Apr232012
The fear of homelessness is the basis of America’s economic system
Modern American culture can trace its roots on the North American continent to pioneering English settlers. Life on the frontier is harsh, and each family unit is self-reliant. In a frontier society, if people didn’t work, and if they didn’t produce their own food and shelter, then they died. Fear of death from starvation or exposure was very real, and anyone who wasn’t motivated to produce something of value to themselves or others faced the near certainty of painful death. In a frontier society, there are no bailouts.
We have made much progress over the last four centuries, and the fear of death from lack of food has been largely eliminated. Private and public shelters have lessened the fear of death from exposure, but America still has a problem with homelessness largely because as a society, we have been unwilling to provide individually-controlled private shelter as an entitlement. The reason we do this is simple. The fear of homelessness is the essential motivation to get people to work to produce goods and services in our society. Take away this fear, and you create an underclass of dependency: the welfare state.
As a society we can and should debate whether or not the fear of homelessness is a desirable motivator. Perhaps we may decide to devote the resources to provide more shelters or private living accommodations for those unable or unwilling to work and produce goods and services. Until then, homelessness is a very real possibility for anyone unwilling or unable to find work. During times of full employment, the system works well and seems just. During times of persistent unemployment when motivated people are unable to find a job, the system works poorly and seems unjust.
The last five years have been very stressful for many people, certainly anyone in the real estate industry. As a renter and a sole breadwinner, I faced the very real possibility of losing my source of income and being forced to move back to my parents house or move in with friends. I am fortunate to have family and friends who would give my family shelter. If I didn’t have that support — and many people do not have those resources — if I had not been one of the fortunate ones, I could easily have ended up homeless. Any renter faced that fear during the recession, and many still do. 
This is one area of public policy related to the housing bubble that angers me the most. Loan owners didn’t face the fear of homelessness. If a loan owner lost their job, they were allowed to squat indefinitely. If a renter lost their job, they were out in the street in 30 days. The endless sob stories on the internet about loan owners losing their homes because they fell on hard times never resonated with me. Each of them generally accompanied some call for a loan owner bailout — actually a banking bailout — but never was such compassion extended to renters. Do any of you remember reading a sob story about a renter becoming homeless during the recession? Apparently, renters are a subclass that really don’t matter.
Perhaps if I had been a loan owner struggling through the recession, my perspective may have been different. I might have empathized more with the other loan owners struggling with onerous payments, and like all loan owners, perhaps I too would have ignored my own bad decisions that put me in that state. However, that wasn’t my experience. I was a renter because I recognized the fallacies of the housing bubble for what they were. And for my wisdom, I faced the very real threat of homelessness. I never had the option to quit paying my housing costs and squat.
In retrospect, perhaps this stress was good for me. Faced with declining income, a shifting job situation, and the near certainty of a calamitous loss of support, I found the motivation to raise money for an entrepreneurial endeavor, and I found the strength to see it through the tough times and reach a level of success where I worry far less about paying my bills month to month. Had I not faced such dire consequences for inaction or failure, I don’t know if I would ever have attempted what I accomplished. But then again, I didn’t enjoy working as if a gun were to my head and the lives of my family depended upon what I did.
Something must be done to level the playing field for renters and loan owners. As it stands, one of the strongest reasons to buy a home, any home at any price, it to have an emergency flophouse to squat in if times get tough. This new unemployment entitlement granted only to loan owners is a huge benefit of loan ownership. To be quite honest, when I bought my first property in Las Vegas, I had a small sense of relief knowing if everything fell apart, I had a place to crash indefinitely. With a long queue of loan owners in front of me, it would be easy to get lost in the sea of delinquent loan owners in Las Vegas. However, even though I know I am taken care of, the system still isn’t right. Renters should not face such a huge disparity in treatment simply because they were unable or unwilling to sign loan documents and become a bank’s debt slave.
I believe we have two options: (1) eliminate the squatter’s benefit for loan owners, or (2) provide rental assistance for renters who are unable to find work. Conservatives in Congress are loathe to extend unemployment benefits because paying people to do nothing encourages people to do nothing. Paying them to do nothing and paying for their housing, puts moral hazard on steroids. But that’s exactly what we are currently doing for loan owners. Lenders and landlords certainly wouldn’t mind the government subsidy, but I question whether or not taxpayers are prepared to pay the bills.
Public policy debates are going the wrong way. Kamala Harris is proposing a loan owner’s bill of rights to increase loan owner entitlements. Of course, renters are not being provided for in any way. We need to eliminate the squatter’s benefits for loan owners by clearing the way for foreclosure. We need to force lenders to go back to mark-to-market accounting so they can’t hid their insolvency by pretending bad loans are good ones. If lenders had to recognize their losses, the wouldn’t fool around with squatters. Instead, lenders would foreclose quickly to recover their capital. The current system is broken, and the actions we are contemplating will break it further.
