Bill Virgin: Homeownership has been oversold

Posted by The Tim on March 27th, 2008 at 12:00 PM · 44 Comments

Over at the P-I earlier this week, Bill Virgin chimed in on the housing mess again with yet another well-reasoned column: Homes are good investments, not slot machines or ATMs.

In the great American sport of finger pointing and blame shifting, a new villain has emerged to explain the mortgage-finance crisis.

The fault, it turns out, lies not with incompetent, deceptive lenders, naïve, speculating borrowers, greedy, reckless Wall Streeters, slumbering regulators, bubble-creator Alan Greenspan or all of the above.

Instead, the root cause is something far more fundamental: the American belief in the value of homeownership.

Or so says an emerging theory that argues that the attributes of owning a home have been, pardon the phrase, oversold, and had the U.S. not been so hellbent on getting people to buy, much of the current debacle could have been avoided.

So now is probably a useful time to review some basics about American attitudes toward homeownership, and whether they did, in fact, contribute to the economy-shaking mess we’re now in:

Homeownership is good. Homeownership — for the individual and for society — works.

What’s not so good, and what consequently hasn’t worked, are the methods for encouraging homeownership and the expectations of what ownership would accomplish financially for the buyers.

…
Homeownership was also considered a financial virtue, being one of the few ways average Americans could achieve long-term financial solvency. Once they saved up for a down payment on that starter home, they could use the equity they slowly built up, from their own payments, price appreciation and improvements to the property, to move up to larger or nicer homes, to maybe even — and here’s a novel concept today — to enjoy the income freed up by paying off the mortgage.

Which is about the point in our story where the trouble begins.
…
Eventually the markets will correct, although the price of that correction is likely to be steep in lost jobs, houses, savings and economic health. If our present calamity strips away the excesses and false assumptions, and returns an appreciation of the merits of home ownership, that might be one of the few good things to come out of this.

Bill continues to be one of the few in the local mainstream press that actually seems to get what’s really been going on, and where we’re headed as a result of this mess we’ve gotten ourselves into. As usual, you should read the whole article. Kudos to Bill.

(Bill Virgin, Seattle P-I, 03.24.2008)

Categories: Opinion
Tags: affordability, economy, Financing, Virgin

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44 responses so far ↓

1 Garth // Mar 27, 2008 at 12:38 pm

I think this is realy a function of there not being a well funded counter point to the Realtors™. Whoever the “Feed the pig” people are is the only counterpoint paying to get their message out.
2 Ubersalad // Mar 27, 2008 at 12:42 pm

Home ownership is not a new concept that surfaced within the last 5 years. That itself is not the variable that created this mess.
3 b // Mar 27, 2008 at 12:58 pm

Ubersalad -

Without homeownership so fundamentally tied to the American Dream(TM), I do not think you would have seen so many people rushing to buy now to avoid being priced out forever, the bubble would have never really taken off. Like most bubble-sitters, more first time buyers, etc, would have looked at prices rationally and decided it was not worth it. Instead you had emotional purchasing which was ego driven and not rational in the slightest. This type of purchasing is not limited to homes, but most things also are not priced as many multiples of your yearly income either.
4 Sniglet // Mar 27, 2008 at 1:11 pm

Otherwise, families, neighborhoods, communities and society and the economy as a whole will suffer enormous long-term damage if another casualty of the housing-finance crisis is the belief that homeownership matters. To lose that would be the equivalent of correcting an ill-advised paint job by bulldozing the structure.

I think this is precisely where we are headed. We won’t have hit bottom until there is an outright revulsion of home ownership. We will have hit bottom when accepted wisdom holds that “only fools buy homes”. Society has built up the myth of home-ownership into something far grander than it really is, and we are just beginning the correction of this misconception (i.e. that home ownership is a “good” thing).
5 John // Mar 27, 2008 at 1:16 pm

Renters don’t have sweet American Dream. They have nightmares and wake up in a cold sweat every night
6 Ira Sacharoff // Mar 27, 2008 at 1:18 pm

When the accepted wisdom holds that “only fools buy homes”, then it’s probably the right time to buy…
7 Ubersalad // Mar 27, 2008 at 1:35 pm

Promise of 50-80% appreciation within 1 year and 0 down at affordable monthly payment?

