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Gambling With Your Home

There is a lot of finger-pointing going on in regard to the sub-prime crisis.  Much of the blame is currently centered on the lenders.  There are certainly organizations and business executives that knew better, but chose to capitalize on the situation for obscene short-term profits, which has lead to the problem.  Government and watch-dog organizations certainly should have seen this coming and gotten involved earlier.  Overall, the actions of our corporations and officials range from incompetent to criminal.

But there was something more wide-spread and insidious going on that is not being discussed enough.  Consumers chose to play their homes like “margin bets” – borrowing money they did not have and hoping the market would rise.  And if we don’t confront this practice as wrong, and put into place regulations and consumer education programs we are destined to repeat the mistake.

Americans have always regarded home ownership as a sacred right.  But your home should not be treated as a short-term risky investment.  Inexperienced investors should not be taking huge risks in the stock market with money they don’t have, nor should they be taking those kinds of risks in the real estate market (especially if those risks could mean your family is suddenly homeless). 

Here is how we can avoid these kinds of situations. First of all, this is an area that cries out for more government regulation.  I know that since the Reagan era America has been anti-regulation, but there are certain areas that require intervention for the public good. Secondly, we need to change consumer attitude and teach fiscal responsibility.  People should only buy houses they can afford. That means putting down a reasonable down payment of 15-20%, and locking in a fixed interest rate for 15 or 30 years.  Like the stock market, real estate fluctuates, sometimes wildly over a decade, so you can’t buy a house expecting the value to increase every single year.  If you can’t afford a down payment – save until you can.  If you can’t afford the payment at a fixed rate – buy a less expensive house. Buy a fixer-upper and spend a few years painting and repairing to increase the value as you go. Pretty simple economics – but as a society we need to regard home ownership as a long-term commitment and not a short-term investment.

Unfortunately, we are not a society that embraces the concept of saving and stability.  Instead, we have a sense of fiscal entitlement that causes us to load up on consumer debt and buy past our ability to pay.  And when we can’t make the payments anymore, we blame the people that lent us the money.  We default on our legal obligations because “the house isn’t worth what we paid for it”, not understanding that if we had bought within our means (and had lenders that insisted we act responsibly), structured our debt properly, and stayed in the house for a few years, valuations would have leveled.
Your home is not a short-term investment to be flipped every few years.

Certainly the corporate Weasels that created and managed these “no money down – cheap short-term loan” programs that were destined to fail should be held accountable.  But consumers that signed on the dotted line to borrow money should be too.

And right now our officials should be levying and accepting the blame accordingly, and using this disaster as a training tool to avoid similar situations in the future.  Most people are not good money managers, and they were easily sucked into a situation that proved too good to be true.  We need to educate American society about the basics –

• Don’t buy what you can’t afford.
• Don’t carry any kind of consumer debt – debt is slavery.
• Save six months salary for emergencies.
• Maximize your tax efficient retirement programs.
• Buy the home you can afford (with a good down payment)
• Leave complex investments to experts – save sanely via the proper asset allocation, and for the term that fits your life.

If we all followed these few steps we would not have to worry about Weasel corporations taking advantage of us.

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