Beginning in 2007 and culminating in 2008, the home-ownership myth was smashed, as values all over the country plummeted, wiping out a primary means of savings and instilling shock and awe all across the country. The thing that was never supposed to happen had happened. FULL ARTICLE by Doug French
Source link: http://archive.mises.org/14819/walk-away-the-rise-and-fall-of-the-home-ownership-myth/
Walk Away: The Rise and Fall of the Home-Ownership Myth
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I’m happy to see this indication that people are finally waking up to at least a bit of reality about housing. In the first place people have gotten into the habit of building far more house than they actually need. Second, building permit systems typically_ unnecessarily for the most part_ raise the cost of building by 25% or more. In many places they’ve made it nearly impossible for people to build their own home. Third, after these first two, until recently with the drop in interest rates, they’ve been paying on a 30 year mortgage almost two and a half times the house cost. It’s all added up to what just might be the biggest thievery since passage of the income tax; it has made the term “wage slave” a reality like almost nothing else.
Building a home is a risky proposition and permits help mitigate some of that risk.
Excuse me, but please leave parenting me to my mother. I will decide my own risk tolerance for myself, and you can do likewise. In a market system, warranties would emerge and the insurers of those warranties would write their own rules binding the builder seeking the warranty.
As someone who’s in the design/construction industry, I can tell you that the real reason for permits is to guarantee that municipal, county, and state governments cannot be held liable for any problems during or after construction.
JFF’s got it right, that is a principle reason for permits. I would have to argue Ryan’s statements that homes are a poor investment. If going by the latest economic trends, yes he is obviously right, homes in the US are a very poor investment. However, along periods where the economy is strong, housing is a phenomenal asset that, in most cases, will appreciate.
If people learn that they can ‘walk away’ from home ownership/slavery, maybe they can learn to walk away from other scams of Leviathan.
Hey, it’s a start. I’m buyin’ that book, Doug. Maybe some of my more orthodox friends will get a copy for Christmas.
The desire of home ownership is not a myth. The myth is; that everyone has a government given right to own a home. The myth is; that government can force social equality through wealth redistribution and coersive regulation. Homes and real property represented two of the most stable long term investment options up until the time government intervention in the markets distorted perceptions and actions.Sure mobility represents the ability of persons to seek a better life. But in the long run home ownership represents the foundations of a stable culture. Without homes, in which roots can be set and children raised, life is nomadic and tribal in nature.
A house is not an investment. It is an immobile, constantly depreciating final consumer good. On the other hand, any form of excludable shelter can be made into a home.
You speak of a “tribal” lifestyle as if it were given as a negative. Yet it certainly gives greater freedom to choose one’s associates versus “buying the neighbors with the house”.
Perhaps it is from “tribal” lifestyles of serial renters that non-territorial defense associations will emerge and the next step towards political liberty takes root.
Ryan, you stole my thunder.
Ooops, gotta run!
I’m curious can you give me an example of a “real” or “true” investment? Is there such a thing? If you want to roam from city to city your whole life that’s fine for you. Some people choose to stay put in one place for all kinds of reasons including proximity to certain geography or the climate. Purchasing a house for cash and living there your entire life has got to be cheaper than paying rent your entire life.
In addition, home ownership is a hedge against high inflation… your home’s value will depreciate less during normal use than the value of the money in your bank account.
Good point – a shelter will have some value if paper currency does not…
Instead of moving freely, the newly-mobile millions may collide with a wall of TSA goons and immigration (and emigration) restrictions, and many of them may find a new home only in subterranean ghettos or in the rumored FEMA camps.
universal American home ownership was fostered to give banks a way to profit on our deposits.
it should be noted that the bank bailout and all the fed purchases of “toxic” assets was the purchase of mortgage notes from investors by the government [at par value] while the behind on his payments homeowner got his butt booted out of the same houses the investors held the notes on.
the home ownership scam is simply business as usual.
The myth concerning home ownership is that a home is an an asset and an investment. Unless you are taking in boarders or are living in one unit of a multi-unit complex and renting the others out, a home is neither and in fact is a liability. It may or may not be less of a liability than renting.
