The Springfield overflow shelter (SOS) is closing down for the season in a week. This not only puts people out of jobs but also out of a safe, warm place to sleep and get food. The closure of the shelter leaves our town with an extra 60 or so people sleeping out on the streets every night. This now causes more problems for the police who are trying to make the city a safe and clean environment. So now when they find someone sleeping on the sidewalk, and they tell them that they have to go someplace else where are they supposed to go? All of the shelters in town (e.g., Salvation Army and Helping Hands) are always full to the max. The city needs to take all of these factors into consideration before closing down a shelter that houses nearly 60 people a night, every night. The city should come up with a solution for where these people can go, it is unethical for us to just leave them out on the streets with no place to go for shelter. I know personally I wouldn’t want to sleep outside even if it was nice, I would want someone to care about me enough to at least give me shelter, and safety.
Showing posts with label housing. Show all posts
Showing posts with label housing. Show all posts
Tuesday, May 5, 2009
Reaction Essay About Homeless Shelter Closing
Here is a student essay about the closing of a temporary overflow homeless shelter in the city of Springfield, Illinois. I'm offering it here without my comments.
One student thinks we should cut food assistance to the homeless.
Check out this editorial by one of my students:
I have long been aware that food stamps are available in this state for the poor, children, and homeless in our society; however I was unaware that those who live in shelters are approved for $200.00 a month per person in food stamps.
I have worked with the homeless for about three years and I see flaws in the system. The clients who live in shelters in Springfield without cost to them for anything (including meals, shelter, social services, bus tokens, telephone use, or any clothing we may have on hand), yet these clients are automatically eligible for food stamps. The client only has to stay overnight and they can qualify as a homeless person and therefore qualify for this benefit.
This seems to me to be a form of either fraud or double dipping. I have long asked many questions about this procedure and I believe that a homeless client should not be eligible for food stamps as long as he or she lives in a state or federally funded free shelter. I do believe that each case is unique and should be look at individually, and I am sure there are cases where it is necessary for the client to have food stamps, but I have not seen many in the three years I have worked there who did not need food stamps.
We need to assess the needs of each client, and if the client is staying at a shelter he should be required to donate the card or a portion of the card to the shelter while in the shelter. We must stop some of the waste so that we can use the funds for those in the need most.
Here is my reaction.
This is certainly a thought-provoking editorial, and I am glad you wrote such an interesting piece. You present a “fact” (I wonder if it’s really true that each person living in a homeless shelter qualifies for $200 per month in SNAP benefits, so that a family of four living in a homeless shelter would receive $800 in credit on their LINK card) and then point out that this is a flawed policy. You seem to be saying that since homeless shelters provide meals to their clients, those clients should, as part of a “payment” for staying at the shelter, be required to share their food security income (SNAP benefits) with the shelter, at least so that the shelter can use this money to supply the client with meals.
You also point out that persons who stay in a homeless shelter may have incomes that would make SNAP benefits unnecessary. For example, a person earning $13 per hour might be able to afford a low-rent apartment, but they could be saving up for a down payment on a better housing arrangement, and using the shelter as a place where they can reduce their costs of living while they save up money to pay for a better living space. In such situations, it seems fair that such persons not be given automatic benefits of $200 per month for food expenses, especially if they are eating at their homeless shelter.
It might be the case that you are suggesting that persons in homeless shelters should be disqualified from receiving food security benefits, because they can rely on the shelter for food, and so they should not receive SNAP funds. I wouldn’t agree with that because some shelters to no offer meals, and I prefer that clients have autonomy, and giving a person $200 to spend on food allows them to enjoy some freedom in making choices about what they eat. Also, if a person is relying on a shelter for their food and has no SNAP money, they became more dependent on their shelter, and less able to strike out on their own, so that is a concern for me.
I am also uncertain about what you mean when you say that persons in shelters receive $200 in SNAP money each month. From your essay, it seems you are saying that even if a housed person spends a single night in a shelter, they could receive the full benefit of SNAP money at a maximum level. It seems to me that the last time I checked, the food security policies did not work this way. When I last checked, food stamps (SNAP) benefits were determined through a complex formula that took into consideration one’s income, the number of dependents in one’s family, and one’s housing arrangement (as well as some other factors, such as one’s disability status and other forms of welfare benefits received). And yes, in such a formula I think it’s reasonable for persons who are designated as homeless (as those who live in a shelter should be designated) would enjoy a slight increase in their benefits because of their homeless situation. I understand why you might argue that homeless people should receive lower benefit levels, because they can have free food at shelters, but I think the program goal is to help clients establish autonomy and independence, and so I am for giving clients a bit more money to use on their own outside the shelter (money they could keep if they left the shelter and found housing in some other situation). Also, persons who are homeless may need to eat more prepared meals if they have no access to a kitchen or cooking equipment. Housed persons can presumably enjoy savings in their food costs by cooking at home.
