It sucks being ahead of your time

Here's an excerpt from a piece in the New York Times on the mixture of federal policy failures that led to the housing bubble:

Typically, as home prices increase, rental costs rise proportionally. But Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

That was in early 2007. But of course, no one believed this guy, because it was accepted as a truism that owning just had to be cheaper than that "sucker's game" of renting. Econ 101, man! Read the whole thing when you have time--especially the early sections that detail how the unquestioned, blind belief that increasing home ownership was a good thing drove so many policy decisions.

For those more visually oriented, here's a clip of a recent talk given by Peter Wallison of the American Enterprise Institute that has alot of good material on how tax policy--specifically the deductibility of home equity loan interest--led to generally lower levels of equity across the board. What's so striking is that Wallison still can't quite see the forest for the trees--note the standard genuflection to the altar of home ownership that prefaces his otherwise very insightful analysis. He's got all the symptoms down, but he can't bring himself to diagnose the disease.

Here's my Christmas present to everyone--something you won't hear anywhere else: owning a home is what keeps poor and middle class families poor and middle class. For most people, the vaunted "wealth-building" effects are only an illusion, and this will only become more so as lending standards tighten back up to require down payments approaching 20%. Consider this: hardworking family A spends five years accumulating a sizeable down payment. By plowing it into a home, they have just placed that capital into a financial vehicle that pays no interest and generates no dividends. May has well have stuffed that money into a mattress. True, each month, a portion of their mortgage payment then goes toward building more equity ("wealth-building" as the radio mortgage jocks like to call it), but because of the reality of loan amortization, it is pitifully small: on a $100K balance on a 30-year note, it takes more than five years to accumulate even $5K of equity. After ten years, it's barely over $12K.

And let's say family A was lucky--after 10 years, their home appreciated in value. What do they most likely do? What do most families in fact chomp at the bit to do? Yep--use all that equity as a down payment on a bigger house, and begin the whole process over once more, starting again at square one of the business end of the amortization table. By investing all this capital in their home, they have choked themselves off for years from the single most powerful force known to mankind: the power of compound interest. This is what economists call an opportunity cost.

Not to mention that all this time, the family has had no access to the accumulated capital in their "wealth-builder" unless they wanted to borrow against it with a home equity loan. When cash shortages came (as they inevitably do), they would instead likely rely on credit cards. See now why we have such outrageous credit card balances? Sure, we shop too much, but it's also because the average American family carries 60%(!) of their 'wealth' in the equity of their home--in the one place where it can't do them any good when they need it.

Plus, I've been kind here--this whole thing ignores the cost of Home Depot, new furniture and appliances, normal (and abnormal!) repairs, increased commuting costs, etc. The term "money pit" didn't appear out of thin air, you know.

Maybe those petunias and picket fences are worth it to some, and if so, that's great. But the numbers show that it's time for a new-style American dream--hopefully one that's got some hard-nosed analysis worked in there somewhere. Here's to hoping!