Over half of poll respondents believe home ownership encourages excessive debt. Is the glass half full? Is public becoming more aware of the true cost of ownership? Is the glass half empty? Is the public becoming apathetic to the huge debt burdens they are asked to take on.
They say the sea turns so dark that You know it's time, you see the sign They say the point demons guard is An ocean grave, for all the brave, Was it you that said, "How long, how long, How long to the point of know return?"
Kansas -- Point of No Return
The Ponzi moment
Debt is only a problem for those who plan to pay it off. Ponzis, and sophisticated personal financial managers, use debt as a tool. If debt is on a house Ponzis can borrow against, the house is given the responsibility for paying off the debt. This shifting of responsibility is the Ponzi moment.
Going Ponzi is a psychological event. It occurs when the debtor comes to believe they will never pay off a debt with their wage income. They abdicate responsibility for repayment to the house itself. For Ponzis debt is not a problem. Only the inability to obtain more debt slows down a Ponzi.
If the Ponzi mind becomes widespread, house prices get bid up by those willing to pay any price to obtain free HELOC money. The rest of the world -- the people who plan to pay down a mortgage with their wage income -- they are faced with paying the Ponzi premium, and they face the risk of loss if they want to liquidate after one of the inevitable market crashes.
This article reviews a recent poll on American attitudes towards owning a home in light of the Great Recession and the housing crisis, and reevaluates the place of homeownership in the American Dream.
Homeownership is at home in the American Dream
Eighty percent of Americans believe it is of total importance they buy a home one day, 90% say they would buy their current homes again and 70% would advise their family and friends to purchase a home as a valuable long-term investment. Clearly the vast majority of Americans still sport a decisive thumbs up to homeownership despite the risk of loss inherent in homeownership made evident by the Great Recession and the housing crisis.
Our concepts of ownership are primal. Our desire to possess and defend a territory is rooted in basic survival needs for food and shelter. Irrespective of what happens to the price of shelter, people are going to desire it.
What's truly delusional is the despite the long-term losses people are going to endure, so many would still advise their friends and family to commit the same financial mistake and purchase a house as an investment. It is consumption, not investment.
All this is according to the latest Allstate Insurance and National Journal Heartland Monitor Poll which Financial Dynamic conducted to monitor middle-class America’s maneuvers in the economy’s post-recessionary aftermath. (The poll recorded a +/- 3% margin of error for 1000 respondents.) [For more information on the "Homeownership and the American Dream" poll, see National Journal article, A Solid Foundation: Why Americans still long for their own homes.]
The American Dream of wealth and independence sustains American homeownership, a national aspiration which is the result of society’s suspension of disbelief in the myth that home prices continually go up.
It does require an amazing cognitive dissonance to ignore the crash and continue to cling to old fantasies, or even deny the crash entirely. People filter data to see what they want to see.
For example, two-thirds of those Americans polled experienced some type of financial distress such as an underwater mortgage and still believe owning is better than renting.
It takes a great deal of faith in appreciation to believe ownership is better than renting when (1) the cost of ownership is higher than renting and (2) owning prohibits moving without a short sale. Trapped in an expensive money-rentership arrangement doesn't sound better than the cost savings and freedom of renting.
Seventy-five percent believe homeownership will help them achieve the American Dream, compared to the 22% who believe otherwise, and 80% believe owning a home is an integral piece of the American Dream, second only to raising a family.
Californians polled in the survey generally exhibit the same level of national spirit for homeownership ― 68%, compared to the national 75%, believe owning a home will help them live the Dream. In addition, 83% believe owning is a better financial decision than renting, and 71% would advise family and friends to buy a home to build long-term assets. (The poll’s California data recorded a +/- 10% margin of error for 99 respondents.)
Optimism and persistence are American
Homeownership is not solely an economic decision. The American image of the home is deeply imbued with social and cultural sentiments. Though 25% believe owning a home is the best type of investment for their money only behind a retirement plan, 60% in the survey view homeownership chiefly as a means to settle down and raise a family. Thirty-six percent view homeownership as an opportunity to build equity.
I wonder what percent in California would say home ownership is an opportunity to get free spending money? I bet it's higher than 36%.