Since most mortgages have been taken over by Fannie Mae and Freddie Mac (or Fran-ron as I like to call it), there is no moral obligation to pay your mortgage, if yours is one of them. The same goes if the lender got bailed out by TARP.
“fran-ron – love it!
I like Phony Mae and Frauddie Mac.
I’m walking away from two “castles” in Florida. Over a year ago, after property taxes had quintupled in just a few years and Charlie Crist’s publicly-run insurance pool scam doubled insurance rates and drove out all competition (State Farm, with which company I’ve insured most things since 1968, says they won’t insure my Florida houses any longer), I called my lenders and said that their rates were too high for me to possibly turn a profit on my rentals. (In one case, the ARM had run up to 10.375% — and I’ve never missed a payment; and, at the time, my credit scores were 750 and 762, plus one I didn’t get.)
They told me there was no reason for them to lower the rates or renegotiate the principal. That was certainly their right — a contract is a contract, and I signed on the line, years ago.
The contracts’ remedies for non-payment: they repossess the houses. That’s the other side of the contract, and I’m fine with that, too. They can have the houses — but they don’t want them, even as gifts, through deeds in lieu of foreclosure. I’ve offered settlements; they don’t want settlements. They want to go through foreclosure, a process that will take perhaps a year and cost them several thousand dollars directly, not to mention the rent they could be collecting or the cash they could realize from a sale (as opposed to my not paying them anything against the mortgages).
Since all the “mortgage” people I’ve dealt with are merely agents of servicing companies, they can’t negotiate anything — the actual investors, who will lose so much more because of that, set things up that way. Again, it is their right, but by that same token, they have no reason to complain — or to be reimbursed by taxpayers for their poor policies.
The tragedy is that the cash-flow problem was initiated by the county tax assessor’s optimistic and usurious appetite, and the government takeover of private home insurance insurance through Charlie Crist’s crony-aggrandizing scam. I had contracts with the mortgage lenders, and they’re the ones who are losing. The state of Florida and its local governments, which caused the problem, don’t negotiate with anybody. The government wants to own everything — let them deal with the fallout. I’ve left Florida, and I’m not going back.
As for me, the ruined credit score doesn’t mean a thing. If I couldn’t get refinancing with credit scores in the mid-700s, how much worse can it get with a credit score in the low 400s? (I’ve not walked away from any other obligation, nor do I have any incentive to. Other than the mortgages, I have no debt whatsoever.) Besides, why would I want to borrow again? I’ve learned my lesson. At least my cash flow isn’t so negative; and I don’t need to deal with tenants, NSF rent checks, evictions, upkeep and all its surprises, taxes, insurance, utilities — or mortgage payments.
I quit. Tell John Galt I’ll be along momentarily.
I think that this blog post goes a little too far in some respects. I agree that government encouragment of home-ownership is fundamentally wrong, but then nor should government policy encourage renting, say. Whilst there are negative aspects of home-ownership such as lack of mobility, there are also positive aspects as well – property ownership is usually a key feature of strong civic society and encourages social participation, but freely and without government interference. Again, the point is that government should not be encouraging the ‘pioneer spirit’ any more than a desire for home-ownership; individuals should be left to make that choice and the price mechanism allowed to express and influence their decisions. Personally, I aspire to home ownership and lots of ‘stuff’ although I can see the financial pros and cons reasonably clearly.
What really needs to happen is for all the government interference which affects property prices such as planning regulations, subsidies and manipulation of money to be rolled back and for the expression of free choice.
What happens over there (in the USA) eventually happens over (in the UK). Home-owner-ism is just as rife here, and the reckoning will be just as salutory. Even now the Coalition government (you really do NOT want one of those) is continuing the desperate policies of its predecessor in trying to sustain the real estate bubble. Luckily it won’t work. No-one knows when it will fail, but I am very comnfident that it will. Meanwhile more young people are renting or living with parents. But renting does not mean that you are rootless. As long as you realise that renting a house is no different to renting the money to buy an (overpriced) house, and that you are not engaged in some geared capital gain play, why would you worry? As long as your tenancy is secure. And if you save the money that you would have repaid in capital on the mortgage, you will eventually accumulate enough investment capital to generate enough income to pay the rent anyway.
