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Housing Bubble News, October 16, 2006

ARLINGTON HEIGHTS, IL

By A.B. Dada
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Finally some news on the credit crunch in my area — Chicago. The Chicago Tribune asks “What’s in your wallet?”, the coming credit crunch. Oops.

From the article: According to First American LoanPerformance, interest-only mortgages made up nearly 20 percent of all new loans in the Chicago area in 2005 and 2006, and option mortgages accounted for another 4 to 5 percent. 20% seems small. But then we also see: There also is a significant increase in late mortgage payments among sub-prime borrowers, generally those with credit scores below 680 on a scale of 300 to 850. Nationwide, just over 10 percent of sub-prime borrowers are at least 30 days late on their mortgage payments. 10% are 30 days late (meaning they have gone over 60 days without making a payment). Double oops.

Many people I know are in trouble right now — including a good number who didn’t feel like they were in trouble 3 months ago. A congregational friend just had his wife’s car repo’d, and he’s unsure how he will make his $610 payment on his car this month. He doesn’t even answer his phone anymore because it isn’t a friend who’s calling. So unfortunate.

From Naples News we get an interesting article yesterday, Expensive times for Lee workers. The article has some interesting figures: With three children to support, for Rudy Bustillo and his wife it came down to a choice between having a home or luxuries like eating out and going to the movies.

They chose to have a home. Now they have a $2,100 mortgage to pay from their combined gross monthly income of $4,800 - about $4,200 during the slow summer months. Bustillo, who works as a cook at Skillets in Bonita Springs, leaves his home in Lehigh Acres at 5:10 a.m. and drives 50 minutes one-way and works a second job in bars or restaurants when he can. His wife works in a grocery store. “We can’t pay our bills with just one job - mortgage, car payments, insurance, utilities…,” Bustillo said. “It is hard but we wanted a chance to own our own home. We didn’t want to rent anymore.”

Why is the choice only buy or rent? Since when did society get so confused that owning a home is the best thing to do, and renting is a few steps below it?

I don’t like debt — I’ve hurt my past by taking on debts for things I didn’t really need, and now don’t even want. I’ve sold most of those things, and given away the items I couldn’t sell. I don’t want a big home either — my old 4 bedroom gigantic house was filled with junk just to keep the rooms feeling “homey” so my friends and family could gawk. What a waste.

If I was to do it again, I’d have done one of three things:

1. Buy a home that I could pay off in 10 years or less — preferably 7 years. Still debt, but much easier to swallow. On top of that, use any income above the baseline to pay down the mortgage.

2. Live with family. Why is this bad? Historically, this was how many people bought a home — getting married, living with family, helping reduce the overall costs of living, cooking, cleaning, and socking away that 33% of their gross income that normally goes to pay down today’s mostly interest payment on a 30 year mortgage. In the 5 years that you don’t pay all that interest, you’ll have more than enough for a 20-40% down payment on a small beginner home. Don’t try to eat a 96 ounce steak if you’re never had an 4 ounce one.

3. Live with friends. It sounds embarassing. One of my closest friends and pastor of a congregation I serve did that for a few years — him, his wife, and their 3 children. They lived with friends who had no kids, and they all shared in the responsibilities of maintaining the HOME (not just the house). It worked so well, but interest rates fell and they bought a house. Now more than 60% of their income to goes to keeping that house in shape. Ouch.

We’re so tied up with our jealousy — jealousy over what our friends and family seem to have (but don’t have titles to), jealousy over what we see people living like on TV and jealousy over the fact that we don’t seem to be capable of having those things. Yet I’d venture a guess that 80% of the people you know who have better things than you don’t actually own those things. Leased cars (owned entirely by a bank!), mortgaged homes (owned usually 80-95% by a bank), clothes they won’t pay off for 3-10 years, and vacations that were taken last year but might get paid off next decade: these are not things that someone can say are theirs, they’re things that someone else was kind enough to rent to them at a ridiculously high future burden.

I’ve always felt that Boston would be the first to dissolve in terms of property value, followed by Vegas. Both of these towns aren’t just oversupplied, they’re overtaxed. Buying a $500,000 house with 33% of your future gross income for 30 years might be acceptable to a bank, but have you seen what they’re hitting you for property and income taxes? That’s a huge consideration to make. The Boston Globe has an article titled The homeowner’s day of reckoning which covers more sob stories about people who “didn’t know” even though they did. Excitement breeds desire — excitement not just that you’ll have something “bigger and better,” but excitement that you’ll be a step ahead of all those people around you who don’t have it as good as you do. Excitement that they’ll be the jealous party, that you’ll come out so far ahead because in recent years you’ve heard how much money your friends and family made on their overinvestment.

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