The American Dream a Cautionary tale

Once Upon a time, the American dream for most American’s was to buy a piece of land and erect a house to provide shelter for themselves and their families.  As years went on, that dream didn’t die, but rather grew.  Americans continued to believe in the dream of home ownership.  At first that dream was a modest home, maybe one with 3 bedrooms. a bathroom, kitchen, and living room.  As more and more attained that dream of a modest dwelling to call their own, the dream of the type of home and where it was located, grew.  As more people wanted homes, they started wanting larger homes with more amenities; maybe a 2nd bathroom, dining room, garage, etc.  the demand for homes grew, builders built larger homes and more people bought starter homes and sold them, making a modest profit and moved into larger more luxurious  homes.  It started a cycle.

 

The system seemed to be working.  Yet, there was a catch, most people couldn’t buy these homes outright with cash, they needed to get a loan (a mortgage) in order to make this dream possible.  Lending institutions, specifically banks were more than willing to help provide would be home owners with the necessary money, IF they could make a profit.

 

This was a win-win situation for all concerned.  The individual bought a home and after 15, 20 or 30 years paid off the bank.  By using the money which would have been used to pay monthly rent for shelter, they were able to pay that money to the bank toward their dream of home ownership. The banks charged interest on the loans, and they made money.  They held the home as collateral and to be sure the borrowers were vested in the transaction, they required a down payment of 20% of the value of the home and they would lend the other 80%.  Mortgage interest rates rose and fell predicated on lending conditions and market situations, based on the prime interest rate provided to the banks by the Federal Reserve, but in general, rates were high enough to make it profitable for the banks but low enough that most responsible people could get a loan and pay the bank back so long as they stayed within their budget. Again, the system was working.  Everything was good.

 

Then some interesting things started to happen, people started noticing, especially in certain “high” demand areas, that they could make more money selling their homes than what was once normal.  The areas in high demand were boom areas, where many people had been moving for better jobs, as the country was changing and people were moving to areas that had more opportunity.  “Wonderful” thought the owners of homes in these areas.  They sold their homes for significant profit and then went on and built new larger more luxurious houses.  But instead of just buying the new house outright with the money they made from the sale, they bought the new larger more luxurious houses, often with new larger mortgages.   Lenders were more than willing to accommodate as this gave them more customers and thus more money.   Life was good!

 

While this was going on, others started noticing, “Hey, houses in my neighborhood are increasing in value, isn’t that great!”  “But, I don’t want to sell my house, I like where I live, perhaps I can go to the bank and get a loan to make improvements on my house, maybe I will put in a new kitchen and an addition or take a vacation”.  So off to the bank they went, and of course banks were more than willing to accommodate these new customers, so long as their credit was good and they had enough “equity” in their homes. So the banks lent the owners of these houses, money based on their equity so that the owners could use that money for what they wanted today, instead of having to wait until they could sell the house.  (Weren’t those lenders so nice?)    The banks had more customers, thus were making more money and the people had money to spend on whatever they wanted.  Every one was happy.

 

Now, other would be home owners, lenders, developers and real estate agents, as well as policy makers, and others…who would later be know as mortgage brokers, were noticing all these happy people and businesses and of course they wanted in on all that happiness, so they all started trying to figure out ways they could get in on the action.   Policy makers decided they wanted to make home ownership possible for everyone.  Rules were changed and new government programs instituted, and interest rates were lowered to encourage lending.  Banks and other would be lenders, decided they would start actively advertising and selling these wonderful new services.   Mortgage broker started springing up and working with lenders and real estate agents.  Real estate agents brought in prospective home buyers and introduced them to mortgage brokers, who knew all the different types of mortgage products available from all different lenders.  They ALL worked together to bring in business for ALL.  Everyone was working making money, people were getting their dream of home ownership and everyone was happy.

 

During this time, it was thought that more people owning homes was a good thing, it helped increase demand and helped society as a whole.  It increased property tax income for municipalities, increased income for real estate agents, lenders and mortgage brokers and brought new jobs in construction and related industries as well as increased jobs in the financial sector, too.

