Posted on 04/27/2015 10:16:14 AM PDT by SeekAndFind
Owning your own home and making it your castle is a key element of the American dream. Or is it? That’s become a more complicated question in recent years, particularly since the crash of 2007 and the bursting of the housing bubble well before that. Obviously the ability to own rather than rent can still be a very advantageous situation… for some people. But the reality is that it’s not the best choice for everyone, particularly if they are already in a tenuous financial situation.
Stan Humphries of Zillow has an editorial at USA Today where he makes the case that home ownership for some lower income Americans who aren’t ready for it not only fails to build security, but actually endangers it. This flies in the face of what he recognizes as the conventional wisdom.
But the limits of this wisdom were tested during the last housing boom, when the homeownership rate was pushed to almost 70% before plummeting as we worked through the bust. The homeownership rate is falling largely because of an inconvenient, truth: While they might feel good, policies aimed at decreasing inequality by increasing homeownership often achieve the opposite.
It’s sometimes easy to forget, but buying a home is a gamble that we will want and be able to continue living in one place for many years. But lower-income Americans sometimes can’t afford that gamble. When circumstances throw these homeowners a curveball — a sick child or loss of a job — they often don’t have the flexibility to both deal with the crisis and keep up with the mortgage.
The results can be even more disastrous when rapid home value declines cause borrowers to slide into negative equity, particularly at the lower end of the market where negative equity is more concentrated. Every time a low-income homeowner writes a check to pay off a home that’s worth less than they paid, their already tenuous financial security takes a hit. They wind up trapped in a home they can’t sell. What was supposed to secure their financial future ends up destroying it.
Stan is covering a lot of different scenarios in a short space here, and I can’t say I agree with every point he’s emphasizing. For example, the idea of decreasing home values which lead owners to a position of negative equity is never a “good thing” but it’s not always a disaster. If you happen to have the advantage of living in an area where you can stay for a significant portion of your life without being forced to relocate, the value of your home to you is often very different from what the market says it’s worth. It’s a home, and as long as you live there and it provides a roof over your head and a place to keep your stuff, then it’s worth whatever you paid for it. A decreased market value still represents a hit to your estate when you try to pass it on, but the value of having a home while you live there is not diminished.
Of course, the author correctly notes that this happy situation doesn’t apply to everyone. If all the jobs in your field dry up where you live and you get into financial trouble, the best option may be for you to relocate to a more thriving part of the nation. But if you are living in a house you own where you owe more than it’s worth, this may lock you out of the option of moving to improve your situation. Then you wind up trapped and having to take a worse job or go on public assistance. That can turn into a downward spiral.
As with most things, the more wealth and opportunity you have, the better off you will be simply by virtue of having more options. This applies to how you first get into the home as well. (One of the real crimes inherent in the system is the way that financial institutions can still get away with the inverse relationship between principal and interest in most mortgage schemes. The way these are rigged, you can make full payments for ten years and have virtually no equity in your house. But that’s a debate for another day.)
Tempting low income, unstable families into mortgages just to “live the American dream” has certainly not turned out to be a favor for many of them. It’s also contributed to the continued depression in the housing market in some areas as foreclosures increase and abandoned homes drive down values. In the end, home ownership is great, but it’s obviously not for everyone and the buyer should be aware of the risks.
BS
If you buy a home you can actually AFFORD owning is almost always better.
How The 30-Year Mortgage Robs Your Future http://www.daveramsey.com/blog/how-the-30-year-mortgage-robs-your-future/
I paid off my mortgage about 15 years ago, not bragging but it was a major goal of mine to stop feeding these horrible bankers.
I have no mortgage either. When borrowing is cheap, like it is now, I wonder if I am stupid for not having a mortgage.
BS indeed.
I kept reading this garbage expecting to see Jazz suggest the answer to low income home ownership problems is to GIB dem a home.
I don’t view my house as an investment. It is not a stock certificate. It is a place to live. Sure the prices fluctuate, but it matters not. It is our home. That is the mindset I had when I bought the house. I don’t understand the concept of being “underwater” on your home. You car immediately becomes underwater the minute you drive it out of the dealership. If your house’s value appreciates over time, that an added benefit as far as I am concerned.
It's more like gambling that your equity growth will cover your closing costs by the time you do move. If so, you'll just be rolling the equity net into the next home.
-PJ
I keep telling people this, including new hires just out of school. The 30-year mortgage is a rip-off.
The payment on a 15-year mortgage is only about 15% higher than an equivalent 30-year mortgage, after you account for the lower interest rate. In exchange, you save a small fortune in interest.
