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.
©ShantyWorld.com 2008 - All rights reserved. No derivative works allowed. Quoting of this article requires permission in writing.

Developer MIA

Hmmm, the chatter & number of Blogs documenting the shadiness of the Construction/Development world (in the USA) seems to know no end...
Horror Stories surrounding Contractors, Developers and low-quality residential construction are abundant.

As I told my brother-in-law 5 years ago, "you can't keep building houses for $170K, then sell them for $800K to people making $85K, and not expect this whole thing to blow up. At some point, market forces are going to realize that a $170K house is not worth $800K-- almost regardless of location."

Read how one Bentley driving Northside developer has allegedly fled the country -- owing money all over the place [ChicagoBubbleBlog.com]

Personally, I don't think developers and contractors should ever be given the benefit of the doubt. Experience tells me they almost always lie.

(Also, Please consider posting your horror story photos to the Shantyworld Flickr.com "Construction Nightmares" photo group.)

They're From Around the Way

Shanty "Pre-Fab Quickies"
Work has been crazy, but I wanted to post a few quick items so my 2 readers won't think I've fallen off my drafting stool and have forgotten about the blog. I'll call these quick posts, "Pre-Fab Quickies." Corny, I know..

Not unlike former Chicago Mayor Harold Washington, I've always loved Chicago. Once you get to know the City, it's easy to see why visitors and natives alike can list-- with considerable ease, those items, places and people that shape why Chicago is fabulous. Over the last few months, I've added a few reasons to my list. (I'll share a few of those reasons in later posts..)

For those who want a quick visual slice of Chicago, I encourage you to visit the Flickr pages that have "Chicago" as part of the tag. This designer is particularly fond of the fabulous amateur (and pro) photos posted of Chicago Architecture on the Flickr site. The photos are just fabulous. (This one reason why I love the internet..) What makes Flickr.com so great is not just that images are there for all to see, but that Flickr has a way to search for images by topic, subject, interest. One such example is a photo by "Menlo" on FLickr of Marina City (shown above left).


Crooks Don't Go Away, They Just Find New Chumps

From the continuing saga of "Lies My Contractor Told Me" , come more contractor horror stories. (You can also substitute the word "Developer" for "Contractor". ) My friends and clients know that I've been warning them for 15+ years that it's not a matter of IF, but WHAT your contractor will lie to you about. (The "when" starts almost immediately..)

That is why I was so glad to stumble on a really good Cable TV Construction show from Discovery HOME Channel called, "Holmes on Homes". The entire premise of the show is about lying, incompetent contractors, and the damage and danger they've been leaving behind. The show takes place mostly in Canada, although one episode was recently shot in the US.

Enter this burly, Canadian Alpha male contractor named Mike Holmes to the rescue. In each episode Holmes breaks down (for some unlucky homeowner) how and why the previous contractor's work was wrong/unsafe/not code-compliant, etc. Then, Holmes and his crew rip out the crummy work and do it the right way (more or less).
Apparently, there are a lot of incompetent, lying contractors and developers in Canada too. (Pheeew --it's not just the Chicago area that has its share of lousy contractors. Again, feel free to substitute the word "Developer" for "Contractor".)

While the designs are builder-esque, the craftsmanship of the work seems very solid. Check your local listings for air times. (In Chicago, the show is on cable TV daily, with several repeats during the day. How did I miss this show the first 6 years ??) Alternatively, you can buy the DVDs from the previous 6 seasons from Amazon.com.

A lot of people think I'm crazy when I tell them I've never NOT had a contractor lie to me about some aspect of a project. And it doesn't matter [to the contractor] the client demographic, location, project size, complexity, dollar value (of the project), nor project type: public vs private, commercial nor residential.. I have found that nearly all contractors lie -- at least here in the state of Illinois. It must be a genetic requirement for being a contractor. Nonetheless..

Newbie homeowners (and those looking to work with a contractor) really need to educate themselves before they buy into a development or hire a contractor. When you don't, this show explains just how badly a project can go when an incompetent contractor is hired by an unprepared homeowner.


SouthSide Blogger

I stumbled on a fun blog that Chicagoans and Condo owners (regardless of locale) should check out: "I Hate My Developer".
(found at ihatemydeveloper.blogspot.com)

"I Hate My Developer" chronicles one southside Condo Owner's trials with her Condo Association's developer, city officials, contractors and neighbors. It's smartly written, and very funny. It's both comedy and tragedy (in a good way.)

See, I too, live in a Condo.. and I've often thought the story of the shenanigans in my not-so-little condo community would make a great 21st century reality TV show. If we could get Hollywood to document (and pay us) for all the drama we get to live through as residents, all of our Association's financial problems (and special assessments) would be alleviated in the first season's airing.

Think: Melrose Place (the 1990s TV Dramady soap opera) with all the racial conflict of a Clinton / Obama Democratic primary battle, set in Chicago's multi-cultural Hyde Park. This show could be good stuff, people.

First, you have to understand that I live in a LARGE, 700+ multi-unit complex-- which makes consensus gathering nearly impossible. Competing agendas and wide-spread incompetence makes for lively Association meetings. Don't get me wrong, as an architect, I love the architecture of the building. The complex is done in a sort-of International, Miesian-lite kind of style.

It's a late '50s modern high-rise with a largely glass facade, and NewYork styled, tiny galley designer kitchens without the starchitect pricetag.
Who needs to live in the high-priced Mies van der Rohe 860-880 Lake Shore Drive apartments when you have Meisian-lite here on the southside? All the drama, but none of the property tax, gawker tourist problems. The southside is such a bargain.

Secondly, we have all the cliche reality show storylines that make for a hit show. We've got generational, race and class issues, prostitution, comic relief (from incompetent Board Members, employees and residents), we've had murder, suicide, domestic violence, and the occasional resident celebrity siting.

As a prequel to the series, we'd have to re-enact the episode where a 50+ year-old Board member tries to open-flame bar-be-que in one of the apartments. (Did I mention we don't have balconies-- and this person was cooking on a carpet and claims to be a Univ. of Chicago graduate ?) That episode would probably earn high ratings, ala the Jessica Simpson Chicken-of-the-Sea Tuna type humor. So many story lines are possible...

Our "building" is home to a cadre of D-list (mostly local) celebs, authors, TV/radio personalities, and we even have a few "has-been" national celebs. Our building is often used for TV/ movies shoots, and we have some of the best lake-front views of the City of Chicago. (I have a wonderful view of Lake Michigan.) We're a stones throw from the University of Chicago campus, the World famous Museum of Science & Industry, the DuSable Museum, and Presidential Candidate Barack Obama lives in the neighborhood.

I have episode outlines...I just need someone to option the show. Takers?

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