The death of home-owner-ism has got to be A Good Thing
Perfect utilitarian ethics? Or perhaps “I am only as honest as I can afford to be.” Do we really think it’s right to encourage people to default on their obligations becaue it’s not in their financial interest? As I teach my children, you can rationalize or blame it on someone else but you must accept personal responsibility. To “honor” mean to accept the costs. Yesterday someone asked me how he could walk away from rental properties that are now valued at less than his mortgage. The renters are still paying and he hasn’t missed a payment. He acknowledged the moral issue but says “business is business.” In other words, he only believes in obligations that don’t cost him anyhing. Doug French concludes his book by saying “No obituary will ever read, “He was a good and ethical man. He died broke, his family suffered, but he never missed a payment to Fannie Mae.” Boy how things have changed! Now we demean the honest man who sacrifices to honor his obligations.
A secured loan is just that: both parties agree to the conditions. If the payments stop, the repossession occurs.
Both parties enter the contract preferring things to go smoothly, but when they don’t, the parties have agreed ahead of time as to the best alternative. With a secured agreement, risk goes both ways, and it is deemed acceptable a priori. The contract is a set of options, accepted by both parties. When Option One doesn’t work, Option Two takes over.
Absolutely agree. The moral issue is just one more weapon in the establishment arsenal.
What’s the downside of walking away? A ruined credit score? Most of us should be able to go through life without ever taking out a single loan. I’m almost 30 and have yet to take out a loan. If I want a new car, I put away the “car payment” into an interest bearing account for five years and buy in cash. Want a flat screen, 3D LED-LCD? Save up. The only reasonable time to borrow money is if you’re attaching a revenue generating function to it – starting a business.
I’m with you. Save for graduate school, which I have paid off in less than 5 years, neither have I. My parents are imploring me to take a mortgage so that I can get that tax write-off at the end of the year. I’d much rather have the cash up front and be able to save it then, as that write-off invariably gets spent, at least by me. More money in my paycheck every month, virtually guarantees it goes to savings immediately and may allow me to increase my monthly savings allotment by cutting out superfluous expenditures.
The tax write-off is always hilarious to me. Why would I take on a $1,000 interest payment to “save” $280? I don’t like the government, but not to the point where I’m willing to spend $1,000 to “deprive” them of the $280.
I’m almost religious about being anti-debt. I only wish I had seen the light before I incurred it, but I was young and foolish (and had exceedingly bad role models).
If you walk away and screw up your credit score, obtaining future credit is not your real problem. Your real problem is getting a good job! Most employers pull your credit report and if it is bad, no job for you.
If you go back 10 years, the current price of most homes are higher. There are a few pockets where prices have fallen more. Houses that I built 9 years ago and sold for $750,000 have sold today for $1,100,000. Yes it is true that people bought the same house 4 years ago for $1,500,000, they made a bad choice but will see the price go up to their purchase price in about 8 years. Basically a home should gain about 4% a year.
The key here is that people that own houses should set out to pay the house off in less than 15 years. I paid my house off 8 years ago and without a mortgage payment I was able to pay college expenses for my two kids and survive this economic downturn without a job for the last 3 years. Home ownership is better than renting!
“. . .home values all over the country plummeted. . .”
Prices, not values. I’ve seen this error once too often on this site.
Exactly my point.
Hmmm, I wonder. Since value is subjective, and price is the combination of supply and demand (the subjective part) it might not be too much of an error to say that people value homes a lot less than they did in the past.
Actually home values do drop.
If you buy a house, it will have X years worth of wear and tear on it. Y years later, it will have X+Y years worth of wear and tear on it, making it less valuable.
The way you write indicates that you probably haven’t grasped the Austrian conception of value. You write about values as if values were objectively defined — they are not.
“If you buy a house, it will have X years worth of wear and tear on it. Y years later, it will have X+Y years worth of wear and tear on it, making it less valuable.”
Making it less valuable to whom? Surely not to every being on the planet…
P.S. – An item being less valuable “to most people” is fallicious. Democracy has no influence on objectivity. Besides, value isn’t objective.
In a free market, home values do drop over time.
