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Evidence cited earlier also suggests that homeownership may not be a wise decision for every person that qualifies for credit, which suggests a more measured, even cautious, approach to homeownership-boosting initiatives than often exists.
What about all the great "intangible benefits" of homeownership? (e.g. "preserving communities", "giving people a stake", "building wealth", "stability") I thought all those things were supposed to make up for the fact that buying costs more than renting?
What am I missing?
What about all the great "intangible benefits" of homeownership? (e.g. "preserving communities", "giving people a stake", "building wealth", "stability") I thought all those things were supposed to make up for the fact that buying costs more than renting?
Well, I might start by suggesting that part of what we're missing is a better calculation of which individuals carry the costs and the risks of the social benefits. For instance, that "preserving communities" and "giving stakes" thing so often boils down to asking the residents of a neighborhood to step in and buy out the absentee landlords who either couldn't make it work, from a much stronger financial position, or who had already wrung the "equity building" out of the place, leaving the "renewal" costs and risks (read maintenance, repair, and deconversion) to be shouldered by individual homeowners. In any case, that whole story gets amusing in the not-actually-funny way when it turns out that, as was recently reported, subprime lenders won't lend on old rowhouses in an urban neighborhood, but they'll gladly put you into some overpriced new SFD in a far-out suburb that will force you to commute 70 miles a day to work.
The appeal to "wealth building" in this context is just begging the question, as is "stability" in the context of moveable employment.
If we are just now realizing that making home loans to borrowers who can barely afford the payments on the house they are purchasing and don't have a few months of reserves in the bank, I throw in the towel in disgust and walk away from the fight.
What's being described in this study are the effects of predatory lending, which is a known and studied phenomenon.
I have to disagree with maxed out moma here a bit. I would say that it is foolish for a first time borrower to have several month expenses in reserve at the time that they buy. Since the alternative is to use that money as part of their downpayment, that reserve is essentially borrowed money. It makes more sense to use access to credit for emergencies in the first year or so of ownership. The alternative is to have a higher level of mortgage debt on the off chance that some emergency needing cash will be needed.
The problem is people who sign up for payments so high that they aren't building up a cushion. The idea was that somehow appreciation would save you. If you can't afford to save some money every month and pay the mortgage, you really can't afford the mortgage. Yes, theoreticly the same principle applies to monthly savings, any money that you save every month could be used to instead pay down mortgage debt, but there is a difference between relying on credit in case of emergencies for a short period of time and relying on perpetualy expanding credit.
Jim - it's the credit that tips them over. Without a reserve they can be forced to go payday/title pawn for an expense like a car repair, or pay 30% on credit cards. Paradoxically, the battle for most subprime households is to avoid credit for any short-term purchase. They simply cannot afford it. Without two months in reserves you do get a lot of early defaults. A lot of traditional "access" credit programs take two months payments up front for that very reason.
Fraud: http://www.mari-inc.com/pdfs/mba/MBA9thCaseRpt.pdf
jim a, I would normally counsel a first-time homebuyer with a stable employment history to use anything more than 2-3 months of reserves as down payment, but I would never counsel a borrower to put all reserves into the property. Many, many years' worth of mortgage performance data shows that there is a significant increase in early delinquencies once you get under 2 months' PITI reserves. We've been ignoring that traditional rule a lot lately, and we also have a lot more early delinquencies lately.
We aren't talking about borrowers who have substantial reserves that could make a huge difference to the loan amount/monthly payment. We're also not talking about borrowers, as MOM notes, who have access to the cheapest consumer credit.
As a side note, I'm not even sure you can get many apartments these days without at least modest reserves.
It would seem that "the vast majority of lower-income households are managing credit just fine" is contradicted by "27 percent of lower-income families are now paying more than 40 percent of their income on debt payments".
When my wife and I were starting out in the early 90's, we couldn't get any credit at all, let alone a mortgage, and we made over $34,000 a year combined, lived in a cheap apartment ($550/mo), and had a car that was paid for. We ended up having to get a secured credit card for $500 in order to build up a credit history first for several years before anyone would even consider giving us credit.
