Sunday, October 19, 2008

Ban All Mortgages?

Gen Xers and younger, are upset and frustrated with the Baby Boomers. They feel that Baby Boomers have screwed their generation in multiple ways:
  • Cost of Housing
  • Government Debt (Inter-Generational Transfer), resulting in higher and prolonged tax burden (which is really stealing money from children)
Since 1996, home prices have been growing much faster than personal income.  This is another way for the older generation to take wealth from the younger generation.  For many of the younger people, buying a house is unobtainable unless they get help.  First-time home-buyers have to borrow money from their parents for the down payment and spend most of their disposable income on the mortgage payments.  In essense, homes are so expensive that buyers have to borrow 100% of the price of the home.   Essentially, these first-time home-buyers, which are usually young couples, are funding the retirement of the previous generation.  The younger generation are significantly poorer than Baby Boomers for these reasons.

We've been complaining about Government Debt and Inter-Generational Transfer since 1985.

Since the late 1990's, the US government has been trying to enable everybody to own homes by making it easy to get mortgages. To do this, they have been:
  • keeping interest rates low
  • making it easier to get mortgages
Why is credit so easy to get and so cheap?  The powerful forces that push for mortgages and credit in general, are businesses and government.  With credit, you take future wealth and spend it today.  By doing this, you increase economic activity today at the expense of the future.  Businesses like this because they get immediate gratification by maximizing revenue and profits today.  Politicians want this because they want the economy to grow when they are in office today, not in the future when they are no longer in office.

This has fuelled the demand for houses, and therefore driven up prices.  With sub-prime mortgages, this has artificially enabled people to buy houses.  It created fake wealth.  As in any fake wealth schemes, such as Pyramid schemes, they can come crumbling down.

Besides, should we enable everybody to own a house?  Is this the correct mindset?  Should couples who make less than $25,000 a year, own a house?  Analogous to this is, should we enable everybody to own cars even if they cannot afford them?

The main reason that homes are unaffordable is the high price. The reason the price is so high is because of the huge demand curve. The factors for driving up the demand curve, are:
  1. Massive market manipulation by governments (This is only a small list of the manipulation that has taken place in U.S., Canada and Australia:  negative real interest rate according to Stanford University's professor John Taylor, Fed Reserve's purchase of $1.25 Trillion of mortgage backed securities to lower mortgage rates, Tax Credits (for first-time and existing owners to purchase, Cash for Caulkers, Cash for renovations), Deduction of interest payments from income (U.S.), Capital Gains exemption (Canada), Loan modifications and refi's, Fannie Mae and Freddie Mac insuring mortgages that are not really insurable, etc., etc.  To see the full list, visit Housing, the most manipulated market in the world).  To manipulate the market to this scale, billions or trillions are stolen from children and the unborn.
  2. Speculation.  Instead of viewing houses as simply a place to live in, people view them as investments and potential money-makers.  Consequently, they spend more on a house then they would if they were simply planning to live there, or they buy more than one house.  This speculative activity increases the demand curve and price.
  3. Because price goes up, people feel that they need to buy, or else they will never be able to afford it.
All of the above drive up the price, but especially #1 and #2.

To reduce the price of housing, we need to reduce the demand curve. We need to eliminate #2 from our society's mindset. Of course, this is easier said than done.

Houses should be viewed upon as simply a place to live. It should not be viewed upon as an investment, or a second/main source of income.  What would happen to house prices if all of society did this?  Should people not should focus on their jobs or business as their main source of income?

Besides, for homeowners to make money, they have to sell it to future buyers.  Therefore, one generation make money at the expense of the future generation.

Houses are so expensive now that most first-time buyers cannot afford them.  Housing is so unaffordable that we have the government has to spend more on subsidized housing.  This is taking one step forward and one step backwards.

Instead of letting the demand drop, banks provide 40 year mortgages, which makes it easier for people to buy and hence keeps the demand curve and prices elevated.

We all know that the lower the interest rate, the more people will buy houses and/or buy more expensive houses.  Therefore, what would happen if the interest rate was very high?  We know that this will reduce the demand and consequently reduce the house prices.

What would happen if we banned mortgages completely?  If nobody can get a mortgage, we expect demand and the price to plummet.  Is this not the desired effect?  Is this not a way of creating affordable housing?