I read somewhere (yeah, take that for what it is worth – not finding the link right now), that home prices from 1815 to 1913 fell by about 25%.
The point I was making is that home prices are being distorted by government policies, not a refutation of the Subjective Theory of Value.
Two quick points:The argument made also presupposes that renting is always cheaper than buying, allowing one to invest the excess income. While I fully agree that gov’t has no business whatsoever subsidizing the housing sector in pursuit of some kind of social policy, sometimes buying is a good option. For example, my wife and I are paying a mortgage on our home of $1,100 / month including taxes & insurance. We were approved for a loan up to $200,000, but being thinking people, purchased a home much cheaper than the max we were approved for. Thus our mortgage payment is only about $100 more than we were paying in rent for a 2-bed, 2 bath in our area. If I sell the home for even a slight profit after having paid it down (enough to cover the maint. costs I’ve incurred), then I’ll be ahead of the curve vs. if I had rented all these years. Housing prices are stable in our area (Dallas); we never had a huge boom, and thus never a big bust. I don’t consider the house an “investment”, just something that I can break even on, as opposed to renting. On a less practical but still very real front, the enjoyment I get from ownership, and being able to do what I want, when I want, to my property outstrips anything I ever experienced while renting (poor maintenance, decorating restrictions, parking issues, etc.)
2) Someone above pointed out, and is absolutely correct, that the investors who are crazed over how much money they stand to lose set up the system so that servicers such as BoA and Wells have no authority whatsoever to negotiate. Everytime someone calls them, they have to run any offers through their investors, which takes weeks, and often involves a lot of return questions, etc. It’s really a bad joke the way this whole thing is set up (I work in the mortgage servicing industry). While servicers certainly are guilty of a lot of things (mostly in regards to quality control of training, hiring unqualified people, etc), you’d be amazed how tied our hands really are when it comes to trying to help people. All the power is with the investors, and they aren’t having to talk to desperate borrowers on the phone everyday, so they’re insulated from all this. All they get are loss risk spreadsheets which they base their decisions on.
There’s an interesting fellow named Ferenc Máté (a winemaker and boat-builder) who wrote a book a few years ago called A Reasonable Life. The author is not an economist, and even back then I picked up on a some major economic blind spots of his (e.g., intense hostility toward speculators, as though they were a root cause of economic troubles). But his personal mantra of material simplicity appealed to me.
There’s a passage in there that I think about every time I pay my mortgage, about how much of a rip-off the whole mortgage system is. He waxes a bit romantic at this point, but he basically describes a time and place, not all that long ago, when it was not only possible but normal for people to move a few thousand yards down the road from where they lived to find a nice spot on the edge of the town, then spend a few weeks banging a house together. Once you get the basic structure up, and the roof, on, you can move in, and finish it out, and build additions, as the case may be. I think he was describing Italy, or maybe his native Hungary, but it made me think of the Appalachian frontier in the 18th century, or the American West in the 19th.
Instead, we live in these code-enforced, heavily-regulated, highly zoned, corporate-built, semi-disposable heaps that cost a fortune. We end up paying a lifetime of money to government-sponsored bankers for something that could be built with a few simple tools, some skills that used to be relatively ordinary, and an expenditure of some elbow grease.
Aside from the socialist dictatorship which has taken over most of this country, I judge the purpose of building permits by the people who support it here locally: contractors_whose association pushed it through to begin with_ and banks. Guess who profits from it_what a surprise!
I’ve never heard of someone suing any government because he built his own house badly.
The only thing missing in the article is that it is very possible today to have a dwelling/storage, and use modern global travel mechanisms to explore opportunities around the world. Complete disregard for home ownership is off the mark – what is important is paying off your property as fast as possible (or cash).
I did that years ago, and now I am retired with no debt.
However, I live in CA and there’s always the fear that I’m kinda stuck here with my house. What if CA raises taxes – sales tax is already at 10%, and they could always have another vote that allowed the government to raise real estate taxes willy nilly. Or they could do any number of things. I could find that I can’t afford to live here any longer and I can’t even sell my house for much.
There’s little safety when you live in interesting times.