I have long been aware that food stamps are available in this state for the poor, children, and homeless in our society; however I was unaware that those who live in shelters are approved for $200.00 a month per person in food stamps.
I have worked with the homeless for about three years and I see flaws in the system. The clients who live in shelters in Springfield without cost to them for anything (including meals, shelter, social services, bus tokens, telephone use, or any clothing we may have on hand), yet these clients are automatically eligible for food stamps. The client only has to stay overnight and they can qualify as a homeless person and therefore qualify for this benefit.
This seems to me to be a form of either fraud or double dipping. I have long asked many questions about this procedure and I believe that a homeless client should not be eligible for food stamps as long as he or she lives in a state or federally funded free shelter. I do believe that each case is unique and should be look at individually, and I am sure there are cases where it is necessary for the client to have food stamps, but I have not seen many in the three years I have worked there who did not need food stamps.
We need to assess the needs of each client, and if the client is staying at a shelter he should be required to donate the card or a portion of the card to the shelter while in the shelter. We must stop some of the waste so that we can use the funds for those in the need most.
Here is my reaction.
This is certainly a thought-provoking editorial, and I am glad you wrote such an interesting piece. You present a “fact” (I wonder if it’s really true that each person living in a homeless shelter qualifies for $200 per month in SNAP benefits, so that a family of four living in a homeless shelter would receive $800 in credit on their LINK card) and then point out that this is a flawed policy. You seem to be saying that since homeless shelters provide meals to their clients, those clients should, as part of a “payment” for staying at the shelter, be required to share their food security income (SNAP benefits) with the shelter, at least so that the shelter can use this money to supply the client with meals.
You also point out that persons who stay in a homeless shelter may have incomes that would make SNAP benefits unnecessary. For example, a person earning $13 per hour might be able to afford a low-rent apartment, but they could be saving up for a down payment on a better housing arrangement, and using the shelter as a place where they can reduce their costs of living while they save up money to pay for a better living space. In such situations, it seems fair that such persons not be given automatic benefits of $200 per month for food expenses, especially if they are eating at their homeless shelter.
It might be the case that you are suggesting that persons in homeless shelters should be disqualified from receiving food security benefits, because they can rely on the shelter for food, and so they should not receive SNAP funds. I wouldn’t agree with that because some shelters to no offer meals, and I prefer that clients have autonomy, and giving a person $200 to spend on food allows them to enjoy some freedom in making choices about what they eat. Also, if a person is relying on a shelter for their food and has no SNAP money, they became more dependent on their shelter, and less able to strike out on their own, so that is a concern for me.
I am also uncertain about what you mean when you say that persons in shelters receive $200 in SNAP money each month. From your essay, it seems you are saying that even if a housed person spends a single night in a shelter, they could receive the full benefit of SNAP money at a maximum level. It seems to me that the last time I checked, the food security policies did not work this way. When I last checked, food stamps (SNAP) benefits were determined through a complex formula that took into consideration one’s income, the number of dependents in one’s family, and one’s housing arrangement (as well as some other factors, such as one’s disability status and other forms of welfare benefits received). And yes, in such a formula I think it’s reasonable for persons who are designated as homeless (as those who live in a shelter should be designated) would enjoy a slight increase in their benefits because of their homeless situation. I understand why you might argue that homeless people should receive lower benefit levels, because they can have free food at shelters, but I think the program goal is to help clients establish autonomy and independence, and so I am for giving clients a bit more money to use on their own outside the shelter (money they could keep if they left the shelter and found housing in some other situation). Also, persons who are homeless may need to eat more prepared meals if they have no access to a kitchen or cooking equipment. Housed persons can presumably enjoy savings in their food costs by cooking at home.
If homeless shelters provide meals to their clients, that is their decision. Certainly they can choose to not provide meals and let their clients use their SNAP funds to keep themselves from becoming malnourished. Also, isn't it possible for shelters to charge their clients for meals, perhaps using food stamps (SNAP benefits)? In some places people have been using food security welfare to eat in restaurants for years.
Sunday, March 22, 2009
Mortgage Lending and Borrower Education
My reaction is to the policy that we suggested in class. I think it would be wise for the lender to require consumer education. Too many people in our country feel that it is their right to own a home. This is not a right, but rather, a privilege. It is a privilege that should come with a wise, informed realization of what financial responsibility comes with owning a home. It is the purchaser’s responsibility to find out what type of mortgage he/she is applying for and what interest rates apply. It is the consumer’s right, however, to have adequate information regarding the reality of owning a home.