My question is, were there regulatory changes that ushered this new era of expensive, but easy to access, credit for lower-income folks ? Or did the credit-card and mortgage companies just figure out that they could simply get away with pushing the risk back onto the lower-income folks with extremely high rates and fees ? To me, this is the textbook definition of predatory lending - dangle access to money and items that are years away (or never) to someone, knowing that they'll bite because a) it is human nature to want things now instead of later, and b) you know that they don't quite understand the small print involved in the transaction.
anotherajh, according to Brookings only 55% of bottom-quartile families have debt. So 45% are debt-free, and 28% have debt payments of less than 40% of income. Thus 27% have unsustainable debt service. I don't know why you couldn't say that 73% are managing credit just fine. I personally rather like the Brookings' authors insistence that one way to manage credit is to refrain from using it when it is not financially healthy for you to do so. If only the rest of the world would agree!
OT, But it's Saturday. Aren't we supposed to be Rock-Blogging?
In ancient world the debtor who can't repay his debt was sold into slavery. Modern world allows you to make very costly mistakes and lose your life savings in one transaction.
Damn! I forgot about Saturday Rock Blogging!
Well, now that we've wasted time on a serious data-filled think tank paper, let's get on with it . . . hang on a minute.
What constitutes a debt payment?
Lets say I make $4000/month and pay $1500/month in rent and I on average spend the other $2500 on consumption usually by credit card. If I pay off the balance every month is that considered a debt payment? What about if I spend an extra $1000 one month and am now carrying a $1000 balance month to month. Does that convert the whole $2500 payment each month to debt maintenance?
Paul - The way I have heard it advised, if you charge everything to a card and then pay it off every month (to get the points, etc.), pay it off before your statement close date, so that it shows up as a -0- balance. That way it won't show as a debt payment when you apply for a mtg.
Ahhh Tanta,
have you ever pissed off the New York AG?
New York State Subpoenas Appraiser, Broker in Probe (Update3) - Bloomberg.com
Well I don't think that 73% constitutes a "vast majority," and I don't think that debt payments constituting 39% of income are "managed" particularly well.
What constitutes a debt payment?
For the purposes of things like this article, or lenders calculating DTI, it is the minimum required payment on a revolving line, or the stated required payment on an installment loan that is sufficient to be counted as "paid as agreed." So if you pay off your balance every month, you are paying more than agreed (unless it's an AmEx). So these folks have 40%+ debt service including minimum allowed payments.
have you ever pissed off the New York AG?
I don't think so, but you know me. It wouldn't be for lack of trying.
I skimmed the report, and I really have to wonder what they think they were accomplishing. I'm going to be all over the map here, but I wanted to get some thoughts out before I get really angry.
While the market in which you're poor makes a tremendous difference into the how and why you have debt the authors really didn't seem to do a whole lot to describe or explain the difference.
One of the things that caught my eye:
Surprisingly, delinquency rates also increase when costs of living drop; in fact, the highest delinquency rates in lower-income markets are in the least expensive areas in the country.
If you've been paying attention to economics/politics in the last 10 or 20 years and you have any logic skills at all that shouldn't be a surprise.
Offshoring of unskilled (i.e. low wage ) labor has been one of the driving forces in lowering the cost of living, if those jobs happen to be the main employer in a sparsely populated (i.e. least expensive) area, then alternative employment simply isn't readily available, and unemployment means delinquency.
While a mortgage is undoubtedly the No. 1 source of new debt, with the possible exception of emergency medical care, transportation almost certainly is second. There's an awful lot to be said about how our transit policies (and it is not a lack of policy, we have the system we set out to build) overburden the poorest Americans.
There have also been some obvious trends, such as the replacement of installment debt with what looks like credit card debt but really isn't that deserve attention as well.
Finally, the snapshot nature of a report like this probably allows a woeful underestimation of the just how widespread these debt issues are.
I have no problem accepting that 27% of the poor had debt burdens greater than 40% of their income. The number could even have been quite similar six months before or six months after, but I would be willing to bet that in that time span there would have been considerable churn in the number.
I would bet that an actual survey of the poor with debt over a three-year period would show a delinquency/default on debt ratio of close to 80% of the pool.
