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Jun 21, 2008

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Joel Gillespie

Ed,

All in all I think that this is bad for the community and bad news for folks generally. But...I have often wondered if owning, at least for some, is overrated from an economic standpoint. Is there an income threshold below which the extra costs associated with home ownership (taxes, upkeep, etc) outweigh the advantages? These costs can be hugely burdensome.

On a positive note, economic downturns seem to be good for my neighborhood. I moved here and bought a house at the pinnacle of the NW housing boom, but in a neighborhood where the houses are small and can appreciate only so much. They are smaller 3BR ranch houses that look a lot alike and can only be improved so much. We've gone from a starter home neighborhood for up and comers, to a destination neighborhood for the more financially marginal, to a large percentage of rentals, to more of a destination neighborhood for retirees and middle age couples. It's interesting.

Appreciation in our neighborhood since 1989 has lagged behind many other parts of the city. But when things get tighter more people look in neighborhoods like this.

Still, too many rentals for my preferences, though less I think than 5 years ago. The trend seems to haver reversed in our neighborhood anyway.

Hope you're having a good day.

Joel


Anthony

"But...I have often wondered if owning, at least for some, is overrated from an economic standpoint. Is there an income threshold below which the extra costs associated with home ownership (taxes, upkeep, etc) outweigh the advantages?"

Absolutely, though the threshold probably isn't really strictly based on income, but rather what percentage of your income you're going to be spending on the mortgage and other costs. A reasonable level I've heard is 25% - if your mortgage payment is much more than 1/4 of your monthly income, you're stretching yourself too thin and should either rent or find a more inexpensive house.

Beelzebubba

mortgage-n. "pledge until death" or "grip until death"... why the infatuation with this morbid activity...and its the american dream?...no wonder we toss and turn in our sleep. I think humans slept better when they were unconsciously aware that movement in their sleep would make predators aware of their location and defenselessness. We must be safer now as we finance 120% of a depreciating asset at the peak of a business cycle. Now, we can toss and turn all night.

David Wharton

Huh. A 1.3% drop seems somehow anticlimactic after all the coverage of the subprime market. The sky is not falling on homeownership, even if it is on Wall Street.

I still agree with Bush that homeownership is generally a good thing, even if he failed at this part of his ownership society initiative:

Simplifying Homebuying and Increasing Education. The President and HUD want to empower homebuyers by simplifying the home buying process so consumers can better understand and benefit from cost savings. The President also wants to expand financial education efforts so that families can understand what they need to do to become homeowners.

Ed Cone

From the article: "The figures, while seemingly modest, reflect a significant shift in national housing trends, housing analysts say, with the notable gains in homeownership achieved under Mr. Bush all but vanishing over the last two years."

I think the idea is that it's a sizable drop relative to the time period involved, the historical nature of the home market, and the trend-reversal represented.

Note also that we're not done yet: ARM resets will be at near-record levels through the summer.

David Wharton

Yes, I read that paragraph, and the rest of the story. The change is "seemingly" modest because, in the context that Times reports have created for it (using words like "hoursing meldown" and "housing crisis") it IS modest. Homeownership is where it was at the end of the Clinton golden years. (Now there's a headline I'd like to see in the Times: "Housing Meltdown Causes Homeownership To Tumble to Low Levels Not Seen Since Clinton Administration."

Spag

You mean there were gains in home ownership under Bush? I thought it has been one big economic depression since 2001, with good things only happening to the rich.

Beelzebubba

At the end of the flight to non dollar assets during the housing mania (2002-2006) 30% of some markets consisted of buyers with no intent of living in the house which was purchased. Houses were a day traded item. This aversion to hold cash and participate in a high cash velocity swindle cannot be compared to true investment. It was a period of malinvestment where Bushdollars were the last thing investors wanted to hold. A similar scenario occurred in the late 1920's and the dot.com bubble of the 1990's. Human spectacles repeat themselves but they have the same victims..humans themselves. More of a farce than a tragedy, but the joke is usually on the same class of pundit worshippers and trend followers.

David Wharton

Which I guess helps to explain, Beelzebubba, why so few actual homeowners have been affected by the subprime investment problems.

Ed Cone

Right, DW -- no progress on homeownership in eight years, and a financial meltdown to boot. And it's not over yet.

Not sure how you spin that as no big deal, but I guess it's good for you and your family that you can joke about it.

Beelzebuba

Tell that to the families, investors and pensioners whose retirement portfolio contained BSC and other financial index equities which have lost 70% of its value. Home foreclosures are merely the fever on this malignant epidemic. Add that to a debased dollar used to make a payment on a depreciating asset that has been borrowed against to hold those equities and you have the economic farce of Bushonomics. When Bush was bragging about record home ownership, many knew it was too late to run for cover. "Home Sweet Debt" "Take Me Debt, Country Road" "Debt is Where the Heart Is" "There Is No Place Like Debt" "E.T.Phone Debt" just does't have the same ring to it, but a Plundercrat pundit slips it in and everyone sings along and some will order the sheet music. If a chimp raised in captivity or a human toddler has a serpent thrown at its feet, both will instinctively retract. If a cocked and loaded pistol is placed in front of both, the innocuous appearing device will probably find its way into their inquiring mouths. The Creature from Jekyll Island and its enabler, the Congress of the US, has citizens sticking their tongue as far as they can down the cold steel device, then riding around with the names of Congressmen on the bumpers of their depreciating 4-wheeled asset, of which they financed 120%. Mission Accomplished.