I fully believe that if we had a policy implemented to help consumers become aware of how loans work many people now would not be in the foreclosure state. Lenders, too, would be regulated with this policy. It would be interesting to see how many foreclosures could be prevented with regulated loan bail-outs for the banking community. It is the lender’s responsibility to think twice before approving an unrealistic loan to a consumer. I honestly think that in the end, this policy would benefit both consumers and lenders.
The policy you chose to evaluate was one that would mandate consumer education about loans and mortgages for anyone getting a loan. I am unable to see how the federal government can have any justification in the Constitution for mandating such training. If the home mortgage loan is in some way involved with federal home loan guarantees, then yes, requiring consumer education could be part of the strings attached to whatever federal backing is given to mortgage lenders. There could also be a stipulation that the government would only provide certain services for banks when those banks had all mortgage borrowers complete consumer credit education classes.
The Federal Reserve Banks (which aren’t really part of the government, although their governing board is appointed by the government) did in fact try to educate borrowers about home ownership. The Department of Housing and Urban Development also provided good educational materials about home ownership, and supported community development corporations in their efforts to educate low-income credit-worthy potential mortgage borrowers.
What we have here is an essential problem. You are correct that a borrower has a responsibility to become well-informed and self-educated about mortgage debt and how housing loans work (although why this isn’t taught in middle school math classes escapes me). You are also correct that borrowers had a duty to notice how credit-worthy their borrowers were. In the case of our current crisis, lenders were able to quickly sell their home loans to financial wizards who would aggregate the home loans and sell bundles of mortgages as home lending derivatives. Since very few Americans traditionally default on their home loans, these derivatives were considered quite safe. And, since most home loans have borrowers paying 5% to 7% interest, these derivatives could yield investors 4% to 5% annual returns quite safely. Also, there had been no sustained or significant drop in housing prices in recent history (in living memory of the young people who were making, selling, or buying these home-loan-backed derivatives).
In 2005-2006 housing prices stopped rising. In Florida, Arizona, and Nevada the prices started to decline rapidly. In 2006-2008 prices for homes declined all across the Atlantic and Pacific seaboards, as well as in some “hot” real estate markets inland. Many speculators, including common middle-class people, had been buying investment properties or flipping homes, and these people were left with homes that were dropping in value, and no there were no willing buyers. This acted as a sort of trigger, and some of the mortgage-backed securities no longer looked safe, but people in the investment community weren’t sure just how unsafe those derivatives were. Were they worthless, or worth 50%, or 90% of what people had thought they were? No one knew.
A general credit-bubble that had increased consumption and consumer demand began to deflate as housing prices fell, and demand declined, but production was initially high, leading to a glut of products, softer prices, and falling profits. This in turn forced companies out of business. Big companies shrank, closing offices or outlets where sales were especially low. The resulting increase in unemployed persons added to the numbers of the unemployed whose jobs depended upon the housing market. Those in home construction or the financial paper-shuffling associated with home buying-and-selling (bankers, loan officers, mortgage brokers, real estate agents, law offices specializing in home sales, etc.) lost income, and this further eroded demand and hit retail sales. Suppliers of materials for home construction or infrastructure development that had been built to accommodate housing booms in places like Florida, Arizona, and Nevada began to lose business, and lumber mills in Georgia, Oregon, and other places shut down, swelling the ranks of the unemployed.
The very rapidly increasing unemployment rate (unprecedented since the 1970s in the rapidity of its growth) caught many people unprepared. As demand slumped, whole industries began to fall apart, including auto manufacturing and sales, construction equipment manufacturing, luxury goods, furniture, travel, and high-end restaurants. More people lost jobs, and many of these people found that they had been living from paycheck to paycheck, and had not enough reserve savings to pay their mortgages on time. Worse, in many places people found that their debt on their homes was now far more than the homes were worth. In recent recessions a person who had been laid off could quickly sell their home to raise money to help them get through the tough time. Home prices were generally stable or increasing, so people could cash in their homes and move to a cheap apartment until a new job came along. Now, however, with people having no money to gain from selling their homes, that avenue of escape was closed off.
Although the media plays up the idea that there are irresponsible lenders and borrowers, and indeed there certainly are many of those, I suspect that the vast majority of the persons facing foreclosure are merely typical Americans who have lost jobs and are unable to find new ones, and are unable to make payments on their homes, and are unable to sell their homes because housing prices have taken them from having $160,000 debt on a $210,000 home to having that same debt on a home that is now valued at $140,000 (or some variation on this).
