I grew up in a small middle class house in Billings, MT. My father bought the house in the late 1950’s, and worked hard – frequently making double payments – to pay the mortgage off in 15 years. He and my mother lived in the house for over 25 years, and when they decided to trade-up they had saved enough money to pay cash for the difference in price to the new house. During the 25 years he lived in the house he never refinanced it, nor was he constantly having it appraised to see if it’s value had increased. There was no reason to do so; it was his home, not a real estate investment. After twenty five years the value had increased – in fact it had about tripled in value – but if you really run the numbers that amounted to a return of a little over 5% a year – a decent but not stellar return. However, when viewed in the long-term it was a safe, stable, and smart investment. People of my parent’s generation valued the concept of home ownership for the long-term.
We all know what a mess the housing market is now. Banks loaned money to people that could not afford the loans. Interest rates rose, housing prices plummeted, many homeowners could no longer afford to make their payments, and now we have empty houses and people without homes. The unethical banks are at fault. The people that bought houses they could not afford are at fault. And the taxpayers and those that did no overextend pay the price.
I understand the difficult situation of losing your house because you just can’t afford to keep it. But amidst the foreclosure statistics there is a more insidious kind of investor. The homeowner that bought a house at the top of the bubble, can still afford to make the payments, but seeing the value of the house plummet they choose to walk away. And when they walk all of us ultimately suffer. They have taken a home loan and turned it into an investment real estate loan.
For a credit qualified buyer, the interest rate on a loan for a home is one of the best deals around. Even seasoned and well-capitalized investors pay much higher rates to finance investment real estate. That’s because it is a riskier investment for all involved. The bank understands that the investor could potentially walk away. They understand that commercial real estate prices can fluctuate wildly.
But when it comes to home loans they anticipate that the borrower has a much greater self-interest in making their payments. The home loan business was built on borrowers with my father’s generation’s attitude about home ownership – not the current generation that see’s their home as a rolling real estate investment. People that can afford to make their home loans, but choose not to do so, change the game for all of us, and may ultimately raise the risk parameters – and ultimately the interest rates – for the people that do pay their bills.