 

So different types of mortgages were created, rather than the standard, traditional 20% down mortgage, with an interest rate based on 1-2% of the prime rate, to accommodate customers who didn’t have the necessary down payment, well of course the interests rates for these products would be higher because there was a greater risk, besides it was thought, when the housing values increased (which of course, they always would) these higher rate mortgages could be refinanced to lower rates when the borrower built some equity.

 

Well as it is with everything, lenders and mortgage brokers, developers, kept finding new potential customers (home owners) with more and more difficult needs and as such they kept coming up with new ways to help finance these people’s “dreams”.  Everything was good.

 

Now as the new financing products became riskier, many of the banks and lenders who were providing this money, started to think about the prospect that maybe lending money “willy nilly” might be a little dangerous and they might end up “holding the bag” if these risky loans weren’t paid back…”Ah, they thought, I know….we will bundle up these loans and sell them as “bonds” to other investor’s who are willing to take higher risks…hey those guys like to gamble…so, they would be happy to buy these up…” and they did.   Well, now with the risk off THEIR direct shoulders, it seemed like a good idea to make the loans even open to even less credit worthy people and even people without verifiable income!  EVERYONE can get a loan!   Some could get even get a loan with low payments in the beginning, some where the interest would adjust over time…”hey, they can always refinance later when the house value rises and they have more equity, and they qualify for a traditional loan, that will surely happen before the interest rate resets…because of course housing values will always go up.”  Yeah…everyone was happy.

 

Of course, while all these people were buying homes, many were busy building their real “dream” homes, houses were popping up everywhere!  Of course, all these new houses wouldn’t possibly cause an overstock of housing stock…”nah…they thought….housing prices ALWAYS go up…right?”

New potential first time buyers were encouraged to buy “before they were priced out of the market”.   “Buy now before you won’t be able to buy, ever”, they were warned.   So of course, being afraid that they might miss out on the “dream” many bought more than they could afford, but the mortgage broker was sure they could get a loan.  “Congratulations” the mortgage broker says as he calls the young family…”I had to pull a lot of strings, and work real hard, but the bank approved your loan”.   Everyone is happy!

 

That is until, one day, houses stopped selling.  Then, housing values started to fall.  Next, the interest rates on the adjustable rate mortgages started to reset at the higher rates and the owners of these mortgages discovered they couldn’t refinance as their house wasn’t worth as much as it did when they bought the house.  All of a sudden, people started to stop paying their mortgages, because they simply couldn’t afford to; next came the foreclosures and then housing values fell more.  It wouldn’t stop, as more houses went into foreclosure, housing values fell more; while more interests rates were resetting, more stopped paying and more went into foreclosure…it became a vicious cycle…as the housing market burst, it started to take down the lenders, the investors who bought the bonds, and the related industries, leading to businesses going bankrupt, jobs disappearing, layoffs being announced; wall street becoming skittish and panicked….leading to a crash, causing more businesses to layoff more workers, thus more people unable to pay their mortgages and more foreclosures.  What a mess!

 

Sadly, much of this mess could have been averted if anyone had bothered to really think it through.  While there were warning and there were those who stood up and tried to warn the masses of the fallacy of the reasoning, many refused to listen.  As far back as 2004 there were economists and experts warning that this wasn’t sustainable.

I chose to tell the above in a simplistic, almost elementary way, as I might to a youngster, because when looked at and told in such a way, it does seem rather amazing that the situation was allowed to get so out of control.   It does seem to me, that basic laws of supply and demand were ignored.  As well as, accurate assessments of consumer behavior and consumer choice, market equilibrium and well just about everything mentioned in any economics textbook. It appears that everyone was “asleep at the wheel” and all are complacent in allowing this to happen.  The market was being manipulated, by unscrupulous charlatans, government policies were partly to blame, regulations were inadequate and/or ignored.   Consumers were irrational, uninformed and ignorant.  Each party involved ignored the consequences of their actions and behaved as if this market wasn’t subject to basic economic and social concepts.

 

So many mistakes and so many false premises led to this failure, it’s hard to know where to start assessing the problems.  While the market is correcting itself, there will be much damage left in its wake, as it was so out of control, it was so irrational it stands to reason it had to fail and fail hard.

 

Let’s start with the most obvious, over the last 10 years, incomes and actual purchasing power for most Americans actually was stagnant and in many cases, fell.  Thus people really could not afford the housing they were buying or leveraging.   Many were simply using credit to finance their housing purchases and other consumables, in many cases that credit came from taking loans against their equity with the false premise that the value of their largest investment, their home, would continue to increase.

