Sunday, September 28, 2008

Bailout: Wealth transfer via Housing

Ok, some of you know I've been predicting this Housing (and thus national economic) housing crash for years. Ok, maybe some of you don't know it-- then you should read my FIRST POST on this blog, logged some 2 years ago.

Part of the HARD TRUTH you home owners don't want to admit is that MOST OF YOU live in grossly overvalued homes, and that ALSO contributed to this avoidable economic "crisis".
The fault for this mess does not lie merely with the investment bankers, mortgage companies, politicians/legislators who looked the other way while they amassed cash and built fake wealth on paper -- knowing it would someday implode. Many-- not all,  Homeowners assisted in creating this crisis. (I explain how in the coming paragraphs.)

But, by the time the middle class wised up to the chaos around them, it was too late. And as reported on CBS' 60 Minutes, 9/28/08, the charlatans who are largely responsible for this mess would have amassed enough cash to insulate themselves from the downside fallout. (Which, in a legal sense, implies premeditation-- don't you think? )
This is a crisis completely created out of greed and selfishness. A real Regan era, "I got mine who gives a F-- about the other guy" attitude. And it's likely that the world over is smirking with glee that Americans finally are having to pay for decades of greed and selfishness-- most recently distilled in the attitudes on display during the last 8 years by Bush et al.

So, how have (some of you) homeowners been complicit in this melt down? Because greed has created a climate where ALL OF YOU want your crappy, cheap [mostly suburban] homes that were built for $140-180K (over the last 15 years) to be assessed/valued at the 275-600 PERCENT MORE THAN WHAT THEY ARE actually WORTH.

As an architect, I more than have a good idea of what it costs to build a house. Trust me, even at $200-250K for a 1900 SF house, a contractor has plenty of room to make a fair profit. In my opinion, the TRUE cost of a house is about 70/30 (maybe 65/35) percent Labor-to-Material cost ratio. That is to say, about 70-65% of the cost of a house is in the labor. The rest is material costs. (This is a rough estimate. Some variances will occur by region, etc. Land costs and professional fees are additional, but not enough to change the ratio by usually more than 5-8% for most areas.) But those hideous vinyl clad houses in the 'burbs that routinely sold for $300-425K+ for 2400 SF (in the '90s and '00s), were probably built for only about $160-190k.

What Treasury Secretary Paulson is NOT TELLING YOU, is that a lot of that so-called BAILOUT debt/cost is a cost (or debt) manufactured on paper.

If you falsely inflate the value of a property/building that was built [true costs, including labor and profit]  for $200k, and assess it at $400-700k, then assign a mortgage (product) to the same property at $400-700K, you will create a limited buyers market. It is no wonder the average middle-class person cannot assume a mortgage for a house at that price-point.   Realize that municipalities, realtors, insurance companies and of course mortgage companies all have a FINANCIAL incentive for your house to be overvalued (to some extent), such that they can charge you more.- Property Taxes [municipal revenue] are based on the house value.
- Realtor commissions are based on the final selling cost.
(The higher the cost, the more the Realtor makes.)
- Insurance rates (thus profits) are based on house values, etc.

With these kind of financial incentives, who should be surprised that under-regulated industries were bound to push the limits of greed?The middle class home owner who DID NOT get in over-their-head also suffers as part of the collateral damage.

If a property is over valued, then it's a FAKE valuation-- and thus a fake debt (when financed.) You should note that banks can still make money on a house sold for less-- just not as much per customer.
Real wages the last 30 PLUS years have not kept pace with these fake housing values. If the TRUE value of these houses were placed with a more modest (i.e. less greedy) amount, then this housing CREDIT DEFICIT CREATED ON PAPER, would almost cease to exist immediately too. Because the truth is a house build for $150K [the widget, product] but sold for $425K still performs like a $150K house.

And because the house sold at $400K, but built for only $180K, PERFORMS like a cheap house, it is inevitable that it will lose money (faster)-- unless you can get realtors, home assessors and banks to play along with the valuation charade. Well, that is exactly what was going on [in the go-go 90s], until recently. The problem is, that kind of lie and fakery is not sustainable-- especially if REAL wages aren't keeping pace with real estate.

Another dirty part of this [2008] financial & housing crisis is that a substantial part of the hard working Middle Class will be swindled (i.e. foreclosed) out of their homes (and thus, assets) due to a woefully under-regulated [Republican manipulated] financial system. This is one of the biggest transfers of wealth from the the Working Class to the well-connected & privileged since the early 1900s. It is an orchestrated financial apartheid.

Because a substantial portion of the lousy mortgage products targeted people of color and lower Middle Class citizens, can there be any doubt that the authors of these predatory financial instruments KNEW IN ADVANCE that these were the people LEAST likely to be able to fight back and hang onto their house (and money)?

