Jun282016

Top 10 sacrifices people make to pay their housing costs

Sometimes people make large sacrifices to obtain a home of their dreams; however, sometimes they aren’t willing to sacrifice at all.

martyrWhenever people buy a home, they make tradeoffs. Do they want to live near the beach in a small condo, or do they want a McMansion and a lengthy commute? In a larger sense, most people also chose whether they want more house or more disposable income. In California, most people feel compelled to sacrifice disposable income to obtain better housing because the alternative is often quite Spartan. The chronic shortage of housing inventory inflates California house prices to very high levels and forces most people to settle for far less than what they would enjoy anywhere else.

Contrary to popular belief, low house prices are better than high house prices. Low house prices stimulate the economy because low house prices make for smaller loan balances and less debt-service. When borrowers endure excessive home debt, the excess comes directly out of disposable income. Since consumer spending is such an important component of the economy, the excess interest payments are a direct financial drain on the economy as a whole.

In the past the economy enjoyed a significant boost from mortgage equity withdrawal, to the delight of homeowners running personal Ponzi schemes. The promise of ever-increasing house prices and unlimited HELOC spending money is seductive because everyone wants to get something for nothing. Why sacrifice anything when you can have it all?

Despite the too-good-to-be-true obviousness of the fallacy of free money from housing, sheeple fall for it every time. Like the gambler in Las Vegas feeding a slot machine, the kool-aid intoxicated California property mogul will buy any real estate they can to obtain their share of HELOC booty. It’s probably only a matter of time before we inflate another housing bubble and unjustly enrich another generation of useless Ponzis. I want to believe it won’t happen, but those who want to believe in California housing gold will likely make another run at it.

Rapidly rising house prices are not sustainable, and the HELOC dependency it creates provides an unsustainable economic stimulus sure to result in a painful crash. Financial market implosions purge irresponsible and unsustainable habits from the populace. HELOC dependency serves no one, not even the sheeple who got to enjoy it for a time. The unceremonious fall from entitlement is inevitable, and although the fall is emotionally devastating, getting off the HELOC heroin is better for borrowers in the long term.

All the things Americans sacrifice because housing costs too much

By Emily Badger June 23house_buys_everything

Expensive housing is a problem not simply because it gobbles up a lot of money, but also because it eats into the things we would buy if we weren’t shelling out so much for shelter.

This is one of the main reasons I advocate for lower home prices. It isn’t because I want to time the market and make a killing on appreciation when prices rapidly rise again. I want to spend less money on housing. If we all spent less on housing, the economy would be much better off. It’s really that simple.

Families who struggle to pay the rent or the mortgage have to scale back on what they spend on health care or groceries or education. As a result, unaffordable housing has a way of creating other problems, too.

According to an annual, national housing survey by the MacArthur Foundation, more than half of Americans — 53 percent — in the last three years have made some kind of sacrifice to cover housing costs. They took on longer hours at work or an additional job. They stopped putting money away for retirement. They accepted tradeoffs for cheaper housing — like moving to neighborhoods that they felt were less safe or had weaker schools. From the survey’s recent results:

imrs.php

The above seven items are all middle-class tradeoffs, but they really don’t get to what many lower-class people sacrifice. I want to add three more items to round out the list of 10:

8. Do without a car

In affluent areas if you see people at bus stops, they generally aren’t the local residents because affluent people own their own cars. Bus stops in affluent areas are transportation hubs for maids and servants who can’t afford cars because they spend their meager pay on food and shelter.

9. Take on boarders or share the house with other families

In less affluent areas, it’s common to see converted garages and cars parked in yards, driveways and on the street. This is a telltale sign of multiple families sharing the same house, and it’s more common in poor communities in California than in other areas. When people must spend 50% or more of their earnings on housing, they must take on boarders or double up to make ends meet.

10. Become homeless

California has a problem that creates homelessness: we don’t build enough housing units to accommodate our growing population. Without enough housing to go around, some people must do without housing. Most of those people leave the state, but many of them end up homeless.

128827543173609

What’s even more interesting is what people won’t give up to pay for housing. Back in the depths of the housing bust, lenders started modifying home loans because their borrowers couldn’t afford to repay. This put lenders in the unenviable position of determining which borrower’s expenses were essential and which were discretionary. As you can imagine, there was some disagreement on the particulars. The standard of what distinguishes discretionary spending from essential spending depends greatly on the the spender’s sense of entitlement.

Personally, I really like to play golf. I don’t spend the $150 per week I would like to on golf because it isn’t an entitlement, and I can’t afford to treat it as one. However, if I were a loanowner, and if my sense of entitlement made it right, I could consider my weekly round of golf an essential. Since this entitlement creates a hardship for me, I could petition my lender for a break on my loan payments. After all, their loan payment is discretionary spending, right?

To understand this problem, let’s review the HAMP program courtesy of Calculated Risk and his contributor Shnaps (from 2010):HELOC_poser

HAMP applicants tanned and juiced

CR Note: The following is from long time reader Shnaps. Shnaps has been working in the mortgage industry in various capacities “since people were extending the antennas on their mobile phones”. Shnaps currently serves in a key role related to HAMP at one of the largest non-prime mortgage servicers in the Nation.

Shnaps writes:

One aspect of the Making Home Affordable loan modification program known as ‘HAMP’ is almost always taken for granted in its wide reporting – that the borrowers in fact need ‘help’. Moreover, it is generally taken for granted that those seeking modification under HAMP simply cannot afford their monthly mortgage payment. It is assumed that they have made great sacrifices, assumed they have already cut back drastically on discretionary expenses, assumed that they have already gone over their monthly budgets with a fine-toothed comb to eliminate all but the most necessary expenditures in an effort to keep their home. So prepare to be shocked – shocked! – as I share with you that I have seen first-hand that this assumption is oftentimes greatly, seriously flawed.

Since many frugal homeowners and renters, particularly the unemployed or underemployed, have no access to entitlements loan owners take for granted as part of their privileged lives, there is an assumption that the high fliers will have their wings trimmed back to the same standard of living as the workers who are paying the bills. It’s a flawed assumption that legislators would rather keep quiet since tax dollars end up supporting people’s entitlements.

Borrower spends on lingerie … should they get a loan mod?

Posted by Troy Freedman on March 28, 2013 01:24 PM

During the course of foreclosures when parties are discussing or attempting loss mitigation, borrowers submit financial records for lenders and servicers to review.

Sometimes, these records show a borrower’s financial condition to be unhealthy – not due to hardship like loss of job, reduction in income, divorce, medical bills, or funeral expenses – but due to uncontrolled, undisciplined, and/or unnecessary personal discretionary spending.

Review of some financial records have shown significant funds being spent on fast food, food deliveries, music downloads, lingerie, vacations, gambling at casinos and online, and even psychic advice instead of on existing financial obligations.

A couple of years ago, I profiled the OC Housewife, Peggy Tanous in The real Ponzis and posers of Irvine. She got plastic surgery while she wasn’t paying her mortgage.

“Orange County women are very big on up-keep. Some people go in for boob jobs has much has they go in for oil changes.” – Peggy Tanous commenting on her third boob job. “The Real Housewives of Orange County” Episode Five.

Back when she was contemplating the boob job, did her and her husband look at their income and their obligations and decide it was better to have big tits than pay a mortgage? Lenders must love that kind of decision making. Entitlements trump financial obligations every time.

irvine_couple

[listing mls=”OC16137110″]