Who would say no? If all of us here can go back to 2002-2003 knowing what the future holds, all of us would be buying and unloading by 2006.
8 Alan // Mar 27, 2008 at 1:44 pm

If I could go back to 2002-2003 knowing what the future holds I would trade options and become uber-rich.

Hell, just a few weeks ago Bear Stearns dropped from $60 to $2 over the course of a few days. You probably could have gotten 100000% (1000x) return in a few days just on that deal.

And then a few days later it went from $2 to $11. There is another 5x return over a few days.

Multiply opportunities like that over the course of a few years and you are talking serious returns.

If you are a real medium, then real estate is for chumps.
9 Ubersalad // Mar 27, 2008 at 2:17 pm

buying options require money, buying RE you don’t. you can buy a house with no money down and come out with cash.
10 TJ_98370 // Mar 27, 2008 at 2:29 pm

Maybe part of the problem is that are too many day traders and speculators -

Real economic growth is created by value-added production. You cannot create real economic growth by trading pieces of paper. We have to relearn that lesson over and over again. We can’t live off imported goods and export nothing. That’s like living off I.O.U.s.

Bob Lutz - General Motors Vice Chairman
11 TJ_98370 // Mar 27, 2008 at 3:02 pm

A bit off topic -

Walking Away From A Get-Rich-Quick Thing

Seattle PI, Heraldnet, Bellingham Herald, Kitsap Sun and others were quoted yesterday on Ben Jones HBB.
12 Orion // Mar 27, 2008 at 3:31 pm

Without homeownership so fundamentally tied to the American Dream(TM), I do not think you would have seen so many people rushing to buy now to avoid being priced out forever, the bubble would have never really taken off. Like most bubble-sitters, more first time buyers, etc, would have looked at prices rationally and decided it was not worth it. Instead you had emotional purchasing which was ego driven and not rational in the slightest. This type of purchasing is not limited to homes, but most things also are not priced as many multiples of your yearly income either.

Exactly, Ubersalad, for an example, look at the Beanie Baby craze several years ago where there was a small bubble in the collector’s prices of those. That only affected a small percentage of the population because most people were rational enough to look at stuffed animals and realize they weren’t worth hundreds of dollars no matter how “collectible” someone thinks they are. Sure there were some “get-rich-quick” morons sucked into sinking their money into overpriced beanie babies, but most people had the emotional distance not to fall for it. That’s not so much the case with real estate, where being a “landowner” has a long history of instilling societal prestige to the individual.
13 Alan // Mar 27, 2008 at 4:08 pm

Options are much more liquid. If you can see the future you want to get in as many profitable transactions as you can. You could make hundreds of profitable trades a day. How long would it take you to buy and sell hundreds of real estate parcels? Transaction costs on options are lower. Rates of return are higher. I’m sticking to my original claim. If I am ever in a position where I can see the future then options are the way to go.

Heck, I’d even go as far as to say options on margin are the way to go.
14 [troll] // Mar 27, 2008 at 4:51 pm

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t’s wrth rptng tht th nly ns flng th crrnt bttm r ppl wh thr ddn’t knw smpl mth r wr jst t &qt;glly&qt; grdy…

t’s LWYS bn n sst t WN hm - f nt NW, whn? n yr nxt lftm?
15 Your Local Realtor(R) // Mar 27, 2008 at 5:00 pm

It’s a great time to buy!
16 Joel // Mar 27, 2008 at 5:03 pm

Rates of return are higher.

