Wednesday, February 18, 2009

I'm not a mortgage expert

I'm not a Realtor, a banker nor someone who has ever purchased a house. I have been incredibly lucky. Growing up, my grandparents owned both the home they lived in and the house that my mother lived in down the street. My grandfather was a Realtor and developer in South King County. He purchased a 30 acre plot of land, and subdivided it into 30 homes. This was in the early 1960's, and most of the homeowners who purchased those houses are still the owners today. Very few of the homes have been torn down and replaced at all. Growing up in that neighborhood, I watched the surrounding land be developed, adding more families and kids that I could play with and go to school with. I don't have contact with any of them anymore, but I had a very stable community growing up.

I've rented apartments and houses, but never gone into a mortgage. I've never had the income necessary to make that a reality, so I've never tried. When I moved into my wife's condo, she had already paid off her mortgage, and we don't plan to move. So I don't have to dig into the mess personally. But because this is part of the core to why my community is in trouble, I still want to talk about what I know.

What I have seen and read about how the housing market has worked over the last 30 years has taught me that our system is fundamentally broken. In the 1950's and 60's, people had good jobs that paid a living wage. You got a job that you expected to have for a long time, maybe even your entire career. You signed into a mortgage agreement with a bank, and paid the mortgage off over 30 years. I don't know if the rates were flat or variable, but they were paid because people could afford them. The housing market was pretty stable at that point.

In the 1970's and 80's, we started seeing a concentration of wealth. This gave bankers and investors the ability to start to influence things like wages, through fights against unions and the search for higher profits that cut our ability to maintain high wages and high standards. In the 90's, the drop in incomes started to affect the housing market, and lawmakers started looking at the problem. But because conservatives controlled Congress, the solution that they moved towards was designed to help the banks and investors more than the people trying to own homes. There was a fundamental choice involved, whether to increase wages so that people could again afford homes in the community, or by lowering the standards and allow people who fundamentally could not afford a mortgage get into one anyway. Interest only loans, no money down, lower initial interest rates, and other attempts to make it possible for lower incomes to be able to sign paperwork that was against their best interest. It took a few years for the rot to start to stink. Here we are. I'm not even going to go into the investment games that sliced these mortgage agreements up and sold them on the stock market promising investors high interest rates until the cows come home.

President Obama is right when he says that we have to do something about this. People shouldn't be punished for trying to create a stable home for their children. But someone earning a minimum wage can't afford to pay $1,500 or more every month on a mortgage for a home that they shouldn't have signed for in the first place. What can they afford? The minimum wage in Washington State is $8.55 per hour. Assuming 8 hours a day and four weeks per month, that gives a monthly gross income of $1,368. According to this calculator that I found, and given a flat 5% mortgage interest rate which might be unreasonably low, the monthly payment on the loan would be $383.04, and the affordable home amount is $72,353.31. I don't know any home in my area worth that little, or if it is would it be worth living in? I don't know.

If we adjusted home values to allow people to afford things like this, there might be a huge drop in home values, which is likely why the conservatives tried to lower the standards rather than increase wages or lower home values, which really should be a market rate in the first place.

So, what do we do?

The first thing we really need to do is establish a foundation, and then stand on principle. I believe that our standards for buying a home should be high. It's important, because we need stability. So let's start with these three principles:

1. 10% - 20% down payment on the loan.
2. Monthly payments should not be more than 33% of montly gross income.
3. The rate of the mortgage should be a flat rate for the life of the loan.

Here are the problems with these principles as I see it. Not very many people working today would be able to put forward 10-20%. Not many homes are a low enough value to allow people to limit their housing expense to 33% of their monthly income. And variable interest rates are popular to banks because the inter-bank loan rate is variable, allowing them to adjust things to fit circumstances so they can maintain their profit margin.

The solutions to these problems are actually pretty simple. Raise wages, both by increasing the minimum wage and by providing and encouraging jobs so that people can afford to save for a down payment and afford a better home. Stop using the Federal rate as a yo-yo to try and manage the economy. Instead, focus on building a solid foundation and then building on that foundation. The foundation of our country is a strong middle class, with good paying living wage jobs that last for years. It's a good education that opens doors of opportunities and expands industries into new technology and resource bases. Change our monetary policy to build an economy on a foundation of wealth instead of a foundation of debt.

Gee, where have we heard this before?


D. L. Bailey said...

Great post.

I would say this: American workers can clearly be trusted with credit as long as two things are true:

1) There is economic growth which employs the minds and hands of middle-class people.

2) Their ability to pay is not fraudulently misrepresented by the financial sector.

Anonymous said...

Great Post Chad~

Our American citizens have also got to get their priorities straight and make the decision to buy based on sound judgement.

Before the housing market fell apart people were only living in their homes for 2-3 years; hardly conducive to ownership now is it?

There just seems to be no real consequences at the moment for not saving and spending everything.