It used to be that the American Dream meant being able to come to
What does it mean for homeowners now? How have families used their homes (besides for shelter) during the time that lead up to the current crisis? Demos has provided some insight on what is happening with homeowners and why we should be concerned in:
A House of Cards: Refinancing the American Dream. Borrowing to Make Ends Meet
I want to look at a couple of the highlights and share why I think there may be some concerns.
From 1973 to 2004 homeowner equity fell from 68.3% to 55%. The number of people in homes was up, but they owned less as a whole. The real scary thing is the market had not bottomed out yet. Where is our equity at now?
Where did the equity go when times were good? From 2001 to 2005 alone households cashed out $715 billion dollars in home equity. 51% of who pulled money used some/all of it to pay for other debts, and 25% used it to pay for consumer purchases.
So what? People pulled money out of their homes to pay off credit card debt or buy a car. Thats a good thing, right? They pay less in interest on a home equity loan than they would with a credit card or car loan, so what is the big deal?
Well, its not just falling equity.....from 1998 to 2004 the average credit card debt held by households increased from $2,768 to $5,129. Our savings rate decreased, to near nothing, and is at the lowest it has been since the great depression.
Surely these numbers reflect young people who bought into home when they couldn't really afford it and had to put money on a credit card to make ends meet. But the older generation, those getting ready to retire or already retired, they are not in the same boat. Right? Well, on average people over 65 only have $4,906 in credit card debt, a bit below our overall average noted above. The real concern? While the overall average increased roughly 85%, the average for elderly increased 194% over the same time frame.
Dropping property values may be a boon to elderly trying to pay rising taxes, but it certainly does them no favors if they were hoping to use a reverse mortgage to make ends meet. Higher health care costs, more debt (as evidenced by rising credit balances), and likely depleted retirement funds from the tanking market may be placing our elderly at greater risks to make ends meet.
The elderly to be are at risk as well. Baby boomers lead the pack in refinancing their homes and undercutting their equity. As they near retirement not only will they face high health care costs and depleted retirement accounts, they will probably still have a house payment. If they truly retire, and their income goes down accordingly, how exactly do they plan to make ends meet?
While the government discusses bailing companies out and dithers over what to do with homes in foreclosure there is little discussion over the only slightly more distant future. Give the economy a couple of years to recover (and time for Alt A, interest only, and ARM loans to default) and they seem to think we will see the silver lining on the clouds. Maybe. If we don't prepare households to utilize their homes wisely and manage their debt payments we may find storm still going strong.
Demos isn't quiet about what they think should be done. I am not saying I completely agree with all of their suggestions, but here is the gist:
Enact a Borrower’s Security Act: limiting interest rates and fees on credit cards. (Still very relevant, could have a big impact on struggling families)
Maintain Existing Bankruptcy Laws: They were up for review. The new legislation is a bit tighter, and better (in my opinion). Demos would have liked to have seen it remain the same.
Address Real Estate Practices: Fight appraisal fraud (Better late than never, though two years ago would have been a good start)
It will be interesting to see what the new administration does. Hopefully Obama will at least consider some of these issues. Whether we help families now, or let them default/declare bankruptcy later, one thing is for sure: taxpayers will continue to foot the bill. Stronger polices for families in financial distress may be the order of the day.
Good start, Lucas. You may want to follow Marci's blog, as she too is interested in financial issues with respect to feelings of entitlement to "have it all and have it now."
ReplyDeleteThe debt issue stretches far beyond housing, as you so rightly have pointed out. I am saddened, but not entirely surprised, to hear that my generation is so far in debt. Many of them have bought into the same mentality as their younger counterparts [have it all, now].
I prefer owning less of a home than I can afford so that I have money to do other things. My husband shares this value, and that's part of how we can travel as much as we have been doing in the past few years. Some of what you've written about the housing crisis sounds very dire.
Wow! Lucas I really enjoyed your post! It is discouraging to read but in opinion your synopsis of the situation is right on. I have actually watched friends and relatives (from the baby boomer generation and from my generation) who strap themselves down with payments that they really can't afford and then are stuck in a horrible cycle of refinancing and having vague hopes that "things improve" Hopefully we all get wiser and are able to pull ourselves out of this mess. I am interested to see what (if anything) happens with this new President. Well keep up the fabulous blogging!
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ReplyDeletePractical suggestions are what is really needed, and you offer them (fighting appraisal fraud, leaving bankruptcy law alone, etc). When will people begin making the hard decisions instead of simply looking for the easier, expedient "solution," which really solves nothing. It actually leads to greater insolvency.
ReplyDeleteI don't know a lot about this, but like Liz, I too have family and friends who are way deep into debt and are doing many of the things you addressed. I think we all secretly hope that the new president and administration can "fix" what has been happening. But I wonder if the only real way to "fix" this is for society to begin changing the way we view and approach money. Certainly, policy can curb this but it seems like a very personal thing. As a society we need to be more responsible.
ReplyDeleteKathy: The have it all now mentality is a tough one to deal with. Can we really use policy to encourage families to save instead of buying everything on credit? The government has made some attempts, ala IDA accounts, but on the whole not much has happened here. I think you are wise not to dip into your home, then again from the post you probably figured that ;). When you are married it really does take two. Some close friends of mine have a home they have refinanced (and cashed the equity out of) several times now. The husband wasn't too keen on doing this, but to keep the peace with his wife agreed to it. They are now nearing retirement and the home still has a good 15 years to go. The credit card debt they paid off is back up to nearly the same level and they have little to show for it, much of it spending by the wife. The lack of shared goals, and inability to communicate about it, will hurt them financially for years.
ReplyDeleteLiz: I also will be interested in what Obama does. There is more talk of another stimulus package, though the impact that will have is dubious (makes for great politics though ;). Hopefully he is willing to jump in and address some of the issues, though I confess I have some reservations about some of the choices he is making for his cabinet, for the federal reserve, etc.
Paul: There is indeed no magic wand. This is actually one of my concerns right now, that households will hold off doing something about the situation in hopes that the new president will do something to save them instead.
Patricia: I think you are spot on. The fix required is a paradigm shift. The question is, can a government that is mired in debt help through policy to encourage the change? Will people trust messages of how important it is to be debt free from this institution?