselves, and are reaping the benefits of feeding off of the blood of the struggling locals.
By the way, I almost acquired my first home (a condo), but lost it when the required downpayment couldn't be met. So close... and still denied. Oh well, hope it don't rain today... hate sleeping on wet sand.
5 - Dave Lucas
Kay,
It all comes down to living beyond one's means. I agree with everything you say except for your last statement. Trickle down economics clearly work, and the inverse is true. Hurt the job creators, the investors, the risk takers and the little guys suffer the most.
I don't see where in your article trickle down or supply side economics is supported, decried, or even discussed.
The current real estate bubble is the love child of ridiculous lending practices; interest only loans, no money down, all sorts of inventive lending.
This is 1987 all over again. That collapse led to a 40% decline in real estate prices (in the hot markets) that bottomed in 1995 and didn't recover until 2000-2001.
The Times had an article last week where the goal of many condo buyers is no longer to make a profit but rather to sell for what they have in it. It's too late for that unless they can afford to hold tight through the next market cycle. Some will, some won't.
Much of the affordability issue comes from the taxes surrounding rising valuations. The Washington Post had an article about a woman who lived in a Habitat for Humanity home that had appreciated so much she could not afford to pay the real estate taxes and had to move.
It would help her a lot to lower the tax rate so she could have enough money to cover the cost of keeping the house. But that smells of supply side, so out she goes. She is probably a closet rich person anyway.
6 - Richard Brodie
When the bubble breaks and housing prices drop, will the tax folks be willing to readjust downward. Or can taxes only go in one direction - up?
7 - Mark C. Hughes
We are certainly in a changing world. Who would have thought that fractional ownership or cooperative ownership would emerge as a new way to own real estate. The fact is, there are more and more people buying property together and builders building homes suitable for multiple families. It is what it is and exploring your options is essential. Who knows you might find what you really like and....share the yard work, too.
8 - Francis
A very good discussion folks:
I haven't had time to read every word of the comments but it seems that many people are overlooking what over-regulation is doing to add to the costs of homes. Somehow, the various levels of government have taken it upon themselves to over-regulate private property with everything from zoning restrictions to so-called uniform building codes.
They require months and months to approve any form of subdivision of land and add on all kinds of mandated costs such as how wide the pavement must be and what must be done for a driveway entrance to be approved. There are multiple reviewing agencies which also slows down the process. (Yes, time is money when the land owner must pay interest costs for months and months before being "allowed' to use their land.
Is all this regulation really necessary? America did fine for the first 100 years of our life as a country without it. Over regulation is very costly and all costs flow to the end user. This is another element that is driving home prices through the roof. We are in a plateau right now so take advantage of it.
When people get a little more confidence I believe you will see home prices rise in an unprecedented rate due to too many mandated delays and red-tape requirements by local and state governments.