Friday, February 19, 2016

Why did you sell your home?

A few days ago, a friend told me she is considering buying a home and wanted to know why I sold mine and whether I'd buy a home again. I wrote this in response.

I bought a home in December 2009 after several years of intensive searching and saving. I had a 15-year loan, steady work which paid enough that I could save and invest each month while paying down the mortgage, and I invited in renters who paid some of the cost and were good company. I loved hosting friends and being able to walk to and from work.

The night before I bought the home, I read an essay explaining how owning a home is a poor financial decision for most people. It made sense, but I was committed emotionally and financially to buying the home. The next day, I bought the home, put the saddening ideas out of my mind, and enjoyed the benefits of home ownership.

In 2011 or so I read a short 5-part series I just looked up for you here: The Growth Ponzi Scheme.

It was my first introduction to, well, the sad situation surrounding housing, debt, infrastructure, ugly inhuman communities, fraud, and more. Municipal budgets interact with taxpayers, states, and fed gov't in such a way that requires growth in order to balance the budget; current infrastructure rarely pays for itself, especially in suburbs. Thus, new (and subsidized) infrastructure that invites new taxpayers is required to pay for maintenance on current infrastructure. The series goes into compelling, visual detail; I highly recommend it. Short version: no house has any value if the roads, electricity, plumbing, or other infrastructure fail; further, the same local governments that cannot maintain that infrastructure long-term (or even short-term) are also reducing fire, police, school, etc budgets as the growth-based economy runs up against various limits to exponential growth people had assumed would never end. All these issues reduce the value of the house in financial and non-financial terms and destroyed my hope of using the house as an investment vehicle, or at least life-long savings preserver. No one's buying a home in Flint, Michigan with their lead-water problem right now, and lots and lots of communities look like Flint but don't get in the news!

Ultimately, along with other research, I got to understand the crash of 2008 in some detail and it impacted my expectations for housing values as well as society in general. Here's a short version of my understanding: Ideally and slightly simplified, house values rise and fall with people's ability and desire to pay for available houses. However, starting in the 70s-ish, income for the bottom 90-95% flat-lined as the rich effectively retained all income gains, but house prices kept going up, starting to skyrocket in the late 90s and then reeeeeally going up in the early 2000s. This was totally unsustainable; people simply didn't have the money to pay for the houses, but it was extremely profitable for the banks to give mortgages and support house flipping, as they made a fee on every sale. The financial sector collectively engaged in 3 major frauds in order to keep the profitable housing boom going a few more years.  (summarized here:

  • appraisal fraud: the banks encouraged massive appraisal fraud, blacklisting appraisers who did not give appraisals they liked - high ones! 
  • underwriting fraud: "ninja" loans were common: no income, no job, no assets, etc. Only a bank that was willing to tolerate massive defaults would give out such loans, and they did this in droves.
  • fraudulent resale of these bundled mortgages to pensions and other investors by lying about the quality of borrowers whose mortgages were bundled. You may have heard of 'mortgage backed securities' or 'MBS' or 'collateralized debt obligations' or 'CDS'. The reason the market for gajillions of dollars of these securities evaporated was that all of a sudden everyone realized the crash was going to be worse than expected and given all the lies, no one knew how to value the securities, and no one wanted to touch them with a ten-foot pole. Hence the major banks' investment portfolios going from many billions to, um, much less over a few weeks :(

To these three frauds described in the link above, I would also add rating agency fraud, where the banks would pay the agencies to rate their securities, steering rating work to agencies that would give high ratings. You could also add political fraud, where the FBI publicly warned in about 2004 that they were understaffed compared to the amount of finance fraud going on after Bush had reassigned massive numbers of FBI staff from white collar-work to 'anti-terrorism'. [Which brings up an interesting question: if the 9/11 terrorists' goal was to damage the US, and their attack encouraged or gave political cover for the US leadership to turn a blind eye to massive fraud and waste causing trillions of dollars in losses as well as loss of faith in the US gov't, then did the terrorists succeed? And who let them succeed?]

I learned about all this largely from Bill Black and the Naked Capitalism blog, though I read a bunch of others' work too, such as Matt Taibbi's. Black was an excellent regulator/lawyer who fought savings and loan fraud in the 80s and wrote a book called "The Best Way to Rob a Bank is to Own One". The executives of these banks would have preferred legal profits, but the public couldn't afford that, so the bank executives made decisions that guaranteed short-term profit and guaranteed long-term loss, maximizing personal profit at the expense of certain corporate insolvency someday. They made the calculated political decision that they would not suffer for this decision. When Obama and his team came into office, bailing out the banks and prosecuting none of the executives who did this, he showed they financial executives had gambled well, becoming massively wealthy as they wasted huge national wealth and committed truly epic crimes.

