Housing Subsidies, Debt Expansion, and the Death of American Liberty (redux)
Fourth of July is a celebration of freedom and independence. Unfortunately, from what I’ve observed, many people have forgotten what those words mean. Today I am revisiting a post from 2010 on this subject to remind everyone of the precious thing the banks are taking from us all.
Housing Subsidies, Debt Expansion, and the Death of American Liberty
Properties are encumbered with too much debt, and buyers in markets where prices have not crashed are being asked to pay much higher prices as a percentage of their incomes than generations past. Today’s buyers are being asked to pay for the excesses of those that came before them and sell out to the money changers.
FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.
But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?
How much of our government’s response is tyranny of the majority? Are the owning taxpayers paying this subsidy comfortable with the face of housing entitlement today?
This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.
In his classic 1985 book, “Crabgrass Frontier,” Kenneth T. Jackson of Columbia University delineated the complex train of thought that over the last two centuries has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.
The middle road is often a path between two evils. In the left ditch is the weakness of landlord dependency, rent controls, and other government subsidies of transitory housing. In the right ditch is an array of market subsidies to encourage home ownership, even if that form of home ownership is really money rentership — and, pardon my cynicism, our lending overlords want it that way. Wouldn’t you want to have 40% of society’s earnings if you could get it?
People forget they are merely substituting one form or weakness for another; landlord oppression is one evil, and lender oppression is another. Somewhere along the way, we lost ourselves. We escaped one form of bondage and fell into another. Why did we do it?
Back in 1899, in “The Theory of the Leisure Class,” Thorstein Veblen described homeownership, particularly of large and expensive dwellings, as “conspicuous consumption.” By that, he meant that it was undertaken substantially for the purpose of impressing others by showing the amount of money one can afford to waste on space one doesn’t need.
What is specifically American here — though it’s increasingly seen in other countries, too — may be the modern sense of equal citizenship, engendered by the illusion that we can sustain conspicuous housing consumption even among a majority of the people.
In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today.
We are witnessing the final stages of a societal change. We have embraced debt as if it is capital or wealth; the change has been gradual, and the individual steps toward this end seemed natural and necessary; however, a significant number of people no longer distinguish between debt and wealth and truly believe obtaining debt bestows wealth and power.
Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.” — George Orwell, Animal Farm.
We are generation pwned. Lenders seek the maximum debt-to-income ratio people are willing and able to support. The lure of appreciation and HELOC spending increases borrower willingness far beyond borrower ability and this willingness (or kool aid intoxication) helps keep prices inflated and debt loads large. Lenders and realtors exploit our modern American delusions, and everyone pays higher housing costs as a result. What good is a large income if so much is spent on housing? Aren’t the lenders the real beneficiaries?
By Greg Fielding:
On home prices, Shiller writes:
If many of these homes needed to be converted to rental units, home prices might well drop.
The Emperor’s clothes are beautiful indeed.
Though the policies are economically insane, they are worth the cost in order to perpetuate “a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity.”
Is our National Identity really defined by lust for a material good?
Consider the alternatives…
Americans: Smart and Hard-Working
Americans: Gracious and Strong
Americans: Helping Each Other
Americans: Character and Perseverance
No, we’re Americans: People who want to Buy Houses
How twisted and materialistic have we become as a culture to openly define ourselves by something we own?
As a renter, I am offended. As a citizen and a taxpayer, I am outraged.
Shiller suggests that The American Dream is too sacred…that our fragile national ego would collapse if its credibility were threatened. But, he’s wrong. The jig is up and the public knows it. In fact, they are asking for it, desperately wanting to find some financial purity after a decade of decadence. Social mood is shifting.
Shiller mistakenly suggests that home prices are worth propping up. But the problem isn’t that home prices are falling, it’s that home prices are still too high. Falling prices and foreclosures aren’t the problems, but the solutions, not the illness, but the cure.
The time has come to shout out that the Emperor has no clothes: The American Dream is simply a marketing campaign, a gimmick, perpetuated by industry groups and their lobbyists. That a home can define one’s success or national identity is simply a symbollic, mutually-shared illusion.
Low-cost housing has benefits
The economy in Riverside County is dismal. Nearly 20% of Riverside County employment was in the building industry, and since about 40-60% of workers in homebuilding are unemployed (that is my anecdotal estimate), there is significant distress in both the employment and the housing markets. But that sorry state of affairs is ripe for recovery. Expanding or forming businesses in Riverside County currently enjoy inexpensive labor and they can attract more with inexpensive housing. Orange County and Irvine do not have those advantages.
Many are focused on maintaining inflated home values without considering the broader societal impact. We may be forced to choose between our house values and our jobs if the economy remains soft because house prices are such a deterrent to business expansion. Also, if all future generations really are priced out forever, is that an accomplishment bubble buyers will look back on with pride? The parties to the bubble have reduced future generations to debt slavery. I see little benefit in that.
Going out with a bang
Inspired by the fourth of July, the former Ponzi who owned today’s featured property waited until the end to really cash out.
- This property was purchased on 1/5/2000 for $299,000. The borrower used a $239,000 first mortgage and a $60,000 down payment.
- On 2/13/2003 he refinanced with a $314,000 first mortgage and cashed out his down payment plus another $15,000.
- On 4/5/2004 he took out a $90,000 stand-alone second.
- On 1/26/2005 he took out a $148,000 stand-alone second.
- On 6/7/2005 he refinanced with a $483,000 Option ARM with a 1% teaser rate. Despite the stupidity of taking out this toxic loan and doubling his mortgage, his Ponzi activity was rather muted compared to the underlying value of the property. In other words, he could have gotten more.
- Then on 10/3/2007 he refinanced with a $728,000 first mortgage. He extracted the last $250,000 in equity his property had to offer before prices cratered.
Now that’s finishing with a bang.
[idx-listing mlsnumber=”MB13122062″ showpricehistory=”true”]
1155 NORBY Ln Fullerton, CA 92833
$829,900 …….. Asking Price
$393,000 ………. Purchase Price
3/13/2003 ………. Purchase Date
$436,900 ………. Gross Gain (Loss)
($66,392) ………… Commissions and Costs at 8%
$370,508 ………. Net Gain (Loss)
111.2% ………. Gross Percent Change
94.3% ………. Net Percent Change
7.2% ………… Annual Appreciation
Cost of Home Ownership
$829,900 …….. Asking Price
$165,980 ………… 20% Down Conventional
4.38% …………. Mortgage Interest Rate
30 ……………… Number of Years
$663,920 …….. Mortgage
$162,927 ………. Income Requirement
$3,317 ………… Monthly Mortgage Payment
$719 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$173 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$4,209 ………. Monthly Cash Outlays
($828) ………. Tax Savings
($894) ………. Principal Amortization
$266 ………….. Opportunity Cost of Down Payment
$227 ………….. Maintenance and Replacement Reserves
$2,981 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,799 ………… Furnishing and Move-In Costs at 1% + $1,500
$9,799 ………… Closing Costs at 1% + $1,500
$6,639 ………… Interest Points at 1%
$165,980 ………… Down Payment
$192,217 ………. Total Cash Costs
$45,600 ………. Emergency Cash Reserves
$237,817 ………. Total Savings Needed