 

This is obviously a false concept, because like anything there is only so much supply and so much demand.  Eventually the supply was going to overtake demand and bring down the price buyers were willing to pay for the product.  With stagnant incomes and less purchasing power it was only a matter of time, to when the market could no longer support raising home prices.

 

The predatory and sub prime lending issue was another false set of premises.  How this made sense to anyone is beyond me.  I can’t for the life of me find a logical explanation for this, other than pure greed and preying upon the least able to defend themselves.  Some of the stories I read and watched on TV, on this subject which I’ve reserached, showed lenders completely outright lying to people…in one case, the borrowers were illiterate and told the mortgage broker they couldn’t read.  How could these people possibly be aware they of what they were getting them selves into, let alone understand the fine print?

 

As to the interest rates, the prime rate was too low for too long.  While it made sense to keep the rate low as a temporary measure during difficult times, it became normal and the rates were not adjusted as they should have to have kept lending and borrowing more in check.  It became more economical for people and business to borrow than to save or to pay back.   How is that a logical long term economical policy?  I can’t even fathom that concept as being viable long term strategy.

 

Next government policies encouraging lax lending standards while in some ways admirable, in the sense, that there were those being unfairly denied access to loans due to “streamlining” policies and such, didn’t mean lenders had to throw all caution to the wind.  However, since the lenders knew they would be selling those risks to others they weren’t kept in check by the “invisible hand” as the risk was no longer theirs and as such they didn’t have anything to lose.  Couple that with inappropriate regulations which did not ensure that the lenders were being honest with both their customers and those they sold the investments to, further added to the problems.

 

While I do not pretend to know the solutions to this mess, it doesn’t appear that the crisis is over yet.  Many are still struggling and with unemployment as high as it is, it appears many more will continue to lose their homes.  There does not appear to be a quick or easy solution.

 

Hopefully, the appropriate lessons were learned and as the years pass, the markets will finish correcting themselves and the housing and mortgage markets will become sustainable once again.

As that happens, it would be well advised,  regardless of whether government regulations are used as a manner to create long term changes in those markets or if market principles cause the changes, that neither market should return to the way they operated the last ten years.

 

 

 

 

Bibliography

WSJ, Staff. (2010). Economists’ views on interest rates, housing bubble. The Wall Street Journal, Retrieved from http://blogs.wsj.com/economics/2010/01/12/economists-views-on-interest-rates-housing-bubble/

 

Irwin , Neil. “Aughts were a lost decade for U.S. economy, workers.” The Washington Post. 02 01 20101. The Washington Post, Web. 10 Jan 2010. http://www.washingtonpost.com/wp-dyn/content/article/2010/01/01/AR2010010101196.html?hpid=topnews

 

United States of America. Bush Administration’s Failed Economic and Fiscal Record. Washington, D.C.: , 2008. Web. 10 Jan 2010. http://budget.house.gov/doc-library/fy2009/7.31.08_Bush%20economic_%20and%20fiscal_%20record.pdf

 

Lim, Paul. “U.S. News and World Report.”, Housing bubble correction could be severe. 13 06 2006. U.S. News and World Report, Web. 10 Jan 2010. http://www.usnews.com/usnews/biztech/articles/060613/13housing_bubble.htm>.

 

Guha, Krishna. “Greenspan alert on US house prices.” Financial Times.com 16.09 (2007): n. pag. Web. 18 Jan 2010. http://www.ft.com/cms/s/0/31207860-647f-11dc-90ea-0000779fd2ac.html?nclick_check=1>.

 

Ip, Greg. “Wall Street Journal.” Did Greenspan Add to Subprime Woes? . 09 06 2007. The Wall Street Journal, Web. 19 Jan 2010. http://online.wsj.com/article/SB118134111823129555.html?mod=todays_us_money_and_investing>.