Rather than fix the economy by prosecuting the elite criminals, removing moral hazard, reducing inequality, reducing the finance sector's control of politics, etc, the administration bailed out the rich but not the poor. To 'save homeowners' (in reality, the banks), the gov't/Fed did everything possible to raise house prices, including taking interest rates to 0% for years which has really screwed up pension funds, savers, and others, encouraging wildly irresponsible investing in a desperate search for 7-8% returns that investment managers expect and used to get relatively easily. There are a lot of other counter-productive aspects of the government response, but to list a few: risk is now more concentrated in fewer highly leveraged financial institutions, these criminal executives KNOW they are above prosecution and thus free to engage in all manner of fraudulent and risky behavior, inequality has skyrocketed, the job situation is worse (ignore the official unemployment number; look instead at employment a percentage of working-age people, which still ignore underemployment), income is STILL flat, and... house prices have recovered to the old bubble peak in many markets. The problem of overindebtedness was solved with - you guessed it! - more debt, not increased capacity to pay debt (i.e. many people having higher paying jobs).

Now in 2016, with interest rates already at or near 0% and no political will for bailouts, we see a multitude of issues as folks prepare for the next crash, two of which being:
  • the possibility for negative interest rates, where you pay the bank to hold your money. These exist in Europe already; in one country (Denmark?) people actually have negative rate mortgages. Lots of rich people are publishing editorials saying we need to ban cash, meaning you can't get your money out of the financial system, meaning you can't escape negative interest rates where you pay the bank to hold your money, meaning you have a constant drain on all savings. Bloomberg just had such an editorial a few days ago.
  • bail-ins, where insolvent banks get bailed-in by the depositors losing their deposits (as opposed to 'bailed out' by governments). The US FDIC and others have already prepared for this. If you read about Cyprus in 2013, you know this has already been done in a European country. This would lead to a widespread unhappiness, I expect.
It seems clear that there were meaningful ultimate and proximate causes to the '08 crisis, and not only were those not addressed, they were vastly worsened by the government/corporate response. If you're wondering how this happened, I suggest you review ex-Attorney General Eric Holder's current employment. After 6 years leading the department of (in)justice under Obama, he's making millions of dollars each year at a law firm serving the banks whom he ought to have been prosecuting while in office, but didn't. Others from the (in)justice department and other government institutions, such as the SEC, followed the same path. Plenty of books and blog posts, very well researched, document all this fraud and corruption in gory detail if you have the time and energy.

I'm avoiding discussing the environmental and resource constraints to our society and financial situation, focusing on the narrower social/political/financial perspective of the housing bust. I'm also ignoring all manner of other frauds and immoral behavior I learned about which changed my feelings about the culture I was born into. I'll just say that all this research lead to my belief that the problems are systemic and not likely to change anytime soon, and that I didn't want to be part of and dependent on such a culture. Selling the home was the first, most obvious step for achieving this!

Back to Strong Towns: Other articles from the Strong Towns site are great; in 2011 I started  obsessively reading everything they wrote along with the work of other researchers, verifying things as I could. The Strong Towns group describes insane tax breaks major corporations get in terms of tax-per-square foot, infrastructure subsidies (like large highways going to a Walmart, or counties paying road maintenance for frackers whose trucks are terrible for roads), regulatory bias (such as requiring parking or construction elements that only large corporations can afford), etc. If you wondered why shitty chains dominate retail and restaurants in the US, now you know. Furthermore, the way suburbia and most towns are designed makes actual human community - you know, face-to-face time to have fun, get to know each other, and make important decisions together - well, suburbia and almost all town/city design makes that very hard and very rare. No wonder when you walk along a street, you can see all the TVs flickering through the curtains - often on the same channel!

In the end, I started learning a lot of other stuff that made me seek out real, profoundly meaningful human community with deep love, intimate connection to our sustenance and wilderness, and other qualities I value. But it started with reading that series I linked above.

Phew! So that's why I sold the house. Basically I feel free of decades of poor financial, ecological, and social decisions made by others. Understanding these left me feeling trapped when I owned the home. Now I feel free of a criminal financial system that maintains housing prices
fraudulently, and I feel free of lots of other things too. It feels good!

To answer your last question more specifically: I will own a home again. I do not expect to 'own' the land, but I will have a beautiful dwelling made by hand by my friends and me with healthy local materials and integrated beautifully into the landscape. I will not care about the financial value of the building, only its utility, aesthetics, and impact on the land around me.

One more P.S. There's so much propaganda around 'The American Dream' and 'Owning Your Own Home'. Combine this with home owners' emotional and financial investment in their home and in the financial and infrastructure systems undergirding its value, and, based on my experience, you're unlikely to find many good conversation partners on the issues I discussed above. I had nobody at all I could talk to in order to come to a decision. Then, I had nobody that emotionally supported me in the decision to sell and the process of prepping, showing, and selling the house, including my two renters and close family. In the end, I just had to do what I felt was right. And that was good practice for future decisions ;)