True – although I can’t imagine a loving government taxing things that we need to survive?!? Oh, wait…
I’v always been bothered this ‘everybody MUST own a home’ mentality. Ownership is a good for some people, but for me at least(as a single man), buying a house is way more expensive than renting a one-bedroom apartment, not to mention way more hassle, and for what? To use my home as an investment? There are better(not to mention more productive) ways to invest my money.
I’m also zelously anti-debt, I dont have a credit card, ever car I’v ever owned I payed up front for(except my first car my parents gave me). I did take out student loans, but I paid them off and looking back I wouldnt have gone to college. I personally dont want to feel like I dont actually ‘own’ anything that is mine. So I would rather not take out a mortgage for a house.
Now, if you have a family and need the extra space, taking out a mortgage to buy a home might be a good idea, depending on where you live, and assuming you dont buy a house that has twice as much space as you actually need. Or if you have enough money saved to pay up front for a hosue, it might be a good way to go, no regular payments at all, just utilities and maintaince. But to take out a mortgage just so you can say you ‘own’ your own home always struck me as silly.
Are home prices plummeting all over the country? This is certainly not the case where I live in Dallas. While they have not risen, they have not lost value. My son in Irvine, California has seen single dwelling home prices drop somewhat, they are still overpriced. Same for my niece in Seattle. The biggest decrease is in condo prices, where they have dropped significantly. But this type of home has ALWAYS been risky. True, in Florida and Nevada they have lost more value. But the sky is falling speaks more to the perceived than to the reality. Try buying a single person home in California for these rock bottom prices, they rarely exist and only if you are in the right place at the right time. Just go to the listings to verify what I am saying. I stay informed, where am I wrong?
You aren’t wrong. I live near Dallas (Plano) and my home value has actually gone up by about $2,500 over the last 3 years that I’ve owned it. We never had the boom / bust here, meaning all the anti-housing advice doesn’t apply as much here as it probably does in places like Las Vegas (provided you only purchase what you can easily afford, as opposed to maxing yourself out). That being said, I’m not using the place as an “investment”, but rather as a place to live. If I break even when I sell it years from now (recouping the costs of maintenance as well), then I will consider myself to have been ahead of where I would have been had I rented.
Folks, it depends on the part of Dallas you are talking about. My mother is the central bookkeeper for a well-known boutique real estate firm that services the Park Cities, and home prices have most certainly fallen in some cases. More importantly, inventory and listing time are up, which is a stealth price decrease because it means a lower present value.
There is nothing altruistic about the notion of having everyone own a home. It’s more about the creation of debt (and in turn, expansion of the money supply) than anything else.
Any real estate investor will tell you that one’s residence is not an asset. An asset is typically defined as something that generates income (income through inflation doesn’t count).
Those that hold real estate debt own a paper asset (a type of derivative) leveraged against real property, and those that service the debt are indentured slaves to the person holding the paper.
So, when the government gets behind home ownership, I think about the puppet masters in the financial sector that are benefitting from the program. They sell the idea as home ownership when it is really something else. And the sheeple buy into it, lock, stock and barrel.
First of all, owning a house is much better than owning gold, at least you can use a house.
Second, the run up in real estate was speculation driven. I have posted in the past the true effects of ETFs on the commodity markets that has fueled the rise in prices from oil to gold, the same is true with real estate. These were called REITs. People that wanted to cash in on the growing real estate prices were able to participate by pooling money together in these real estate investment trust. As money poured in, these REITs had to buy real estate in direct relation to the money invested.
Everything was fine as long as prices and demand was going up, but when prices leveled off and started to drop. Since real estate is not very liquid, and people were taking money out or shorting these REITs, real estate needed to be liquidated at any price. This is where we started to see the big fall.
As a home builder turned private investment manager the problem is clear and simple. Any commodity that goes up too fast will drop faster and go down further. Nothing makes prices go up faster than a bunch of speculator sheep and are left holding the bag when the wolf sells.
You can blame the speculators all you want, but the real sheep were the people who scraped together money to buy a grand mansion they could barely afford with two incomes. No buyers (or only smart buyers) = no money for speculators. I think the housing mess underscores how much people really don’t understand economics and sound money practices. That is one of the greatest gifts of Mises Institute in all its forms.