For most people in poverty borrowing comes out of desperation not planning, and as I read somewhere recently, when you want something badly, you're very likely to get it badly.
I wonder whether this study is a little out of date, given the current, very high foreclosure rates in California and Florida--very high housing expense states. Are the people who are loosing houses in the 300-600K range in these states really considered "low income." Traditionally at least, one needs an income at least in the top 10% of the nation to qualify for such loans, even given a good credit rating and some down payment.
My question is, were there regulatory changes that ushered this new era of expensive, but easy to access, credit for lower-income folks ?
Blame the "Greenspan Put".
Once he took the helm of the Fed in 1987, every market hiccup was covered up by flooding the system with liquidity. Normally such policies would've led to inflation (as we're seeing now); however, FCB support, cheap imported goods, outsourcing, and the down side of the commodities cycle compensated.
Bill wrote: Are the people who are loosing houses in the 300-600K range in these states really considered "low income." Traditionally at least, one needs an income at least in the top 10% of the nation to qualify for such loans, even given a good credit rating and some down payment.
Unfortunately, it is not all that rare for people to be buying at 7-8 times income out there. CA's own housing programs often have pushed interest-only loans, etc. That is one reason I was so sure that CA wouldn't pass the state equivalent of the interagency guidance. Their own state programs would be disallowed. This may seem shocking, but it is true.
Tanta,
While the "majority" are handling debt well, my main quibble is with the word "overwhelming". Perhaps I'm being picky, but when I hear "overwhelming majority" it implies a very small minority are having trouble, not over 1/4.
Are the people who are loosing houses in the 300-600K range in these states really considered "low income."
Guess you didn't read the story about the 15K/year strawberry pickers in California (somewhere around Salinas I think) who are losing "their" 700K house to foreclosure.
You're couldn't make up this kind of stuff.
I wonder whether this study is a little out of date
Bill, that's the nature of academic/think tank studies. Secondary data sources are always at best a few months out of date, and one is usually lucky to do even that well.
My question is, were there regulatory changes that ushered this new era of expensive, but easy to access, credit for lower-income folks ?
I want to know, too, ONNA, especially considering that there was some pretense of cleaning up the S+L part of the mortgage industry, at least, just back in the 90s. This Common Cause study offers a few unsurprising hints:
The study continues with the heading, "REP. BOB NEY TO THE RESCUE." I think there's a real story on failed oversight, as there was in the 1980s.
OhNoNotAgain,
The change you're looking for is the repeal of the Glass-Steagall Act.
The median price of a home in sonoma county is now 10x median family income,down from 12x.we have an hourglass economy here,and also the bottom end of the market,the under 600k market,is gone.I ran across a case last week where an hispanic family earning 30k was on title for 3 homes...each costing above $500k,their daughter who became a realtot 3 years ago got them in these homes...and made a nice commission.the daughter is bilingual,the parents are not.there is some family discord at this point...somthing to do with foreclosures.ouch.oh 100% financing on all three homes and an initial FICO of 760.
55% of bottom-quartile families have debt. So 45% are debt-free, and 28% have debt payments of less than 40% of income. Thus 27% have unsustainable debt service. I don't know why you couldn't say that 73% are managing credit just fine.
The bottom half of the bottom quartile make almost no income, and as a result have almost no access to debt, so I don't think it's sensical to say they "manage it just fine", it's just not a part of their lives. I would expect that it is the top half of the quartile that has almost all of the debt. Within this group half (27%/55%) have unsustainable debt burdens, so I wouldn't say that even a simple majority (much less a "vast majority") of low-income debt holders are managing it well.
"Mortgages do substitute for rent, but transaction costs, short holding periods, market downturns, home upkeep costs (i.e., repairing and replacing appliances) and interest-only and other exotic mortgages all can make homeownership a more expensive form of renting."
What an original idea - whouda thunk? Oh yeah, the CalculatedRiskers have only been discussing this, for what?, 2+ yrs now?
All the ink that spills and all the hot air that rises in MSM back n forth - Is there a bubble? Is there not a bubble? Are consumers strained, are they not? Are many mtgs ticking bombs? Etc, etc ad nauseum.