When median house prices rise to over four or five times the median household income in an area, how are you going to be able to sell those homes? Mortgage lenders had to adopt new standards and lend people more money in those areas where the housing markets would have priced typical middle-class people out of traditional systems of home lending. So, in California or Florida or Virginia banks might give a family with an income of $70,000 a loan for $240,000 when in the past they would have only wanted to give a loan for $160,000 to such a household. So long as the $280,000 home the family bought with that money was likely to continue growing in value and become worth $300,000 in a year or two, this seemed safe. But, now that the house is worth $210,000 rather than $280,000 or $300,000, and now that one of the two income-earners in the family is unemployed and the household income has dropped from $70,000 to $40,000, the situation has become horrible for everyone concerned.
I like the idea of giving people education about home loans, and I think that such policies might be helpful in reducing the really crazy kind of lending to unqualified people that took place. But, I think the bigger segment of the foreclosure crisis is based on the American tendency to live on credit, and save very little. People were told to buy the largest home they could afford because housing prices always go up and housing is a good investment. And in fact, many people made fortunes on the growing costs of homes, and this fact was widely publicized. Given that situation, how many Americans would save 10% of their income in case of a recession where they would lose their job? Where would they save that money, in a safe investment that gave 5% interest? That would seem like a stupid thing to do when one could use that money to buy a much nicer home and then make 8% or 10% interest on the appreciation of the home while in the mean time enjoying living in it. Or, one could invest in the stock market, which had 10-year average annual return rates of 10%-15% (because of the rapid growth in equity prices in the late 1990s and for a couple years between 2003-2006). Now the stock market has declined by over 40% in a year, and housing prices have dropped nationally by nearly 10% on average across the country, and by over 30% in some areas.
This problem isn’t really reducible to a case of greedy and irresponsible home mortgage borrowers. Yes, such people exist, and it’s fun to think of them getting punished for their greed and ignorance. That is one reason why I showed pictures of people’s belongings scattered on the lawns and sidewalks of their former homes as the law-enforcement people moved them out onto the street. And a policy to help ignorant people become more enlightened will help somewhat. But, you can’t hardly lay the blame for the 30-year credit bubble economy on the backs of the 2%-3% of home mortgage borrowers who bought more than they could afford with the “help” of usurious loans from unscrupulous lenders.
I blame the baby-boomers and my generation X cohorts for generally failing to read enough history to realize that capitalism is prone to cycles of boom and bust. We had parents or grandparents who lived through the Great Depression, and their stories were there for us to hear if we asked. And if we did ask, we might have reflected on what they told us and thought to save 10% or 15% of our incomes instead of spending 102% of our incomes and living well, but building up resulting debts on cars, homes, and credit-card purchases.
I fully believe that if we had a policy implemented to help consumers become aware of how loans work many people now would not be in the foreclosure state. Lenders, too, would be regulated with this policy. It would be interesting to see how many foreclosures could be prevented with regulated loan bail-outs for the banking community. It is the lender’s responsibility to think twice before approving an unrealistic loan to a consumer. I honestly think that in the end, this policy would benefit both consumers and lenders.
The policy you chose to evaluate was one that would mandate consumer education about loans and mortgages for anyone getting a loan. I am unable to see how the federal government can have any justification in the Constitution for mandating such training. If the home mortgage loan is in some way involved with federal home loan guarantees, then yes, requiring consumer education could be part of the strings attached to whatever federal backing is given to mortgage lenders. There could also be a stipulation that the government would only provide certain services for banks when those banks had all mortgage borrowers complete consumer credit education classes.
The Federal Reserve Banks (which aren’t really part of the government, although their governing board is appointed by the government) did in fact try to educate borrowers about home ownership. The Department of Housing and Urban Development also provided good educational materials about home ownership, and supported community development corporations in their efforts to educate low-income credit-worthy potential mortgage borrowers.
What we have here is an essential problem. You are correct that a borrower has a responsibility to become well-informed and self-educated about mortgage debt and how housing loans work (although why this isn’t taught in middle school math classes escapes me). You are also correct that borrowers had a duty to notice how credit-worthy their borrowers were. In the case of our current crisis, lenders were able to quickly sell their home loans to financial wizards who would aggregate the home loans and sell bundles of mortgages as home lending derivatives. Since very few Americans traditionally default on their home loans, these derivatives were considered quite safe. And, since most home loans have borrowers paying 5% to 7% interest, these derivatives could yield investors 4% to 5% annual returns quite safely. Also, there had been no sustained or significant drop in housing prices in recent history (in living memory of the young people who were making, selling, or buying these home-loan-backed derivatives).
