Home Run: Can it get around the bases

The Utah Legislature recently passed the Home Run grant, administered by Utah Housing Corporation. In short the grant provides $6,000 if you purchase new construction (single family) in the state of Utah. Why are we encouraging them to buy new homes? Well, its because we have hundreds of homes sitting empty from unsustainable building (encouraged by irresponsible financing and real estate speculation). Some are calling the grant the "Clark Ivory Bailout Bill". Lets talk about the good, and the bad.

THE GOOD

Right now we have hundreds of empty new homes. Empty houses are a target for vandalism and theft. The more empty homes there are the greater the risk. Moving them is good.

Contractors are struggling. They have huge loans on these subdivisions that they cannot pay on....because the borrowed planning on selling homes to pay along the way (fairly standard procedure). This could keep some of them from going under and save jobs.

The grant is for anyone buying a new home, not just a first time home buyer. Those who may be ready to move up could do so, and their cheaper affordable homes would become available to families who should be buying those rather than newer more expensive homes.

The grant requires a fixed interest rate 30 year loan.

Income guidelines are pretty loose.....$75k for single, $150k for a couple.

THE BAD

As noted above, some see this as a bailout for builders who overextended themselves. Are we really helping homeowners or are we encouraging them to purchase overpriced homes?

This hurts homeowners who are trying to sell. A family whose home is being foreclosed upon will have an even harder time selling their home, since the an incentive to buy new is essentially a disincentive to buy existing used homes. This is really poor judgment on the part of the legislature, as it increases the risk of foreclosures in Utah.

Why buy new when there are so many more affordable homes out there? My fear is we are once again encouraging potential buyers to look at homes that are out of their price range. Contractors are not the only ones who stand to benefit here. Lenders and realtors are paid commission based on the sales price. If they can get consumers to buy newer more expensive homes, who are we really helping? Is this an incentive for homebuyers or a subsidy for builders, realtors and lenders?

No education requirement for new home buyers. Of course not. That would make sense.

My overall Impression: Not good. The bill seems designed to help lenders, builders, and realtors. It encourages the purchase of newer homes (most of which are more expensive than existing market options) while hurting families that are already struggling. It does NOTHING to address the issue of households in foreclosure and will probably exacerbate the problem. How many families could we have helped with this money? 1,600 grants for new homes...... The amount of help it will provide, cash incentive to borrowers, commission to realtors/lender, bailing out builders, compare to the costs; higher risk of unaffordable loans, money "lost" in higher commissions on higher home sales, and the collateral damage caused by a disincentive to buy existing homes that are in trouble. I touched on the real costs of foreclosure in a prior post, we are talking tens of thousands of dollards (minimum) for each foreclosure, and over a hundred thousand dollars when you consider the collateral damage to credit, surrounding homes, crime etc. Now imagine 1,600 of those homes foreclosing because some one purchased a new home instead. Who is the Utah legislature looking out for, their constituents or an aggressive lobby by real estate professionals? I think the answer is clear.

Home sweet home

It used to be that the American Dream meant being able to come to America, from anywhere, and through hard work achieve your dream, what ever that may be. You could work as whatever, believe whatever, and achieve whatever. Somehow, part of that dream has been redefined to include the house and picket fence.

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.