Many of the Generation X (me) and most of the Baby Boomers where sons or daughters of parents that their highest level of eduction was high school. In fact none of my grandparents completed high school. In contrast, the baby boomers attended college in record numbers leading to explosion in the number of higher education institutions and this trend continued in sequent generations. Just look at how many colleges were founded after 1945 and huge increase of enrollment at existing institutions. However, something happened with the knowledge transfer between generations. The more educated generations have a worse financial track record when it comes to homeownership. Didn’t college make people more educated and wise concerning their future financial decisions?
The Greatest Generation (1905-1925) and Silent Generation (1925-1945) didn’t have vast number of foreclosures or incredible number of squatters not paying their mortgages. There was never great bailout of banks except (S&L due to commercial issues) and a alphabet soup of federal programs to help underwater loanownerships. What factors in homeownership changed from over the last 20 years to create these current conditions? I have a few in mind.
Downpayments
It was almost required that you have a 20% downpayment to purchase a home for people of those generations. FHA and private mortgage insurance did exist but it was rarely used. It was the very first test you need to past to prove you could own a home the downpayment requirement. When those generations moved into a home their was at least 20% equity already in the home. This protected banks in case of default, it was less risky for them. The homeowner also worked extremely hard to accumulate this downpayment. Therefore they didn’t want to go into default and lose their downpayment, any paid off debt, or gained equity. Unlike current situation, many homeowners had skin in the game.
The Starter Home
There was concept that your first home wasn’t prefect, it was too small, it didn’t have all the best features, it wasn’t in the best neighborhood, and you have to fix some issues before you moved into your home. For our parents and grandparents this was their first home and they were happy to get the opportunity to become homeowners to prove they were worthy of owning a home. Some people stopped at the starter home level, but if you paid your loan, saved your money, and worked hard you could sell your existing home and then purchase the home more desirable features, size, and location. It was the beginning of the move up buyers. It was another test in the homeownership game. Could you responsibly own your starter home and move up to a bigger home? Again these tests helped to ensure a stable financial system. Many of my generation wanted to bypass the starter and go directly to a home that was equivalent their parent’s second or third home.
Paying it off, the pride of ownership
If you talked to people of those generation,s they feared their mortgage like it was an axe getting ready to drop and cut off their head. They were fearful and hated their loan however it was necessary to finance the purchase of the home. They didn’t just pay the monthly payment, they paid extra, they made 13 payments, or they tried to refinance into a short term loan. In addition, having a home mortgage into their retirement was unthinkable. In contrast where we have loanowners that equal debt with wealth. Debt is OK to leverage a home purchase, since it’s very difficult to save 100% of the purchase prices. Intelligent leveraging helps the economy grow and create jobs. However, when debt was used to purchase cars, upgrade to a $75,000 kitchen, or host lavish parties it stopped being a banking system based on sound principals…it become a Ponzi scheme.
Maintenance and Upgrades
Upgrades? Are you talking about a new kitchen every ten years? No, we are talking fixing, repainting, and additions. People of those generations had a tendency to fix a lot of the smaller themselves if they could. When labor saving devices like washing machine, dryers, and air condition came they purchased these items. They also repainted when the walls looked old, replaced the carpet when it was time, or added on to the house. However, it was done usually with money they had saved or reasonably financed. However, these upgrades weren’t over the top. I’ll give you one simple very Californian example, look at swimming pools pre-1980. It was a hole, diving board, and it was some concrete. It didn’t look like something that should be in front of a hotel in Las Vegas with fountains, rock features, individually placed stones, and $75,000 outside bar. It something that was fun, functional, and didn’t empty out your wallet. That’s the difference, it’s a shift between function and fun to over the top grandeur where everyone had something to prove.
In Conclusion
To return a housing market we had 20 years would require a general attitude shift to adopt these practices. It was a great system where borrowers were more responsible, banks gave sensible loans, and there was gentle backing by US to encourage 30 year fixed mortgages. I don’t see US returning to this system anytime anytime in the near future. It’s not just homeowners, but its also being enabled by the government along with crony capitalism with the To Big To Fail banks.
16 Responses to “Why our less educated parents and grandparents were more intelligent on homeownership”
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Great post, Mike! I look forward to more weekend installments.
The 20% down payment barrier was a great test of responsibility. If a family could prove the responsibility to save for a 20% down payment, they established the habits necessary to pay back the other 80% over 30 years. It said something positive about homeowners that they all cultivated the habit of saving and paying down their debts.
Ponzis want to believe they have the same positive character because they are now homeowners. However, by letting people buy homes with no money down who increase their debt levels, lenders diminished or eliminated the character test that used to distinguish homeowners from renters. Being a homeowner is not as prestigious as it used to be.
