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Home ownership is no longer a low-risk path to wealth and happiness

Posted: 30 May 2011 03:30 AM PDT

Is the constant negative reinforcement in the housing market causing people to change their view on home ownership?

Irvine Home Address ... 110 BRIARWOOD Irvine, CA 92604
Resale Home Price ......  $299,000

And you're back, you're back for more
You turn away, you're back for more

You gave him an inch, he took you a mile
He made you believe you're society's child

Ratt -- Back for More

US housing policy has been one failed stimulant after another. It's time to say no to the lobbyists who are back for more intervention.

U.S. needs to stop coddling sickly real-estate market

by Froma Harrop - May. 20, 2011 12:00 AM

Just as busts follow booms, booms are supposed to follow busts. But there has been no boom, not even a boomlet, to light a candle in the gloom of the housing collapse. Many economists thought that a recovery from the real-estate meltdown that started in 2007 would be well on its way by 2011.

The unhappiness is understandable. But some extension of this pain would not be a terrible thing in the long run.

The latest news shows new-home construction down almost 11 percent in April from March, and housing starts were off by 24 percent from a year earlier. The causes are weak demand in a tough economy and hard-to-get home loans, but also a heavy dose of negative reinforcement.

Negative reinforcement is a principle of behavioral psychology whereby repeated punishment reduces the likelihood that a human or rat will continue doing something. If whenever the rat hits a lever, he gets a shock, he stops pressing after a while.

A parade of shocks on the housing front is delivering Americans much negative reinforcement. And they need it.

An American mystique about home ownership has kept us ignoring history and going back for more and bigger houses. In the recent real-estate bubble, consumers who couldn't afford it desired far grander digs than a simple nest with room for the chicks. They wanted media rooms, wine cellars and hotel-sized kitchens.

And they had the federal government cheering them on. Washington has long let homeowners deduct mortgage interest from their taxable income, thus encouraging bigger home loans. It has kept interest rates super low, providing incentive to borrow larger sums. And in the boom, because homebuyers could borrow more, they could pay more, thus launching real-estate prices into outer space.

Only constant negative reinforcement will change a society that never seems to learn that home ownership is not the low-risk path to wealth and happiness.

In the 1920s, Americans gorged on Florida real estate, some of it underwater. The Depression came, and - ka-boom! - property values fell like a rock in the Everglades.

Shabby lending practices and deregulation during most of the 1980s set off another real-estate stampede. That run-up in house prices went south late in the decade as lenders, chiefly savings and loans institutions, went bust in another financial scandal.

Then as now, scams and the collusion of government had created a market of glass, leaving taxpayers to pick up the shards. Then as now, a busted housing sector hurt the larger economy.

Only it's worse now.

The temptation for government to extend yet more support for housing is great but must be resisted. Granted, Washington can't abruptly stop the federal loan-guarantee programs that currently back nine out of 10 mortgages. They are nearly all that's left holding up the sickly market.

However, the Feds are eyeing the beginning of the end for subsidies that help feed real-estate frenzies and, besides, make no macro-economic sense. One fix already on the way is a cut in the size of home loans that the federal government will guarantee - now as high as $729,750 in the most expensive communities - to $625,500.

Another worthy proposal is to reduce the size of mortgage debt on which interest may be deducted from taxes. The current maximum is $1 million. Eventually, no mortgage interest should be deductible. (Ignore the screams, and arguments, from the real-estate interests.) There is no mortgage-interest deduction in Canada, and rates of homeownership there are comparable to ours, and the economy a lot healthier.

In the meantime, let the pounding bad news on housing change American attitudes toward home buying - and start moving the government out of the business of egging on the worst behavior.

$20,000 in, $262,450 out in four years

Playing the California housing Ponzi scheme does have its rewards. The owners of today's featured property started with a conservative $20,000 down payment on their $145,000 condo. However, three and one half years later, they refinanced with a $337,450 first mortgage and a $50,000 second. That's about $80,000 per year with no taxes. Most wage earners did not enjoy that kind of spending power, and that income was just from the house.

This is the behavior we are encouraging with housing policies designed to inflate house prices to stimulate the economy through mortgage equity withdrawal. When the lenders were the ones covering their own losses, this kind of stupidity was a curiosity, but now that the US taxpayer is paying the bill, Ponzis become a drain on everyone.

Housing has ceased to be a means to accumulating equity through amortizing loan payments and increasing values -- a state of equity sure to elicit peace of mind. Instead it has become associated with consumerism and equity destruction leading to foreclosure and unhappiness.

Irvine House Address ...  110 BRIARWOOD Irvine, CA 92604    

Resale House Price ...... $299,000

House Purchase Price … $145,000
House Purchase Date .... 11/20/2000

Net Gain (Loss) .......... $136,060
Percent Change .......... 93.8%
Annual Appreciation … 6.8%

Cost of House Ownership
$299,000 .......... Asking Price
$10,465 .......... 3.5% Down FHA Financing
4.56% ............... Mortgage Interest Rate
$288,535 .......... 30-Year Mortgage
$63,097 .......... Income Requirement 

$1,472 .......... Monthly Mortgage Payment 
$259 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$62 .......... Homeowners Insurance (@ 0.25%)
$332 .......... Private Mortgage Insurance
$385 .......... Homeowners Association Fees
$2,511 .......... Monthly Cash Outlays

-$136 .......... Tax Savings (% of Interest and Property Tax)
-$376 .......... Equity Hidden in Payment (Amortization)
$18 .......... Lost Income to Down Payment (net of taxes)
$57 .......... Maintenance and Replacement Reserves
$2,074 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$2,990 .......... Furnishing and Move In @1%
$2,990 .......... Closing Costs @1%
$2,885 ............ Interest Points @1% of Loan
$10,465 .......... Down Payment
$19,330 .......... Total Cash Costs
$31,700 ............ Emergency Cash Reserves
$51,030 .......... Total Savings Needed

Property Details for 110 BRIARWOOD Irvine, CA 92604
Beds:  2
Baths:  2
Sq. Ft.:  1125
Property Type: Residential, Condominium
Style: Two Level, Traditional
Year Built:  1978
Community:  0
County:  Orange
MLS#:  S657992
Source:  SoCalMLS
Status:  Active
Inside popular two story model with greenbelt view. Oversized eat in kitchen, open living room and oversized upstairs bedrooms. Cute backyard patio for entertaining with direct carport access. Great starter home. 

oversized? It's a 1,125 SF condo.

Enjoy your Memorial Day holiday.

real estate home sales


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