By Roxane Premont, Lake County Resident
Why 50 year mortgages will force everyone to lease their homes
What would happen if tomorrow there was no credit available to purchases houses or cars? Answer: Prices would drop to what people could afford to pay out of pocket with cash.
President Trump recently floated the idea of 50-year house mortgages, arguing that this would “increase affordability”. But this begs the question: “How did homes come to be so expensive in the first place”? The answer to that question is that lending itself IS the poison that has pushed prices into the stratosphere. Longer loan terms always push prices higher.
Consider a thought experiment. 10 people show up to bid on a house in Detroit, where run-down houses have been selling for about $50K. Joe is a schoolteacher who has worked hard to save $60K and hopes to buy his first house. Nine other people show up at the auction. None have cash but they all have $200k credit lines. What will the house sell for?
Clearly, Joe will lose. One of the people with credit lines will win the house using money that they have not earned. Let’s imagine that the 9 folks with credit lines duke it out and the final sales price is $180K. Credit has pushed house prices on that Detroit street from $50K to $180K. Local homeowners may feel ecstatic that their houses are now “worth more” until they find out that they can’t afford the taxes after property revaluations, and some are forced out. Others sell to tap into their increased “wealth”, but find that home prices have gone up everywhere, making moving elsewhere a wash. Meanwhile, individual savers like Joe find that they are now forced into taking out a loan to buy at the new, higher prices.
Credit allows buyers to bid up prices, forcing everyone to pay the newer inflated prices.
This is exactly what happened over the course of American history. My dad was a Private in the U.S. Army circa 1950 and was able to buy his first house with cash as a gift for his mother. When he later got married, he bought his new bride another house with cash.
Although the 30-year mortgage was approved by Congress in 1948, it did not gain widespread traction until the 1960’s. While 30-year mortgages allowed more people to borrow their way into home ownership, this primarily benefitted those who got into the market decades ago. Since then, generations of borrowers have bid prices up with ever increasing credit, so that today’s youth are priced out of home ownership.
So here we are. Everyone who wants a house and can afford a 30-year mortgage, has a house. The rest can’t afford a 30-year mortgage. President Trump is advocating 50-year loans because lenders realize that there is no one left to lend to. The 50-year loan solves the lenders’ problem. Lenders know well that most borrowers focus on that monthly payment, and a longer loan term spreads payments over a longer time. While this appears “cheaper”, those payments are largely interest to the lender. The banks don’t want you to pay off your house and get clear legal title. Even homeowners are encouraged to move and to refinance, resetting their payment term. A lender survives only with a constant stream of borrowers who will keep paying and paying—even if it is only interest payments. This saves them, but means that you are just leasing your house from the bank.
So, what can people do?
Tell your legislators that you don’t want the federal government to approve 50-year loans or support bank bail outs. Let lenders fail.
Many banks are already insolvent due to bad commercial real estate loans. Others are failing because of defaulting sub-prime auto loans. If we don’t bail them out, then there will eventually be very little lending. This means that prices will drop to whatever people can pay out of pocket. It will be painful to see your house value going from $600k to $100K on paper. But does it really matter if you can go out and buy another similar house for $100K? The price is just numbers; the real wealth is the house itself. When it comes time to sell a house, a house will still be worth another similar house.
This is exactly the type of reset that we need, not the bankers’ 50-year MORGUE-age reset, which is a step on the road to you “owning nothing” — just as automobiles have gone from 2-year loans to 7-year loans to leasing. Let’s return to a system where more people can own a home with a free and clear legal title, not to perpetual indebtedness indistinguishable from serfdom. Let’s go back to a system where the elderly don’t have to worry about rising tax revaluations that price them out of their homes. Oppose the 50 year MORGUE-age.
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Categories: Community Activism, Contributors, Lake County - General