The #1 Lesson of the Housing Crisis

I have now tracked the housing crisis carefully for several years. I have read twenty books on the subject, hundreds of articles and spoken with tons of experts. So, I feel that I have the standing to opine on the #1 lesson to take from the housing mess.

And that lesson is EDUCATE YOURSELF. Do not rely on the government to protect you. Do not rely on the good faith of your friendly real estate agent or mortgage broker. Do not depend upon your attorney or title carrier to help you avoid pitfalls. EDUCATE YOURSELF.

The housing crisis would never have happened if most people understood any or all of the following:

#1 No asset class can always go up in value. Economies are cyclical.

#2 Real estate agents have an incentive to convince you to buy houses -- and, as many house as possible.

#3 Mortgage brokers have an incentive to persuade you to take a loan which may not be in your best interest.

#4 Lenders are not your friend. They are business people with their own agenda, which may not be in your best interest.

#5 Attorneys do not generally explain to you the business (and at times legal) risks of the house purchase and/or financing process.

#6 House inspectors need to keep their referral sources happy -- that means real estate agents. So, some inspectors will be less-than-forthcoming.

#7 Leverage is a two-way street. It is great when prices are rising. But, when prices fall even a modest amount, your equity can be totally wiped out and very quickly.

#8 Houses are money pits. You will expend more on your house than you think.

#9 Buying a house is ONLY an investment IF: (i) prices rise, OR (ii) you analyze the purchase on an income basis, i.e., what would someone rent for your house and how that amount relates to ownership expenses and debt.

#10 The biggest risk of homeownership is illiquidity as many people are today discovering. They may wish to downsize to save money, or move to take advantage of employment opportunities, but they cannot sell their house. Default and/or foreclosure which damage one's credit rating may be the only answer.

None of this stuff is rocket science. It is within everybody's ability to understand the basic principles of home ownership and debt. It is easy to blame all the "bad guys" who created the housing and foreclosure crisis -- and there are plenty of those. But, the real blame lies on the doorstep of every person who did not take the time to educate himself or herself, who did not reach out with advice and counsel for friends or family new to the home buying process, who did not take an instructive role in their community if/when they saw problems brewing, who was elected to lead but did not take the time or invest the energy to understand the issues and deal with them proactively.

Today's crisis is housing. Tomorrow's will be something else. The ultimate protection we all have is to make well-informed decisions on how, when and under what terms we spend our money. Then, if a problem arises, we have no one to blame but ourselves.

Jim Randel is the author of The Skinny on the Housing Crisis (RAND, 2009), the winner of the Robert Bruss Gold Medal for excellence. The Bruss Award is sponsored by NAREE, an organization of 650 journalists and professionals who cover housing, finance and business.

Follow Jim Randel on Twitter: www.twitter.com/jimrandel

Comments

[libgrrl]

De-regulation is the direct cause of the financial industry collapse. Mortgage companies can now charge whatever they want in late fees, attorney fees, etc. The answer lies in the balance sheet. The stock value of a company is directly determined by a companies net worth. To put it simply, Assets-Liabilities= Net Worth. The higher the net worth, the higher the stock value. Included in receivables is your payment - an asset which increases a companies net worth, and in turn, it's stock value. This is why mortgage companies will not negotiate. Lowering interest rates and eliminating late/attorney fees will directly, negatively affect receivables, and in turn, net worth, and in turn, a drop in stock value.

A friend was laid off, could not make all of her house payment. Countrywide refused to accept a partial payment and added an additionl $600 in late/attorney fees. Had made her payment, on time for 7 years. If they had accepted partial payment and not tacked on the additional fees, their receivables (a current asset) would have decreased, as would net worth, and in turn their stock value. This has been a systematic industry practice to inflate stock value. De-regulation is directly the source of this problem. Charging whatever a mortgage company wants highly inflates their stock value by creating higher receivables - their assets. Eventually auditors will deem these receivables uncollectable and mortgagers are forced to remove them from the balance sheet - this is what caused the collapse.

[dnpvd51]

The twelfth rule is the government will always bail out the whiny crybaby homeowners at the expense of those folks that rent.

[ntmessage]

If we had a consumer protection arm in government as opposed to government being the arm of every business that contributes a few bucks to a campaign, perhaps these obvious points would not have been overwhelmed with faulty conventional wisdom propagated by those against the consumers interest pointed out above though our media outlets, including most of the news bureaus.

In addition to a consumer protection arm, we must make one more change. Make illegal ANY release forms by ANYONE doing business with the consumer for routine matters.

For example, in some states, before a realtor will work with you, they want you to sign a piece of paper that essentially says they are not responsible for anything they say to you, like misrepresentations of any kind. So you sign a paper that gives a sales person the ok and you have no recourse, if they lie to you. Perverted or what?

So this is a license for them to lie to you and get away with it, or provide less than expected service and get away with it. Every health care provider does a similar thing as well as a paper that says we will charge you anything we want since we do not provide quotes yet you are obligated to pay.

These forms must all be outlawed by general consumer rules that need to get back into force. Also, this will lower costs for everyone, even the businesses.

1. Consumer Protection.
2. Outlaw release forms for routine transactions.

[cavegal]

You forgot location, location, location.