I was thinking about this question last Sunday, when I was writing this article.
Hillary Clinton said ““Homeownership is about more than just owning a home. It is about putting roots down in a community with better schools, safer streets and good jobs. And it is about building wealth, as homeowners build equity in their home one mortgage payment at a time…We must make sure that everyone has a fair shot at homeownership.”
I agree wholeheartedly with the latter statement; however, having an opportunity and “fair shot” to purchase a home should be combined with several factors.
1. Do you have enough of a down payment to purchase?
2. Are your credit scores sufficient enough to show that you pay your bills on time and can pay a mortgage? (exceptions can apply)
3. Of those with bad credit what is the percentage that previously went thru a short sale or foreclosure situation in the last 10 years?
4. Is it the public’s responsibility once again, to always bail out the banks, lending institutions and those that have fallen behind on their mortgages or is it the lending institutions problem, since they checked their financials and credit and provided the loan?
5. Should variable rate mortgages be eliminated or only be provided to those who qualify with a track record of consistent income and solid credit.
Helping those who want to purchase a home, condo or Coop should be combined with an estimate of their capability to do so. Borrowing beyond your means, which is now more carefully checked by the banks, is really a train wreck waiting to happen. I am sure many did not plan to have to sell their place in a short sale or go through foreclosure, but what happened could have been minimized with the more conservative rules we have today. The other issue was, people were flipping homes and the last person to grab the property when things did collapse, got left holding the bag, almost like musical chairs; there was no one to purchase, when all the buyers left the market. Most important, people used their real estate as a piggy bank, taking lines of credit and borrowing off the equity, that they thought would never end, to buy, other properties, cars boats etc.. However, in the last downturn, stated income and other types of creative loans were the rage and the abuse by borrowers, lending institutions and Wall St that took place greatly contributed to the catastrophic event that almost brought our country and the rest of the Globe to a screeching halt!
I read a very in depth and sometimes complicated article from (Sept 21, 2005) (prior to our real estate market collapsing as well as our overall economy) on “The American Mortgage In Historical and International Context” by Richard K. Green from the University of Pennsylvania and Susan M. Wachter from George Washington University. You may get somewhat confused (as sometimes I did) reading it, but you will gather some interesting information from it.
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1000&context=penniur_papers
Before 1948, mortgages were a maximum of 20 years and until the 1930’s they were five to 10 years.
But after the Great Depression, 250,000 foreclosures were occurring each year from 1931-1935.
In 1949, mortgage debt was 20 percent of GDP (Gross Domestic Product=all goods and services produced in a year).
In 1979 it was 46 percent of GDP and in 2001 it was 73 percent of GDP.
So it is obvious, mortgages have played a huge role, affect and significance on our economy. However, most important is the ratio of mortgage debt/household income has escalated.
Again in 1949 it was 15 percent, by 1979 it was 28 percent and in 2001 it jumped to 41 percent.
So, we are spending more and more of a percentage of our income on debt service.
However, we also have to factor in the average income of a household, which during those periods, has increased too.
Although incomes have gone up substantially, the buying power of that money has actually gone down, especially for the Middle Class.
Housing, health care, education and inflation have all contributed to decreasing what a dollar can purchase today. Service sector jobs, not paying enough wages and the lack of savings has been detrimental to our economy and society. While the middle class had increased dramatically after WWII through 1979, it is now going in the opposite direction.
As they say, “The rich have been getting richer and the middle class and poor have been getting poorer.”
The following link will give you some excellent perspective on these issues:
http://www.mybudget360.com/income-growth-history-middle-class-data-income-history/
Although our life expectancy has been increasing over the years relative to the increases in our GDP, this trend may potentially head in the opposite direction in the future.
Many of these factors over the past, current and future will have an adverse affect on people purchasing primary residences, that have and will become priced out of the market.
The demand has never been higher and the lack of inventory in many markets has been increasing prices from 3.2-6.9 percent, even some as high as 8 percent per annum.
Home ownership is a crucial step in enabling individuals and families to gain a piece of the “American Dream” and build equity, especially since our savings rate has not kept up with other countries, who do not have Social Security or other retirement benefits to fall back upon.
This forces those people to save more, since there is no safety net. So making it easier for people to afford a home is a two edged sword.
If we provide the platform for below standard credit and income people to get in, we are subject to a repeat of the economic disaster of 2007-2008.
But if we do not figure out a way to allow them to get in, how will they build future equity?
Will Social Security and the continuance of working the rest of their natural lives be the only answer?
All societies throughout time (Romans, Greeks etc.) have done themselves in by their actions or inactions to help their population survive.
When China sneezes we won’t get a cold, but may contract the flu; and it will affect us for years to come.
China now has their own issues of spending an inordinate insane amount of their GDP (48% when I last checked) on infrastructure, building cities (that many remain empty!), railroads, roads, bridges, etc.
Now, local Chinese municipalities now need to be bailed out and are asking for assistance from the Chinese Government. So will we be able to continue borrowing money for our debt service, if China has none to lend?
Most important, our government spending is out of control and we absolutely must cut our deficits nationally and internationally to survive in the future. We have been practicing temporary “band aid fixes
What we do individually as consumers and our insatiable borrowing and our need to buy and accumulate “things” may have to come to a rude awakening once again and how we handle it, will have an affect on the rest of our country and the Globe.
For sure we have to purchase commodities and things to survive, like food, shelter, etc.
But at what point does all this buying and accumulation have an adverse affect on us? Being in debt is not a bad situation, if handled properly, but how much is too much?
We need to have somewhat of a balance between “Needs & Wants” just like when purchasing a home; figuring out what is really necessary and what is “champagne tastes and beer pockets.”
Have we created a monster that will eat us alive in the future? Hopefully, we and the rest of the world’s governments, must convene and sit down and come to a reality check and figure a way out of these difficult situations; otherwise we just might be the richest civilization on record but the shortest lived one!
Philip A. Raices is the owner of Turn Key Real Estate in Great Neck. He can be reached by email: Phil@TurnKeyRealEstate.Com or by Cell, (516) 647-4289 to answer any of your questions. To search for property, see what your home is worth or homes that have sold in your area, go to: WWW.Li-RealEstate.Com
