Changing the Nation's Mindset About Housing

After the housing crisis subsides (or eases enough for people to start thinking seriously about the future) there will be some talk and thought given to policy changes with respect to housing, namely the nation's attitude towards subprime mortgages, assistance programs to low income borrowers, the role of FHA, the GSEs, etc.

The obvious/easy/popular solution will be to reign in lending to low income folks, and change policy attitudes that are more focused on getting people into homes as opposed to putting them into a sustainable housing situation whether they're owning or renting. However while measures like these would be a good idea it's important to realize that this crisis goes way beyond subprime loans to low income people, and that it was actually a function of bad mortgage lending to borrowers at all levels, not to mention problems with consumer debt in general, syndicated loans for PE buyouts, etc, etc.

In other words: we need to rethink our nation's entire attitude towards housing, home ownership, etc, whether we're talking about low income homebuyers or highly affluent ones; a couple of ideas:

Education: we need a massive education program that teaches people the truth about how homeownership actually works, as opposed to the truth as presented by the NAR and/or people trying to sell you a mortgage or a house. People need to understand that a home is where you live not an investment, and that while they do offer some financial benefits they're still a major liability that needs to be managed properly. The goal shouldn't be to buy a home from the perspective of the potential returns, the goal should be to buy an affordable home that you can enjoy.

Better yet we need to educate people so that they understand what true financial sustainability is, so that their decisions won't be based on expecting stability via a specific action in of itself (owning vs. renting), and will instead be based on the impact of a particular decision on their own personal balance sheet. Whether we're talking about affluent individuals who would be better off buying a $300k home than a $400k one, or middle class and low income ones who should spend a few years saving money and paying down debt instead of taking on a subprime mortgage, we need to get people to start thinking in terms of sustainability.

Most importantly: the current crisis would be markedly smaller if borrowers (of all types) had made smarter decisions and elected to take out the typical mortgages of old, instead of risking their financial futures with the exotic mortgage products of the housing boom.

At the end of the day nothing will do more to avert future housing crises than a massive dose of education.

Government Programs: building on the above all government programs that are designed to enable more citizens to purchase homes should be more focused on putting people into sustainable housing situations, more than they should be on enabling people to buy homes in general. Instead of subsidizing the purchase of a home by someone who can't quite afford it, the goal should be to work with citizens to get them into a stronger financial position so that they're not in need of a Government subsidy in the first place. It's all a matter of approach, instead of working to get person "X" into a house, address the issue of why they're coming to the government for help in the first place.

Mortgage GSEs: in addition to my prior ideas on scaling back the GSEs and breaking them into multiple smaller companies, the size of the mortgages that the GSEs purchase should be limited to the value of a median house in a particular region. The reason for this is simple: the government should only be helping average citizens purchase houses, as opposed to the current situation where they're indirectly subsidizing mortgages that only 5% of the population can afford.

In the end these are only a couple of ideas and overhauling the nation's mindset around housing (at the political and average citizen levels) is a huge job, however if we don't start taking some critical steps towards changing how this nation views housing we're going to find ourselves back in this situation again sooner rather than later.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[Jason Rines...:]

I often wondered why they did not teach Economics 101 in High School. Should have a year of personal finance prep as a Junior and more advanced class as a Senior.

2008 Oct 28 03:38 PM

[Homer II:]

"...I often wondered why they did not teach Economics 101 in High School..."

considering that public high schools barely teach grade school level reading skills and little else, what makes you think that they could master teaching Econ?

2008 Oct 29 01:35 AM

[pooh:]

Anyone have any thoughts on reforming how loan officers and other housing industry professionals are paid? Seems like removing the incentive to write bad loans would be a good start........

2008 Oct 29 09:08 AM

[John Preston:]

Hey Pooh, in the 100 Acre Woods, to they understand that LO's don't write loans....they fill in blanks, and the Banks and the GSE's and Wall Street make the decisions....and let's toss in Congress, since they manage the GSE's....that's like blaming the kid who works in the vegetable section at the local grocery for bad tomatoes....

The partnership that is lending...regulatory..... and operations...broke down...the problems started at the top...in Congress and at Fannie/Freddie...and it was down hill from there...

Yes, the consumer needs to get smarter..but a lot of highly paid employees (Congress) perverted the system....other employees (Fannie and Freddie) made it worse....still other employees (The major financial institutions, Banks, lenders, Wall Street) who we "HIRE" to hold our money and our mortgages and our investments did really bad work in a bad faith manner


I say "FIRE ALL OF THE EMPLOYEES"... and I am probably right.

If you are pissed off...closed your bank account....you investment account...and through out ALL incumbent politicians in Washington.....

Unless you are prepared to FIRE them all, a lot of the ranting that goes on is just sophomorish ranting........

2008 Oct 29 09:29 AM

[rm:]

[we need a massive education program that teaches people the truth about how homeownership actually works, ...People need to understand that a home is where you live not an investment,]

Would that be great?

Except, the information is widely available for anyone who'll take a minute to do some homework.

But see, there's the problem, nobody WANTS to do their homework.

In order to truly educate, you have to have a pupil who wants to learn.

Otherwise, all this "education" is wasted effort.

