Why mortgages have eaten Americans out of house and home
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jgcf on Flickr They’re calling it a “mortgage crisisâ€, with home foreclosure rates higher than they’ve been since the Great Depression. What exactly happened? Just yesterday, weren’t people lauding the virtues of buying over renting, rushing to slap their downpayments on the table? Perhaps the downpayments weren’t big enough, and the loans too variable? These days, in our area, even people with good salaries find themselves out of a house they can no longer pay for, flipping through the classifieds in the newspaper for rentals.
Just last night, my father and I were discussing a recent NPR report on mortgages. “Back when your mother and I bought our house,†he said, “things sure were different. A bank wouldn’t even look at you twice unless you had 20% to put down on the house you wanted. Then they checked your salary to make sure you could afford the monthly payments.â€
I hate to oversimplify the issue, but didn’t my dad just basically hit the nail on the head? At some point, people stopped calculating what they could afford long-term and started chasing what was just (or substantially) beyond reach, made possible by slim downpayments and variable-rate mortgages. On September 2, 2007, the New York Times quoted President Bush’s diagnosis, which was similar; he mentioned “both ‘excesses in the lending industry’ and unduly optimistic homeowners who took out ‘loans larger than they could afford,’ as reasons for the mortgage woes.â€
The mistakes indeed do go both ways, with irresponsible lenders and uninformed buyers engaging in the dance of debt. The terrible irony is that now, even people who responsibly make their mortgage payments on time are confronted with declining equity; their neighbors are foreclosing, so their own house value is plummeting so quickly that they can’t resell.
I can understand the mentality of those who bought beyond their price range; we all want (and probably deserve) a taste of the American Dream. We all have our “dream house†in mind—why can’t we go out and get it now? The catch, in my mind, is this—my husband and I, for example, are just shy of our thirtieth birthdays, just starting our careers. Why should we be able to afford our dream house right this second? Of course, according to real estate principles, we should try to find a house that serves as a wise investment, something we’ll be able to resell—but do we need a castle? Not now! I’d rather keep financial stress at bay and live within our means.
In fact, my husband and I just made an offer on what will probably soon be our first house, and there were a few ground rules we put in place when we started looking. First of all, we were fortunate to have accumulated savings for a downpayment thanks to three years of teaching overseas, but we decided not to empty our savings account to cover housing costs. Additionally, we vowed to buy only what we could afford to put 20% down on and to calculate a monthly payment that would not stress us financially according to our current salaries. I realize it might not be possible for everyone to put down 20%--it’s hard to save money in this country—but the more, the better. What matters most is finding a monthly payment you’re comfortable with—and preferably choosing a fixed-rate mortgage that will leave you less susceptible to the windy changes of market interest rates.
Our house won’t be the one we live in forever, but it’s a wonderful little house to start with, and frankly, at this point in our lives, that’s what we can manage. Somehow, it seems right, and not too different from my philosophy on credit card usage, which basically amounts to this: “why buy anything you can’t actually pay for in the end?" Whether it’s a new outfit or a house, the principle stands.
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Home prices were getting out of hand in some markets, particularly on the west coast. Most things in life run in cycles – it was time for the residential market to catch its breath. Unfortunately, it was an abrupt halt. With so much of our economy tied to residential, the ripples spread. However, this is a great opportunity for homebuyers to upgrade or make their first purchase. It is also a good opportunity for investors to buy battered stocks such as banks and homebuilders. The current situation may not end soon, but rest assured, it will not last forever.
Best Wishes,
D4L
congrats! my boyfriend an I are taking advantage of this same situation - we saved the money and now we're getting a fantastic home that we can be in for several years to come before we feel the need to move.
Several years ago, I bought a house that was much smaller than what is usual for people in my occupation. The small house made it possible for me to save enough money for an emergency fund.
Recently, I had a period of unemployment caused by a health problem. I'm so thankful that I didn't have to worry about money during this difficult time when everything else was going wrong!
I've recently started back to work and everything is going to be all right. It would have been a stressful time if I had borrowed money for a "dream" house.
When my Wife and I were ready to buy our first house, we started by looking at our home budget and deciding on what would be a comfortable amount to pay each month, keeping in mind, that my Wife wanted to leave her job when we had our first child.
We then went to the mortgage broker and presented our desired monthly payment, and asked him to tell us what size mortgage that would give us, based on the money we had to put down. That number was about 2.5 times smaller than what the bank would have been willing to lend to us. They offered us more, but we turned it down, rather staying in the monthly payment, and a fixed rate, that we knew we would be able to afford.
Once that was figured out we went to our Real Estate agent with the total amount we could afford for a house, drew a circle on the map noting the areas where we were interested in owning a house, and asked him to find us houses in that range. We were not interested in seeing any houses for more than our mortgage amount.
We made an offer on a house in just under 2 weeks. We have had the house for several years now, and my Wife did leave her job when our son was born.
We avoided any serious financial trouble because we worked backwards from budget to house. House buying is the largest emotional purchase you will make. If you don't approach it logically, it is far too easy to get caught up in the emotions of it and buy a house or get a mortgage that you cannot afford in the long run.
...and while I can't say that we were fortunate enough to be able to put down 20%, we put down over 5% while sticking to a limit of our price range. We knew what our top dollar amount was for a house, and despite the bank offering us 20% more than that in a loan, we stuck to our limit. We figured that our current rent + our monthly mass savings for this house down payment should be more than the monthly mortgage, and we were able to hit those numbers pretty well. We got a great deal on a house that we'll be in for 20+ years, as well as have enough room to care for our parents at the appropriate times in their lives, as that was important to us.
