Here are two real cases of the poor in the United States and the current housing crisis.
Case one is a single mother from Nicaragua who has lived in the Miami area since the 1980s. She used to live in a modest one-bedroom apartment, paying $900 per month for rent. She works as a receptionist, speaks good English and makes a decent living, in the range of $2800 per month before taxes. She was pretty thrifty and had about $20,000 in savings (including some money given to her by her former husband). During the housing boom in 2005-2006 (when houses were increasing in value in Miami at 30 percent a year) she took an offer to buy a $200,000 townhouse with no money down. The bank gave her a loan without really looking at her income (yes, this did happen in those days). Once she had the house, she needed new furniture, so she bought a new living room set, bedroom set and new big screen TV.
Those of you with a mortgage are doing the math and seeing that a before-tax income of $2800 per month with a $2000 per month housing payment (including taxes and insurance) does not add up if she wanted her and her two kids to eat and pay utilities, car insurance, car payments, etc. But this woman saw real estate increasing at 30 percent a year and thought, worst case, she could hold the house for a few years and then sell it at a profit. She thought her savings would help her make up the difference until she could sell.
Well, you can imagine what happened. By 2007, her townhouse was worth $180,000, then by 2008 it was at $150,000. The woman’s savings were completely blown. She delayed foreclosure for months but was finally kicked out of the house. She is now in a smaller apartment and has had to sell most of her furniture. The $20,000 she had in the bank is gone. She still has her job but her future is considerably more grim than it was before she decided to take up the dream of home ownership.
The second family involves a husband and wife (also from Nicaragua) who both work. They also live in a small $900 apartment. Neither of them speak English, so they have more modest jobs. Together, they earn about $3000 per month before taxes. They have been able to save about $15,000, which they keep in the bank. A lot of their other savings are sent to family members in Nicaragua.
I talked to these people when the housing boom started and asked them if they were going to buy a house. They said, “no way, we couldn’t afford it.” They stayed in their apartment and missed the boom, and continued to save a few hundred dollars a month. They kept their savings and did not put their kids through the mental torture of buying a house they couldn’t afford, moving and then being kicked out of the house.
So, you say, why did the first woman make such a bad decision? Well, we are all responsible for our own actions, and this woman is responsible for hers. But there is an important point here. It was government policies intended to “help the poor” that caused the woman to buy a house she could not afford. One lesson we learn here is that the best way to help the poor is to let them work and save and not offer them free handouts. Free usually ends up being very expensive indeed.
The source of these government policies to “help the poor” with housing go back decades. This Wikipedia history of Fannie Mae provides a good summary. The point is that in our fervor to provide the dream of home ownership to the poor we have pushed government policies that force banks to give loans to people who otherwise would not be able to afford them. These (admittedly well-intentioned) policies started with the Community Reinvestment Act in 1977 and continued into the second Bush administration. Both Democrats and Republicans signed on to these policies.
To continue to push home ownership for the poor, government agencies began to guarantee loans given by banks. To the bank, there was relatively little risk because of these government guarantees. This gaves banks a huge incentive to create all kinds of new mechanisms (subprime mortgages, ARMs, etc) to get more people to buy mortgages.
There is plenty of blame to go around for the current foreclosure crisis. Both political parties are to blame. Well-meaning government bureaucrats are to blame. Greedy bankers are to blame.
But from the perspective of pure economics, there is an interesting question worth exploring. Are people always better off owning their own home? Well, actually no. A lot of very smart money managers have been saying for a long time that renting is a better investment than buying. So government policies that encourage people to get out of their rented apartments and into their own home seem to be encouraging people to make a bad investment.
From the perspective of the gospel, the Book of Mormon warns about the pride cycle of wanting the newest, biggest and best. Modern-day prophets constantly warn us about getting into debt. I still remember the talk President Hinckley gave when he said President Faust was the happiest guy he knew because he had paid off his mortgage. So, government policies that encourage the poor, middle class or anybody else to covet things beyond their means also appear to be just plain wrong and immoral.
I hope we have learned our lesson. The examples of the two families mentioned above provide a very cautionary tale for all of us.