In 2005-2006 housing prices stopped rising. In Florida, Arizona, and Nevada the prices started to decline rapidly. In 2006-2008 prices for homes declined all across the Atlantic and Pacific seaboards, as well as in some “hot” real estate markets inland. Many speculators, including common middle-class people, had been buying investment properties or flipping homes, and these people were left with homes that were dropping in value, and no there were no willing buyers. This acted as a sort of trigger, and some of the mortgage-backed securities no longer looked safe, but people in the investment community weren’t sure just how unsafe those derivatives were. Were they worthless, or worth 50%, or 90% of what people had thought they were? No one knew.
A general credit-bubble that had increased consumption and consumer demand began to deflate as housing prices fell, and demand declined, but production was initially high, leading to a glut of products, softer prices, and falling profits. This in turn forced companies out of business. Big companies shrank, closing offices or outlets where sales were especially low. The resulting increase in unemployed persons added to the numbers of the unemployed whose jobs depended upon the housing market. Those in home construction or the financial paper-shuffling associated with home buying-and-selling (bankers, loan officers, mortgage brokers, real estate agents, law offices specializing in home sales, etc.) lost income, and this further eroded demand and hit retail sales. Suppliers of materials for home construction or infrastructure development that had been built to accommodate housing booms in places like Florida, Arizona, and Nevada began to lose business, and lumber mills in Georgia, Oregon, and other places shut down, swelling the ranks of the unemployed.
The very rapidly increasing unemployment rate (unprecedented since the 1970s in the rapidity of its growth) caught many people unprepared. As demand slumped, whole industries began to fall apart, including auto manufacturing and sales, construction equipment manufacturing, luxury goods, furniture, travel, and high-end restaurants. More people lost jobs, and many of these people found that they had been living from paycheck to paycheck, and had not enough reserve savings to pay their mortgages on time. Worse, in many places people found that their debt on their homes was now far more than the homes were worth. In recent recessions a person who had been laid off could quickly sell their home to raise money to help them get through the tough time. Home prices were generally stable or increasing, so people could cash in their homes and move to a cheap apartment until a new job came along. Now, however, with people having no money to gain from selling their homes, that avenue of escape was closed off.
Although the media plays up the idea that there are irresponsible lenders and borrowers, and indeed there certainly are many of those, I suspect that the vast majority of the persons facing foreclosure are merely typical Americans who have lost jobs and are unable to find new ones, and are unable to make payments on their homes, and are unable to sell their homes because housing prices have taken them from having $160,000 debt on a $210,000 home to having that same debt on a home that is now valued at $140,000 (or some variation on this).
When median house prices rise to over four or five times the median household income in an area, how are you going to be able to sell those homes? Mortgage lenders had to adopt new standards and lend people more money in those areas where the housing markets would have priced typical middle-class people out of traditional systems of home lending. So, in California or Florida or Virginia banks might give a family with an income of $70,000 a loan for $240,000 when in the past they would have only wanted to give a loan for $160,000 to such a household. So long as the $280,000 home the family bought with that money was likely to continue growing in value and become worth $300,000 in a year or two, this seemed safe. But, now that the house is worth $210,000 rather than $280,000 or $300,000, and now that one of the two income-earners in the family is unemployed and the household income has dropped from $70,000 to $40,000, the situation has become horrible for everyone concerned.
I like the idea of giving people education about home loans, and I think that such policies might be helpful in reducing the really crazy kind of lending to unqualified people that took place. But, I think the bigger segment of the foreclosure crisis is based on the American tendency to live on credit, and save very little. People were told to buy the largest home they could afford because housing prices always go up and housing is a good investment. And in fact, many people made fortunes on the growing costs of homes, and this fact was widely publicized. Given that situation, how many Americans would save 10% of their income in case of a recession where they would lose their job? Where would they save that money, in a safe investment that gave 5% interest? That would seem like a stupid thing to do when one could use that money to buy a much nicer home and then make 8% or 10% interest on the appreciation of the home while in the mean time enjoying living in it. Or, one could invest in the stock market, which had 10-year average annual return rates of 10%-15% (because of the rapid growth in equity prices in the late 1990s and for a couple years between 2003-2006). Now the stock market has declined by over 40% in a year, and housing prices have dropped nationally by nearly 10% on average across the country, and by over 30% in some areas.