The general consensus is present economic troubles and housing market miseries are but minor impediments to the American Dream. Sixty-three percent of Americans and 67% of Californians trust the housing crisis is temporary and the housing market will improve. Nationwide 60% believe their skills coupled with a tough work ethic ― rather than the economy ― has the most impact on their ability to achieve the Dream.
It's good to know more than half still believe they have to work and contribute in order to achieve their dreams. If we every lose that, we are doomed as a nation.
Splintered views in uncertain times
Though many Americans are convinced they control their own Dream, the Great Recession and the housing crisis cast doubt over what part the government plays in subsidizing American homeowners. Americans and Californians are split over the matter. Fifty percent of the nation and 42% of the state want to reduce the role of government agencies like Fannie Mae and Freddie Mac, yet 42% nationwide and 52% statewide want the government to continue its role. On the home mortgage tax deduction question, 50% want the government to keep the subsidy, while 43% want to limit or eliminate it. Californians polled at 56% to keep the subsidy and 37% to trim it down or cut it out. [For more information on getting rid of the home mortgage tax deduction, see the February 2011 first tuesday article,The home mortgage tax deduction: inducing debt and stifling mobility.]
I think it's interesting that nearly half would like to see the GSEs disappear along with the mortgage interest deduction. That represents a significant change of thinking since the bubble popped in 2006.
It should be noted the poll shows some Americans appear misinformed about how the government housing policy works. Seventy-five percent report they have not benefited from federal homeownership policy even though 71% report they have taken a home mortgage tax deduction.
Americans do not understand the myriad of ways government policy impacts the housing market. It isn't surprising that 75% don't realize they benefit in some fashion (how many have government-backed loans?)
The same level of ambivalence exists on the question of whether homeownership stabilizes American society. Forty-two percent agree homeownership has created stable communities because it encourages people to actively invest in a neighborhood and its surrounding area. However, 51% think homeownership encourages people to incur high amounts of debt, which renders them unable to pay their mortgages if they lose their jobs, and results in increased foreclosures and blighted communities.
The community benefits of home ownership are overshadowed by the harsh reality of dodgy loans creating blight and foreclosures. Remember Vicente the Fox?
California’s response to the relationship between homeownership and the health of a community differed from national results, which is not surprising since the state has been hit much worse by the housing crisis than the rest of the country. Seventy-seven percent of Californians report their homes have decreased in value (fact: all have decreased), compared to the 41% nationwide, and 40% say their homes are underwater, compared to the 18% nationwide.
The other 23% are the permanently kool aid intoxicated or completely oblivious.
As a result, 61% of Californians believe homeownership has only made communities less stable.
Home ownership didn't destabilize communities, loan ownership did.
Younger Americans surveyed seemed the most uncertain about buying a home, but overall, the poll demonstrates the economic down has caused Americans to ask questions about homeownership and the American Dream, but it has not budged their desire for it.
Time to reevaluate the Dream
Americans, and Californians included, are split or confused on what role the government has on the issue of homeownership. They are divided as to whether the government should continue to intervene in the housing market.
Americans crave homeownership, even if they understand they will have to trudge through the backwash of another cyclical recession and accompanying housing crash. But Americans need to distinguish: the Dream is homeownership, not homedebtorship, as promoted by interest deductions. The craving however is not the result of tax policies, which if eliminated would not alter the American compulsion to own and gain wealth.
Homeownership is not for everyone, and those who are forced to finance that acquisition might ask themselves whether owning is the right decision. The job mobility provided by renting is what has always enhanced California’s economy, attracting the most creative and industrious people in the world. Here, homeownership is near 50% of those housed in California, while the rest of the nation ranges around 70%.
The real estate industry calls the mortgage interest deduction the “catalyst of the American Dream,” but an American Dream based on irresponsible indulgence has more costs than benefits. [For more information on the housing subsidy problem, see the December 2010 first tuesday article, The mortgage interest tax deduction imbroglio - the squabble continues.]
At its very core, a home is a form of shelter, a basic life necessity. However since the 1970s, national public policy encouraged and exploited by lenders, builders and brokers marketed homeownership as a symbol of success and autonomy. The glamorous spotlight on the accessibility of homeownership for everyone thus casts a shadow of disapproval on renting, but what is there to be embarrassed about when paying cash to buy a home? If being in debt is a foundation to homeownership in America (and one of the reasons for the housing crisis), then Americans need to change their attitudes towards homeownership. Dreaming about homeownership is laudable, but on a solid foundation. [For more information on the trends of American attitudes towards housing, see the October 2010 first tuesday article, Is homeownership a luxury or necessity?]
