Nothing is more foreign to the average native New Yorker than the concept of home ownership. The vast majority of people in the five boroughs rent their small living space from a landlord, and deal with superintendents, noisy neighbors, roaches, shared laundry machines, trash disposal rooms, and alternate side of the street parking. I spent the first 31 years of my life living in rented spaces. The apartment in Queens that I grew up in, where I experienced my childhood, where my youthful memories reside, is now being rented by some other family who probably also lives two year leases at a time, just like my family did.
A few years ago, at the ripe old age of 32, I decided it was time to start looking at home ownership. Seemed to be a popular choice at the time, and I figured out that over my lifetime, I had paid over $60,000 in rent. Not a king's ransom by any means, but certainly I'd have been better off if at least some of that money went to equity I owned. And with rents in the NYC area rivaling the monthly cost of a mortgage, it was worth doing without for a while in order to get that down payment saved up.
I remember the massive effort involved in working out the specifics of getting a home loan. The paperwork, working on my credit score, buckling down on needless expenses. The government was kind enough to have a program called FHA that enables first time home buyers the opportunity to get into the game without plunking down the full 20% down payment. In the New York tri-state area, considering a meager home price of $300,000, 20% is $60,000 – no small sum for even the most disciplined to amass over a reasonable period of time. And although my credit rating was higher than sub-prime, it was not stellar by any stretch, I assure you.
While I was new to all of the requirements of home buying, and while this whole thing was an exploration for me, I remember distinctly when my mortgage broker suggested using an ARM (adjustable rate mortgage) rather than a fixed rate mortgage. I immediately said no. My mortgage guy let me know that I could probably save money over the short term by going with an ARM. And while that may be the case, in terms of home buying, variability just didn't seem like a smart feature to have in terms of monthly payments. This is basic common sense. Would you go for variable rent? I don't think so. I declined and went with a higher 6% fixed interest rate. It might be more than what others might have been getting — this was during 2004/2005, when rates were as low as 4% for some ARM folks. But I didn't care, I was more interested in ensuring that I could keep my home rather than save a few hundred bucks here and there for who knows how long, only to get squeezed out when the payments grew. Besides, isn't one of the benefits of home ownership that over time, by virtue of inflation, that the payments decrease (at least in terms of dollar value)?
The house was great. But there were things that needed to be done. The windows were old and drafty. The bathroom needed work. A friend suggested I take out a second mortgage on the home to pay for these enhancements. That mortgage would ride on the back of the increased worth of the house that these changes would undoubtedly bring. I told my family that we'd do the work on the house, but no way would we take out a second mortgage to pay for it. Common sense once again told me that less is more when it comes to mortgages, and if I can't pay for these improvements to the home without resorting to more loans, I probably shouldn't be doing the improvements in the first place.
It's almost 2008. And guess what? This home buying noob, originating from a culture of renters, still owns his home, and is not at risk of being foreclosed. Because I listened to common sense, I don't need to be bailed out by anyone.
My property value has likely dropped as a result of the credit mess that this country finds itself in, but I can weather that storm. I bought my house with the long view in mind, and there is no question that in the next ten years (barring any extreme situation such as a massive terrorist attack on New York), the property should be worth substantially more than what I originally paid for it. Meanwhile, the amount that I pay each month, which is fixed, will continue to cost me less in terms of actual worth, because in ten years I will still be paying the same dollar amount.
Smart, eh? Apparently, I should have been much more stupid. The government is trying to bail out those who didn't consider the risks when signing up for loans outside of their budget, either as a result of sub-prime ARMS, and even for regular, non-sub-prime loans that are simply too high for them to continue to pay. The Wall Street Journal editorial page, with commentary from such fiscal giants as Alan Greenspan, has been ablaze all week with editorials lambasting this insanity, and rightfully so.
More qualified folk than myself can comment on the specific financial impacts to, not to mention the standing of, America's most valuable asset (this country's portfolio of mortgage backed securities) this bailout will have in the global marketplace. But forcing investors owning mortgage products into changing the rules of the game after contracts were signed doesn't raise the appeal of investing in America.
