Why mortgages have eaten Americans out of house and home
They’re calling it a “mortgage crisis”, with home foreclosure rates higher than they’ve been since the Great Depression. What exactly happened? Just yesterday, weren’t people lauding the virtues of buying over renting, rushing to slap their downpayments on the table? Perhaps the downpayments weren’t big enough, and the loans too variable? These days, in our area, even people with good salaries find themselves out of a house they can no longer pay for, flipping through the classifieds in the newspaper for rentals.
Just last night, my father and I were discussing a recent NPR report on mortgages. “Back when your mother and I bought our house,” he said, “things sure were different. A bank wouldn’t even look at you twice unless you had 20% to put down on the house you wanted. Then they checked your salary to make sure you could afford the monthly payments.”
I hate to oversimplify the issue, but didn’t my dad just basically hit the nail on the head? At some point, people stopped calculating what they could afford long-term and started chasing what was just (or substantially) beyond reach, made possible by slim downpayments and variable-rate mortgages. On September 2, 2007, the New York Times quoted President Bush’s diagnosis, which was similar; he mentioned “both ‘excesses in the lending industry’ and unduly optimistic homeowners who took out ‘loans larger than they could afford,’ as reasons for the mortgage woes.”
The mistakes indeed do go both ways, with irresponsible lenders and uninformed buyers engaging in the dance of debt. The terrible irony is that now, even people who responsibly make their mortgage payments on time are confronted with declining equity; their neighbors are foreclosing, so their own house value is plummeting so quickly that they can’t resell.
I can understand the mentality of those who bought beyond their price range; we all want (and probably deserve) a taste of the American Dream. We all have our “dream house” in mind—why can’t we go out and get it now? The catch, in my mind, is this—my husband and I, for example, are just shy of our thirtieth birthdays, just starting our careers. Why should we be able to afford our dream house right this second? Of course, according to real estate principles, we should try to find a house that serves as a wise investment, something we’ll be able to resell—but do we need a castle? Not now! I’d rather keep financial stress at bay and live within our means.
In fact, my husband and I just made an offer on what will probably soon be our first house, and there were a few ground rules we put in place when we started looking. First of all, we were fortunate to have accumulated savings for a downpayment thanks to three years of teaching overseas, but we decided not to empty our savings account to cover housing costs. Additionally, we vowed to buy only what we could afford to put 20% down on and to calculate a monthly payment that would not stress us financially according to our current salaries. I realize it might not be possible for everyone to put down 20%--it’s hard to save money in this country—but the more, the better. What matters most is finding a monthly payment you’re comfortable with—and preferably choosing a fixed-rate mortgage that will leave you less susceptible to the windy changes of market interest rates.
Our house won’t be the one we live in forever, but it’s a wonderful little house to start with, and frankly, at this point in our lives, that’s what we can manage. Somehow, it seems right, and not too different from my philosophy on credit card usage, which basically amounts to this: “why buy anything you can’t actually pay for in the end?" Whether it’s a new outfit or a house, the principle stands.
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