Listen Joe Depot and Susie Target, let me give you a simple metric:
When properties have gone parabolic 2x, 3x, sometimes 5x in just 7 or 8 years AND:
cheap, easy credit enabling buyers to bid up and overpay beyond fundamental value... and their ultimate ability to pay it back.
Seems a pretty simple equation - all the hair-splitting is just so much noise.
When so many (CA) transactions were built on a wobbly foundation of volatile loan terms, fictional income, absurd assumptions, and the greater fool, of course there's going to be blowback. Trends that are unsustainable... don't sustain. What goes up comes down, reversion to the mean, and a lot of people with no chair when the music stops (or no swim trunks when the tide goes out).
One macro thing that nags at me is this:
How can the US' cost structure possibly be maintained?
In other words, there are HUGE amounts of folks in China/India, etc that are just as smart and talented as anyone here who can do the same jobs but at a fraction of the cost... and they're HUNGRY.
So how do we maintain $500k home prices and 5 and 6 figure annual incomes with the inevitable global labor dilution and people who can live well on 1/4 as much and are just as capable?
Seems there's going to have to be a lot of readjustment... unless we're just innovating fools who can maintain an edge and price premium.
Oh yeah, there is that rather advanced and powerful military machine that can get the point across if all else fails. Advantageous globalization benefits at the end of a gun?
CalculatedRiskers - what do you think?
ken, anotherajh, I'm not attempting to defend Brookings' phrasing here. I'm just trying to suggest that the phrase "managing credit" can be as loaded with presuppositions as that business of "home ownership." There is an assuption in play (in the wider world, not necessarily in this comment section) that not having debt, like not owning a home, means ipso facto that you "lost out."
And once again we get that anecdote about the strawberry picker buying the $500M home. This anecdote certainly suggests to me that the mortgage system is broken. It does not, however, suggest to me that either 1) most low-income people are struggling because they bought huge pricy homes, as opposed to any homes at all, or that 2) most of the funny-money mortgage debt is held by low-income borrowers or that 3) prices in the bubbliest markets were driven up mostly by strawberry pickers with a predatory broker.
Brookings is telling us that the lowest-income 25% of households were carrying $481 billion in total (not just mortgage) debt at the time when total mortgage outstandings were just south of $10 trillion. That sample, by the way, will include a significant number of elderly homeowners whose current income is social security.
So in my view there's the issue of the vulnerability of the bottom quartile, and the question of whether homeownership is sustainable there--which includes the question of whether the elderly can keep their homes if they're still making mortgage payments in retirement, an excellent issue for these middle-income middle-aged sorts who are out there taking 30-year or longer loans at age 45. Then there's the question of the extent to which the current run-up in prices and debt loads were primarily driven by the low-income segment.
Until someone presents me with evidence to the contrary, I tend to think that the strawberry pickers's broker (or the broker in Tom Stone's example) are small-time crooks making a few bucks out of the gross "inefficiencies" created at the height of the boom, not the drivers of it in the first place.
CalculatedRiskers - what do you think?
Billygoat - the current arrangement is unsustainable & most here realize it. Unsustainable in that debt can't continue to grow for low income through upper middle income without real income increase in proportion to the debt growth. Upper incomes have seen debt growth too but they HAVE HAD the income growth to offset it (from what I read anyway).
There are some active dissenters who chime in & say its never been better but generally the consensus here is it is broken.
The question as to how it will play out (the failure mode half of 'its broken') is very much in debate... i.e. will the currency 'hold up' & markets 'collapse' to rebalance debt-asset levels (depression scenario)... or will currency collapse so that money supply 'inflates incomes' to payback debt & 'support' assets (inflation scenario)... or some awkward combination of the two (stagflation scenario)?
I tend to currently lean toward inflation but then I am re-reading 'The Black Obelisk' right now... If I get around to re-reading 'Grapes of Wrath'... in honor of doomster in denial's constant chiding... that might change my mind. I'm pretty fickle that way.
Thanks to everyone for the answers to my question. One thing I forgot to mention about my original post, and probably the funniest part, was that we were living in Orlando, FL at the time when no one would give us access to credit, let alone a mortgage.