Monday, December 1, 2008

On houses, On the Recession

Guess what folks, it looks like we're officially in a recession, as of December of last year, and by all accounts, we may be in this one a long time.

So much about this recession is both predictable and irritating. Predictable because the core of its cause came because too many of us thought we could get rich simply by buying a house. Now, that thought is not so crazy, many people have gotten rich off of real estate, but everyone cannot get rich off of real estate, and you certainly cannot get rich off a house you are living in. Why? Because you have to live in it. It's draining money from you every single month in maintenance costs in mortgage payments. It's not a cash cow, its a money pit.

But that's not how people were looking at houses. They would put a little (or no) money down, get into the house, watch it appreciate, take out an home equity loan and Wa La, free money. It's easy to say now, but this makes no sense in so many levels. The home equity loan is not free money at all, its a loan that you'll have to pay back on top of the mortgage you already took out. But assuming the house won't depreciate (which of course it now has), you can always sell the house, and pay back the mortgage, right? Sure, but now where do you live????? You have basically put yourself back to where you began before you bought the house but now house prices are more expensive.

This made sense to me then and it makes sense to me now, but I understand why many people did what they did, because everyone else was doing it. I was bucking the trend set by so many other people (getting a fixed 30 year mortgage rather than an ARM, getting into a mortgage well below the amount I qualified for, buying an older home in a area closer to my work, refusing to get a home equity loan, trying to stay out of debt generally so I wouldn't have to get a home equity loan). I'm really glad I did all of those things now, but at the time, I felt out of date, not with it, and rather foolish as I kept pleading with people to not buy crappy cookie cutters at edge of the universe...

But the whole thing is very irritating to me because a lot of bad behavior affects me. Too many people were making money off of a phony economy and I wasn't. Peddling subprime mortgages to whomever and whoever, making bank off of commissions. All of this real estate effort was doing nothing for the real economy. But it was inflating our perception of how large our economy was, and that perception was born out in an inflated stock price which is now in process of a free fall, and that free fall effects me. Now house prices and stock prices are sinking below their true values, the values they should be at if people just remained calm. The value of my house will bottom out I am sure below where it should be, the value of my 401K is below what it should be. None of this matters too much, as long as I don't sell my stocks or sell my house, my losses aren't realized. And even if I did sell my house, sure I sold in a buyer's market, but I would be buying another house in that same market, so I'm not too worried. As long as the economy stays healthy enough for me and for you to remain productive and employed.

But the fake economy can and is affecting the real economy. It affects our psyche, it scares us out of the stores. We stop spending, we stop investing, we begin hoarding, and that is a recipe for a prolonged recession.

But it doesn't have to be. Our government needs to spend money where we the general public pulls back. Ideally, we would have a healthy symbiotic relationship between government spending and personal spending. I want to live in a community where my government spends money on nice parks, light rail, free ways.

I drive around my part of Tempe, some of the oldest neighborhoods every single day and I wonder how we could more beautify the city. I love what's been done in downtown Tempe. I love the light rail that is opening soon that will connect me to downtown Phoenix in a more personal way than a freeway will.

I love the Tempe Center for the Arts, Tempe Town lake, the Botanical gardens, the Zoo. Scottsdale's Museum of Contemporary Art has an exhibit exploring innovative ways to renovate and gentrify the ugly strip malls that litter our community. I personally live right next to three, with their expansive parking lots, ugly 1970's cheap no-design architecture. They are ugly and decaying. Granted, one corner was refreshed slightly by a fresh coat of paint, but that ghetto-Fry's strip mall needs much more than a coat of paint. I would love to see something happen there, and yes I'm willing to pay for it.

At the same time, I want my neighbors to spend money on their houses, to landscape and beautify. Living next to their beautiful homes makes my life more beautiful, living next to their blight makes my life more blighted. Investing in my home makes my life more beautiful, failure to do so, makes my life more blighted.

So, there is a ton of work to do. Really, the amount of work to be done is limitless. And guess what? We have more than enough people who can do the work. We have talent, the US has the most educated work force in our earth's history. More people are graduating with college degrees. The internet provides information to each of us at our finger tips. We can mingle, share ideas, innovate together, help each other find more opportunities, learn from each other's mistakes. Technological advancements allow us to do more with exponential efficiencies. We have no excuses for a recession really. Let's get to work.

