Reaction Paper on Housing

I would like to start off with a story. Last year I decided that I was tired of living in an apartment. I wanted to have a place of my own where my son could run in the backyard. Maybe I could get a dog! I went to see a mortgage associate at National City Bank here in Springfield. After I filled out my paperwork, she informed me that I could afford to buy a 30,000 dollar house on my small income. That doesn’t amount to much of a house by American’s standards.
After seeing the disappointment in my face, she explained to me that I could apply for a mortgage based on a “tell” income. That is, I “tell” you what I make, and I get a loan for however much money I want. Of course, I would have to pay more in interest, but who cares, I could get the home of my dreams!
I immediately called my agent from Remax, and we were off looking for potential “dream” homes. Finally, after searching diligently, there it was. Unfortunately, my “dream” home fell into the 90,000 dollar range. But I didn’t care. It was in great shape and in a good neighborhood. It even had a fenced in yard for the dog! I couldn’t have asked for anything better.
Fortunately, someone else purchased the house before I even had a chance. Yes, I said fortunately! After all the excitement was over, I really sat back and looked at the situation. How in the world could I afford a 90,000 dollar house? My son and I would have to eat Ramen noodles for the rest of our lives.
I began to think about the discussion that we had in class last week. It seemed to me that the majority of the class agreed that poor people are entitled to own their own home. A few people argued that we shouldn’t have to help the Americans who extended their means to buy a $500,000 dollar house. I’m pretty sure that out of the 43% of people in poverty that Robert Rector claims to own their own home, many of them have extended themselves beyond their means just like the people who are better off. What’s the difference?
Mortgage companies took advantage of homeowners. Not too many people, including me, know how to navigate their way through the complex system of buying a house. These lenders don’t have our interests in mind. All they care about is how much money they will make off the loan of some sucker who knows nothing about fixed loans, adjustable rates, or “tell” incomes.
After the housing market crashed, it was apparent to me why. It is a great accomplishment to own your own home, especially if it has the white picket fence. Most Americans can’t afford the house of their dreams but purchased it anyway with the overenthusiastic help from the mortgage lenders. Now as a result of the mortgage crisis and our bad economy people find themselves losing their “dream” homes to foreclosure. So, I’m sure that Rector’s 43% will quickly decrease over the next few years.

A person who can afford a $30,000 home (with 30% of your income going to housing) could probably afford a $50,000 home. That is, although mortgage lenders are only supposed to arrange loans where the purchaser will end up giving 30% of their income to the principal, interest, home owners insurance, property taxes, and utilities, it is in fact the case that many lower-income people spend about half their income on housing. So, if you can legitimately afford a $30,000 home, you can probably stretch safely to buy a $50,000 home.

The first home I ever bought had one bathroom, two bedrooms, a large living room, a kitchen, and a basement (about 800 square feet), and I paid $42,000 for it, and sold it three years after purchasing it for $46,000. Had my stupid real estate agent helped me out more, I could have received about $4,000 in help as a first-time home-buyer buying a house in a special district of the city where there were incentives to help first-time home-buyers, which would have significantly reduced the cost of that home to me.

Looking at a real estate guide for Springfield I see a house at 2627 S 7th Street with two bedrooms and 995 square feet for sale at $46,000. There’s a home at 208 E Spruce St. with 1,043 square feet for $49,900. These homes are in okay neighborhoods, and they appear reasonably attractive, and they are priced in a way that makes me suspect there is nothing seriously wrong with them. Were I a bank lender, I’d be happy to put you in a house like these. But no, I wouldn’t want you to buy a $90,000 home. You could never afford such a thing. Assuming you purchased the home at 208 E. Spruce, and you had $2,900 for your down-payment, and used first-time homebuyer help from the City of Springfield, to come up with closing costs, you would be getting a loan of $47,000. With a thirty-year loan at 6.5%, your loan and interest payments would be about $300 per month. Your escrow for real estate tax would be about $80, and your homeowner’s insurance would be about $60 per month, so you would have a monthly home payment of about $440. With such a small house, your heating and cooling costs would be reasonable, and perhaps you would need an average of $120 each month for water, electric, and sewer (more in the winter, but much less between April and October). That’s a total housing cost of $560. If you are making $1680 per month, that’s fine. If you’re making $1120 per month, it’s too much, but you can probably survive and do it.

On average, homeowners care more about their community and get involved in civic affairs. As a taxpayer, I’d much rather have you as a homeowner in 208 E. Spruce than have you renting an apartment somewhere in town for $400 per month.

Let’s say you’re earning $9.00 per hour and working 34 hours per week. You would be earning about $1250 per month. You would have some of that lost in payroll taxes, but with the state and federal earned income tax credits you would clearly end up with an average take-home income over $1,300 per month. That would put a single mom with a child slightly above the 2009 poverty threshold (you would be earning about $15,000, and the poverty threshold for a two-person household is $14,570). So, in Springfield at least, it seems to me that if lenders were willing to let people take on extraordinary housing debts (where about 50% of income would go toward housing), a single mother with one child who was working for $9 per hour at near full-time could reasonably buy a tiny house in an okay neighborhood.

However, if a person in those circumstances I’ve described lost their job, they would be in trouble, because it would be difficult to make their home payment of $440. They would be in a similar problem with an apartment that had a $400 per month rent. The difference is that one can run away from an apartment and break that contract without having $40,000 of debt following you around, whereas if you can’t make a payment on your home the bank can repossess it and sell it for less than you owe on it, and you’re still stuck with the debt. The fact that you’ve had a foreclosure on your home will do more damage to your credit rating than running away from an apartment lease contract. In fact, if you can’t sell the house quickly when it becomes unaffordable to you, and the bank auctions it for less than you owe, you might declare bankruptcy, which is really bad, and isn’t nearly as likely if you merely get out of an apartment lease contract.

More about owning that little house… LIHEAP might help with utilities, and there might be other help available, but it would be difficult to make ends meet. A two-person family with an income of $15,000 would qualify for food stamps. It would be difficult to work 34 hours per week and also be a full-time student, especially if your child needed lots of adult supervision. I guess this all goes to prove that if you're living on the edge of poverty you're living in a precarious situation.

I think you are correct that many real estate agents care mainly about their cut of the closing costs. Likewise, mortgage brokers and loan officers seem concerned with their commissions on the loans. So, there are incentives for people to give the typical $15,000-per-year family a $80,000 loan, which such a family could never really afford. All this contributes to the economic crisis we find ourselves in.

I like this post about the mortgage crisis at Juan Cole's blog.