Everyone gots to live someplace. I like the security of a paid off house. My property taxes are about 5% of my pension. It isn’t much of a house and not much of a neighborhood but it has taken care of me . . . we have taken care of each other for 20 years and it doesn’t owe me anything.
Sure if you have enough money saved to buy a house, its probably the best way to go.
Since I dont, I would rather rent a one bedroom apartment for half what even the cheapest houses near me would cost in mortage payments.
I skimmed all the comments so far, and I don’t think anyone has mentioned the fact that you “own” your own home only to the extent that you can pay your real estate taxes. These are skyrocketing everywhere. If you can’t pay them, the government takes your home and evicts you. That’s the end of the story. So one of the factors causing property prices to fall is that people cannot afford the mortgage AND the taxes.
Of course, that’s true. The problem is that, as someone eluded to above, this concept applies to everything. What can we hold that is not threatened by the government? Gold can be seized, everything can be taxed in some way…. Even holding “too much” cash will cause the DEA to come and kick your door in because they suspect you are a drug dealer. I think the concept of a house is that you can at least live there, and if necessary, have renters to help with expenses. This article is excellent, but I would like someone to tell me what is a “safe” investment in the USA?
I own four houses and still live out of a hockey bag. I also keep twenty grand cash in the “bank of mattress” in case it gets ugly fast and I need to get out of dodge. I’ve been on road trips out west when I dreamed about just keep going and dont look back. Point is, all that stuff in your house is just crap that’ll end up in a landfill or a woodstove someday.
While owning your own home in the silly hope that it will forever increase in value is flawed, I feel that my fellow libertarians are a little harsh in immediately marginalising home-ownership altogether.
Surely our problem is with capital goods bought during a fiat-induced economic boom, and home-ownership per se is irrelevant to this; surely home-ownership is a positive step for any man that can afford it, just as provision of his own health-care or education is clearly positive.
I also sense nihilism in Doug’s reference to his opening proverb. “[A] man’s house is his castle”, or “an Englishman’s house is his castle” is in fact many hundreds of years old, and its implications should be more widely understood in a libertarian community.
The saying was passed into common law by Sir Edward Coke in “The Institutes of the Laws of England, 1628″:
“For a man’s house is his castle, et domus sua cuique est tutissimum refugium”
It was, however, Sir William Pitt who summed it up best in 1763, and in prose that will stir every libertarian:
“The poorest man may in his cottage bid defiance to all the forces of the crown. It may be frail – its roof may shake – the wind may blow through it – the storm may enter – the rain may enter – but the King of England cannot enter.”
I just emailed the following to the author, after his article was posted at Lew Rockwell’s site:-
Acting ethically or morally means doing things that are not in your immediate best interest. If your promise only lasts as long as it is to your benefit to keep it, then your promise or word is useless.
Essentially, the bankers underestimated the risks of failure to pay – they failed to account for the loss in value of the asset they loaned money for. The question is whether it is our duty to punish them for this error. French argues that because the government underwrote the debt, it is our obligation to make them suffer.
The long-term costs of living in an amoral society are many. If you must always beware those who would take advantage of you in every situation, a great deal would need to be spent to protect yourself from the unscrupulous. Perhaps that is a society a libertarian would enjoy, but I much prefer a world where I can take you at your word rather than requiring a legal document that outlines the agreement for every transaction.
Very well spoken, “the real castle is to be found within”. I 100% agree. My wife and I (one of those young couples described in the blog) just freed ourselves up from a lot of things – clutter so to speak. We didn’t have to walk away from a mortgage. However decluttering freed us totally up, got us ready to move. And most of all, it also decluttered our mind, soul and heart. The most liberating experience in my life!
I’m unclear as to how this post has to do with Austrian economics? Are we saying that to be free from the shackles of a mortgage, we Austrians are against home ownership? I’m a home owner that could financially benefit from selling my home – as in my home is worth more now than it was when I purchased it and therefore results in a reasonable investment for me personally. I’m also not tied to my home via an overwhelming mortgage that “ties me down” – it’s part of my financially responsible and diversified investment portfolio that I maintain in order to eventually be able to retire with financial fears. I also receive satisfaction from having a place to call my own and I enjoy the benefits of home ownership including my garden and the freedom to paint it any color I want and make additions and changes to it as I want. I don’t really desire the “freedom” of not being tied to a home and I don’t understand how that “freedom” has anything to do with Austrian economics.
