Home ownership in America is low (relatively). The homeowners themselves? Overextended and trapped. What went wrong?
Most Americans buy a home using a fixed-rate 30-year mortgage.
Why is that?
The short answer is because Americans have been told by Wall Street and the government that a fixed-rate 30-year mortgage is a great deal (!).
Is it though?
If you take out a conservative (relative to your income) 30-year loan and make aggressive prepayments, then a 30-year mortgage is a good deal.
The problem is most Americans get swindled by the marketing message and take out a bigger loan than they want, to buy a big house they don’t need.
All Problems Start with the Government
In If You Can’t Afford a 15-Year Mortgage, Then You Can’t Afford the House, I reviewed the history of the American mortgage industry because — believe it or not — a 30-year loan didn’t used to be possible.
What I reviewed in that article is that government-sponsored enterprises, such as Fannie Mae and Freddie Mac, were created to stimulate the housing market.
They do this by spending billions of dollars purchasing mortgages from banks and bundling them into “mortgage-backed securities.” When the bank sells the loan to the government-sponsored enterprise (GSE), it no longer carries the risk of that loan which means it can loosen lending standards and issue more loans. This is exactly the goal of the government-sponsored enterprises.
In other words, the more debt Americans are in, the better.
The GSEs then sell the mortgage-backed securities (i.e., loans) to investors. Investors buy them because the government guaranteed them! Meaning if the homeowner defaults, the investor will still receive the interest income.
Why is the Government So Involved?
As you’ll see below, no other country has a government as intimately intertwined in their housing market as the US. So why is this? Why does the US government feel we need to have our hands held?
- Housing is 20% of our nation’s gross domestic product (GDP).
This includes the building of physical homes, along with the financialization of home buying (mortgage-backed securities). Gross domestic product is a measure of how well our country is doing, so it’s very important the government report a healthy and growing GDP to other world leaders.
- Source of Revenue.
Whether its PMI from the borrower or fees charged to the bank, the government makes serious money each time someone takes out a 30-year mortgage. Even when it was obvious Fannie Mae and Freddie Mac were not conducting due diligence back in 2008, the government bailed them out using taxpayer money and is profiting billions of dollars as a result.
So I get it. The US government, per usual, thinks it is helping by getting involved.
And in order to achieve their stated goals, it is crucial that Americans believe owning a home is a sign of success and that a 30-year mortgage is how to do it.
The 30-Year Mortgage Is Stupid
No matter how you slice it, being in debt for 30 years is just silly.
People stay in jobs they hate because they “have a mortgage to pay.”
They take fewer risks and play it safe because they “have a mortgage to pay.”
Is this what life is about? Playing it safe? Should you be held back from realizing your authentic desires because there is a cultural paradigm saying that owning a home is the dream?
You need to take responsibility for your life and see the reality of the situation: You don’t own even 30% equity in your home after 15 years of making payments!
So in exchange for nothing, people across the country are laying low and making payments towards homes they don’t own and then using that purchase as an excuse not to live.
As a society, we stopped asking, “How much?” and started asking, “How much per month?”
The banks, government and investors are all profiting handsomely off your mortgage. And you? When you calculate the math — and the opportunity costs you paid in favor of owning a home — do you come out ahead?
Owning a home is not a sign of success. It is not the American Dream.
America is the Only Country with a 30-Year Mortgage
It is rare to find mortgages for such a long duration outside the US. What’s more, not a single other country in the world has a government that guarantees and buys mortgages from their banks. If that doesn’t prove there’s no separation between banks and government in America, I don’t know what will.
- The most common is a 10-year fixed mortgage
- Fewer than 50% of citizens own homes
- The government does not encourage home buying (no tax deductions, etc.)
- Renting does not carry a stigma; rents are cheap and the buildings are nice
- Loans are commonly made by friends and family
- Banks do issue mortgages but are strict and require a 30% down payment
- 90% of Chinese citizens own their homes
- Chinese homeowners are mostly debt-free; 80% own their homes outright
- 80% of citizens own the homes they live in (versus only 64% in U.S.)
- Only 13% of homeowners used a mortgage to buy a home
- Mexicans use cash savings to build (or buy) homes in areas they want to live in; there are limited property rights
- Limited government intervention results in more homes owned
- 15- to 20-year fixed mortgages are common
- Interest rates are low, between 1.5% and 3% at the time of writing (2019)
- A very “debt-averse” culture
- A free-market; there’s no government intervention in the mortgage industry
- Loans average 20-25 years, and the banks carry the risk of the loan for the entire duration
- Defaults are extremely rare because foreclosure is not possible
- An excellent podcast about Denmark housing is here
- To note, Denmark was completely unfazed by the housing crisis of 2008
Again, the U.S. is the only country where the government is involved in every aspect of the home-buying process. It guarantees loans, it’s responsible for selling the loans to investors, it will bail out banks who make bad loans, it will bail out banks who cheat and lie to their customers. It will even create an organization dedicated to putting mandates on banks on how many loans to issue per quarter!
What the fuck!
And after all this,, the U.S. is still at the bottom of the barrel when it comes to homeownership rates.