Monday, 08 September 2008

Rants

“Clueless” home buyers


The weekend takeover of Fannie and Freddie by the feds has restarted a lot of talk about the mess in the housing market. On the conservative side, there’s not a lot of sympathy for the “foolish/clueless” buyers who “bought more house than they could afford” and “failed to be cautious” of things like adjustable rate mortgages. They should have “done their research,” and not “ignored the warnings in the disclosures.” (paraphrasing comments by one local radio talker)

I’ll buy that, to a degree. But as somebody who has spent the last three months as an on-the-sidelines witness to a couple of real estate closings, I want to say that it’s not that simple, at least for most home buyers.

Let me make it clear that this is not about the “flippers,” or the “investors;” the folks running their own “Make $5 Million In Your Spare Time in the Exciting World of Real Estate” program who now are upside-down on five houses they can’t sell. I see those people as professionals, and “professionals” are supposed to realize that markets (and asset values) go down as well as up, to know the ins and outs of what they’re doing, and to evaluate and manage their risks accordingly. Those folks should have heard the alarm bells.ringing.years ago[1]: Either they were too greedy[2] or too stupid to trim their sails in time. Let ’em take their lumps, say I.

No, the people I’m talking about are like most of us: First-time or once-in-a-while home buyers. People who buy houses because they need somehere to live, for whom the “investment” aspect of appreciating property values is an attractive side benefit. These buyers are/were anything but professionals, for how many times in your life do you buy a house?  Unless you’re on some corporate management merry-go-round, certainly less often than you buy a car.[3]

For the first-time buyer, it’s all brand new, but for the nth time buyer it’s even worse, because it’s all different– the knowledge they think they have is now obsolete. In either case, there’s a lot of specialized information to be assimilated very quickly, information that will, by and large, be useless once the transaction is completed. In this circumstance, what does the rational person usually do? Well, usually the rational person gets advice from an “expert.”

So we decide to buy a house. We’ll deal with a real estate agent or two, a mortgage broker, maybe a banker and an insurance agent. Now none of these people is really “on our side” (although they may encourage us to believe so.)  Furthermore, there’s the “New York City gyp joint” problem:  For the real estate people and the mortgage broker, it’s most likely a once-and-done transaction:  They’ll never see us again, once the sale completes.

If we were buying a car, we’d be prepared for this: We know that none of the gang at the “friendly” dealership is really our friend.  But we don’t buy a house every three years, so we’re disarmed by everyone’s friendly manner. 
But their incentives are not ours, which can lead to bad advice:

Me:  Can I afford this?
R.E. Agent:  Sure you can. (If I tell him “no,” there goes the sale, and I’ll be stuck with this turkey for another three months.)
Broker:  Sure you can. (If I tell him “no,” there goes my commission.)
Banker:  Sure you can. (at least for the moment. By the time anything goes wrong, I’ll be promoted.)
Insurance Guy:  Sure you can. (Well, he’s always been able to afford his premiums before...)

Me:  But what could go wrong?
R.E. Agent:  Well, you might get into a crunch when the rates reset, but for that to happen the rates would have to go up, and by then the house’s value would have increased so much that you could (pay me to!) sell it and take a profit.  Remember, they’re not making any land anymore...
Broker:  Well, the rates could go up... but we don’t see that happening (until after I’m outta here), and you could always refinance...
Banker:   Well, you might get into a crunch a few years down the road, but if you get your regular raises and if rates don’t jump too much and if taxes don’t go sky high and if inflation stays under control... (hope! hope!)

And if anyone’s a crook, it’s even worse:

Me:  That’s really expensive? You sure I can afford it?
R.E. Agent:  Sure you can. (Think of my commission!)
Broker:  Sure you can. (At least long enough for me to get my money!)
Banker:  Sure you can. (Well, it would look good in my portfolio. Maybe he’ll get a raise or be transferred before the rates go up.)
Insurance Guy:  Sure you can.  (“I’m in the money...”)

Now two people who should be our side are our lawyer, and our accountant.  Except, like most people, our lawyer is “the guy who drew up the wills fifteen years ago,” and our “accountant” is really “the guy who does the taxes.”  So the â€œaccountant” is probably out (since he’s not really an accountant at all).  And the lawyer is most likely not a real estate expert, lacks the accounting skills to project our financial circumstances years into the future, and is expensive besides.  Which means there’s no one who knows our circumstances and can take a hard look at the deal and say, “You really don’t want to do this.”

So here we are, sitting in some stuffy conference room with eight or nine other people, closing on the transaction.  We’ve asked all the questions, gotten all the assurances, maybe we’ve been “sold” a deal that, down inside, we’re a little uncomfortable with.  But everybody says things will be o.k.

Now comes the “disclosure.”  Well, so much “disclosure” as to be useless:  Thirty-some legal-size pages, all printed in two point type, which we’re supposed to to read, understand, and then sign.  But there’s all that momentum toward completing the transaction, not to mention all those other people just... sitting there... waiting. Do we read all thirty pages, all the way through?[4] Or worse, do we throw up our hands and send everybody home, knowing that the deal just got more expensive?  Or do we whisper a silent prayer that we “not get screwed too much,” trust that our “experts” have told us the truth, and sign?[5] 

And 18 months later, when house prices have gone to hell and we find ourselves owing more than the property is worth, and refinancing isn’t to be had for love or money... how guilty are we?


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[1] Housing Bubble blog’s current URL is http://thehousingbubbleblog.com/

[2] “Don’t try to buy at the bottom and sell at the top. This can‘t be done, except by liars.” – Bernard Baruch

[3] ...and, unless you’re in the habit of paying sticker price, recall the “pleasure” of your last encounter with the car weasels.

[4] Hands up everyone who actually read all of the warnings in the front of the manual for the last consumer product you bought...
One of my pet peeves is manuals that start off with three or four pages of dire warnings concerning danger to life and limb that seem to come with every product that could conceivably be dangerous in some way, no matter how outlandish. The lawyers must motivate this for ass covering purposes. I look forward to the first lawsuit that arises out of injury following inadequate warning of a real danger because the warning was embedded in one of those ever lengthening lists of ridiculous warnings, which, like the effect of little boy who cried wolf on his listeners, have caused reasonable users of such manuals to regard the introductory list of warnings as not worth reading, thereby making them ineffective. - Tom Cohoe

[5] Yes, you could ask, “Why didn’t you have your lawyer go over all the paperwork first.”  But would that have been of any benefit, since, nine times out of ten, all he would have had to say is, “If you want the house, then sign everything”?

Posted by: Old Grouch in Rants at 20:05:02 GMT | No Comments | Add Comment
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