Let us say that the current average house price is $350,000.  Let us assume that the price will drop to $200,000 if we ban mortgages.  Below is how these two scenarios compare:

Status QuoBan Mortgages & Buy with Cash
Interest Rate7%7%
Monthly Payment$2,150$2,451$1,700Monthly Rent
Annual Payment$25,796$29,418
Property Tax Rate0.8749%0.8749%
Annual Taxes$3,062$3,062
Total Annual Payment$28,858$32,480$20,400
$244,800Total Rent Paid
$16,667Yearly Savings Needed
$1,389Monthly Savings Needed
$200,000Purchase House for Cash
252513Number of Years of Property Taxes
0.8749%Property Tax Rate
$1,750Annual Taxes
Total Taxes$76,556$76,556$22,748Total Taxes
$344,446Savings over 25 year mortgage
$640,840Savings over 40 year mortgage

As you can see, it is much better to rent, save until you have enough, buy a $200,000 house with cash, than to buy a $350,000 with a mortgage.

One might argue that this is destroying the wealth of seniors who might rely on their house's net worth to pull cash out.   However, we believe that a tiny percentage of seniors do reverse-mortgages.  If home-owners never need to do a reverse-mortgage and live out their lives in their homes, which we believe this is the case for the far majority of people, then this concept will have no affect on them.

Besides, why should people rely on their homes as a source of funding for their retirement?  To do so, is to rely on the future generation to buy your home to fund your retirement.  Did the previous generations do this?  What about the next generation, and the generation after that?  Should every generation rightfully expect prices to continue to grow faster than income in order to fund retirement?  Is this sustainable, ethical or moral?

To enact this no-mortgage concept, we will need more rental units.  This is addressed in our article about rental units.

With this concept, there will be a transfer of wealth from the Baby Boomers to the Gen Xers and younger.  Is this bad or good?  One can argue that this is fair because huge amounts of wealth have already been stolen from Gen Xers by Baby Boomers through government debts and inter-generational transfer.

What are the pros and cons of this concept of banning mortgages?:
  • Create affordable housing.
  • Create huge wealth for people wanting to buy homes, mainly the Gen Xers and younger.  Since the most important issue to voters is money, government leaders would be achieving their main mission, which is to create wealth for voters.
  • People who bought at high prices with mortgages will lose.
However, it will be difficult to ban mortgages, for several reasons:
  • The people in power are Baby Boomers.
  • Most Baby Boomers are current home-owners.
  • Current home-owners who paid high prices with mortgages will reject it.
Even if the price of houses stayed at $350,000, the home owner still comes out significantly ahead if they bought the house with cash:

Status QuoBan Mortgages & Buy with Cash
Interest Rate7%7%
Monthly Payment$2,150$2,451$1,700Monthly Rent
Annual Payment$25,796$29,418
Property Tax Rate0.8749%0.8749%
Annual Taxes$3,062$3,062
Total Annual Payment$28,858$32,480$20,400
$244,800Total Rent Paid
$29,167Yearly Savings Needed
$2,431Monthly Savings Needed
$350,000Purchase House for Cash
252513Number of Years of Property Taxes
0.8749%Property Tax Rate
$3,062Annual Taxes
Total Taxes$76,556$76,556$39,809Total Taxes
$177,385Savings over 25 year mortgage
$473,779Savings over 40 year mortgage

The losers will be the banks who will no longer make billions from selling mortgages.  The big winners are the millions of Gen Xers and younger who want to buy homes.

If the government left the housing market to operate alone and freely, mortgages would not have exploded.  Exploding mortgages created and fuelled the housing bubble.  This has screwed the younger generation and will transfer huge amounts of wealth from the younger generation to the older generation.  It is only fair to reverse this trend by making mortgages harder to get or to eliminate them completely, in order to make housing affordable.

If you are part of the younger generation, speak up and speak out.  Complain to your politicians.  Send them links to our articles.  If you do not, they will continue screwing you because most of them do not even know that they are.  Many of them think that continuously rising prices is good for everybody.  It is obviously not for you.

Read more:
Housing, the most manipulated market in the world 
Bubbles - Extreme Maker and Breaker of Wealth 
Real Estate - Ponzi Scheme? 
Housing: After the Bubble Bursts 


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