Wednesday, December 24, 2008

An Ignored Reason for the Mortgage Melt-Down in the United States

Here's an interesting quote from a real estate website:

The size of the average American home has more than doubled over the past half-century. The most recent statistics from the National Association of Home Builders show that the average American home grew from 983 square feet in 1950 to 2,434 square feet in 2005. In 1950, only one percent of homes built had four bedrooms or more, but 39 percent of new homes had at least four bedrooms in 2003. Garages have become almost obligatory, with only eight percent of new homes built without a garage, as opposed to 53 percent built without one in 1950.

Think about the implications of the information contained in that paragraph. Since most contractors charge for home construction on a square foot basis, and apparently bid their jobs out on that basis, this means that as the size of homes went up, so did the cost of building those homes. Now, for the most part, incomes also kept going up, so people could afford the increase in the size of the average home and didn't think about what that increase meant.

Well, here's what it meant: It meant more energy usage per home; it meant more money being tied up in real estate instead of other assets; and it meant that when times got bad, a lot of homeowners couldn't make the mortgage payments. It costs a lot less to pay for a 1300 square foot home than it does to pay for a 2600 square foot home.

Why did this happen? Homes went from being a way to house people to a way to show off your wealth. Homes went from being a practical thing to a status thing. Homes went from a place to raise your family to an investment. Children who grew up in "McMansions" began to believe that they were entitled to live that way, and so, when they got married, wanted to start where their parents had left off.

One way to solve the housing crisis is for Americans to start thinking of homes as a way to house people and not as a way to show their status, or as an investment. This won't happen overnight, but it will happen because America can no longer afford the "average American home."


Anonymous said...

THE PROBLEM IS:The way the builders sold these homes was due to the lenders and their "fuzzy math" loans.
1.) interest only loans only good for 10 yrs. (then what happens?) they have a 20 yr. amortization and can't afford it's payment. People don't want to look that far into the future.
2.) 2 yr. or 3 yr. fixed periods and then a 6 mo. adjustable. Again...people only look at the immediate couple of years and then figured they could refi. again for another 2 or 3 yrs. only they cannot because these loans are now gone. They got 80/20's or 100% financing as it was and the value is now lower than what they owe and they are trapped in an a.r.m. they cannot handle.
3.) The almighty "negative amortized loan". These are still out there and are SURELY future foreclosures. The rate is actually 7% but they only have to pay "partial" payments of 1% (THE REST GOES TO THE BALNACE, WAKE UP!!!) and these loans were "qualified" at the 1% which MEANS the sale of the McMansions were ever so easy and inticing. The lenders only now qualify at the fully indexed rate and rightfully so. The problem is that they now have the McMansion home and accumulated more debt. for the toys to match (due to a tiny house payment for a short time only of approx. 3 yrs.) I myself have gone to refinance these folks of "excellent" credit standing only to find they now own the BMW's and Mercedes to "match" their McMansions and now cannot qualify for a "normal" loan anyway and likely had THOSE kind of loans ever been there they wouldn't have purchased THESE McMansions. In fact...I recently ran across an AVERAGE income couple that also got a large boat loan to fill the 3rd car space for "looks". I told them there are only 2 good days to own such a boat. The day you buy it and the day you sell it and to get rid of it and call me back when IT is gone. Unload the BMW too while you are at it. I'd like to say and I do at times. Put your house on the market too...only they cannot because they owe more than they can now sell it for...
Again...we are going to fall in our values due these horrible loans. Old school is back and rightfully so.

Anonymous said...

I believe the banks and the builders have learned their lessons. The buyers need to be relieved of their debt that they TRUSTED the banks in putting them in and qualifying them for wrongfully.
It's simple and is going to have to happen.
The right way to qualify a home loan is very simple. Their housing payment with taxes and insurance should not exceed 38% Debt. to income ratio. This is called "housing ratio".
The lenders need to "man up" reduce the balance and refi. the loans where they stand to a fully amortized lowered rate to "what ever" their existing income is at 38% mo. d.t.i.
They, the lenders need to "eat it". Trust me they are anyway so why not salvage part of the balance?