Broke Enough to Buy a House: What the Housing Bubble Has to Do with Sustainability
In the years immediately following the housing bubble burst, borrowers had to practically promise their firstborn child to secure a mortgage. Or at least a preferred arm or leg.
And while the requirements to obtain a mortgage are still pretty strenuous, particularly for those with low or even non-existent credit scores, there are signs that at least some regionally-focused lenders (think credit unions, non-franchise banks, etc) and mortgage insurers are beginning to ease up. But is that really a good thing for a rapidly changing economy?
In the first few years of the millennium loan companies and mortgage insurers were targeting those with high credit scores, higher annual net salaries, and more desire to conspicuously show their success with little thought of the next day, the next month, or, let alone, the next decade. But now lenders are beginning to be more accepting of merely average loan candidates, in certain circumstances. Traditionally speaking, mortgages in the last several years have been made largely to people with down payments of at least 20 percent and a strong average credit score of 760. That is not so any longer though. In fact, now what we are seeing is that lenders are willing to tinker with one element at a time. So if someone is putting at least 20 percent down, they will go down to a 720 credit score. And if someone has a 760 or a 780 credit score, they might be willing to go up to a 95 percent financing. 95%? A lending institution would be willing to offer a substantial amount of money on only 5% down? What then must the payment stipulations look like? Doesn't matter.
I Said FHA, Not FFA
Fees on F.H.A.-backed mortgages have been inching higher for several years. For those that don't know F.H.A. is the Federal Housing Administration (better known as the U.S. Government) and provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934. Borrowers must pay an upfront mortgage premium of 1.75% of the loan amount, which can be rolled into the mortgage. But it seems that because this is a government agency (albeit one that does self-generates its own operating budget) nothing is as simple as first states. As of April 1, another fee, the annual mortgage insurance premium, rose to 1.35 percent from 1.25 percent of the loan, which is broken down into monthly payments. And while this monthly mortgage premium was typically canceled once the mortgage amount fell to less than 80 percent of the original loan value (after a minimum of five years), starting in June, the insurance must generally be paid for the life of the loan. And for those that don't know, if you put less than 20% down, you will have to pay Private Mortgage Insurance, called PMI. So having said all that, let's plug in some numbers.
The house you want to buy is being advertised for $150,000. You are able to put just 3.5% down. That leaves $145,000 to be financed. Your interest rate is just 4.125% but with the mortgage premium and the annual mortgage insurance premium being added in you are staring at a 6.35% interest rate. If you take out the note for 30 years you are facing a $902.24 monthly house payments plus an additional $138.96 private mortgage insurance payment for at least 5 years or until 20% of the house has been paid.
What Does My House Payment Have To Do With Sustainability?
The housing bubble we have been witness to over the last eight or nine years is not an isolated incident leaving the public blindsided and set in motion by a bunch of political criminals bent on their own greed. In fact, it is just one of the latest examples of wild, uncontrolled speculation and investing, that comes along with rabid capitalism. I should know. I fell...no, not true. I willingly walked toward that light in 2009.
Blinded By The Light
Somewhere along the line the American Dream became defined by owning more stuff than thy neighbor and having the best money could buy. Many times that meant relying on credit that was unsecured and came with lofty interest rates.
My wife and I were still very much newlyweds and felt the urge to spread our wings and build a nest of our own. Living in the rural South we wanted a very quaint, idealistic, home we could maybe raise a family in. The only roadblock seemed to be that I worked a dead end job making just barely over $20,000/year. We didn't have a car payment though and our lives were somewhat simple. We honestly felt we could make it work out with a moderately priced home, a little overtime, some creative financing, and a lot of American optimism. By early December of that year I had made an appointment with a mortgage broker to discuss our options. Our credit score was reasonably good due to our severe lack of credit (irony of the system, trust me). We didn't really have a pot to pee in but we also hadn't gotten a Target card to buy a new pot.
The home we were interested in was just at $87,000 and we felt the price was somewhat negotiable due to its time on the market and some maintenance issues that had to be performed. Imagine though my surprise when the broker told us we were "golden" and together with a first-time home buyer, FHA backed loan, we could purchase our home on with just a 1.5% down payment. That meant in as little as a month we could walk into our new (to-us) home for just $1,305.
It was a dream. A dream that was all too quick going to wake us in a cold sweat. What we hadn't figured was that over the course of the next 30 years we would be paying 6.5% interest, mortgage insurance, and just at $495 in interest per month.
That $85,000 home would come out to be a grand total of $328,950.
That does not bode well for the sustainability of our American housing market.
Neither A Borrower Or Lender Be
I am not naive. I understand that for the most part no one can outright buy a home. We must take out a loan. In that case, it is in our best interests to ensure that the value of the item is close to - ideally below - the amount borrowed. But in the early part of the Millennium we were all (or, mostly all) looking at homes not just as a place to live but rather as an investment opportunity. Our speculation drove the market prices up. Our greed fueled our own downward spiral.
By "wanting it now" and accepting no less, we fall victim to a very unsustainable and shallow short term thinking pattern that serves only to fuel larger bubbles. We move from one transaction to the next looking to cash in with a minimum investment. Houses are no different. In fact, houses have historically been reasonable investments, providing shelter for us and our families while growing in value. But - and here is the thing we seemed to have overlooked - the mortgage our parents and grandparents took out on 30-year homes were in ideal and rational (and dare I say, sustainable!) conditions. [They] sold for higher than they bought and did so after paying off the majority of the principle of the loan. Generations before us didn't have "starter" homes and transition houses and vacation homes.
At the end of the day our wants outweigh our needs. Our desire to keep up with the Joneses (or worse, BE the Joneses) causes us to make poor decisions and create an unsustainable scenario for ourselves. We fear the future because we live in an uncertain present.
Andrew Odom is a content contributor, author, designer, community manager, neo-homesteader, and dreamer. In his spare time he typically dons a tin foil hat and sets out to reveal the real culprit behind the Scooby Doo mystery. Read more from his sustainable housing chronicles here or find him on Google.