Housing--Who Can Really Afford One?

The kid next door wants to build a house. I call him “kid” because I’ve known him since he was tiny. He’s actually almost twenty-three, has a good job—secure as a five year government contract can make it, owns a piece of land, and has thousands in the bank.
The contractor is raring to go, but the kid cannot find a loan. Two years ago, with less seniority and cash, his brother built on the land next to his at a very favorable cost. (Contractors around here will build for around cost, just to keep busy.) The same contractor is ready to build—but no loan.
Things around here seem to have gotten worse since the Paulson bailout. Last May and June, I watched five houses near me sell within weeks. I almost said to myself, “What real estate crisis?” Nothing has moved since—and I walk, look, ask and watch.
A fellow near me took a job in Florida last September. His house stands empty and for sale—there’s no sign in the snow that anybody has driven up to look at it. (I’m sure he’s sell a house that he’s a thousand miles away from on very favorable terms if you want to buy it—it’s only two years old.) A group of three houses, one to four years old, stand for sale a block away. Another elderly man who wants to move into assisted living has had a sign up since summer, just around the block.
We certainly aren’t out of the real estate woods yet. By now it’s so dark under the trees, I suspect some folks can’t even see the path any more. If the tax assessor tells you your house is worth $180,000 or a quarter of a million, let alone a million, just laugh. It’s very funny money indeed.
Which brings to mind a question: exactly when did the cost of a house become funny money? Three months ago? Three years ago? At the end of the 70’s when housing costs began a violent escalation in places like New York and California? I remember a friend of mine from San Francisco saying to me then, talking about rising California housing prices, “The American dream is dead.”
He was wrong. The dream didn’t die. We stretched higher and farther to reach it—with the help of a lot of foreign loans. When I was a boy, banks felt that no more than 25% of income should go toward housing. Helped by an infusion of foreign cash, we stretched that figure ever higher.
We bought what we couldn’t afford to furnish. So we took second mortgages for that. And vacations, and college educations (when I was in college, a kid could earn his tuition with a summer job), and whatever else became necessary for the good life.
I’m not talking about the working poor and unemployed who were encouraged by zero down and teaser rates to buy expensive housing, I’m talking about middle and even upper middle class folk—like those trying to sell houses in my neighborhood. This is the class that found itself in such trouble last fall that the demographic spread that had given Republicans victory over the past 30 years went up in electoral smoke—in a brief week or two.
Conservatives do make a valid point ONE of the causes of the housing misery is a law that demand banks act like welfare agencies instead of banks. (Note I did not say this was ALL of the cause—like many conservatives do.) Specifically this charge is brought against the Community Reinvestment Act of 1977. It was given teeth in 1994 and, under its provisions, banks were forbidden to redline.
Redlining was the practice of banks looking at the census data for neighborhoods to determine who could afford to pay back a mortgage. Neighborhoods with income and employment levels too low for reasonable loans had red marker lines drawn around them—and no loans were made there.
That sounds mean and discriminatory from the point of view of residents, but it is sane lending from the point of view of banks that are required to get their money back in order to have sufficient cash to stay in business. But the government was having none of it—lend to anyone who is in need, regardless of income level or employment. No more red lines indicating high risk areas.
That may be a worthy cause—but it’s not banking. The government persisted. Between 2004 and 2007, 40% of all housing loans were made by banks that were guaranteed by and under the direction of the CRA. This was called “fair lending”, and mortgage money poured into minority communities.
A worthy goal for a straight out welfare program, no doubt—but it wasn’t banking. Banks were under orders to comply with the “fair lending” programs of the government—and the subprime mortgage was made to order for that kind of compliance.
Some of the banks most heavily involved in “fair lending” were: Freddy Mac, Fannie Mae, Washington Mutual and Countrywide—all basically out of business as independent banking organizations today. But at least they avoided one of the worst consequences of not adhering to “fair lending” guidelines. Bankrupt they may be, but no one is calling them racist.
There are certainly many Americans who need help with decent housing. Requiring private banks to make loans that make no banking sense isn’t the best way. Ask the people who owned stock in some of the institutions that went down under the subprime collapse. Ask the tax payers who will be paying for that collapse for decades to come.
Let’s let charity be charity—and banking be banking. If you think for a moment, you realize they cannot be one and the same thing. (Should we require car companies to give them away to people who cannot afford to buy? How about grocery stores? Or clothing stores?) It can’t work.
But since this housing collapse is by no means limited to ghetto neighborhoods, could it be that there is a more fundamental problem here—one no one is talking about? Is it possible that housing prices had climbed to such a level that NO ONE could really afford one.
Some of the people living near me are hanging on by fingernails. Is it possible that they overbought and over borrowed just like those old redlined neighborhoods did? Have we got several billions in mortgages out there—in all sorts of neighborhoods, under all sorts of mortgage devices—that NO ONE could really afford to pay for no matter how extensively readjusted?
That’s a horrible thought that no one—liberal or conservative—has really addressed yet.