If you have any kind of money options are clearly better, but if you literally have zero money, you could’ve made hundreds of thousands in the housing market which you can’t do with options. Your rate of return if you start out with zero and make any money is effectively ERROR: DIVIDE BY ZERO. Which is infinitely more than you could get with options.
17 Alan // Mar 27, 2008 at 5:12 pm

If I can see the future then convincing someone with money to loan me some is easy. You don’t need to be in real estate to do that.
18 wreckingbull // Mar 27, 2008 at 5:13 pm

Wow - people just figured out that, beyond flipping, you could actually live in a home for > 5 years and enjoy it? AMAZING!!! :) Whew, getting out from under this rock feels truly liberating…

Right on cue. Now that the unwinding is happening, here comes the forgot the money, it’s always been about personal enjoyment argument.
19 Michael // Mar 27, 2008 at 5:19 pm

I still see some articles about bad borrowing. NPR had a story about ARMs and how many people are still getting them. I also heard a story on CNN about the new 8 year car loan. Now you can be underwater on both your house and your car. This is just a theory but don’t you think the Fed and administration understand how toxic this type of borrowing can be?

The reason they can’t regulate ARMs in any reasonable way is because that would kill the entire housing market. If a home owner makes a stupid investment your only hope is to find somone willing to make a worse decision to bail them out. If we legislate stupidity out of the mortgage mess then we really don’t have a housing market. We are now in a death cycle of toxic stupidity and any attempt to regulate this stupidity will force our society to pay for it in ways that no one wants to imagine.
20 rose-colored-coolaid // Mar 27, 2008 at 5:19 pm

#16 Your math is sound, but your premise is entirely wrong.

A person can get into options nearly for free, assuming the play far enough outside the money, and in a short enough time frame. Let’s look at Google for an example. To buy an option that closes in 22 days and is near the money, you’ll pay around $18-$23 a contract. You must buy at least 100 contracts at a time, so it’ll cost you $1800-$2300. That’s not such a massive price to get in (not that Google is the way to go, but it’s a name everyone knows).

But let’s say you don’t have a couple thousand. You can instead use your uncanny ability to always predict the future, and make up for it. If you knew GOOG would lose $100 in value during last February (which I believe happened), you could buy a put at $100 below current price. Today, such a put sells for $0.90, and since you have to buy 100 you would be in $90 (plus $10 to make the trade and $10 to sell). Surely you can scrape together $110!?!

But let’s play devils advocate and assume you don’t even have $100. First, you can always drum it up. Just get a credit card, and you can get a cash advance for that amount. Or go get a pay day loan. Regardless, if you can’t find $100, you can’t buy a house anyways. Even with 0% down it costs some money to get into a new house (moving, painting, driving around to look at homes!).

And because of the magic of cumulative returns, you might make 300% on options every month or every week. So Alan is correct that it’s a better investment if you can predict the future than housing…even from 2000-2006.
21 Alan // Mar 27, 2008 at 5:38 pm

Or better yet, Bear Stearns was selling at $60/share the Thursday before it crashed. Say you bought put options at $30 a share. Each option gives you the right to sell one share of Bear Stearns at $30. I’m going to guess that each option sold for $0.05 (maybe someone can look up the actual historic value for me — you might have been able to buy a higher put for a nickel). On the next Monday, Bear Stearns was selling for just under $5/share. At that time each $30 put was worth around $25. If only bought 100 options (the minimum) then you just turned $5 into $2500 in four days. Annualized, that comes out to over a 6000000 % return.

I could get $5 begging at the traffic light.
22 Alan // Mar 27, 2008 at 5:50 pm

You know, compounding make a bigger difference when you are talking about 50000% every four days. Annualized rates should take into account compounding. Let’s see… four days into a year means around 91 compounding events… so 500 to the power of 91 gives you 4×10^245 times your investment. As a percentage that comes to 4×10^247%.

So your initial $5 investment becomes $2000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 after one year.

Did I mention I would be uber-rich?