$417/SF in debt
These little houses carry a remarkable amount of debt. I really like this neighborhood, but the prices of houses here are extraordinarily high on a per-square-foot basis. Today's featured property was purchased on 11/29/2004 for $520,000. The owners used a $416,000 first mortgage and a $104,000 down payment. They refinanced on 10/13/2005 with a $420,000 first mortgage and a $80,000 second mortgage. They withdrew all but $20,000 of their down payment.
They are priced to sell at breakeven in hopes of capturing the remainder of their down payment. However, since they are the highest prices home on a per-square-foot basis, I have my doubts whether they will get their money back.
House Purchase Price … $520,000 House Purchase Date .... 11/29/2004
Net Gain (Loss) .......... $1,700 Percent Change .......... 0.3% Annual Appreciation … 1.0%
Cost of House Ownership ------------------------------------------------- $555,000 .......... Asking Price $111,000 .......... 20% Down Conventional 4.84% ............... Mortgage Interest Rate $444,000 .......... 30-Year Mortgage $112,834 .......... Income Requirement
$2,340 .......... Monthly Mortgage Payment
$481 .......... Property Tax (@1.04%) $150 .......... Special Taxes and Levies (Mello Roos) $116 .......... Homeowners Insurance (@ 0.25%) $134 .......... Homeowners Association Fees ============================================ $3,221 .......... Monthly Cash Outlays
-$398 .......... Tax Savings (% of Interest and Property Tax) -$549 .......... Equity Hidden in Payment (Amortization) $206 .......... Lost Income to Down Payment (net of taxes) $69 .......... Maintenance and Replacement Reserves ============================================ $2,549 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $5,550 .......... Furnishing and Move In @1% $5,550 .......... Closing Costs @1% $4,440 ............ Interest Points @1% of Loan $111,000 .......... Down Payment ============================================ $126,540 .......... Total Cash Costs $39,000 ............ Emergency Cash Reserves ============================================ $165,540 .......... Total Savings Needed
Property Details for 172 GARDEN GATE Irvine, CA 92620 ------------------------------------------------------------------------------ Beds: 2 Baths: 2 Sq. Ft.: 1200 $462/SF Property Type: Residential, Single Family Style: Two Level, Cottage Year Built: 1998 Community: 0 County: Orange MLS#: S652006 Source: SoCalMLS Status: Active On Redfin: 17 days ------------------------------------------------------------------------------ Charm galore in this 2 bedroom plus den cottage home in Northwood Pointe. Light & open floorplan features living room w/ built ins, gourmet kitchen w/ sparkling white counters & cabinets, & dining area w/ cozy fireplace. All rooms are open to each other, making this a perfect floorplan for living & entertaining. Gorgeous slate tile flooring accents the main floor. Tranquil master bedroom features bath area with dual sinks, travertine tile floors, & walk in closet. Second bedroom has it's own private full bath w/ travertine tile floor. The versatile den could also be used as an office, playroom, nursery, workout room, or craft area. Your yard & outdoor living area is highlighted by a custom built in BBQ area w/ sink & slate topped dining bar, a patio trellis with outdoor lighting, & mature trees for privacy. Enjoy relaxing in this tranquil oasis at the end of the day. 2 car garage has built in storage. Walking distance to award winning Canyon View Elementary & Northwood High. A real gem!
All rooms are open to each other, making this a perfect floorplan for living & entertaining. Gorgeous slate tile flooring accents the main floor. Tranquil master bedroom features bath area with dual sinks, travertine tile floors, & walk in closet. Second bedroom has it's own private full bath w/ travertine tile floor. The versatile den could also be used as an office, playroom, nursery, workout room, or craft area. Your yard & outdoor living area is highlighted by a custom built in BBQ area w/ sink & slate topped dining bar, a patio trellis with outdoor lighting, & mature trees for privacy. Enjoy relaxing in this tranquil oasis at the end of the day. 2 car garage has built in storage. Walking distance to award winning Canyon View Elementary & Northwood High. A real gem!
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