Every day I drive down from the hill where I live in my half-remodeled exurban mansion cum ruined shack and into the valley where the repos live. Some time about five years ago our little town of about 2000 people unexpectedly developed its own suburbs. They're really Austin suburbs, but they're inside our city limits and add to our tax base and our crime rate, so they're ours.
They string out along an old country road in what used to be farm land, laid out in a pattern of increasing home value the farther you get from downtown. They're perfect examples of what's at the center of the current real estate and mortgage banking crisis. We don't have as big a problem as some other parts of the country because our regional economy is still booming, but they make a perfect study of what was going on at that time and what led to the current problems.
What makes these developments relevant is that they were built for a market of low-middle income families who were looking for their first homes. As a result the houses were built relatively simply and inexpensively and the prices were kept as low as possible, but most importantly they were offered for sale with very attractive alternative financing options to encourage people who might otherwise not buy a house to take the plunge a few years before they normally would, or to go for more of a house than they might otherwise be able to afford. That means letting people who would normally be renters get into a house for a price per month comparable to what they might be paying in rent, ideally with no money out of pocket, and in some cases with less of a credit check than you'd face as a renter in most areas.
The financing options for homes in these developments included all the clever and profitable tricks you may have heard tales of woe about in the financial news, including: 80/20 'no money down' mortgages where you take a second mortgage to pay your downpayment, 'front-end-loaded' mortgages where you pay mostly interest for the first couple of years, variable APR mortgages where the interest is lower but fluctuates with changes in the rate, non-qualifying loans where the interest rate was high but credit rating and even family income weren't even looked at, 'teaser' rate loans where the interest starts low and then increases, and just about any other goofy way to lower payments and increase profits for the lender that you can think of. The result was that you could get into a 'starter home' with a price as low as $80,000 a year and payments as low as $700 a month including insurance.
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Article comments
1 - Lumpy
It really is shocking how ignorant most people are about personal finances and basic business practices, even college graduates. They can't even balance a checkbook much less handle anything involvimg credit. And so many of them are carrying huge student loan debt. It's ridiculous.
2 - Dave Nalle
I need to write an article about student loans and college costs in general - the one thing in the economy which has exceeded the rate of inflation every year. I'm particularly sensitive to the subject because I've got a teenager headed off to school in a couple of years and she's looking at colleges that cost $40K a year - how the hell is anyone supposed to pay that?
Dave
3 - Nancy
The colleges are also sinks of uncontrolled, unregulated spending. Talk about throwing money down ratholes, or good money after bad, IMO-! The irony is, they're notorious for not paying any but the top echelons of faculty (the "names") decent wages - & the Names are 'way overpaid, like all CEOs.
In any event, good article, & for once I agree w/your economic analysis & proposed solution, Dave. A combination of stupid, ignorant consumers & greedy, irresponsible sellers is a baaaaad thing. Very.
Speaking of education, they USED to make all of us (back in Neanderthal days when I was in school) take a semester of basic living skills, which involved balancing checkbooks, reading a bank statement, reading labels, basic consumer legalese, etc. Obviously they don't do that anymore, or are today's kids just too dumb to learn?
4 - Dave Nalle
I think it's been a long time since they had a practical skills class like that, Nancy, but apparently some effort is being made to bring them back.
As for college pay, I sure know what you're talking about. As a junior faculty member I had to teach all the most boring classes and got paid less than half what someone with tenure would get.
Dave