There is a lot of wisdom in these common voices. But, it does not address the question of whether it is possible to significantly expand home ownership? Will we always fail, always throw ourselves into a great depression every time we try?
The answer may lie in our recent experiences and even our experiences of the 1920's and 1930's. Perhaps our entire approach to home ownership is wrong.
In fact, if you think about it, our long-established way of buying and selling homes -- and home financing -- is extremely impractical and not very liquid. Every time a family wants to move into a new home -- move for purposes of job or school -- a lot of events must fall into place at just the right time. The family must have a buyer for the present home, and they must have found a home they truly want. They must also be able to finance the transition and they have to get an adequate selling price and affordable buying price. On top of that, most transactions come with a 10% transaction load (6% for the realtor and 4% for closing costs). Under these conditions, it is actually a wonder that we have as many home transactions as we do!
An even closer look further reveals the ridiculous nature of home financing. First, a loan is based on some appraised value of the property. The loan is secured by the home itself. But, payments are based on the income of the individual. Except for independently wealthy individuals, who can guarantee that their income will be consistent every month over a thirty year period? And, when a prudent home owner sees a coming drop in income, that is the very time when the costs to downsize a home skyrocket. The current home financing system is tailored not to the general population, but only to the lucky and the better off.
That's what makes our desire to give home ownership to everyone so interesting. Those who rent, rather than own, are actually making economically wise and prudent decisions. They are financing shelter in a way that matches their expectations of future income. The system itself is designed to limit the proportion of the population who should own homes.
So, we have two basic problems with American home financing. One, it assumes a long-term steady income of the purchaser, for periods up to thirty years. Two, it ties the financing to a particular piece of property, making it difficult for the purchaser to resize. Further, there is a 10% skim built into the system every time a property changes hands.
Elimination of these two (or even three) problems will go a long way towards some Great Society dream of giving everyone a chance at home ownership. Until we decouple home financing from a fixed rate of equity repayment, and decouple financing from the actual piece of property, the American method of home financing will only serve a small portion of the population. It will dis-serve the rest of the population.
Worse yet, until this issue is squarely addressed, any attempts to expand home ownership will put this country, and the world, at repeated risks of great depression.
(c) 2008 Knobloch. All rights reserved. Contact for publication permission. http://www.charlesknobloch.blogspot.com/
Posts
No comments:
Post a Comment