Friday, August 10, 2007

They Own You Society

I know I am harping on another financial issue. I will try to get back to social, constitutional, and foreign issues soon. The big news story of the week has been the wild ride and downward trend of the stock market. I mean besides a couple of illegal immigrants trapped in a coal mine, and the Illegal immigrant that rapped and murdered a mother and daughter. Besides that there was the stock market. The main catalyst for this downturn is results of the policies know as the "ownership Society". You can read one of many articles that support this statement here.

The "ownership society" policies were supposed to be implemented so that poor and middle class people would find it earlier to own their own houses. The problem is that they didn't own them because they couldn't afford them in the first place. So, loaning them money to buy a house only meant that the company holding the loan "owned the house". The "buyers" were just renting until some major financial downturn happened. If anything it encouraged people to sell themselves even deeper into servitude to the wealthy. Either they worked harder and longer with less benefits, or they gave up. Then they would have to give the house back and often be worse off for it. I don't just mean worse off financially. (If there was a sub title of this blog it would have to be "full impact studies"). In their struggle to keep their house, they spent less time with their family, friends, education, and entertainment. In other words, they spent less time being free.


The last 6 years have had two diametrically opposed forces acting on the system. While the "Home Ownership" policy has been pushing money into the economy through loans, the job market has remained unstable and the middle class has been diminishing.

This is one domestic issue that The Bush administration can not run from. That is their policy of an "Ownership Society". Here is one straight from whitehouse.gov. While the concept is admirable, the implementation is a demonstration of the incompetence that has plagued this administration. It is just another example supporting a policy with out brainstorming the full impact of their actions.

What were these "impacts" you ask? More money was being turned into credit. Debt is money that doesn’t do any real work for the economy. When I give you a loan, that money is locked up until the debt is paid. I can't spend the money because you have to give it back to me. You can't spend the money because you don't have it yet. By "the money" I am not talking about the cost of the house paid to the previous owner. I am talking about the interest. Interest on a home line can often be equal to the actual cost of the house.


We kept hearing a few years ago about this "housing bubble". The experts kept trying to predict when it was "going to pop". I wondered what the hell they were talking about. A look in the local paper every Thursday and you could see the bubble already had a whole in it. It wasn't popping, but rather deflating. On Thursdays, our local rag listed two full pages of sheriff’s auctions. It is true, people weren't selling their houses for less then they were worth. Everybody was told "investing in your own house is guaranteed to be worth later". Many of them never got the chance to sell their house. They lost them to the bank long before they could sell them. Houses on the sheriff’s auctions start at 2/3rds the tax appraised cost. This is often 15 to 20% less then the market rate. This practice effectively dropped the price of the house 1/3rd%. Now it is so bad here that there are 12 houses for sale on the 2 square miles of my block. 9 of them have been for sale for more then 2.5 years.

Many people I know were sucked into the allure of a bigger and better house with the reduced interest rates and easy to get mortgages. Many bought their latest dream home with out having their first home sold. Many have struggled to pay the mortgage, taxes, and utilities on both houses and ended up selling at a loss.

As a personal example of why this was such a narrow sited situation, I offer my own house buying story. When my, at that time fiancé, and myself decided it was that special time in our relationship. It was time to buy a house. At that time in our lives we were making a combined total of about $44,000 p/y. I had explained to her that we would have to look for a house around $60,000 to $70,000. Then we went to get "pre-approved" through one of the many lenders that had flooded the market in the recent years. They cleared us for $120,000. My wife saw visions of a mansion on the lake with horses and a white picket fence. I know that doesn't make sense, neither does it make sense we could afford a $1000 a month house payment. That is the point.



That $44 thousand was before taxes. On average we only brought home about $1,500. With a house payment, meager groceries, really cheap beer, vodka, and whisky we would have walked that thin line of financial catastrophe. Some months we would have won some we would have had to charge more and pay the minimum balance at the end of the month. We ended up buying a house for $80,000. As it was we were barely making the bills. Had we bought a house for $120,000 we would have been just one incident away from loosing it all. That incident came only 6 months after buying the house. I was laid off from my job. It would take two years, something like 2000 resumes, and 50 interviews before I found solid work. I stopped following the finances during that period of time. We are still in the whole as a result. If we had taken the full amount of the money, we would have had to have gone bankrupt. I, fortunately, am the cheapest man alive. Most couples would have jumped on the offer of greater credit, and a better house.

That brings me to the second part of that equation. The diminishing job market. In this same area we have seen high paying; labor intensive, low skilled jobs evaporate. Employers such as Ford, the steel mill, Goodyear, and all the subsidiary industries related to these major contributors have all reduced or completely closed up the shops around here. When that happened, you have people who were used to making 60, 70, or even $80,000 a year for the equivalent of putting lug nuts on a tire. They had those jobs for 10 or 15 years. All of the sudden they get laid off and they have no transferable skills. What they do have is a house payment, car payments, and other bills made while they were making more money. This is what is known as, under employment. That is when you are forced to take a job for less then the market had previously said you were worth to it. With no way to make that kind of money in their current state, they loose these possessions. This is epically hard for a labor force who have not had to enhance their education, intuition, or occupational direction since leaving high school.

I guess what I am saying is that an ownership society is about as realistic as a democracy in Iraq. The idea is great. It is the kind of admirable concept you might make a kids cartoon about. However, if you think that you can buy a home for $120,000 plus taxes, upkeep, utilities, insurance, and general maintenance on $44,000 a year, then you need financial education realignment. In reality your payback obligation is more like $240,000. That means if you put your entire paycheck into the house every month, and did not eat, sleep, or use its utilities, you would require 6 years to pay it back. That translates to really meaning 20% of your families income has to go just to the house as a structure. Add your transportation, food, education, and entertainment what have you got left?

Mark my words here. I am saying it before anybody else has acknowledged the futility. People must live somewhere. As all of these families loose their houses, the demand is going to drive up the cost to rent. You will find previously well intentioned (financially speaking) families finding it hard to pay the rent. The bright side is that there is still plenty of supply of houses. Renting is a more market immediate adjusting product. In other words, when a landlord finds that his renters won't or can't pay their rent time after time, he will be forced to consider his profit margin.


The landlords are another Issue. Many of them are people lured with the promise of wealth beyond their dreams into “flipping houses.” They are both victims and perpetrators in the current problem. They are not business people yet they will have to be landlords to survive.


There should be some attention paid to your economy when the country's 2 highest paid CEO's are Thomas J. Fitzpatrick and Richard D. Fairbank. They are heads of Sallie Mae and Capital One respectfully. Both are lending corporations.


Here is where I get to use a variation of my favorite quote. For those of you who work part time at Wal-Mart and hope that will one day lead to you buying a house.



You can "Hope" in one hand and crap in the other. Tell me which one
fills up first.
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