Jim Caserta

The housing crisis is not just 'subprime'. 22 million homes were bought between 2005-2007, during the peak and an estimated 10 million homeowners owe more on their mortgage than their homes are worth [ref]. Is that 'so few actual homeowners'? The problems are most noticeable in FL and CA, and having family in south FL, I get second hand insight into what's going on. While there is much less visible impact here, I did drive through a neighborhood of 1-2 year old homes that had 3 auctions scheduled for the same weekend. It is often a much better financially to rent as opposed to buy, and it is a tragedy that a housing crisis was needed to really drive this point home. I think the incentives to buy as opposed to rent should be reexamined.

David Wharton

Ed, it's you (and the Times) who are trying to spin a modest reduction in homeownership as something greater than it is. As I said, the sky is not falling on homeownership, even though it might be on Wall Street.

Nobody's making fun of people who have lost retirement money in the markets or equity in their homes -- a group that includes me -- but it's always appropriate to make fun of the Times, and I'll continue to enjoy my cakes and ale at its expense, no matter what Malvolio says.

Spag

When Obama becomes President, all of these problems will miraculously go away just like all of our troops were pulled out of Iraq when the Democrats took control of Congress in 2006.

I have many problems with Bush's economic policy other than tax cuts, but let's stick to the truth instead of political exaggerations. Bush didn't start or cause the subprime bust and as David points out that was only a part of the market and not all of it is in default.

Perhaps we should blame global warming (which will also go away when Obama is elected President) for the problems.

Jim Rosenberg

Has data been released on the distribution of loans in default or under stress? It would surprise me if the those living on the Rent/Own Line were the driving force in the subprime meltdown. It seems more likely to me that the biggest driver was the middle class buying too much house too soon. I think the interesting untold story here is what a colossal failure of corporate underwriting and risk management this has been. These are precisely the bets these institutions are created and operated to take. I'm angrier as a shareholder than a citizen.

David Wharton

JC, do you know where Krugman got that 10 million number? He's frequently wrong. And do you know if those 10 million are owner-occupied dwellings, or investment properties? The census numbers are based on owner-occupied homes.

Ed Cone

DW, to blithely label this "a modest reduction in homeownership" is to misunderstand the fundamentals of the homeownership market. Going backwards eight years on ownership is a big damn deal, and it's not over yet. The decline in ownership also needs to be seen in the larger context, which includes declining home values and the frozen housing market. The implications of the whole thing for the larger economy are far-reaching and also unfinished.

To cast this as simply tweaking the NYT is to ignore the volumes of data from the government, the media, and the market itself.

Spag

"Going backwards eight years on ownership is a big damn deal". No it's not. The percentages of homeownership have been between 63% and 69% since 1960. The norm seems to be between 64-66%, going back to the norm isn't a "big damn deal" when considering that we probably shouldn't have gone too far above it in the first place. Staying above the norm artificially would have been the "big damn deal".

jimcaserta

DW - the 10mil is probably an estimate from # of mortgages in certain markets, % put down, and how far those markets have fallen on average. Op-eds don't get referenced well. Not all those people will default, but it is a significant detriment to moving. The problem I see is that younger people should tend towards renting (less financial resources and tend to be more mobile), while older people should tend towards owning. The US is trending older, so if you're 55-65 and moved between 2005-2006, you could have vaporized a good chunk of your retirement. Also, simply having your name on a mortgage doesn't mean you really 'own' your home, you need to maintain your side of the deal. The more worrying trend for me was that average equity in homes was actually declining as home prices were increasing - the product of 100% financing and overly optimistic home equity loan withdrawals.

David Wharton

JC, thanks, good info. Krugman's piece implies that declining homeownership is probably a good thing, and I find a certain irony in that, since the most recent, relatively low levels of homeownership were under Reagan and Bush I.

Ed: "To cast this as simply tweaking the NYT ..." I didn't do that.

Jim Caserta

I found an actual report on housing with one (at least) interesting related statistic. Home ownership peaked in 2004, and the report leads me to believe that people were beginning to get priced out. Rising prices might have been good for those who already owned, but were terrible for those buying between 2005-2007.

Also, in 2005/2006, roughly 20% of all mortgage originations were either interest-only, or payment-option (increasing loan balance). A lot of those will end up going bad, and it will probably take the rest of 2008 and a lot of 2009 to work through those.

With the 400 so people recently arrested by the FBI and the two hedge fund managers arrested there were criminal activities going on which were contributing to the problem.

cmf

In this post, Greensboro Housing Coalition has links to some local stats and maps about foreclosures that may be of interest.

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