Excellent post.
Socialized, central planned industry ALWAYS fails (see world history) due to: 1) forced capital misallocation 2) every dollar govt spends as sustenence has to be taken from someone else 3) amount of capital destroyed far exceeds the amount generated 4) self-interests.
A new study reveals that banks take forever processing short sales. This isn’t news to any buyers looking to get one.
Major banks all take more than one full year to process short sales
Pursuing a short sale is often thought of as a painstaking process, and it’s not uncommon to hear of complaints about slow responses from servicers and last minute rejections on offers. Fortunately, not all lenders/servicers are the same when it comes to dealing with short sales, and RealtyTrac compiled a list of data revealing which institutions tend to move through the process quicker and for less.
Fannie Mae, Freddie Mac, and FHA had the shortest timelines at 193 days in January 2012, a decrease compared to a year ago in January 2011, when short sales averaged 248 days. Ally Financial came in second at 321 days, reducing its timeline as well from 393 days a year ago.
PNC Financial Group was third, taking 353 days, though the bank takes longer than it did a year ago when the it took 206 days. Wells Fargo came in fourth (385 days). Bank of New York Mellon took the fifth longest (402 days), followed by Bank of America (403 days) and Sun Trust (404 days). The short sale timeline includes the time a property starts the foreclosure process to the time it’s sold as a pre-foreclosure property.
Recently, Fannie Mae and Freddie Mac announced new guidelines to take effect in June requiring servicers to respond within 30 days after receiving a short sale offer or a borrower application. Bank of America recently announced that its providing a decision on a short sale offer in 20 days.
In terms of pricing, Fannie Mae, Freddie Mac, and FHA sold homes for the least amount in January 2012, averaging $128,642, a drop from year ago prices in January 2011 when they averaged $160,982. Deutsche Bank’s average price was $132,996, followed by Sun Trust Banks ($144,024), and CitiGroup ($148,411), and PNC Financial Group Inc ($149,332). Bank of America Wells Fargo were the bottom two on the top 10 list, averaging $158,632 and $167,371, respectively, for January 2012.
As for the number of short sales, Bank of America completed the most in January 2012, with 5,276, followed by Chase (2,967), Wells Fargo (2,788), MERS (1,429), and Bank of New York Mellon (1,401).
As time is passing, more and more market participants have begun to accept the reality that housing really is done.
The deflationary washout is coming.
http://www.bloomberg.com/news/2012-04-17/-explosion-in-student-debt-drags-down-housing-chart-of-the-day.html
The move up market is already dead, and if first-time buyers are too burdened with debt, they won’t be buying much either. I suspect we will see enormous pressure to recycle the Ponzis. We know they want to buy homes.
Student debt is much worse Federal SL are Non-forgivable and have no squatter’s right to free house and free RE-tax.
How long can the govt hold up house prices? We have inflation on necessities — check out the up pricing and down sizing of food at your local market. Same goes for auto parts, insurance, used cars, etc.
Only new car prices have affordability factor in with one/two month payment down $500, and low interest rates. Jack up the car prices to pay for all the future non-payers who are driving a Mercedes to their job a Jack-in-the Box and McD. Remember, there were 10,000 new jobs created there.
I think of the two options you presented, #1, eliminating squatters’ benefits for loan owners will be the long-term most effective solution to correcting our societal entitlement mentality. I don’t think providing protections for renters does us as a society any good, same as skewing the system and providing extra benefits to loan owners on housing properties does far more detriment than harm to true free markets. There are plenty of jobs out there for those willing to find one, the real issue is, that people think they are either worth more than the jobs pay and/or they are simply not willing to do the work involved. Most readily available jobs these days are in the service, retail, hospitality and/or restaurant industry, and they are mostly low-wage jobs. And many unemployed folks are unwilling to admit that is all their skill/ability/experience is worth in securing employment.
I say all this as an educated, trained and licensed architect who personally saw the implosion of my entire industry with the housing bubble. Even before the bubble, it was a common lament that architects were underpaid for the work they did, but that’s either a function of architectural businesses not communicating and charging appropriately for the worth of what goods/services they provide, and/or the simple reality that the role of an “architect” simply isn’t as valuable in monetary terms as say, an engineer or attorney would be. Good thing I had enough foresight not to engulf myself in debt and did my homework before college to know the reality of what wages I could expect to earn in future years, so that now I am not in a bad place.
I know a few engineers who became architect partially because of the pay and opening as a license engineer/architect. Other have collected 4% on the entire construction cost and that’s including hiring construction supervisors and contractors. Architect work does take much more work than selling RE and the 3% fee.
There’s a couple of lucrative niches between being a civil engineer employee and an independent architect:
1. civil engineer stamping building plans for a fee
2. engineers who become distributors of technical products.
Both pay more than being an employee, but avoid the brutal business of architecture.