How would you be doing on those real estate investments?
23 Alan // Mar 27, 2008 at 5:54 pm

Hmmm… my hypothetical net worth got cut off.

Let’s make that more clear…

20000000000000000000000000000
00000000000000000000000000000
00000000000000000000000000000
00000000000000000000000000000
00000000000000000000000000000
00000000000000000000000000000
00000000000000000000000000000
00000000000000000000000000000
000000000000000

You know how one million is equal to one thousand thousands?

That number above is roughly 20 trillion trillions.
24 mike2 // Mar 27, 2008 at 6:44 pm

This was a good article. It’s clear now that rich people buy homes, they don’t get rich because they own a home. Plenty of poor desperate suckers are on the edge of foreclosure simply because they bought a home. Bentleys on the other hand are a sure fire way to get rich. Do you know even a single poor person that owns one? I’m surprised more financial counselors don’t see the connection. And the best thing about it is it’s not just an investment, you can use it for transportation as well.
25 Joel // Mar 27, 2008 at 7:28 pm

Fine. I’ll concede you can get undefined rates of return from options, but I still maintain that the rate of return from options does not exceed that of 0 down house flipping because their rates are both undefined.

So your initial $5 investment becomes $2000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 after one year.

Bah! Good luck doing that past a couple hundred thousand dollars. I can’t imagine an order for 500 thousand front month way way way out of the money puts getting filled. Even if it did good luck with the sell order, or the buy order if you exercise them instead (what would happen to the stock price if there was a buy order for 50 million shares of stock?) .

How would you be doing on those real estate investments?

I already said that with any kind of money options would be better so I’d be just as rich as you in our dream world. In fact I would have whatever you had plus one.
26 Alan // Mar 27, 2008 at 7:56 pm

You’re right, Joel. If you could know the future you would suck all of the money out of the futures market and they would shut down. There is a finite amount of money sloshing around.
27 softwarengineer // Mar 27, 2008 at 8:11 pm

CALL ME A PRAGMATIC CYNIC

But where were all these thoughtful MSM reporters last year?
28 economist // Mar 28, 2008 at 2:53 am

The question is not whether home ownership is a good thing, but at what price is home ownership a good thing.

The answer is easy - when the yield (net rental income) exceeds financing costs.

It’s all about the price.
29 Buceri // Mar 28, 2008 at 5:10 am

Just when we did not how to keep the bubble going…..50 year mortgage, anyone?

http://www.usatoday.com/money/perfi/housing/2006-05-09-long-mortgage-usat_x.htm
30 Buceri // Mar 28, 2008 at 6:18 am

One more thing; notice it says the rates can adjust but they are not as risky as ARMS.

I can see the promo: “You are already leaving your children a HUGE national debt; why not a suicidal mortgage? Act now before you are priced out!!!”
31 Ira Sacharoff // Mar 28, 2008 at 7:19 am

50 year mortgage? Yikes! How about a mortgage that’s eternal, paid for by your children and grandchildren and can never be paid off? …But the payments are low, making this clapboard sh*thole affordable..No, I forgot, I meant “Old World Charm Craftsman Tudor”.
32 rose-colored-coolaid // Mar 28, 2008 at 8:26 am

#25

Fine. I’ll concede you can get undefined rates of return from options, but I still maintain that the rate of return from options does not exceed that of 0 down house flipping because their rates are both undefined.

Both examples have taken turns for the ridiculous. Alan took perhaps the greatest highly publicized crash in the last 5 years as his basis for returns, when in fact you will not do that well on any other 4 day period.

However, I think your 0 down statement is even less authentic. You may have put zero down, but you have costs to retain the investment (mortgage payments, taxes, repairs). You can only call it a $0 investment if carrying costs are equal to the costs of not carrying. E.g. the first home you buy replaces rent, so if all carrying costs are equal to your rent then it can truly be considered a $0 down investment. If carrying costs exceed that, you no longer have infinite leverage, and if carrying costs are lower than rent would be (negative equity ARM potentially) you can claim an even better gain.