We have zero credit card debt, which helps us substantially. We did not want to overextend ourselves and be up a creek, but we are both in our early 30s and want to stay in this house for a long time. The market here (in NH and VT) has been incredibly stable without a great deal of dropping off (mostly due to an overall lack of housing).
We knew what we could afford, and stuck to it. Friends of ours who bought a house as recently as the spring are telling us time and again that we picked the right time, as the market was entirely in our favor.
What really kills you when you have less than 20% is the Private Mortgage Insurance -- basically, you pay a couple extra hundred dollars a month to make sure the bank doesn't lose on their investment. This continues until you hit 20% equity. Ouch. Of course, if you lose your ability to pay the mortgage, you have no insurance. You're paying the bank twice, in essence. Once we get rid of that (in about 6 years), our payments will be a breeze as we'll both be more advanced in our careers.
When we bought our first place I didn't even know what the mortgage payments would be! 10 years latter we finally crawled out of the house. I'm much more careful with impulse purchases these days.
The reason for the bubble was the disconnect between lending and owning of the mortgage. Do you really care if the person can afford the payments, once it's closed you sell the loan off. Your interest is in generating fees not interest income.
From Dr Housing Bubble
The Foreclosure Story: $130,000 income to Foreclosure
http://tinyurl.com/2hveen
Rising expenses don't help either. Our house payments with insurance are a bit lower than renting something a knotch down in size and quality. We saw the going rate for our property go up 20 to 50 grand since we bought it based on what other properties are being listed for. So far we are not seeing a big panic in the market here but we also have some decent state sponsored loan programs.
What is really squeezing people are stagnant wages combined with really high grocery prices and higher than average gas prices and we have virtually no public transit.
I'm saving now for a home, and I'm thinking ahead about what I can afford. I'm considering home maintenance (if no yard, then no landscaping), utilities (if no oil heat, no oil bill), and monthly payments - (either my BF or I must be able to afford an entire mortgage payment if the other one loses income). The point is to try to get a house that's WELL within our means. As you say, we're young (late 20s) so there's no need for a dream house now. We can earn that later.
I, too, am one of those don't-overextend-yourself-on-a-mortgage people, though I have been around long enough to see housing busts and booms (which can vary by region and city) as well as swings in interest rates up to double digits and back to low rates now.
I also remember when tapping into your home equity was termed a "second mortgage" (ask your dad!) and spoken of in whispers about a neighbor who was in a financial jam.
There are smart ways of building wealth with real estate and even leveraging with home equity but as with any investment, there can be risks and rewards. Risk taking is one thing, though, and overextending is another -- it's smart to know what you are getting into when you buy a home and get a mortgage, glad you explored this topic from a new homebuyer's perspective.
What do you get when you combine dumb borrowers who don't understand what they are stepping into, greedy mortgage brokers who don't do their due diligence and qualify any schmuck who walks in off the street to make commission and a housing market so over heated it had to collapse?
You get falling home values, sky high foreclosure rates, sinking interest rates and equity markets that tank.
Ain't it great?
As I sit here typing this now the markets are down huge, again.
So tonight when you get home and pull up your brokerage/retirement accounts and see another 1%+ of your wealth gone be sure to thank all the brain dead buyers, let me process this no doc loan so I can get my commission mortgage brokers and the housing speculators who drove prices to unsustainable heights.
A very good post and equally sound comments. I sometimes think that I am fortunate that my internal "wiring" makes me a bit risk averse and so unwilling (unable?) to make purchases beyond my means. My wife and I are in our mid-30s and have been considering our own dream home for some time. Although we could afford it, it certainly would have caused sacrifices elsewhere in our budget. The recent downturn has actually helped us in that it has forced us to postpone our plans...enabling us to continue saving more money and hopefully finding a more economical price when we do decide to buy.
In my financial planning career, I saw way too many young people get in way over their head with mortgages they couldn`t afford simply because their eyes were too big for their wallets, they didn't take into account other home ownership expenses, the interest rates were low, and the bank was willing to lend them more than they could realistically afford.
Frankly, not being able to get through to these people and watching them make huge mistakes was one of the reasons I burnt out and got out of the business.
I am amazed at what the lenders are willing to lend. My husband and I have lived in our house for 17 years so have a fair amount of equity plus decent income and no consumer debt. I plugged our numbers into a mortgage calculator and it said we should be buying a $1.2 million dollar home!!! Holy smokes! I live in downstate Illinois so that would be quite a house. I think I'll stay in my $400,000 house and pay for my kids' college tuitions, retirement, heat and food.
Why would you want your first house to be your "dream home?" You don't even know, at that stage, what dreams you have.
I buy houses from people loosing out to foreclosure.
I've seen victims of mortgage fraud having paid too much for their house because they were nieve.
I've seen people spend their money on stupid stuff, rather than making their house payments.
I've seen people treat their house like a landfill (their personal dump).
I've seen people get in over their heads because of credit blemishes and loan brokers who push the edges of truth.
Yet, I've seen people who were just plain irresponsible. There was no mitigating crisis like divorce or bankruptcy. Just irresponsibility.
If you can handle your money well, handling a mortgage should be OK. If you can't handle your own money, then don't borrow money.
Just my .02
Chris
While I agree that some of the blame for the housing crisis should be shared, I think it ultimately comes down to personal responsibility. We seem to have a "keeping up with the Joneses" mentality in this country, and we want everything to be bigger, faster, newer the guy's across the street. The current housing crisis is the result of that.