For the longest time, becoming a “homeowner” has been a staple of western culture. Every homebuyer was sold on the idea of living the “American Dream”. Of course this was mostly a concept that worked best during a time when America championed the nuclear family and honest money. People would become homebuyers not only to have a place to raise their family but to eventually become homeowners too (as much as they legally could). Nowadays “the family home” is no longer the staple of Americana that it used to be, with individuals now being sold on the idea of “starter homes”, flipping houses, and trading places in more ways than one; from one Brady Bunch McMansion to the next - on nothing more than an empty promise backed by an endless flow of debt.
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As I write this, the average three or four bedroom two and a half bath single family home is listed on the Real Estate market for roughly a quarter million dollars, and if built new - costs over a half million. That’s just for the house itself because depending on the location of the property, that asking price can multiply two, three, or several more times over. These are properties that just seventy years ago (ask your grandparents) were bought at a fraction of the price that they’re listed for today. In most instances, we’re talking an appreciation rate upwards of over a thousand percent! What an “investment”, you must be thinking and this must be what the market makers mean when they say “real estate (value) never goes down”. So what the hell was I talking about in the last article when I said homebuyers lose in the long run, if real estate “value” only goes up?
“Equitable”
I’m just going to go ahead and burst your bubble right now by saying home equity ≠ home value, contrary to what you heard from some banker. There was a time when the term depreciation meant more than just a tax break, but that was a time before Fannie Mae and Freddie Mac. Home equity was a reflection of the real economy, a reflection of GDP based on actual revenue streams derived from real goods and services exchanged within the free market. In other words, the average price of any home on the market was congruent with real earnings. All mortgage loans are based on something called a debt to income ratio, so back in the day that meant that the asking price of homes would naturally fluctuate based on the strength of any local economy. If the economy was doing well then home prices went up to reflect that, however what goes up must also come down… if the economy reflects that. Well that idea of risk doesn’t make for much of an interest market, now does it? Fast forward to the nineteen seventies, the dollar is removed from the gold standard and the United States officially becomes a debt based economy. What is a debt based economy? It means the economy is fueled not by the exchange of goods and services but rather the continual lending of funny money (unsecured debt). How can banks make unsecured loans? This is where our pals Fannie Mae and Freddie Mac come in to play. This duo of financial devastation came, making hallowed promises to bankers, in good faith that their programs would afford every family in America the dream of becoming a “homeowner”. At least that was the alleged idea that was originally sold to the American taxpayers.
Why is all that significant for a “homebuyer” to understand? In short, the real estate industry is all but completely detached from the real economy and has become engaged in a sultry entanglement with the debt market. The real estate market is now influenced by regular injections of debt rather than real earnings from GDP, which gives real meaning to the saying, “Real Estate never goes down (in value)”. That’s great you may say, because that means you get to tap into some of that easy money, to which I would reply whoa, slow down there Skippy… not so fast. Before you get all excited about the idea of money coming cheap, fast, & sleazy - it doesn’t mean it’s going to be easy.
These home “values” are skyrocketing because of the artificial market inflation caused by all the funny money being pumped into it. So one would think that that means access to more equity right? Well, only for those individuals who have bought in early to this Ponzi scheme (more on that later). What this means for the first-time “homebuyer” who wants to enter into the market (based on the condition it’s in today), is that they will afford less house than their grandparents did and at a much higher price of entry. So the next time a boomer tries to lecture you about possessing the will to work hard for what you want in life, remind them that they lived in an era where the average "home value" was based on a 2 to 1 debt to income ratio. Today homes are easily listed at 6.5 or a 7 to 1 debt to income ratio (and if financed, there is still front loaded interest to be paid before one even makes a dent in the principal amount - which would bring the total cost of the average home to about 13 or 14 to 1 on the debt to income scale). Mind you, this is 13 to 1 on a piece of real estate that is over seventy years old on average, and most likely has major structural depreciation with maybe some cosmetic updates to the interior or to the essentials like the roof/plumbing/electrical etc. and that is a hopeful maybe in many cases. No thanks.
The “first time homebuyers program” allows unsuspecting and mostly uneducated individuals to buy into the real estate market on the cheap (as low as a three and a half percent down payment). What they need to understand is that their home equity is practically useless until they “own” more than twenty percent vested interest in that home’s overall value. That means if you only put the minimum three and a half percent down at closing, then you’re going to be making many high-interest loaded mortgage payments before you reach that twenty percent equity mark. Oh, and if you think you’re going to lower your monthly payments if interest rates happen to go lower after you close the deal - think again, because most banks will require at least six months of payment history and twenty percent of acquired equity in the home (not to mention a desirable credit score) to qualify for a cash-out refi loan. For these mentioned reasons, the “first time homebuyer” program is the biggest sucker deal in the real estate industry.
Why is all that significant for a “homebuyer” to understand? In short, the real estate industry is all but completely detached from the real economy and has become engaged in a sultry entanglement with the debt market. The real estate market is now influenced by regular injections of debt rather than real earnings from GDP, which gives real meaning to the saying, “Real Estate never goes down (in value)”. That’s great you may say, because that means you get to tap into some of that easy money, to which I would reply whoa, slow down there Skippy… not so fast. Before you get all excited about the idea of money coming cheap, fast, & sleazy - it doesn’t mean it’s going to be easy.
These home “values” are skyrocketing because of the artificial market inflation caused by all the funny money being pumped into it. So one would think that that means access to more equity right? Well, only for those individuals who have bought in early to this Ponzi scheme (more on that later). What this means for the first-time “homebuyer” who wants to enter into the market (based on the condition it’s in today), is that they will afford less house than their grandparents did and at a much higher price of entry. So the next time a boomer tries to lecture you about possessing the will to work hard for what you want in life, remind them that they lived in an era where the average "home value" was based on a 2 to 1 debt to income ratio. Today homes are easily listed at 6.5 or a 7 to 1 debt to income ratio (and if financed, there is still front loaded interest to be paid before one even makes a dent in the principal amount - which would bring the total cost of the average home to about 13 or 14 to 1 on the debt to income scale). Mind you, this is 13 to 1 on a piece of real estate that is over seventy years old on average, and most likely has major structural depreciation with maybe some cosmetic updates to the interior or to the essentials like the roof/plumbing/electrical etc. and that is a hopeful maybe in many cases. No thanks.
The “first time homebuyers program” allows unsuspecting and mostly uneducated individuals to buy into the real estate market on the cheap (as low as a three and a half percent down payment). What they need to understand is that their home equity is practically useless until they “own” more than twenty percent vested interest in that home’s overall value. That means if you only put the minimum three and a half percent down at closing, then you’re going to be making many high-interest loaded mortgage payments before you reach that twenty percent equity mark. Oh, and if you think you’re going to lower your monthly payments if interest rates happen to go lower after you close the deal - think again, because most banks will require at least six months of payment history and twenty percent of acquired equity in the home (not to mention a desirable credit score) to qualify for a cash-out refi loan. For these mentioned reasons, the “first time homebuyer” program is the biggest sucker deal in the real estate industry.