 

 

 

 

 

 

 

 

 

 

 

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For the last 21 years, I worked in international trade as a licensed customs broker, international freight forwarder and international trade consultant. I ended up in that business after having studied Journalism and communication in college. (Strange how that worked) Over the last 3 years I have been trying to change my life and my career, so I left my job, returned to school and am on the last leg of completing my Bachelor's of Science in Business Administration and Economics, and am planning on going on for my masters in International Business. It might seem odd that I decided to formally study the business I was in for 21 years...but there is a reason for that... I hope to teach and write on the subject in the future. I'm a mother of 2 young adults and have many hobbies; reading, researching, writing, blogging, decorating, are my current favorites.

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ADONAI
Member

“It’s called the American Dream because you have to be asleep to believe it.”
~George Carlin

The “housing crisis” was the end result of this nation’s collective greed. An entire country must suffer for the recklessness of a handful of it’s citizens. Home owners. How I hate them.

More people rent than own. The number of rented houses has increased 40% in the last 5 years. In a country of over 300 million, only about 14 million people actually “own” a home. And that’s an all time high. I say “own” because, was it ever really yours? Somewhere there’s a bank that could take it away from you pretty easily. They couldn’t get your TV but they can take the house it’s in lickity-split.(that’s right. I said it) Unless you can get enough out of the TV to pay them off.

The American Dream shouldn’t be about owning a home. It should be about raising your children to be responsible, productive citizens. Who cares what kind of “home” you do that in ,as long as it’s a loving home?

deygirl
Member

One of the HUGE factors in the demise of my last marriage (other than that he was a complete a…….) was that he bought into the bullshit that was the credit scam. He ran up massive credit card debt, which he hid from me until it hit crisis. Then he would want to “consolidate” with a refi. And then he would do it again.

To be fair, I had started that whole ball rolling by initiating the first refi, but in my case it was to re-roof and update from aluminum windows. I reasoned that it was worth it because it added to the value of the house. His refi’s, on the other hand, simply ate up equity.

During one of our last battles, he insisted that it was our money to spend, and that we should use it for nicer cars and fancy vacations. I told him he was insane, and that at the rate he was going we would one day find ourselves in a position where we would have to COME UP with money simply to sell the house. He told me that I was the insane one, and a fool, and a control freak.

We were divorced by the time the whole thing came crashing down. And while I never got the satisfaction of saying “I told you so,” neither did I have to suffer the consequences of his foolhardiness.

I blame the Bush administration and all of their crooked cronies for what happened to the housing market. They used refinancing to hide the drop of wages. They made our housing market into a ponzi scheme, and only the very wealthy have avoided paying the price for this scam.

My mortgage is under water, not because I was foolish with my money (I managed to dump the over-mortgaged one just in time) but because the wealthy wannabes overextended themselves and defaulted on their trophy beach houses.

2ndClassCitizenPundit
Member

I was composing a reply and it got so long that I had to cut it all out and save it as a future article.

The American Dream was simple: provide your kids with an improved lifestyle. This involved a stable, secure home; a good education; healthy food; improved health (through doctor visits and vaccinations, mostly). All of this required a decent, stable job that adequately provided a living wage.

However, we have been sold a dream that does has little to do with the American Dream. This new dream consists of having enough credit and/or income to buy whatever we want, having a substantial amount of leisure time, and making lots and lots of money (usually doing very little to earn it).

Maybe this is due to those lucky/hard-working individuals who make it big and then are darlings of the media. Envy seems to be one of the biggest products of our society today.

But the corporations have been selling this dream to us for a long time. If you drink a particular brand of beer (which means you paid for it), you will be rich and sexually attractive to potential trophy wives. If you wear clothing with *this* name on it (which means you paid for it), you will be promoted to CEO (from the mail room) within a couple days. If you live in *that* neighborhood (which means you paid for the house), bags of money will fall out of the sky into your back yard. If you use *this* credit card (which means, they hope, that you pay the bill), then oil sheiks will invite you into their homes, give you oil wells, jewels, and half their harem.

I think some of you can see where I am going with this.

jdmn17
Member
jdmn17

Dey

I drank THAT beer, it didn’t make me sexually attractive and worse, it hit my wallet in a bad way. You trying to tell me they lied to me?

2ndClassCitizenPundit
Member

No, of course they didn’t lie to you.

BTW, I have a bunch of goods that got shipped to your city by mistake. I can’t afford to have them shipped to my city, but I’ll sell them to you for .5% of their worth. All you have to do is send me money, and I will send you the bill of lading, and you can pick them up.

