Sometimes, It Is Your Fault

As human beings we tend to try and find someone to blame for our problems. When something goes wrong with our lives it is easier to find a cause outside ourselves than to evaluate our potential responsibility for the troubles. I don’t want to minimize the Bible principle that “time and unforeseen occurrence befall us all” however, I think that often if we took a step back and objectively looked at the situation, we would find that we did something that was, if not the direct cause, at least contributed to the situation.

In my last column, I talked about the current disaster in the housing markets. In this instance, there are a lot of culprits and certainly an abundance of blame to go around. The government adopted what is ostensibly an admirable goal, increase home ownership by easing the eligibility rules for government insured loans. Unfortunately, they did not foresee the creative ways that people in the lending business and all of its associated parts would come up with to profit from the government’s largesse.

It seems that everyone got in on the act. The first line was of course the banks, mortgage brokers, title companies, appraisers, home inspectors, credit agencies and surveyors who were engaged as a result of the loan. The homebuilders and all of the tradesman and suppliers who contributed to the construction process were also primary beneficiaries as the purveyors of the product that everyone wanted. Then too, the furniture retailers, appliance dealers, electronics stores, art dealers and so on, after all who wants to move into an new house with all your old stuff.

So a tremendous boom in housing was created that resulted in prosperity for all. The stock market went crazy as the US economy went on a tear. We were spending money like it was going out of style and as a result the rest of the world was growing too. China, India, Mexico, Indonesia all benefited from US growth and spending. The outlook was actually somewhat scary since the speculators foresaw continued demand and drove up the price of commodities like oil, copper, steel and other metals. The rising price of oil caused a strain on food crops that could be used to make fuel. The price of corn and other oil bearing crops increased causing increases in food since corn and soybeans are ubiquitous in our food supply.

In the housing market, subdivisions popped up everywhere. City planners were having a hard time regulating the growth and “Sprawl” was on the lips of environmentalists. In hot markets like Florida, Las Vegas and the Southwest, condominiums in good buildings were being sold two or three times before they were even finished. People were putting down deposits on condominiums with the expectation of never moving in. They were in the building solely to flip the unit at a profit.

Just like any good Ponzi scheme the early ones made a lot of money. In fact they made so much that it encouraged a whole lot of folks to get into the act. Ordinary people with no experience whatsoever were encouraged to invest in real estate and many of us did. I say us because I’m one of those people who bought a house to get into real estate ownership. Actually I bought two, the first one I still own. It is rented to the woman who lost it. She got sick, fell behind on her payments and had to file bankruptcy. The bank sold the house to me at a loss. Since she was still living in it, I asked her if she wanted to rent. She did and she is. As she works her way out of her bankruptcy, I’d like to sell her the house.

Because I had a good experience the first time, I bought another house. This one was in Brooklyn Heights. The neighborhood was one of the best for resales in Cleveland. The houses had been increasing in value, the neighborhood was stable and safe. I don’t know what the reason was, but this house too was a foreclosure. The bank took an $80,000 hit when they sold it to me. It was not in bad shape, just needed some updating. I bought it in June of 2007, shortly thereafter, houses stopped selling in that neighborhood. I fixed it up as I had planned, but by the time I was done, it was nearly impossible to get anyone to walk through it. I had originally planned to mark it up about $20,000, by the time I sold it I broke even. I consider myself extremely fortunate that I was able to sell it and not lose my shirt. Ultimately, the house sold for $40,000 less than the bank I bought it from had it on their books. Just next door was a nice house, fully furnished, that was listed for less than mine that was still for sale when I closed the sale.

Did I make a bad decision in getting the second house? Perhaps. It seemed like a good investment at the time. I had a partner who was going to do the work and it was my credit that bought the house. We had a good arrangement, but as in anything where you don’t have a lot of experience, things go wrong. Inevitably, renovations take longer than they should. Subcontractors don’t always perform up to expectations, more money needs to be spent. The economy falls around your ears. After that my wife and I decided it would be prudent to not take on anymore of this type of risk. We did not have the time or the financial wherewithal to carry another house should things turn sour.

What about all those folks that had deposits on condos when the bottom fell out? If the building was done, they were legally obligated to close. If it wasn’t done they may have just lost their deposit. Either way, they were significantly worse off for having made the decision to invest their  money in real estate.

What about my renter? Did she make a bad decision? I don’t think so. She got sick and didn’t have a cushion to carry her. In our economy many people almost have to have two incomes to survive. Saving for many seems to be out of the question. I am fortunate to have a wife who is prudent and wise when it comes to managing our household. She tries to spend our money frugally and saves money also. We have examined our spending and reduced or eliminated bills. Which is not to say that we haven’t made bad financial choices. I made an investment in a stock picking class which turned out to be a major waste of time and a lot of money. I also spent a week in California at a web authoring seminar. I was going to be a “web site designer”. I came back from that week several thousand dollars poorer but knowing that I was not going to become a web designer. Maybe it was a week well spent since it disabused me of a foolish notion.

I feel bad for someone that has lost their home. It must be terrible to experience. But in reality, some of these folks never should have bought a home in the first place. The New York Times ran a story about some mortgage brokers and the lengths they would go to close a loan. One man’s verification of income was a photograph of his pickup truck with his name on the door as a landscaping business. This man bought a house that far exceeded his means using a loan that allowed him to pay less than the interest accrual. Every year his principal balance went up due to the negative amortization.

Whose fault was it when he and his family lost their home? The mortgage broker? He had some responsibility for putting the man into a loan he couldn’t possibly afford. The realtor? She too had some responsibility for putting the notion that this man could live in the big house. What about the man? Did he have some responsibility? I say yes. Just because a thing is possible doesn’t mean it should be done. Perhaps he didn’t understand about negative amortization or the other financing mechanisms used to get him in that house. But I think that just maybe if he had stepped back, looked at the neighborhood, looked at the price of the house, looked at his paycheck, just maybe he would have realized that he was in way over his head. That just maybe the whole mess was his fault.

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