We are all a product of our experiences, events that shape out our perceptions and personal philosophies What shaped my view of the housing market was a history of real estate investment prior to 2005, when I held an affiliate-broker’s license.
For those paying attention in 2005 and early 2006, there were ample signs that the housing market was building up at an unsustainable pace. Houses were getting ridiculous, with some topping out at 4,000 and 5,000 square feet. That would be fine, if the surrounding community had the jobs base to support $400,000 homes — but this was a development out in a field, literally, in rural Tennessee, where the average home price at the time was just over $110,000, and the biggest employers in the area were a small military base, a candy factory, and plant that made liquid diet drinks.
In so many ways you don’t own a home as much as it owns you.
The financing for those homes was nothing short of an ongoing fraud. Second mortgages were routine, and wrap-around mortgages that included a personal home equity loan to cover part of the cost were not uncommon. No one verified income, and borrowers seemed unconcerned that the insanely-low interest rates they were quoted were only good for five years.
The last straw for me was stopping by a local grocery, and having one of the clerks tell me she and her husband, who also worked at the store, had just bought a second new home, intending to flip it. The next day I put every property we owned up for sale, save one we could live in. The rest, as they say, is history.
Deja Vu All Over Again
So here we are nearly a decade later in 2014. We the People bailed out the banks that cheated us, and stood by as the executives of those companies rewarded themselves with massive bonuses. All this in exchange for a few meager rule changes that make it harder for banks to play the same games they played in the early 2000s. There are three very good reasons to remain skeptical of the housing market, and the retail housing in particular.
1. It’s Still a Bad Deal
Let’s say I’m your investment counselor, and I tell you about a great deal where you pay $50,000 up front, in cash, but you don’t actually get anything for that money. You have to pay all the fees associated with that investment, out of your own pocket, and periodically pay big penalties to maintain your investment. If your investment by some miracle makes money, you still have to part with 7 or 8% in fees to sell it. If it loses money, you still have to pay 7 or 8% in fees to sell it.
Most people would righteously laugh me out of the room — but now imagine that I’m your real estate agent, and that’s the deal millions of Americans accept when signing up for a mortgage.
2. Prices Be Crazy
In California, we’re seeing the return of multiple buyers bidding on houses, offering more than the asking price. Price inflation is back in the hottest markets and, even though it’s tougher to support valuations, prices still manage to creep up faster than inflation. Housing wasn’t that great an investment before, and buying at the top of the market just puts you further in a hole right up front.
3. Not a Level Playing Field
The way housing deals and mortgages are constructed, there’s no risk-sharing involved. You accept all the risk and, if something bad happens, you lose everything you own. The latest insult to homeowners is contract mortgage servicers; sometimes they pay your property taxes out of escrow, sometimes they don’t. My doctor was shocked to find out he was on the hook for late fees when his mortgage servicer didn’t pay his property taxes on time. After hours on the phone, he finally got them to pay the taxes — but the residual came out of his pocket. The irony is that the mortgage servicer then used the higher taxes, which included the late fees, to raise his escrow contribution.
For sure that’s a minor niggle, but it’s just one more thing you have to find time to deal with, one more reminder you have to set, one more dragon to fight off. When state and local governments need money, your home becomes a brick-front ATM. If the utility company decides they need a power pole on your easement, whoop there it is; if it lowers your property values, too bad.
In so many ways you don’t own a home as much as it owns you. Still, for some people with the right property, it’s still a good investment; just take your time and choose carefully. Keep firmly in mind that, for the vast majority of Americans, housing is a bad deal.