Let me know when you want to pay for *that* bill of goods.

jdmn17
Member
jdmn17

Oh I’m not real smart but I’m smarter than that! I sell on etsy and believe me I’ve seen it all, something about having some of the more expensive items there I get lots of opportunities.

“Please Sir or Madam

I wish to pay for your item. I will send you a certified check in the amount with extra you will send to my shipper who will pick it up from your building. I cannot come to view the item as I have been called from the country for three weeks. Please to contact me directly at my personal account as I cannot access etsy from my laptop – [email protected]

UhHuh…..

What’s the worst part is their English is so bad.

deygirl
Member

Dumbass. You were supposed to make the GIRL drink it. 😉

jdmn17
Member
jdmn17

Why should I give her the good beer when I can give her the $5 case crap? It gets her just as buzzed a lot more cheaply? Suppose I should have switched the labels first?

2ndClassCitizenPundit
Member

Actually, I think you are supposed to give the beer to the plastic surgeon. When (and if, considering the doctor just had a beer) you come out surgery, it is remotely possible one would be more attractive, at least physically.

jkkFL
Guest

You are speaking truth 🙂

PocketWatch
Member

Unmentioned explicitly but implied in places and critical in this sad tale are the built-in incentives at every step along the way to the people that encouraged these practices.

Ordinary people were lured by additional wealth through rising home prices. All you had to do was breathe in and out, and you could make money because you could sell your house for much more than you paid for it.

Mortgage brokers get paid on every transaction, up or down.

Real estate agents get paid on every sale. I know many that have made 6% on the same home 4 or 5 times in as many years.

Banks make their interest and fees on every sale.

Individuals in all those companies get bonuses on sales volume.

As was stated, local, county, state, and federal governments make out on sales taxes, property taxes, can borrow against property value, and so forth.

As in any pyramid scheme, it’s the bottom of the pyramid that not only holds the weight, but bears the brunt of the rubble when it collapses.

I think that all the bonuses that people got for pushing paper was as much of the story as anything else. And, sadly, it is still happening. No one has changed a thing concerning incentives for enabling sales. The only thing that HAS changed is that lenders are more cautious, but someday that will change and another boom will happen, I fear.

Chernynkaya
Member
PocketWatch
Member

Cher- Yup! That’s the vision I had in my head when I made the comment. Super article, and well worth the read.

Chernynkaya
Member

PW as a businessman, I knew you would relate. It was a clusterfuck, but I can so see how it happened. Zillions of bad decisions at every step. I don’t think it was nefarious–although disastrous. I know those people (they are in a couple of cases a composite). I talked to them. And I was like the homeowner!

jkkFL
Guest

Ok, now I know.
But I do have an ace in the hole 🙂
My neice has been in the mortgage business for about 10 years; so a few years back I asked her about buying..when I laid out my financial siutation- she looked at me and said ‘yes, I can get you a mortgage; ARM or Interest only’- so when I bit, she said:
‘AJ, I can get you a mortgage- but I won’t. If you can’t afford a conventional mortgage, you can’t afford to buy. This market is going to implode and a lot of people are going to be hurt. You won’t be one.’ ( This was about 5 yrs ago- I love my beautiful neice!!)

AdLib
Admin

Two for two today, quite a batting average!

I mentioned this a bit on your other article, very much in agreement with you that The Authentic American Dream is a relic which was swapped out with a corporate changeling.

What Americans are indoctrinated with for decades has been the Corporate Delusion of The American Dream. The goal of crony capitalism is to keep the peasants deluded into thinking they will one day be wealthy so they will support the corporate campaign to make the wealthy wealthier…laughing all the time at the American “peasants” who think that what they’re supporting will help them when they surely become millionaires.

There is an authentic American Dream but especially now, it has become very modest. It can’t compete with the greed-infused version corporate America foists on children through tv.

The Corporate Dream is opposed to The American Dream. Unlike Ford wanting his employees to make a good wage so they could afford to buy his cars, today’s corporations are all about keeping the bottom line as low as possible, grabbing as much public wealth as they can and encouraging people to have everything they want by borrowing money from them using credit cards and house mortgages.