Are we saying that what we’re against was the government intervention that tried to stop the housing bubble from collapsing? That I can understand at least, though the post doesn’t really get to that point very clearly. Are we saying that we’re against all of the thinly veiled “private” hand-outs given to Americans through Fannie Mae’s private-veil of government intervention into Capitalism? If we are, then I can again (sort of at least) understand where we’re going.
On a related note, are we advocating the horrific and ridiculously self-centered and despicable (yet common) practice of home owners that are walking away from paying mortgages which they entered into without understanding how debt would impact them or how housing prices are a fluctuating investment that has risk, including not always increasing (thanks Capt. Obvious, I know)? Those people that irresponsibly entered into mortgage contracts to which they were not financially capable of fulfilling are irresponsible and if they default and leave the nation at large to pay for and clean up their mess, particularly selfish. I don’t deserve to have to pay for others lack or responsibility just because I am a law-abiding citizen that keeps to my promises to repay my debts with interest in accordance to contracts that I purposely entered into.
Anyways, I’m just unclear why this article is posted as a Mises topic and an Austrian economics issue. Home ownership is a private individual choice and is one that is primarily outside of the scope of the economic-related articles that are typically posted to Mises.
I tend to agree with this. The govt and their banker allies should be tarred and feathered, no doubt. However, a great many citizens freely played along with the illusion, they’re not blameless in this mess by any means (stupidity is no defense). I’m not comfortable with this idea of encouraging people to renege on their agreements, although I don’t accept that failure to pay a debt is a criminal act. But, surely there should be consequences from such failure. In fact, in his book Doug French does acknowledge that there can be very serious consequences from “walking away.” What exactly is the point he is trying to make?
If you read the whole book (relax, it’s well under 100 pages once you ignore the blank ones), Doug French’s arguments related to Austrian economics go something like this:
- The whole housing market has been manipulated and controlled by government for far longer than the current crisis, having started programs to make owning a home cheaper in an effort to tie people down and make them committed to the government, since the 1920s.
- A mortgage is a contract, and contracts do not have to be honored – they have to be fulfilled. Since mortgage contracts contain clauses for failure to pay, they essentially lay out the cost of failing to honor the contract. If that cost is too low, the fault is with the originator of the loan, not the home buyer. In many states, the only costs are a knock on the credit report and surrendering the property – your other assets are not at risk. It is a strict business decision as to whether or not to pay your mortgage or not – based on the cold hard facts of the costs vs the benefits. This is justified because the same mortgage companies walk away from other contracts (say, rental properties) when it is financially beneficial to do so.
- Because Fannie Mae and Freddie Mac underwrite half of all mortgages, and essentially manipulate the mortgage market with their terms, mortgage debt is owned by the government. Libertarians have the moral obligation to give governments as little as possible, and thus what would be unethical to do to a person (fail to pay a debt you agreed to) is in fact ultra-ethical if you do it to the government- i.e. walk away from an underwater mortgage.
I don’t agree with Doug French’s points. I merely state them so that you can understand the Austrian/Libertarian arguments he makes in the book.
Re. your second point, doesn’t French note that in some states lenders *can* pursue the borrower’s other assets, but normally don’t choose to do so because it’s not worth the effort? I believe he also notes that the impact on one’s credit score can be much more than a “knock.” Although, frankly, many of affected borrowers shouldn’t be lent money in the first place.
You are completely right that govt at many levels has manipulated and distorted the market for housing. But this is a separate issue from walking away from a mortgage. BTW, I’m not necessarily opposed to strategic default, but I do think it’s more serious an issue than French portrays.
… horrific and ridiculously self-centered and despicable …
Jeez! Where does that vitriol come from?
It’s just a contract. There is no moral dimension to breaching one, even if you do so willfully. Your intent doesn’t matter.
Now, it is fraud if, at the time you enter a contract, you have no actual intent to perform. But if you intended to fulfill it, at the time you made the contract, then there’s no issue of wrongfulness in later merely breaching it.