If you already have a 30-year mortgage, there's no need to refinance unless you can get a interest rate about 2% lower than your current one. You can just add 10-20% to your payment each month, and be sure it is subtracted from your principal.
If you have a mortgage, you don’t own a home. You are not a ‘homeowner’. You are a mortgage owner. You are party to a mortgage contract, that is all. If you have paid of part of the principle you are a ‘partial home owner’ at best.
If this was made more explicitly clear and we used the correct words for things we’d all be a lot better off.
Language has power.
/johnny
“it was a major goal of mine to stop feeding these horrible bankers.”
So could you have owned a home with those “horrible” bankers?!
Nothing wrong with getting a mortgage if you are ready for home ownership.
Most people can’t put 100% down on a home.
Yep...
Mine’s paid off, too.
What I’m trying to figure out is whether to sell it, or keep paying nearly $9,000 in property taxes every year.
We live on N. Padre Island...on the water. And they’re killing us with taxes.
I know that it’s part of the price of living here, but this is nuts. I try to calculate rent vs. taxes and come down on one side or the other.
I know I could live somewhere else and pay lots less in taxes, but it’s a beautiful location.
If I could figure the numbers to where I was still living down here and the total for renting (rent/CAM, etc.) was less than owning (taxes, maintenance, etc.), I’d be VERY interested. But a rental place will never build any equity. But an owned place eats up total ROI via taxes.
Stupid government. Stupid taxes.
It all depends on your goals and lifestyle. There are significant benefits to renting. You can often afford to rent a place with more amenities than you can buy. If you lack handy skills renting has many benefits. And if the neighborhood goes downhill you don’t need to worry about what has happened to property values, you can just leave.
Everybody has different needs with different solutions. There’s no one answer.
Thank you, Captain Obvious!
What does he mean that mortgage repayments are rigged? In what way?? The way interest is calculated you are paying more interest in the early years of a mortgage. That’s just how the math works. You can always pay more each month And have additional payments go to reduce the principal, if you choose to do so. Not sure what he is getting at with this statement.
The home mortgage is the biggest scam ever perpetrated. You pay 2-3x the home’s alleged price, only to remain beholden to making large monthly payments or lose it - losing your liberty in the process.
Yep...those f-ing bankers. How dare they lend you money for a house. You should pay rent because that it is so much better to have nothing to show for 30 years of toil!
I wouldn't borrow money now, unless you need it. A home equity loan MIGHT be appropriate, but you have to consider how you would use it, and whether alternate sources of financing are better choices. Often, the right answer is to pay cash and don't borrow at all, but it depends on your situation.
We bought a new home, and got a 15-year mortgage at 3%. The previous house was paid off, but we invested that money instead, and have done pretty well. As a result, we have enough liquid cash to pay off our mortgage at any time and still have some spending money left over.
If you buy a home you can actually AFFORD owning is almost always better.
I was in Seattle during the last run up and actually posted a lot on Seattlebubble.com. My new director from Colorado was looking to buy a house in the $650k range and I told her to hold off and just rent. This was in late 2006. She did rent. And in 2009 she took a better job in Chicago.
Had she bought, she would have been AT LEAST $200k in the red and would have been stuck in Seattle.
In my case, a divorce kicked me out of a home I had owned since 1980, but when I saw the run up I refused to buy. I was averaging between $1400 and $1700 a month, depending on location, for 4-5 bedroom homes in fairly nice neighborhoods (one was two blocks from Paul Allen’s place on Mercer Island in “The Scar”).
I was paying $1600 for the place we lived in in 2008 when we bought our small farm in central KY. If we were to have purchased the house, it would have put our payments, with RE taxes, at around $3300 a month.
Meanwhile, the place in KY (new house on 12 spectacular acres) cost less than a year’s wages and the annual real estate taxes are ~$150 less than the MONTHLY RE taxes on our last place in Seattle.
And real estate prices in central KY were stable then and stable now (i.e. little movement). But if you are going to live on a farm and want to put your heart and muscle and soul into a place, you are gonna want to buy it.
I’d not consider buying in a development. It is all about renting now. Even if I own rental real estate of my own. :-)
It isn’t always one way. Just like in politics, “bumper stickerisms” are woefully inadequate to describe situations you will eventually swim in. But they lead to delightful/irritating yet absolutely meaningless conversations where one persons 30-year experience doesn’t match someone else’s 3 year experience and then they get to match their anecdotes, as if that means something. You cannot and will not live in a generality. You can believe you are doing a smart thing by repeating what others have done successfully. You can believe you are being smarter by avoiding anything they have done. There is no way to predict which will be the smarter way. There are only probabilities.
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