Despite this, I'm sure there'll be some goverment-mandated garbage that will be doled out... it will be poorly designed, dull and boring... and borrowers will continue to ignore it.

2008 Oct 29 01:28 PM

[the observer:]

{ we need a massive education program that teaches people the truth about how homeownership actually works, as opposed to the truth as presented by the NAR and/or people trying to sell you a mortgage or a house. People need to understand that a home is where you live not an investment}

Yeah, and that will only happen when we get rid of the NAR lobby in Washington and reform the tax code to eliminate the preferential treatment afforded housing that resulted in speculators/investors who together with all the other elements (e.g. Alan Greenspan easy
money, greedy lenders, crooked GSE's, the Community Reinvestment Act...etc.

2008 Oct 29 07:18 PM

[Tran Harry:]

"I often wondered why they did not teach Economics 101 in High School. Should have a year of personal finance prep as a Junior and more advanced class as a Senior."

They did teach (or try to teach) Economics in high school it was during my Senior year, but the topic is simply too dry and at times the language is too new for a 17 year old pubescent kid to understand. Now that I have taken a fair share of economics while getting my 4 year degree, I must say that while its a good idea for kids to learn early about economics and finance, these two topics are simply too far of a reach for the mindset and education level of high schoolers.

They have yet to master basic checkbook balances for most students let alone have their own income to take accountability for. If a child is getting food and shelter from a parent, and hasn't had a job yet prior to graduating from high school, than they really don't have a large attention span available for learning financial obligations.

2008 Oct 30 12:05 AM

[Kiisu:]

Strange... I took basic economics in a rural junior high in a backwater state. Really basic stuff: budgeting, balancing a check book, debt fundamentals (loans, mortgages), etc. The class was optional, the subjects uncomplicated, and I put the topics to good use avoiding the money traps that snared my parents.

Of course I had the incentivizing advantage of being scrawny and half starved. My clothes were twice my age, and the house I lived in would have been illegal if a prison (I hot-bunked with a sib, and had one drawer and 12 inches of closet space to call my own).

The class paid off.

I bought a small farm two weeks ago. I retire in 64 days… having set the date 10 years ago.

I'm not rich, but I’ve been able to accumulate the resources I need for what I want to do for the foreseeable future. Seems to me, opportunities abound, even now, if you're hungry enough to dig for them.

2008 Oct 30 01:14 AM

[sittingonth...:]

I've been waiting 5 years to buy. i never bought because the home prices were rediculous. i could have afforded the traditional 30-year-fixed with a 20% down, but i chose to stay put until the home prices make sense. who doesn't want what the jones have, but everything has a price and you must be able to pay for that. if you can't afford it then don't get it. don't expect someone else to save you. what's wrong with people going back to renting now that they can't pay for there mortgages. why should they be able to stay in there current mcmansion if they're not able to pay for it. it's not like they put any down in the first place so they're not really losing any money. and the money they've been paying for their mortgage is like money going toward the rent. so for all those people going through foreclosure, just go get an apartment. if the goverment's going to help you out, then it's only fair that you give your house to someone else who's more deserving.

2008 Oct 30 02:37 AM

[Mowog:]

Same as Kiisu. Maybe that's why I have no debt, save as much as possible, and only use a credit card when I know I have the money to pay the bill. Of course, starting work under age 16 helped drill a sense of fiscal responsibility into me.

Privatize Fannie and Freddie, abolish Section 8, and give all Federal employees a 20% pay cut. Ah, the stuff dreams are made of.

2008 Oct 30 02:38 AM

[radiowaver:]

These are all very good ideas, but there's no quick money to be made, so they'll never happen. People need to teach their kids economics and finance at home so they won't take the bait on any of these govt-sponsored traps. The schools won't do it. I suspect private schools do, but public schools basically train people to get jobs and get in debt.

2008 Oct 30 07:33 AM

[Blues Gal:]

Yes, they do teach basic money skills in high school. My sister-in-law is a
teacher and "How to Budget" and the lessons a person needs to be able
to handle their money are a part of her courses. But, she has found that
the students are more interested in what's going on after school than in
what will be going on in their future. And she is not a dry and boring
instructor. Many parents are not holding their kids responsible for their
behavior, we are babying them into thinking that everything will be handed
to them on a silver platter. So, we now have 2 generations of people who
think the world owes them everything they want, the kids and these parents!
Don't know if the present financial crisis will spur more people to find out
about how to handle personal finances, I sure hope it does, it's high time!

2008 Oct 30 09:34 AM

[john1:]

Just more unpatriotic negativity from liberals who hate America, and the troops.

2008 Oct 30 12:54 PM

[bobomite:]

That education should include topics such as:

"What is the Federal Reserve?"
"Who owns the shares of the Federal Reserve System?" and
"Federal Reserve shares pay 6% dividends, where does this money come from?"

2008 Oct 30 03:46 PM

[Kiisu:]

John,

"Take a deep breath, hold, out slowly, relax." Instructions from Drill Sergeant Reeves, 1975, Ft Jackson, SC. Son, I was wound a bit tight back then, but found his words good advice... then as well as now. So I'm passing on the favor, and handing those words to you...

2008 Oct 31 03:14 AM