When I was reading your arguments against providing increased benefits to renters (something I agree with), I was surprised to read that coming from a renting architect given how much your field was hit by the collapse of the housing bubble. It was refreshing to read a comment from someone who wasn’t arguing for their own interest.
You and I had very similar experiences in the collapse. I watched land planning evaporate as a means of making a living, and I have watched myself and others in related fields take huge pay cuts and accept their skills are not worth once they thought they were. Like you, I avoided debt, but I admit to creating a series of entitlements that caused me stress to maintain. I’m glad things worked out for you. Better times are ahead for homebuilding related fields.
Thanks, IR. While we all certainly see the world from a bias toward our own experiences, I try to be as objective as possible despite my own personal situation. Hopefully others can take a step back from their own little everyday bubble and see things from a broader perspective. While I would love to be back doing site planning/design and architectural work every day, the frank reality is that there is only so much demand and/or need for the services, and thus, only so many jobs, billable hours and/or wages that will be paid for the work to be done. I made the switch from architecture full-time more than 3 years ago into a completely different industry, franchising a well-known business in the service sector, simply to pay the bills and survive long-term. It is what it is. Knowing the skills/competency/attitude even of many of my prior classmates and/or co-workers at architectural firms, many of them have STILL (by choice) not yet come to grips with the reality that they aren’t worth what they think they are. So they sit on unemployment, and dabble here and there, do jobs under the table, and meagerly subsist, hoping for some mythical big break. I guess the fear of homelessness doesn’t pervade them when they know that next check from EDD will surely come through. But when that doesn’t happen, I guess only then will they begin to be motivated to take the cashier job at Home Depot for $8.50 an hour.
As the post says from newbie2008 above, maybe the A/E combined fees on any new building project nowadays may truly only be worth 4% of actual construction cost. Given the complexity and knowledge necessary for that type of work involved, I’d say that means you can extrapolate the true worth of realtards’ services falling between 0.5-1% of a home purchase price.
“Knowing the skills/competency/attitude even of many of my prior classmates and/or co-workers at architectural firms, many of them have STILL (by choice) not yet come to grips with the reality that they aren’t worth what they think they are. So they sit on unemployment, and dabble here and there, do jobs under the table, and meagerly subsist, hoping for some mythical big break.”
I know far too many people who fit this description. Many of the best and most competent people I know are now working in other fields like you are. I suspect most will go back if things pick up, but right now, trying to make a living in architecture, engineering or construction is very, very difficult.
In 2005 I remember a conversation I had with my neighbor (a loan owner). I was renting an SFH a few doors down. I was complaining about the ridiculous home prices were in the area, and the lack of consideration and inequality in public policy for renters (like me). I’ll never forget my neighbor’s response:
“Well, I think it’s because renters don’t pay taxes like homeowner’s do….”
Oh, so that’s why my pockets were so bursting with cash and why I’m relegated to 3rd class citizenry! It’s because renters don’t pay their landlord’s property taxes!”
“Well, I think it’s because renters don’t pay taxes like homeowner’s do….”
I don’t know what I find more appalling about your former neighbor’s statement, the ignorance or the arrogance?
So if I buy candy from a store, I’m paying the shopkeeper’s property taxes??
A very small piece of the revenue from that piece of candy does go toward the shopkeeper’s property taxes. If he doesn’t sell enough candy to pay the taxes and other bills, he goes out of business.
The connection between renters and the owner’s property taxes is more direct. Property taxes are one of the main expenses of being a landlord, and if the rent is not high enough to cover that expense, the property is not a good investment.
Interesting perceptions. I find the following incredible in-depth study not ducking any hard issues for Orange County, and some real startling facts:
http://www.ocbc.org/wp-content/uploads/Worforce-Indicators-Report-FINAL.pdf
I could highlight some of the most devastating information, but will leave that to each person to reach their own conclusions. Well, I got as far as page 61 and find that page of the greatest interest to would be home buying families or even anyone wanting to settle in Orange County. Also p. 17-19, but all of it is well done.
By and large, though, buyers still get fleeced wholesale by the insane brokerage-financial-appraisal-federal reserve manipulated system, and don’t ever figure out how really to strike even a fair or smart deal, not on a home, a car, a credit card, a mutual fund at low fees or even a mobil phone service or a useable education (or loans). Most homebuyers just hope a new real estate bubble saves them from being hopelessly unable to figure out how to get the best transaction. Come to think on it, that ineptitude in sharp and smart acquisition/lifestyle choice is true of so many who choose a spouse, too, these days (although many more lately figured that out and in frustration, don’t get married).
Thanks for sharing that report.
[…] The fear of homelessness is the basis of our economic system. American’s allow homelessness largely because as a society, we have been unwilling to provide individually controlled private shelter as an entitlement because the fear of homelessness is the essential motivation to get people to work to produce goods and services in our society. Take away this fear, and you create an underclass of dependency: the Welfare State. […]