The current trend toward bypassing the starter home is a classic example of entitlement and have-it-now credit consumerism. People no longer feel the need to earn anything, they simply have to finance it.
Thanks Larry ,
I don’t think these will ever return as long as loans are backed by the tax payers
Banks were once required to get deposits from working people to back loans. And people required each other do something productive before they received a paycheck to deposit. With the advent of total fiat currency and unlimited funding for the favored few at now zero interest by the fed, and for the well connected cronies zero risk, we switched to a system in which a handful of academics, who have never built anything real in their lives, now control our fate circumventing both elected government and industry. Their desire to enrich themselves (turned into a feeding frenzy by low taxes on ridiculously high compensation) has turned the average home buyer into nothing more than a prop the banks use to appear as if they are actually running a legitimate business.
My parent’s first home in Fort Worth was a new three bedroom home that in 1960 cost less than $8000. (Less than a year of my dad’s wages) In 1967 my mother bought a nice 1200 sq. feet three bedroom home in the Dallas ‘burbs for less than $14000 which was about a year of her wages. In 1992 I bought a 1750 sq. feet three bedroom home in Austin for $100,000 which was about three+ years of my wages at the time. Today the county says this place is worth >$250,000 which is more than five years of wages at my last full-time job. Yeah maybe loan-owners are less savvy than they were 20-30 years ago but the market has changed as well.
Also I think the housing porn on networks like HGTV deserve quite a bit of blame. My wife watches a lot of it and I cringe every time I see some twenty-somethings look at $500,000+ first homes (let alone ‘buy’). Not only is that not reality, it definitely creates false expectations in the minds of ‘less thoughtful’ viewers…
The reason the market has changed is because the loan-owners are less savvy AND the lenders don’t have to take the risk of the loans they write- that’s what the taxpayers are for, right?
95% of all home mortgages are either directly (FHA) or indirectly (Fannie, Freddie, and guaranteed bailouts for the financial cartel) underwritten by the taxpayers. Additionally, HUD finances most multi-family rental developments and often the construction of large residential tracts and large condo projects.
Sunset the entire array of government support for housing, from the guaranteed support for failing TBTF banks, the entire alphabet soup of housing and mortgage relief programs, government support for the GSEs, and fade the HUD and FHA, and just watch how fast the housing market reverts to the “normal” of 1960. Or 1930.
“… which was about a year of her wages.”
That one evidence that housing cost have gone up faster than wage inflation.
Wage inflation is the last to go up and the first to be blame and have policies against raising wages. The people never seem to learn. Fool me once shame on the government. Fool the public 10 times, shame of the public.
There lots of trash taught in school. Students need to be able to reason and know the truth from spin. Too bad that’s not encouraged in school and punished in corporate life.
When children become adults, the spin continues through nonsense articles in the mainstream media. Most of my posts are attempts to cut through that spin to find the truth. Most casual readers don’t bother.
The problem is a system that is fraught with moral hazard. People can buy up anything using financing and then if it doesn’t work out simply shrug their shoulders and walk away. In addition, now they can even stay payment free while they drag through the foreclosure process.
Change the laws such that you will have to pay the loan no matter what. They signed the contract and their wages should be garnished for life if need be to satisfy their obligation. Then let us see how many people will buy homes they cannot afford
Well, also keep in mind the houses changed. That 1960 home was probably not up to 2012 codes, and could simply not be built today. It’s also true the trucks that hauled the supplies in didn’t satisfy 2012 emissions standards, and the workers may have been part-timers with zero health benefits, and the company wasn’t trying to service a $50 million wrongful termination sexual harassment judgment, and didn’t have to worry about OSHA checking to see whether every guy got a 10 minute break every 4 hours, or whatever. There were probably no serious land-use “anti growth” measures in place that constrained where houses were built, or how, or dictated that a big chunk of the development money had to be funneled to local government for their pleasure. Obviously social security taxes on wages the builder paid were way lower, Medicaid and disability were almost nonexistent. So I bet that house simply costs a lot more to bring into existence.
In the good years, 1945-1975, Americans put in place a lot of “luxury” public spending — spending on public consumer goods, like perceived fairness (affirmative action, sex discrimination laws) or environmental quality or charity (Medicare/Medicaid/disability SS). We just assumed the massive post-war economic growth would continue forever and we could fold the cost of all that into a nearly unnoticeable slight increase in the prices we paid for things. Apparently, that might not work. Who knew?
