Who's to blame for the housing "crisis?"

by pittcaleb Email    5138 views

I received the following e-mail from a friend yesterday:

As the falling housing market shakes financial institutions and pummels Americans in an election year, the nation's economic woes have surged to the top of voters' minds. The timely question: To what extent are politicians and regulators at fault?
WSJ Article

I initially thought the text was his own, but it's ripped from the 1st paragraph in the Wall Street Journal article he linked in the message.

Initially I was infuriated, of all people, how could Eric be questioning fault and asking for politician and regulation blame? Has my conservative friend gone liberal on me?

Folks, I do not need or want the government to protect me from myself! Nowhere in the constitution does it say, "Congress shall have the powers to protect its citizenry from making poor financial decisions, and bail them out when appropriate."

Here's is my short and sweet take on the current "housing crisis" - it's two-fold and will touch 2 different hot buttons:

First Blame: You, the consumer
I graduated High School in the late 1980's. At that time, credit was not for everyone. Credit Cards were only issued to people who showed restraint and could 'afford' to use them 'properly.' My father taught me how to use them, when not to use them and all about borrowing and saving money.

In the year that I went to college, all that changed. Credit Cards had gone from something only a select few had to literally a pre-approved application put in your bag every time you went to the college book store! So these college students, my peers, would get cards and think that if someone's willing to lend them $100, $500, $1000 on credit, then they can 'afford' to do it.

At the same time, this loosed credit noose (yeah, it was a noose, wasn't it?) was made available to regular adults. These people actually thought, and said aloud, "hey, if the banks willing to loan me $2,500 on my credit card, then I can afford to buy this XXX and pay them back. They wouldn't lend me the money if I couldn't afford it."

As this first generation raised on easy-credit aged, it made sense that housing loans became easier to get. My first home purchase required 20% down. We only had 10%, so we had to ante up PMI. I paid extra as fast as I could to get 20% equity and drop PMI. In the years that followed though, people were buying houses without even thinking about putting down 20%, not 10%, some only 5% or 1% and a lot of people doing it with "no money down!"

Is it the lender's fault for giving those now facing bankruptcy and foreclosure loans with little or no money down? Is it their fault for writing you a loan that requires 50%, 66%, 75% or more of your monthly income to go towards P & I & T? Yeah, the banks were stupid allowing you to take out a mortgage on a house you shouldn't have been able to afford, but is it their fault you didn't use better judgment and buy smaller or buy less? Is it anti-American to not buy the biggest and best?

Compound on this low interest rates and a re-financing boom of the early 2000's. These very same people who bought their homes with almost no equity, we're now re-financing their homes every few months. They would have a paper-gain of value on their house and re-finance it while taking out the principal in cash to take a vacation, buy a new car or what have you.

We re-financed our mortgage once during this craze, we were stupid not to take advantage of lower interest rates. We took our 30-year fixed-rate mortgage and re-financed it to a 15-year mortgage! Our neighbors/peers took out new 30-year mortgages and used the cash to do something temporary. We looked at them in astonishment as they turned 50 with new 30-year mortgages and we're turning 30 with new 15-year mortgages. The decisions other people were making was un-thinkable to us at the time.

Which brings us to today... While we watched our friends & peers, both educated and uneducated, make choices over the past decade we sat back and observed. Now that we have a "housing crisis" we read each new story of how the banks took advantage of people, that the government wasn't watching our back, who should go to jail and what are they going to to "for me" mentality. I sit back and ask myself why?

Why should anyone do anything? Why can't we simply require people to manage their own finances? I know our community college in MI offered free 1-day courses/lectures on understanding mortgages and borrowing. This stuff is out there. We choose rather to believe others have our best interests in mind when we make a financial decision.

I want to leave with one thing - these cash-out-refinancers, the no-money-down borrowers and the poor-credit sub-prime borrowers - those people are the reason why houses got so expensive in the first place. They're the reason my house cost so freaking darned much! If I have a beef with anyone, it's them, not the banks! Because some half-employed doofus down the street was able to obtain a loan for $500,000 to buy a house and he was willing to plop that money down in my neighborhood meant that I had to bid "against" him to buy the house that I want to buy.

He only wanted to buy a 3-bedroom house with 1.5 baths and since the bank lent him $500,000 to buy it, he spent that much money on the house down the street from me. That means the guy selling me the 4-bedroom with 3 baths and granite counter tops expects much more for the house I want to buy and I end up paying much more for my housing.

In my honest opinion, it's the people who had access to this loose credit who are responsible for the housing "boom" we experienced over the past decade. It was a false boom - it was built on people paying over and above the actual value of real estate simply because they had the money, rather than the property being 'worth' that much. This bubble-up effect meant all housing stock appreciated. That meant I had to pay more for my house.

So yeah, I'm mad. I'm mad because of this housing crisis. I want credit tightened. I want people to rent for a few years like we did. I want people to purchase responsibly and within their means. If this happens, all prices will return to their normal and natural state. We've gone through 25 years of "keeping up with the Jones'" and it's about time we stop doing things just to keep and do things within our means!

Photo Credit: Flickr user pierre_pouliquin (photo)