Borrowing 'til it hurts
Anyone out there wondering how we got into this mess? By mess, I mean the slowing economy, which might or might not be in recession. Officially, we're not in a recession, as the msnbc story says. But, and this is a big BUT, things are definitely not rosy.
I read a great story in the WPost yesterday about why we've got this mortgage mess on our hands. We're leverage addicts. Writer Michael S. Rosenwald sums it up quite well:
The simple answer, according to personal finance experts, is that we want more -- more money, more house, more car, just more, more, more. We often think we deserve more. Leverage gets us more. With historically low interest rates, leverage is the easiest and quickest tool to get more stuff.
The problem is that too much leverage has a downside that is easy to overlook. When everyone else is using leverage so successfully to get more, do we wonder what will happen if interest rates go up? Not so much.
Here's another excellent point from the story:
"When people borrow and spend money, it's really the reward centers of the brain that become activated," Zweig said. "When you borrow money, you are thinking not about the long-term consequences but the short-term result: You have more cash in your pocket. The pain you are going to experience down the road of having to pay -- that's in the future, it's remote, it's abstract."
Factor in all the hype you got from mortgage companies and real estate agents who probably told you that you could afford more house and here we are. I remember when I was buying my little house near Patterson Park, I began working with a real estate agent. Now remember, this was a little over four years ago. At the time, you could still find a house for under $100,000. He kept insisting that I could afford to pay for $150,000 house.
I said sure, I probably could with all the fancy adjustable rate mortgages and zero down offers out there, but looking ahead, I didn't want to buy more house than I needed and I didn't want to get strained financially when interest rates went up. In other words, I didn't want to be in a position where I had to decide between eating or paying my mortgage. When I insisted that I only wanted to look at houses below $100 grand, my agent became less than helpful since I was not one of the high-roller clients he was used to assisting.
Long story short, I ended up buying a fixer-upper house I found on my own that was being sold by the homeowner. The house needs work still, but my mortgage payments are fairly stable (if you don't include taxes etc.) and they're far less than what I was paying in rent.
I have to admit, the agent did make me pause. I did start thinking maybe I should just spend more like he was saying... but looking back on it now, boy, am I ever glad I didn't listen to him or any of those other people who told me I could afford more house. I could be in deep financial doo-doo right now.
A native of Vietnam, 
Comments
And you have hit upon one of the great swindles of all-time: Realtors (R). Realtors (R) do very little work and yet collect a 3% commission. For your Realtor (R), the difference between you buying a $100k home and a $150k home is $1500. And the work involved in each transaction is about equal. Of course they are going to steer you to the higher price range: they have financial incentive to do so. It really makes you wonder who that "deal" your Realtor (R) got you was really so great for.
Posted by: Mitch | March 25, 2008 2:17 PM
Mr. Rosenwald speaks the truth. Why is it that we Americans feel we need to have so much? Big house, big car, big tv, etc., etc. Your experience purchasing a home reminds me of my husband and myself when we bought our place 5 years ago. I remember the loan officer telling us "You can afford a $400,000.00 mortgage" We thought? Why would we want to do that? Luckily our real estate agent only showed us the homes we wanted to look at which were far below 400K. So not all Realtors are swindlers
DD: I don't really know that the Realtor I was working with was trying to swindle me. I think he was just weighing his options at the time and he knew right off the bat that investing time in me wasn't going to make him much money. His goal is to sell houses to make money... It's up to me, you and other consumers out there to be responsible about what we can realistically afford.
Posted by: Steph | March 25, 2008 9:49 PM
I don't mean that all individual real estate agents are swindlers or actively push their clients to homes they cannot afford. I mean that the Realtor (R) has convinced the American public to pay 6% of the selling price in a commission on a transaction where the real work involved is much, much less. With the internet, it's possible to search for homes and open houses, research neighborhoods and schools, and even pull comparable sales... all without a Realtor (R). Essentially, you're paying for negotiating skills on sales price and legal advice. But Realtors (R) don't have a financial incentive to negotiate on behalf of their clients (if their client is the buyer). Rather, they make more money the more you pay for your home. As Dan shows, its very possible to negotiate a sale without an agent. Needing a Realtor (R) is a marketing scam.
And why do they get to have their name capitalized? We don't capitalize Financial Advisor or Newspaper Columnist.
Posted by: Mitch | March 27, 2008 10:24 PM