Clearly home prices are inflated, and the foreclosures that we are seeing are the natural process to correct that. This is healthy and necessary considering the recent meteoric and unsustainable rise in home prices, mixed with unrealistically cheap loans and overextended borrowers. Softening the blow by further reducing individual responsibility is senseless and regardless of intentions will do much more harm than good.
Previous attempts at bailing out sectors of the economy with heavy-handed price or wage (or in this case rate) freezing measures, such as the early '70s wage freeze, had an immensely negative unintended impact on the economy that took years to correct.
Moreover, for home buyers who are paying an overvalued mortgage, foreclosure is actually a good option. Better to leave a home that is overvalued, one you are paying too much for, than continue making payments for something that isn't worth it. Another way to look at it is this: why continue to pay for a home at a price much higher than its actual value, especially when that price is out of your range? Maybe the homeowner would lose their equity, but the same would be true if they were paying rent the entire time – with the added benefit of the tax deduction on interest. For the fiscally irresponsible, or those with interest only loans, this really isn't such a bad deal.
Rather than bail out those who made their own unwise choices, why not help the housing market by encouraging more first time home buyers by expanding FHA, the great program I spoke of earlier, that helped me and helps other first time home buyers get their homes. As wonderful as FHA is, it could be even better, by expanding the types of homes and the caps on home values (there are price and other limits on the types of homes that FHA will cover). Note that FHA isn't a bailout or charity – an FHA mortgage means that the government will back the smaller down payment, and the home buyer has to take out mortgage insurance. But it's a real mortgage, the private sector makes the loan, the home buyer has to qualify for the mortgage, etc.
The real problem is that the market is in a downturn. So what about cutting taxes to help the economy? Rather than bail out fiscally irresponsible adults, or looking to the fed to accelerate inflation even more with a lax monetary policy, tax cuts would actually put more money in the pockets of all Americans, not just irresponsible ones, who are feeling the pinch of the current downturn. Unfortunately, in the current political climate, this idea is pure blasphemy.
I know some holier than thou, newly fiscally restrained liberals are going to come out of the woodwork, chastising this Republican for daring to suggest more tax cuts, when the deficit is supposedly at an all time high and people are losing their homes. How heartless can I possibly be? And besides, our money is obviously needed elsewhere, for such things as government health care, more environmental programs, and other socially redeeming efforts, right? This viewpoint is eclipsed in its stupidity only by the mortgage bailout itself. I never said we can't pair tax cuts with cuts in government spending too – we should, and the bailout is the first place I'd start.
But we can't wait for spending cuts to happen, nor should we engage in some faux paygo nonsense (which the Dems have conveniently and thankfully dropped from their lexicon). We can cut taxes now. The government is already running a deficit and we are likely going to elect a Democrat for president in 2008, which will ensure a long and healthy life for our debt, with no dot com gold rush to cover it up.
All indications are that the economy will slow down even more in the coming months. Deficits are much more difficult to pay off when the economy is bad, and at the same time, paying off deficits doesn't help the economy. However, tax cuts done right can do both, by improving the economy and as a result, federal tax receipts, thereby reducing deficits.
Republican Presidential candidate Rudy Guiliani said in the recent Des Moines debate, "The strength of America is not its central government, the strength of America are its people… restrain the central government, and give the people more choice, more money to spend, and we will see the economy booming." He's absolutely right.
Cut taxes, and encourage more first time home buyers, and this economic rough patch might not be so bad. Bail out the fiscally irresponsible and engender more irresponsibility right when the economy is in a downturn, and do absolutely nothing to help, and possibly hurt the economy. Doesn't seem like that hard of a decision to me.
I think it's better not to destroy the entire concept of personal rights and responsibilities. Better to increase the deficit and help the economy, than to kneecap one of the greatest drivers of personal wealth (home buying) by tacitly approving irresponsibility in personal financial matters, while taxing the rich and middle class to pay for it all. The fact is that deficits can be paid down, just like they have been time and again during the boom periods of the last two decades. But screwing with the housing market, by engendering even more fiscal irresponsibility, isn't nearly as easy to fix.