Tuesday, April 21, 2015

Without the Requisite Knowledge and Understanding, Being Free To Choose About Debt, Housing and Knowledge Doesn't Always Work to Our Advantage ... It's Especially Harmful to the Government's Intended Beneficiaries ... The Poor and Middle Class

Far too many Americans owe too much money for the knowledge we've gained, the houses we occupy, and the debt obligations we've undertaken.

A college degree is not an automatic ticket to financial security. Neither is a house an automatic ticket to financial security. And debt is never free.

Yet a lack of knowledge leads us to conclude that we 'can't miss' by taking on mountains of debt in getting that expensive college degree and by purchasing a 'no to low money down' home as soon as possible after graduation. Nothing could be further from the truth.

Nearing Peak, U.S. Home Price Gains to Slow has this to  say in relevant part:

"Housing starts, as reported by the Commerce Department, have been in a deep funk ever since the U.S. housing bust and Great Recession hit with such ferocity in 2007. They sank from an annual pace of more than two million in the 2004-2006 period to around 500,000 in 2009. They’ve bounced back since, but can’t seem to get much over the hump of one million a year, even though population growth and immigration alone would seemingly dictate construction of at least 1.4 million homes annually. . . .
One theory holds that growing income inequality has stymied the millennial generation (folks born between 1982 and 2000) from playing the same role in energizing the housing market as did their parents and grandparents. This is the most populous generation of potential home buyers. Yet the millennials have largely been missing in action in the home market, forced by college-debt burdens and sketchy incomes to double up in apartments or remain in their parents’ basements rather than form and head new households. . . .
In addition, 27% of the owners of the lowest-priced third of U.S. homes remain in negative equity (owing more on their mortgage than the value of the dwelling), making them reluctant to do anything . . . .
As a consequence, . . . first-time buyers—millennial or otherwise—have sunk to 28% of purchasers of existing homes; the normal historical level is 40%. Without a strong cadre of first-time buyers, the entire residential real estate ecosystem stagnates. Move-up activity languishes because not enough people are buying their first homes, allowing others to purchase more expensive digs.
Likewise, future home price growth figures to be tempered by continuing tightness in mortgage credit. True, the government in recent months has tried to entice more lending to first-timers. For example, for folks with strong credit, it has cut mortgage down-payment requirements, to just 3% from 20%, on loans that Fannie Mae and Freddie Mac guarantee.
But lenders aren’t loosening credit standards much, either to mortgage borrowers or smaller home builders, who in the past supplied much of the starter-home inventory. And who can blame them? . . .            
FEW OBSERVERS HAVE as acute an understanding of the residential market as Yale economist and Nobel Laureate Robert Shiller. He was co-creator of the Case Shiller home price indexes and has done extensive academic research on housing prices in the U.S. and abroad....
Shiller evinced concern about the prospects for homeownership in the U.S. . . . many buyers during the boom years, aided and abetted by real estate industry cheerleaders, made the mistake of regarding homes as an asset class, like stocks or bonds. This is clearly not the case.
Homes, in fact, are a consumption item that depreciates, albeit at a much slower pace than, say, cars, requiring much upkeep spending to hold value. In fact, about the best one can expect in home appreciation over the long term is to match inflation. That’s what a study of U.S. home prices from 1890 to 1990 showed. Actually, Shiller found that prices outpaced inflation by a trivial 10 basis points (a tenth of a percentage point) annually. . . .
Americans no longer expect lush annual gains in home values. And . . . Shiller detects reluctance on the part of many to shoulder the long-term commitment that a home requires. “People are clearly beset by insecurity over their careers, both as a result of globalization and job displacement by computers,” he observes. . . .
The future course of home prices is immensely important to the U.S.
Residential real estate accounted for $23 trillion of Americans’ total 2014 year-end net worth of $83 trillion, according to the Fed, affecting people across the entire income scale."
Summing Up
Americans owe too much and in our slow growth debt ridden global economy, we are earning too little.
Both K-12 and college education costs have skyrocketed in recent years, and student loans are at historically staggering levels.
Meanwhile, the great American home pricing bubble has burst in a big way.
As a result, far too many people are deeply in debt, with student loans and home mortgages, along with credit card and auto loans, leading the charge.
The government's attempts to help kids from low and middle class earning families borrow heavily to get expensive college degrees and then acquire low money down home mortgages have backfired in a big way.

Government policy makers have clearly demonstrated once again that the law of unintended consequences is alive and well, and that the road to financial hell is indeed paved with good intentions.
So now we all suffer, but in the end, we have nobody to blame but ourselves. We the People are the real 'rulers.' We are free to control our own destiny.
The basic American freedom to choose is a wonderful thing, but exercising that freedom without the requisite understanding and knowledge --- especially about the perils of debt --- can be dangerous to our individual and nation's future health and well being.
That's my take.
Thanks. Bob.

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