Tuesday, May 17, 2011

I don't know

Seriously, I don't know. I could not tell you if we are nearing the end of the instrument that has made home-ownership attainable and affordable for countless millions of Americans. I can tell you that the house I just purchased, which was built in 1865 or so, sold for $700 around 1890 to a new owner. Adjusted for inflation, I should have just paid around $16,000.

Instead, since housing prices have risen according to a number of factors beyond inflation, it's a safe assumption that I paid a multiple of that. And since I don't have that lying around in my cup holders, I had to get a mortgage. A fixed, 30-year mortgage. Of the kind that this article says is going away.

It was hard to get. It took a long time. Lots of qualifying. Many disclosures. I had to lay out my entire life for the bank, and they got to decide whether that was good enough for them to finance our dream. And we decided that that was an OK trade for getting something that we really wanted.

It was much, much harder to get than the mortgage we took out for the house we bought in 2004. And frankly, it should have been. No one would suggest that enormous mistakes weren't made back then. It's so obvious that it's not worth rehashing further here.

I would just suggest that if you take away the instrument entirely, or make every single borrower put down a huge down payment, or create a system where cash sales become the norm, then we're back in 1890, when about 45% of Americans owned the house they lived in, including those who built it themselves with trees felled on their property. I don't think that's a desirable outcome, both because if we ever want to sell this new house it would be more difficult, and because it moves the goalposts on the American Dream further down the field.

I don't think that home ownership is right for everyone, and I don't think the 30-year mortgage is right for all homeowners. But our example has been modeled successfully all over the world, and it's a pretty valuable tool to abandon. Don't throw the baby out with the bathwater.

1 comment :

Ian said...

I suspect that if they kill Fannie & Freddie and get rid of the mortgage tax rebate (both of which are under serious discussion this year) then home prices will fall fairly violently. Our home prices are currently heavily subsidized by the government, which I wouldn't care so much about if I wasn't looking to buy.

On the other hand, if these shifts happen it'll take a while before people are actually willing to sell their homes at new, reasonable prices. A long-term decline in house prices would probably be good for the country, but people would freak out at their disappearing "wealth", and more banks would fold under pressure from underwater loans.