The problem is that we have been working for the past decade on completely idiotic activities. We had Harvard grads go to work for financial institutions to discover ways to make money by dividing up and moving around securities and credit default swaps in ways to maximize their profits. I'm sure some of this work is necessary, it creates greater efficiencies in money transfers, providing industry access to funds. But I am also sure that much of this work was a complete and total rip off and a complete waste of some of the best minds of our country. And that is nauseating to me.

Changing the color of the collar, I'm also thinking of all of the labor that went into building cookie cutter McMansions in the most remote locations of our dear desert just so people could have the illusion of money. They could feel rich in their pillored-stucco houses miles away the city center where they pile into their SUV's to commute each day across miles of dessert.

Now, places like Maricopa and Anthem are completely over-developed, glutted with foreclosures. A lot of hard work and sweat went into building a lot of cheaply constructed homes in far away places that now nobody wants to live in. I made some pretty persuasive arguments to friends who were buying out in the far reaches of our cities, predicting that the slums of the near future will be in exactly those neighborhoods.

So, we're in a recession. But it does not have to be prolonged. I believe we have elected the right president to pull us out of this one. I believe he will care more about spending then about deficits. He will invest in health care, in education, in infrastructure. We need improvements in all of those things. In the short term, it will get people working, in the long term we will benefit from the innovation and the infrastructure that will result from the efforts.

We can worry about the debt later when the recession is history. Let us hope that in the meantime we can take away a few lessons from the financial mistakes at the heart of this recession.

Let us learn the ultimate lesson of all: we can get rich, but its better, more sustainable and more globally available if we get rich off of work producing goods and services that actually help people. That kind of work is more enjoyable and more sustainable.


H said...

Wow Scott! You just wrote a post on the economy that I can understand AND it was filled with hope for the future! I'm so very, very impressed with both of us :) Thanks for you thoughts on the recession and how we don't really need to be terrified of what is happening, just smart (right?!).

tempe turley said...

H, I think there is room to be concerned, but hopefully nobody gets too scared, because fear will ultimately doom our economy if everyone hoards.

What we need is good, widespread sense of optimism and hope for a better future, and that will pull us out of the recession.

The problem is that there are people legitimately hurting, too many people were on the edge (and beyond) of their finances, and some amount of pull back to build up a little savings is called for.

Also, a lot of people are upside down on their mortgages, and with ARMS that are pushing mortgage payments past their limits, are facing foreclosure.

I'm hopeful that a combination of banks and government can step in and come up with solutions that allow more of these people to stay in their homes.

House prices needed to fall, they were way beyond the level of sanity, what we need them to do though is to stabilize to their true market worth, and then begin to appreciate in a reasonable way again. I hope that comes sooner rather than later, but the government needs to get a grip on the foreclosures before that can happen.

I wish Obama was president right now.... :-(

But yes, I believe there's still a lot of reasons to hope, but I'm far from an expert, just my gut feelings.

Jeff said...

I recall a few years ago, when my wife and I first contemplated purchasing a house, numerous people recommended an adjustable rate mortgage. These were for 3 reasons:
#1. We were looking for a couple of jobs, which might take us out of state.
#2. We might only live there for a few years and upgrade into a house.
#3. If we did remain, we could always refinance in after a few years.
Unfortunately, all of these were predicated upon the cost of houses going up, even at a rate much slower than what was occurring at the time. If it was true, it might have helped us with our future house hunting, while giving us a comparable house payment to our rent check. (Fortunately we later bought at a fixed rate.) When we get advice from financial planners we know and respect, it makes me wonder about the many sub-prime lenders that were out there offering bogus advice to people thinking they were making smart financial choices. People, who thanks to deregulation, would take their cut and then promptly sell it to other companies without any care or the effects of the mortgage. The business model of many companies has become driven by immediate quarterly profits. I would love to see the corporations gain some type of care towards the long-term ownership of their business decisions. I am also hoping that the new administration can help do something to bring new life to how success in the corporate world is defined.