What It Means For The Kids - Reforming Housing Finance
A large part of a father's job is to teach and help prepare the kids for the world and that means that I have to actually follow what's going on in the world. Much of my worldview is skewed by the knowledge that I have children who will someday have to contend with issues that are being impacted by actions taken now. Given that, I just finished reading the US Treasury Report on the reform of the housing finance system, a k a what the hell do we do with Fannie Mae and Freddie Mac?
Everybody knows that the housing market is a complete trainwreck and most are aware that the financial hulls of Fannie and Freddie are so shot full of holes that they've gone into government receivership. This report outlines the potential steps that the government proposes to bring stability back to the housing market and it's finance mechanism. The upshot is that the mortgage market revert back to a principally private domain with private funding and the only government involvement would be for targeted markets. This involves revoking the $729,000 maximum conforming loan limit (probably not impacting our kids), increasing the cost of mortgage insurance (impacting our kids) and increasing the size of the downpayment to a minimum of 10% (again, impacting our kids). With the expectation that the lion's share of lending for mortgages will revert back to the private sector, the handwriting is clear that the underwriting standards will be returning to the pre-house mania standards of solid credit history, which will absolutely impact our children. After all, the banking sector has to be a good steward of the money entrusted to them now that they can't slough it off on the taxpayer.
So here's the brief synopsis of what my kids will have to consider when they eventually wish to purchase a house:
- increased monthly premium for mortgage insurance from today's levels;
- higher downpayment as percentage of house price (from about 3% to at least 10%);
- higher credit scores.
Intellectually, this is a good thing and something that has to happen for the system to right itself and recover. But I've got a real problem as I look at it. We know that the real income - corrected for inflation - of the average American is dropping or stagnant at best. This means that the amount needed just to get into a house will be higher as a percentage of income and assets than the amounts which we've had to pay in quite some time. Given the poor savings habits of Americans, who collectively haven't saved 10% of their paycheck in decades, this drives the hope of homeownership further away from our children as the ability to gather a sufficient downpayment will be taxed. Couple this with real concern about incipient food inflation, and the kids paychecks will be stretched just trying to keep food on the table.
I suspect that the Treasury authors understand this as well. They're blunt in their upfront assessment that their goal is not to put all Americans in their own homes, as proposed by George Bush. Their goal is to reform the broken system so as to make it sustainable and safe. A later section of the report flatly states that work must be done to improve the state of financing for multi-family housing in order to attract apartment building owners that will put sufficient money into the properties to make them passably habitable. Hey, if the kids are gonna be priced out, we still gotta find 'em someplace decent to live.
What truly bothers me however, is that the only way - given these proposed changes and the existant income parameters - for a home to be affordable to the kids is for the price to fall. But this imperils the financial system as housing prices are the foundation of so many Collateralized Debt Securities and everything possible is being done to prevent that from happening. So...my kids or the banks? Guess where that one comes down.
What do I have to do to help prepare my kids for this scenario? There are several things on which to work, but none of them are simple or foolproof.
- Speak frankly with the kids about buying a house. First, a house isn't a home, it's a structure and ignore the advertising about buying a home. While the kids might not understand all of the details, they'll get the underlying message better than you think that they might.
Speak frankly about the need to save and then go out and model that behavior yourself. Purchase items with cash that you've saved in a coin jar or alter your own behavior. Kids smell hypocrisy like stink on a skunk and they'll notice.
Work with them to understand debt. What exactly are the varying forms of debt and when are they appropriate? How much debt should one be able to carry given a certain income level?
Talk with them and teach them to be skeptical of what they hear and read.
In short, talk to them. Don't just chat, but talk to them in the car or at the basketball hoop, ask them if they know anything about whatever and see what they say. And while you're chatting about drugs, chat about the money, too.
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