This problem isn’t really reducible to a case of greedy and irresponsible home mortgage borrowers. Yes, such people exist, and it’s fun to think of them getting punished for their greed and ignorance. That is one reason why I showed pictures of people’s belongings scattered on the lawns and sidewalks of their former homes as the law-enforcement people moved them out onto the street. And a policy to help ignorant people become more enlightened will help somewhat. But, you can’t hardly lay the blame for the 30-year credit bubble economy on the backs of the 2%-3% of home mortgage borrowers who bought more than they could afford with the “help” of usurious loans from unscrupulous lenders.
I blame the baby-boomers and my generation X cohorts for generally failing to read enough history to realize that capitalism is prone to cycles of boom and bust. We had parents or grandparents who lived through the Great Depression, and their stories were there for us to hear if we asked. And if we did ask, we might have reflected on what they told us and thought to save 10% or 15% of our incomes instead of spending 102% of our incomes and living well, but building up resulting debts on cars, homes, and credit-card purchases.
Thursday, February 26, 2009
Reaction Paper on Housing
I would like to start off with a story. Last year I decided that I was tired of living in an apartment. I wanted to have a place of my own where my son could run in the backyard. Maybe I could get a dog! I went to see a mortgage associate at National City Bank here in Springfield. After I filled out my paperwork, she informed me that I could afford to buy a 30,000 dollar house on my small income. That doesn’t amount to much of a house by American’s standards.
After seeing the disappointment in my face, she explained to me that I could apply for a mortgage based on a “tell” income. That is, I “tell” you what I make, and I get a loan for however much money I want. Of course, I would have to pay more in interest, but who cares, I could get the home of my dreams!
I immediately called my agent from Remax, and we were off looking for potential “dream” homes. Finally, after searching diligently, there it was. Unfortunately, my “dream” home fell into the 90,000 dollar range. But I didn’t care. It was in great shape and in a good neighborhood. It even had a fenced in yard for the dog! I couldn’t have asked for anything better.
Fortunately, someone else purchased the house before I even had a chance. Yes, I said fortunately! After all the excitement was over, I really sat back and looked at the situation. How in the world could I afford a 90,000 dollar house? My son and I would have to eat Ramen noodles for the rest of our lives.
I began to think about the discussion that we had in class last week. It seemed to me that the majority of the class agreed that poor people are entitled to own their own home. A few people argued that we shouldn’t have to help the Americans who extended their means to buy a $500,000 dollar house. I’m pretty sure that out of the 43% of people in poverty that Robert Rector claims to own their own home, many of them have extended themselves beyond their means just like the people who are better off. What’s the difference?
Mortgage companies took advantage of homeowners. Not too many people, including me, know how to navigate their way through the complex system of buying a house. These lenders don’t have our interests in mind. All they care about is how much money they will make off the loan of some sucker who knows nothing about fixed loans, adjustable rates, or “tell” incomes.
After the housing market crashed, it was apparent to me why. It is a great accomplishment to own your own home, especially if it has the white picket fence. Most Americans can’t afford the house of their dreams but purchased it anyway with the overenthusiastic help from the mortgage lenders. Now as a result of the mortgage crisis and our bad economy people find themselves losing their “dream” homes to foreclosure. So, I’m sure that Rector’s 43% will quickly decrease over the next few years.
A person who can afford a $30,000 home (with 30% of your income going to housing) could probably afford a $50,000 home. That is, although mortgage lenders are only supposed to arrange loans where the purchaser will end up giving 30% of their income to the principal, interest, home owners insurance, property taxes, and utilities, it is in fact the case that many lower-income people spend about half their income on housing. So, if you can legitimately afford a $30,000 home, you can probably stretch safely to buy a $50,000 home.
The first home I ever bought had one bathroom, two bedrooms, a large living room, a kitchen, and a basement (about 800 square feet), and I paid $42,000 for it, and sold it three years after purchasing it for $46,000. Had my stupid real estate agent helped me out more, I could have received about $4,000 in help as a first-time home-buyer buying a house in a special district of the city where there were incentives to help first-time home-buyers, which would have significantly reduced the cost of that home to me.