My apologies for the vitriol – it’s just that I happened to work for a mortgage wholesaler working on their automated underwriting engines during the peak of the housing bubble. I saw people who had repeatedly gamed the system (default, take the 100 point credit hit, let banks (by the way, I pay for your default through higher interest rates charged by the bank) and my tax dollars clean up their mess, and then start the process all over again 5 years later when their credit rating was high enough to purchase another house) and will likely choose to do so again. Although it’s due to a broken system fraught with government intervention that makes it a moral issue, it’s still a moral issue when I burden someone else with a mess that I created.
I realize that every situation is unique and there are responsible people who fall on hard times or that have been tricked into purchasing homes that they can no longer afford to pay. I sypathize with those individuals and families and wish them the best and I would probably be willing to directly give them money to help deal with their financial crisis should they be a part of my life.
My frustration comes from government intervention into helping those who default – by giving them money (or the bank to whom they owe) taxed from others to bail them out from their poor decision-making instead (the lender probably made a poor decision to lend to them if they defaulted also) of letting them deal with the consequences. However I still maintain that it’s no longer “just a contract”, it’s a contract that I will get to pay for you should you choose to default, due to the fact that the fed won’t let you fail – sort of like the fed’s bailout of half of the major mortgage banks and automakers in the US.
A further example that maybe highlights my frustration a little better. I was taught not to purchase a home that we can’t afford to pay for on 1 person in the family’s income. How many people actually choose to be responsible and purchase a home that is well within their means? I was taught to keep a rainy day fund of no less than a year’s worth of mortgage payments for in case I’m laid off or unable to work. How many people actually choose to be responsible and keep a rainy day fund at all? Now, if you fail repay a mortgage contract in which you’ve entered, don’t worry, you can default and let me pay it for you because I was responsible, didn’t take the instant gratification solution for the overpriced house on the hill that I could barely afford. That to me helps to make it a moral issue – just because someone doesn’t bother to plan or think, doesn’t mean that they’ve made a morally sound decision.
Statists learned a long time ago to make as many people as possible dependent on government action for their livelihood. Schooling became a massive make-work program. Government contractors depend on their existence for government money. Unions, of course, are directly dependent on government. Copyright holders. Even electricity users, and anyone who wants to use the roads, ever since the statists took it all over.
This process gives them long-term job security. It degrades people’s ability to operate without direct statist intervention.
By making you and I pay for their screwy system, the statists turn you against the people who utilized the system to play their “strategic default” game. The only reason you’d be angry at those borrowers is if you believed that they were not using the loan programs as intended. But they were.
The true purpose was never to guarantee loans, or get people to buy houses. It was to create dependence, to spread it. The fact that the rest of us end up getting screwed by some people’s strategic defaults is a feature, not a bug.
There is also a huge problem looming. Our parents generation arrived at retirement owning their houses free and clear. Now we have many boomers approaching retirement with very little equity in their houses. They can not afford the mortgage payment without a job. Those with houses under water will end up having to walk away.
Those boomers you refered to were usually people who could not understand the concept of living within their means. If any generation has had the means to afford a reasonable home it would definatly be the boomers. I never even took out a mortgage as I thought the interest rate at that time [late 70's early 80's] was ridiculous. Instead I bought property and built over a period of 3 years.
Mike D. is right, with even 70 year mortgages out there, there is little hope that many will someday own their homes. Dave M. did it the best way, buy a nice piece of property and build over 3 years. Also, there’s this thing called savings that few people are doing these days that could really help when buying a home
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Yup pretty much
A home is a definite investment! Don’t let anybody tell you different. The problem is that not enough people are educated in the financial aspects of home ownership, especially the mortgage part. The American banking system needs an overhaul and more educating of the public. People are materialistic and can’t stop spending!!!!!
A home is a definite investment! Don’t let anybody tell you different.
Actually, that’s one of the biggest lies that got us in this mess. A home is a durable consumer good–period, full stop, end of story.
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Don is absolutely right, the banking crisis caused nearly all the major problems in the housing industry today. The executives at all the major banks took their investors and the American people for all their worth. That is why the banking industry proved to be the worst investment over the last 5 years with a -1.6% return.
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