Moderated by Rick Badie
The American Dream has morphed into a nightmare for many metro Atlanta homeowners. Some observers, like the college law professor who writes today, question whether homeownership is all it’s cracked up to be and suggest the nation rethink its quest for owning homes. An executive for a nonprofit credit counseling agency, however, challenges such notions and calls homeownership a solid, long-term financial investment.
Home ownership has risks
By Mechele Dickerson
Many Americans believe that you haven’t achieved the American Dream until you own a home.
For decades, the U.S. has enacted housing policies that advance and heavily subsidize homeownership to make sure people believe the road to riches must end at your own home.
Given the economic realities most Americans currently face, these homeownership beliefs are fundamentally flawed.
Homeownership is said to be a good thing because it makes people thrifty, responsible and financially secure. Homeownership is also said to be good because it forces people to save money to buy a home and then pay for it.
Until recently, homeownership was viewed as a risk-free, low-cost way to increase household and generational wealth because houses always increase in value and always sell for more than the owner owes.
Americans also have been convinced that homeownership is good for communities because homeowners take better care of their homes and are more involved citizens than renters. Having involved citizens ensures neighborhood stability and strengthens communities.
Homeownership can’t make people thrifty or financially secure because too many Americans are financially fragile. Americans face uncertain economic futures because of persistently high unemployment rates.
Recently released Census data shows household income for all but the highest earners continues to fall and is at the lowest since 1995. Most households now have low (or no) savings but rising and crushing consumer debt.
Many homeowners profited handsomely during the crazed housing boom that preceded the current housing crash. This same boom made homeownership unaffordable for other potential owners. So, to make sure cash-strapped people would keep buying homes, federal housing policies encouraged lenders to create “flexible” loan products.
The flexible but high-cost mortgage products looked nothing like the mortgages people used to buy homes in the past. Buyers with bad credit were qualified for loans. These products discouraged savings; many required no down payments. Because borrowers weren’t required to document their income or assets and many loans had artificially low initial (“teaser”) monthly payments, borrowers from all income groups had an incentive to behave irresponsibly and borrow more than they could repay.
When unemployment rates rose, interest rates rose, household income remained low and housing prices plummeted. The housing market crashed. It still hasn’t recovered.
Many homeowners still cannot sell their homes or refinance mortgages because their houses are worth less than what they owe. Lenders who were once eager to help renters buy homes are much less willing to help homeowners stay in those homes.
This has trapped millions of Americans in homes they cannot afford to keep and cannot afford to sell.
Though rarely discussed, the loss of homeownership can create neighborhood instability and harm homeowners who have behaved responsibly. Foreclosures create abandoned and rundown homes. Homes near these rundown properties decrease in value even if the owners of those homes have been financially responsible.
Many homeowners continue to suffer in the current housing crisis as they watch the value of their own homes plummet simply because they live near foreclosed properties.
The reckless pursuit of higher homeownership rates at all costs has caused millions of homeowners to lose decades of accumulated household wealth. Many Americans can no longer afford to be homeowners. Pushing homeownership on them will not fix the economic challenges they face.
For many, homeownership is no longer a good thing. It has become a high-cost gamble that just isn’t worth the risk.
Mechele Dickerson is a University of Texas law professor.
Having your own house is still worth it
By Phil Baldwin
I took an informal poll of my agency’s housing counselors to find out if they would say homeownership is still worthwhile. Without exception, I heard an emphatic “yes!”
Keep in mind, our counselors spend their day speaking with people trying to save their homes from foreclosure.
How do they stay so positive about the benefits of homeownership?
It’s because they are experts at taking a sound, long-term approach to buying a home.
The fact is that people who wait to buy a home until after they’ve done their homework can still benefit from the investment the same way past generations did.
My nonprofit organization conducts monthly workshops in metro Atlanta to prepare people buying their first home for the responsibilities of homeownership. Attendance for these workshops has remained strong.
We advise people to answer a few questions to determine if they are ready to own a home.
Do you plan to stay in the home for at least five years?
Do you have a significant down payment saved?
Can you get a fixed interest rate loan so your payments will be predictable over time?
Do you have enough income to cover expenses that come with ownership, like lawn care and other maintenance?
Once you’ve considered the pragmatic side of homeownership, you can think about other reasons to buy a home. Is it in a neighborhood that’s right for your family? Your goal might also be to find a place where you can live through your retirement years.
Going through this checklist was the normal approach to home buying until the first half of the 2000s. It is still a great way for Americans to build wealth, as they use money they might have paid to someone else to create equity in a place that also keeps the rain off their heads.
But in the early 2000s, a combination of historically easy credit and expansion of exotic financial products lured people with the false promise that the old approach to homeownership was old-fashioned.
Residential real estate was marketed as a viable short-term speculative play. Far too many people gambled on homes, instead of investing in them. And this approach got them into trouble.
Some people seeking our counsel to save their home from foreclosure took out first mortgages for 80 percent of the purchase price and at the same time borrowed the other 20 percent to use as a “down payment.”
Others come to us with interest-only loans that typically require only a monthly interest payment until after five years when the payments jump skyward.
It was never realistic to expect a quick return on a home. People buy homes for emotional reasons too, but they should take the long-term view when it comes to their financial expectations.
Buying a home is a sound addition to your mix of investments and savings that will build your net worth. It has historically been a good hedge against inflation.
I hope some good comes out this painful mortgage crisis. It would amount to a silver lining if people now understand buying a home is not a get-rich-quick scheme. It is a serious life event for most of us, and we need to treat it that way.
Phil Baldwin is president and CEO of CredAbility.