However, you are only likely to see such good gains on 1 house. Other houses you buy will have extra carrying cost, since they do not replace your rent.

One argument for housing being a good ‘predict the future play’ is that you don’t need to know much information for it to pay off. If someone told you in 2001 that prices in every major coastal city (and Las Vegas and Phoenix) would rise by at least 70% in the next 6 years you could make a profit. Meanwhile to win huge at options you would need to have quite a bit more information.
33 Marc // Mar 28, 2008 at 9:21 am

Ira,

I’ve read that that’s a big part of the problem in Japan’s real estate market: mortgage debt liability survives the borrowers death and falls to the borrower’s family members (Fortune Favors the Bold by Lester Thurow).
34 economist // Mar 28, 2008 at 9:34 am

Unless the estate has a negative net worth this is a moot issue anyway, as the deceased’s assets must be used to satisfy creditors no matter what. In the US just as much as in Japan.

And given Japan’s culture of saving I don’t they they have many negative net worth estates.
35 TJ_98370 // Mar 28, 2008 at 9:42 am

Japan had (has?) 90 year loans.
36 Marc // Mar 28, 2008 at 9:48 am

That should have said, it survives the borrower’s default and falls on family members.
37 Marc // Mar 28, 2008 at 9:51 am

In other words, the debt doesn’t simply get resolved away by foreclosure as it typically does here. There the debt will burden other family members until it is repaid.
38 Marc // Mar 28, 2008 at 9:53 am

The author also pointed out that there is a much greater stigma associated with losing a home to foreclosure than in the U.S. Thus, Japanese homeowners will scrimp and save to a greater extent than their state-side counterparts.
39 Joel // Mar 28, 2008 at 10:02 am

However, I think your 0 down statement is even less authentic. You may have put zero down, but you have costs to retain the investment (mortgage payments, taxes, repairs).

Rent it out, have the carrying costs paid by the renters then it’s still authentically zero down.
40 Shawn // Mar 28, 2008 at 10:24 am

Americans often think that ideals are theirs, theirs alone. Many people in many other countries believe that owning a home is desirable. In some nations you can buy a home and the land it sits on, and if you are too poor then you can build your home on the governments land. The gov’s land is free. That is how it is in the Philippines. Going to other countries has taught me that we are not the only free people of the world, we are not the only people with hopes, with dreams, with desires to own our own home. The real problem in the U.S. is that people can be priced out. Imagine if here we had the option of building on land we bought or building on land that the gov owns. Imagine if housing was not an investment, but a place to live. Just my feelings, not guaranteed to be the absolute truth for all.
41 [troll] // Mar 28, 2008 at 3:09 pm

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nd t NY PNT n tm y knw hw mch y rsk y cn hndl - nythng ls s prtndng nt t knw. nd w sw th rslt f tht prtns, bvsly, vr th lst yr nd hlf r s.
42 faster // Mar 28, 2008 at 6:00 pm

Mike2 said:

Bentleys on the other hand are a sure fire way to get rich. Do you know even a single poor person that owns one? I’m surprised more financial counselors don’t see the connection. And the best thing about it is it’s not just an investment, you can use it for transportation as well.

You can also live in a car (and you can’t drive a house). So a Bentley will make you rich, provide you with transportation, and if you park it down by the river, provide you with a waterfront home. If you want to add a bathroom - trailer hitch + porta potty - cheap, and easy.

Buy one now before you’re priced out forever!
43 FreedomLover // Mar 30, 2008 at 1:09 pm

Shawn:

The fundamental difference in the USA from other countries is our Constitution. Our government can’t just do anything it wants unlike say the Philippines.
44 Alan // Mar 30, 2008 at 2:19 pm

RCG, you forgot the most ridiculous part of both arguments:

No one can see the future!!!

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