Dec012012

Why our less educated parents and grandparents were more intelligent on homeownership

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?retirement_savings

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.