The Corporate dream is that all Americans are buried in debt, treading water financially and thus desperate to work for whatever stagnant wages they’re offered so they can pay their bills.

Corporations NEED people to not realize The American Dream. After all, if a majority of Americans had decent wages and could pay cash for the things they want, think of the billions or trillions in interest and debt they would lose.

If Americans weren’t desperate about paying their bills, think of how wages would have to be more attractive to get good people.

The path to reclaiming the American Dream runs through gutting the power of corporations and requiring equitable pay and acceptable working conditions.

The corporate snake is trying to swallow us whole, they’ve been trying for a while but they’re closer than ever to succeeding. Americans need to stand up and get in the streets or else not be surprised how dark it gets when you’re in the belly of the snake.

audadvnc
Member
audadvnc

I was in a department teleconference this morning, listening to a Boss tell us, now that we’ve instituted 10% price increases on all our products, we now have to cut back on discounting, otherwise the new gains will be lost.

Left unsaid, of course, was how many customers will take their money and leave in disgust. There are few things that will make a boss more uncomfortable than stating the obvious…

2ndClassCitizenPundit
Member

Obvious to you and most people. Rarely obvious to them.

A friend of mine is forced to attend a teleconference every Monday for a staff meeting (the company has offices in several states). He says he would not object so much if the VP wouldn’t sit so close to the microphone.

This VP turns a twenty minute meeting into an hour long (because he’s not allowed to go longer) chore, as he constantly interrupts staff to voice unqualified opinions on IT, accounting, budgets, etc. The VP is in Sales (never put a salesperson in charge of the budget – it ain’t pretty).

My friend is the de facto head of IT. When they needed to do an upgrade to software, but had to purchase new certificates for their web-based apps in order for the updates to install properly, the VP told him to do the upgrades without the certificates, as a cost-cutting measure.

My friend called the president of the company on his cellphone, put the president on speaker phone, and asked “do you want the cost-cutting way to do it, or do you want our customers to actually be able to use our apps and servers, like they pay to do?”

The VP is a totally Type-A, micromanaging loudmouth with no knowledge of anything but schmoozing. He’s lost five secretaries in the last year, because they wind up being better at his job than he is (because they get forced to do his job).

jkkFL
Guest

Desperate as it sounds- it IS the soundtrack of our lives; the ‘Corporate siren song’. And they have swallowed some of us already.

jdmn17
Member
jdmn17

Abby

I remember well when my best friend and his wife wanted a new boat and kitchen. They went to the bank, got a third mortgage and some other line of credit for the boat and the total for all their mortgages was 120% of their equity. I asked him how that happened and he informed me the lender saw that home price increases would mean they would be even in two years and ahead in four. I recall shaking my head at the time. Last summer they lost their house. Neither of them had lost their jobs, but his bonus’ shrank as his sales declined and her wages were frozen. Add in at least their last two mortgages increased in payments (somehow I don’t understand their interest rates tied to the homes value – as it stopped growing and even started shrinking the interest owed increased)

They now live in a condo with two kids, a friend rented it to them and they are still making payments on over $50,000 they lost on the house, and paying an huge interest rate to boot.

That sort of sums up my experience with this. Your story is a classic 1990’s review of the wild and wooley decade when debt was simply ignored because your home value increases would cover everything.

Truth
Member

jd, good to finally catch you before I’m leaving…. I had written a reply to your idea on the “Invite…Part 2” thread long ago, but then you never checked back there. In any case, I took your idea as Nr 1. to kick off the series. So do you want to write this episode:

1. Experiences of an average user and how he felt the changes at HP over time

Now average sounds a bit strange, I meant just a normal user like you and I. Maybe there is a better expression, let me know if, for I’m going to publish Part 3 of the Invite tomorrow and can still make small changes. And please let me know if you’re still on board.

Here’s my mail: [email protected]

jdmn17
Member
jdmn17

Truth

I’m good with that and will email you at gmail

I’ve been buried with work this week, ten tables going out by middle of next week but I’ve got some great local baked Italian bread, some killer Provolone and a great Merlot – tonight I’ll write

jd

Truth
Member

Thanks Jd, great, and no hurry! We start only on March 19th, see my post later Saturday. 🙂

Truth
Member

Abby, thanks for explaining this so succinctly.