Looking at a real estate guide for Springfield I see a house at 2627 S 7th Street with two bedrooms and 995 square feet for sale at $46,000. There’s a home at 208 E Spruce St. with 1,043 square feet for $49,900. These homes are in okay neighborhoods, and they appear reasonably attractive, and they are priced in a way that makes me suspect there is nothing seriously wrong with them. Were I a bank lender, I’d be happy to put you in a house like these. But no, I wouldn’t want you to buy a $90,000 home. You could never afford such a thing. Assuming you purchased the home at 208 E. Spruce, and you had $2,900 for your down-payment, and used first-time homebuyer help from the City of Springfield, to come up with closing costs, you would be getting a loan of $47,000. With a thirty-year loan at 6.5%, your loan and interest payments would be about $300 per month. Your escrow for real estate tax would be about $80, and your homeowner’s insurance would be about $60 per month, so you would have a monthly home payment of about $440. With such a small house, your heating and cooling costs would be reasonable, and perhaps you would need an average of $120 each month for water, electric, and sewer (more in the winter, but much less between April and October). That’s a total housing cost of $560. If you are making $1680 per month, that’s fine. If you’re making $1120 per month, it’s too much, but you can probably survive and do it.
On average, homeowners care more about their community and get involved in civic affairs. As a taxpayer, I’d much rather have you as a homeowner in 208 E. Spruce than have you renting an apartment somewhere in town for $400 per month.
Let’s say you’re earning $9.00 per hour and working 34 hours per week. You would be earning about $1250 per month. You would have some of that lost in payroll taxes, but with the state and federal earned income tax credits you would clearly end up with an average take-home income over $1,300 per month. That would put a single mom with a child slightly above the 2009 poverty threshold (you would be earning about $15,000, and the poverty threshold for a two-person household is $14,570). So, in Springfield at least, it seems to me that if lenders were willing to let people take on extraordinary housing debts (where about 50% of income would go toward housing), a single mother with one child who was working for $9 per hour at near full-time could reasonably buy a tiny house in an okay neighborhood.
However, if a person in those circumstances I’ve described lost their job, they would be in trouble, because it would be difficult to make their home payment of $440. They would be in a similar problem with an apartment that had a $400 per month rent. The difference is that one can run away from an apartment and break that contract without having $40,000 of debt following you around, whereas if you can’t make a payment on your home the bank can repossess it and sell it for less than you owe on it, and you’re still stuck with the debt. The fact that you’ve had a foreclosure on your home will do more damage to your credit rating than running away from an apartment lease contract. In fact, if you can’t sell the house quickly when it becomes unaffordable to you, and the bank auctions it for less than you owe, you might declare bankruptcy, which is really bad, and isn’t nearly as likely if you merely get out of an apartment lease contract.
More about owning that little house… LIHEAP might help with utilities, and there might be other help available, but it would be difficult to make ends meet. A two-person family with an income of $15,000 would qualify for food stamps. It would be difficult to work 34 hours per week and also be a full-time student, especially if your child needed lots of adult supervision. I guess this all goes to prove that if you're living on the edge of poverty you're living in a precarious situation.
I think you are correct that many real estate agents care mainly about their cut of the closing costs. Likewise, mortgage brokers and loan officers seem concerned with their commissions on the loans. So, there are incentives for people to give the typical $15,000-per-year family a $80,000 loan, which such a family could never really afford. All this contributes to the economic crisis we find ourselves in.
I like this post about the mortgage crisis at Juan Cole's blog.
After seeing the disappointment in my face, she explained to me that I could apply for a mortgage based on a “tell” income. That is, I “tell” you what I make, and I get a loan for however much money I want. Of course, I would have to pay more in interest, but who cares, I could get the home of my dreams!
I immediately called my agent from Remax, and we were off looking for potential “dream” homes. Finally, after searching diligently, there it was. Unfortunately, my “dream” home fell into the 90,000 dollar range. But I didn’t care. It was in great shape and in a good neighborhood. It even had a fenced in yard for the dog! I couldn’t have asked for anything better.
Fortunately, someone else purchased the house before I even had a chance. Yes, I said fortunately! After all the excitement was over, I really sat back and looked at the situation. How in the world could I afford a 90,000 dollar house? My son and I would have to eat Ramen noodles for the rest of our lives.
I began to think about the discussion that we had in class last week. It seemed to me that the majority of the class agreed that poor people are entitled to own their own home. A few people argued that we shouldn’t have to help the Americans who extended their means to buy a $500,000 dollar house. I’m pretty sure that out of the 43% of people in poverty that Robert Rector claims to own their own home, many of them have extended themselves beyond their means just like the people who are better off. What’s the difference?
Mortgage companies took advantage of homeowners. Not too many people, including me, know how to navigate their way through the complex system of buying a house. These lenders don’t have our interests in mind. All they care about is how much money they will make off the loan of some sucker who knows nothing about fixed loans, adjustable rates, or “tell” incomes.