Consider also you disposable income is a smaller fraction of your parents’ in 1960 — because you have to pay considerably higher taxes (not Federal income taxes, typically) but less visible things like payroll taxes (SS/Medicare), state disability and unemployment tax, sales tax, use and “sin” taxes, license fees, and the taxes corporations and investors pay that are hidden in the price of the goods you buy. You shouldn’t compare gross incomes, even accounting for inflation, but rather after-tax incomes, measured in purchasing power parity. You’re probably nontrivially poorer in terms of your actual disposable income than your parents at the same stage of life.
OSHA? Wrongful termination sexual harassment judgments? Land-use “anti growth” measures in place that constrained where houses were built? Taxes? Dude, this is Texas! The only land-use restrictions I’m aware of were here in the Austin ETJ, and to look at the development in the Edwards Aquifer recharge zone these days you’d never know the laws were in effect. Our economy went to hell when the ‘powers that be’ decided to stop making things here and instead decided that the best use of resources was to build & sell houses to each other while offering endless loans, insurance and taking their cut(s) along the way. The final blow was that there was no real recovery after the tech bust of 2000, as well documented here by IR over the years, the ‘growth $$$’ came from cash-out HELOCs and not from wealth-creating activities like manufacturing. Yes indeedy my wife & I are poorer than my mother was when she was our age and BTW, she also has a pension & health insurance from my step-father’s employer in addition to Medicare…
To stabilize or increase housing prices, they can have GSE’s give out 110% equity loans with nothing down and non-recourse. I can safely bet that housing prices will go up.
I wouldn’t put it past our powers to do this.
The vicious irony of it is that while we are coddling home-borrowers by subsidizing them heavily while forgiving massive deficiencies and even the taxes ordinarily due on forgiven deficiencies, we are brutally punishing college borrowers in far worse predicaments. College borrowers are NEVER forgiven debts, and defaults and delinquencies are brutally punished, with the borrower hounded clear to the grave and beyond by harassment techniques that were outlawed for every other type of debt more than 50 years ago.
If you borrow, say, $450,000 for a house and can’t pay it back, while the house dropped to $300K in value, you can default on your payments and live in the house payment free for anywhere from 9 months clear up to three years or more while seeking a modification or principal reduction, and then be allowed a short sale where your $150K deficiency is forgiven, PLUS get tax forgiveness on the forgiven deficiency that would ordinarily be taxed as a gain.
College borrowers don’t get any such forbearance. If you find yourself unable to find a job after borrowing $75000 to earn a degree from some for-profit diploma mill as Phoenix U or another of its ilk, and miss a payment by a week, you will be charged a “collection fee” of 25% of the loan balance and your interest will be hiked steeply. Most students use private loans as well as public, and you are permitted no relief – no bankruptcy will ever clear these loans even if you are disabled or ill. If you continue to miss payments because you don’t have a job and are living in a trailer somewhere with holes in the floor, that collection fee will keep being added and so will unpaid interest. This is how $75000 worth of college debt quickly balloons to $300K, or how that $250K borrowed to go to med school becomes $949K. The protections that apply to borrowers using other types of credit do not apply to you- collectors can and do call your relatives, employers, neighbors, while going after your entire income, even if it is disability or SS. No allowance for illness or disability is made. You will pay everything you have until you die and then they will go after your surviving relatives
The problem is that kids are borrowing way too much in the name of getting an education. I do support education but it is incredibly stupid to get into $75,000 of college debt to major in music and then get a $10/hr job. Students these days are not making a very realistic assessment as to whether they will be able to get a job paying enough to satisfy their obligations after they graduate.
In addition the way the student loan system works, many students are borrowing heavy sums to finance their lifestyles – staying in expensive neighborhoods, going to concerts, buying gadgets, vacationing by enrolling in expensive and unnecessary study abroad programs and eating out at restaurants.
Student loans should be capped taking into account the cost of tuition, the likelihood of repayment by average starting salary in the field, a baseline cost of living that only provides the VERY BASICS and nothing more. Expensive socializing, buying iPhones/iPads, going on vacations, buying clothes, eating dinners etc. is not the purpose of college loans.
The argument that people should be able to study whatever they want at whatever cost is silly…in an ideal world that would be possible but the reality is that the loan has to be paid back with the job that will be obtained post graduation.
[...] In my view traditional views of home ownership, like those extolled in Mike’s weekend piece Why our less educated parents and grandparents were more intelligent on homeownership, have been replaced by a twisted concept of money rentership as a proxy for home ownership. I [...]
[...] In my view traditional views of home ownership, like those extolled in Mike’s weekend piece Why our less educated parents and grandparents were more intelligent on homeownership, have been replaced by a twisted concept of money rentership as a proxy for home ownership. I [...]