Investigations into  bank lending practices already show that a substantial portion of the people who were put into these lousy mortgages actually QUALIFIED for more traditional mortgage packages but were steered (conned) into these riskier financial products.

Again, this is a predatory, pre-meditated money grab to strip a portion of the population of what little money it already had. And since wealth through real estate is the primary means thorough which most working class American families build, gain and transfer wealth, taking homes from Working Class people --especially people of color-- is the fastest way to insure they remain among the working poor for the next 2-3 generations (or 50-75 years.)

It is DIABOLICAL. This reeks of hatred and real contempt not just for fellow Americans, but for all humanity.

As an architect, I can say there are indeed expensive homes that perform like expensive
homes. The problem is, the average home buyer the last 20 years let their own greed get in the way of hoping their crappy $150K house would be valued at $500K in 5 years. Todays consumers wouldn't know how to spot (evaluate) a TRUE $1+ million dollar house if it built itself in front of their own eyes.

The problem is, home buyers (caught up in keeping up with the Joneses), developers, realtors, and housing contractors were just as greedy and as complicit in this mess as the bankers and investment houses.

In a time where housing values have SOARED 3-6 TIMES faster than REAL INCOME, it is no wonder that a substantial portion of the population can't and WON'T ever be able to sustain that debt repayment on a mortgage product that changes rates. (Didn't this raise any red flags for any of you? Did you really think housing valuations could increase without real wages increasing and it wouldn't have any effect? Are you kidding me?)

The suburbs are FILLED with carcinogen clad, cheap homes that were built with low-quality, environmental killing vinyl products and other toxic materials for a fraction of what they were sold and assessed for. I have witnessed this first hand the last 15+ years. I routinely walked into homes that were built for $150-180K by a thieving (unqualified) developer, but sold to a suburban schmuck for $375-500K. And the developers and bankers laughed all the way to the bank-- until last week.

Those cheap homes are still worth something-- they just aren't worth the $425K you were hoping for when you bought the house. The real value is probably closer to $220-245K on one of these fake colonial 2400 SF houses. So, those of you in hock for one of these homes, would actually be better served if you could renegotiate your mortgage down to $220-245K. (This would require having it assessed for its true value-- not the false, inflated value.)

Hey, the $125-300K difference in value pre-crisis versus now was -- as the wealthy like to say-- just wealth on paper. You'll still have the same lousy cheap furniture, same bad wallpaper, and same personal effects you had before the crisis. It's just that you won't be able to get AS LARGE A LOAN against your assets [i.e. equity] as you could have pre-crisis.

But allow me to let you in on a secret:
The really wealthy folks-- the ones that truly do have $5 mil, $20+ million dollar houses that ACTUALLY ARE BUILT with quality products and are truly worth those numbers--- they KNOW your crappy vinyl/aluminum, or faux brick shack in the 'burbs is the social & economic equivalent of putting lipstick on a Chevy and trying to pass it off as a Bentley. (Sorry about the bad metaphor, but you get my point.) That level of fakery is not sustainable over time.

Old money never would have let you into that [true] multi-million plus dollar house club anyway. It's one of the reasons your crappy vinyl house has and NEVER WILL be featured in any design magazines or on a TV show.

So, the chickens are already home and will be roosting for years --if not decades-- to come. You better hope your grandchildren aren't so saddled with debt and anger, that they hold your sunset years in their power-of-attorney hands. You better start treating your younger relatives/caretakers well, and better buy long-term care health insurance with whatever money you have left. Because some U.S. taxpayers are about to feel some debt pain for the next several years.

And while it is true that a slew of GREEDY Contractors, Developers, Bankers/Mortgage lenders etc., all lied and manipulated the American middle class into falsely believing their homes were worth several hundreds of thousands of dollars, the truth is you can't get something for nothing. And that is what the middle class is guilty of trying to do:  trying to get something for nothing. Unfortunately, only the middle class (or as Leona Helmsley use to say, "The Little People") will get screwed in the end.

Only time will tell how the economic fallout will manifest.  But this scenario HAS happened before. Too bad many of you failed to learn the economic, planning and urban development lessons of the past.  Societies and industries that allow greed to grow unchecked (i.e. an unregulated, truly free market) has -- and always will, produce chaos... eventually. History has shown this again and again.

For the fools out there who think you and your country can move forward, amassing stuff (and even wealth) and benefits (of any kind) without paying more taxes (or some other cost), then you are bound to again suffer the consequences of economic crises like this one.

Your taxes will go up, and they should. It is the cost of lessons not learned, stupidity, complicity and greed.
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