After the housing market crashed, it was apparent to me why. It is a great accomplishment to own your own home, especially if it has the white picket fence. Most Americans can’t afford the house of their dreams but purchased it anyway with the overenthusiastic help from the mortgage lenders. Now as a result of the mortgage crisis and our bad economy people find themselves losing their “dream” homes to foreclosure. So, I’m sure that Rector’s 43% will quickly decrease over the next few years.
A person who can afford a $30,000 home (with 30% of your income going to housing) could probably afford a $50,000 home. That is, although mortgage lenders are only supposed to arrange loans where the purchaser will end up giving 30% of their income to the principal, interest, home owners insurance, property taxes, and utilities, it is in fact the case that many lower-income people spend about half their income on housing. So, if you can legitimately afford a $30,000 home, you can probably stretch safely to buy a $50,000 home.
The first home I ever bought had one bathroom, two bedrooms, a large living room, a kitchen, and a basement (about 800 square feet), and I paid $42,000 for it, and sold it three years after purchasing it for $46,000. Had my stupid real estate agent helped me out more, I could have received about $4,000 in help as a first-time home-buyer buying a house in a special district of the city where there were incentives to help first-time home-buyers, which would have significantly reduced the cost of that home to me.
Looking at a real estate guide for Springfield I see a house at 2627 S 7th Street with two bedrooms and 995 square feet for sale at $46,000. There’s a home at 208 E Spruce St. with 1,043 square feet for $49,900. These homes are in okay neighborhoods, and they appear reasonably attractive, and they are priced in a way that makes me suspect there is nothing seriously wrong with them. Were I a bank lender, I’d be happy to put you in a house like these. But no, I wouldn’t want you to buy a $90,000 home. You could never afford such a thing. Assuming you purchased the home at 208 E. Spruce, and you had $2,900 for your down-payment, and used first-time homebuyer help from the City of Springfield, to come up with closing costs, you would be getting a loan of $47,000. With a thirty-year loan at 6.5%, your loan and interest payments would be about $300 per month. Your escrow for real estate tax would be about $80, and your homeowner’s insurance would be about $60 per month, so you would have a monthly home payment of about $440. With such a small house, your heating and cooling costs would be reasonable, and perhaps you would need an average of $120 each month for water, electric, and sewer (more in the winter, but much less between April and October). That’s a total housing cost of $560. If you are making $1680 per month, that’s fine. If you’re making $1120 per month, it’s too much, but you can probably survive and do it.
On average, homeowners care more about their community and get involved in civic affairs. As a taxpayer, I’d much rather have you as a homeowner in 208 E. Spruce than have you renting an apartment somewhere in town for $400 per month.
Let’s say you’re earning $9.00 per hour and working 34 hours per week. You would be earning about $1250 per month. You would have some of that lost in payroll taxes, but with the state and federal earned income tax credits you would clearly end up with an average take-home income over $1,300 per month. That would put a single mom with a child slightly above the 2009 poverty threshold (you would be earning about $15,000, and the poverty threshold for a two-person household is $14,570). So, in Springfield at least, it seems to me that if lenders were willing to let people take on extraordinary housing debts (where about 50% of income would go toward housing), a single mother with one child who was working for $9 per hour at near full-time could reasonably buy a tiny house in an okay neighborhood.
However, if a person in those circumstances I’ve described lost their job, they would be in trouble, because it would be difficult to make their home payment of $440. They would be in a similar problem with an apartment that had a $400 per month rent. The difference is that one can run away from an apartment and break that contract without having $40,000 of debt following you around, whereas if you can’t make a payment on your home the bank can repossess it and sell it for less than you owe on it, and you’re still stuck with the debt. The fact that you’ve had a foreclosure on your home will do more damage to your credit rating than running away from an apartment lease contract. In fact, if you can’t sell the house quickly when it becomes unaffordable to you, and the bank auctions it for less than you owe, you might declare bankruptcy, which is really bad, and isn’t nearly as likely if you merely get out of an apartment lease contract.
More about owning that little house… LIHEAP might help with utilities, and there might be other help available, but it would be difficult to make ends meet. A two-person family with an income of $15,000 would qualify for food stamps. It would be difficult to work 34 hours per week and also be a full-time student, especially if your child needed lots of adult supervision. I guess this all goes to prove that if you're living on the edge of poverty you're living in a precarious situation.
I think you are correct that many real estate agents care mainly about their cut of the closing costs. Likewise, mortgage brokers and loan officers seem concerned with their commissions on the loans. So, there are incentives for people to give the typical $15,000-per-year family a $80,000 loan, which such a family could never really afford. All this contributes to the economic crisis we find ourselves in.
I like this post about the mortgage crisis at Juan Cole's blog.
