It wasn’t “liar loans” (stated income/no documentation required) that got us into the housing mess, and new government regulations and printing money won’t get us out. Instead, it’s time to get back to basics.
For the last 20 years, we’ve enjoyed consumer-led growth based on credit. We haven’t produced a lot, but the extension of easy credit actually mitigated the last two recessions. The pile of debt never stopped growing. We printed more money, borrowed from foreign governments and gave artificial values to esoteric collateralized securities that no one dared to call worthless.
I made more than $100,000 from the appreciated value of my home from 2005 to 2006. With so much growth financed by debt, I felt prosperous—as did many others. Money velocity was rapid; so, as a country, we didn’t save. Instead, we spent. We grew businesses and turned a blind eye to the debt. I “lost” that money in 2007, but nothing really happened. I stayed in the home, maintained it, painted it and expect to stay there for the next several years (regardless of value).
The last 20 years was a period of falling nominal interest rates. Every cycle of low interest rates was another opportunity for people to refinance on better terms and extend their spending further. Lenders made it easier to borrow.
Who’s responsible for this economic collapse? According to the latest Federal Reserve Consumer Credit report, total revolving debt by consumers (which consists primarily of credit cards), is at an all-time high of $947.4 billion. The U.S. economy is in the midst of a credit crunch, and more and more economists are tracing its origins not to the housing meltdown but to credit cards.
Having it all is a dream. The credit card industry has seduced us into selling our future to make this dream seem possible. Easy credit has turned into a nightmare for many. This same industry could be the next domino to fall if consumers don’t get a handle on their personal finances soon.
But living the dream is different than living in a dream. Honest disclosure—not unsupported statements—is the real foundation to building a life. Critical life decisions have real consequences for us and for those around us. If we treat each other as we hope to be treated, our work and our play can be joyful. But if we treat ourselves at the expense of others, we’ll find unrest, turmoil and conflict.
Slow and steady wins the race. A positive attitude, some adherence to moral and ethical boundaries, continuous upgrading of skills and education and a sober look ahead will serve you well as the world changes around you.
Housing isn’t a luxury item; it’s basic to survival. When it comes to basic needs, remember that reliability must prevail if we want a world where we can safely work and play. If we try, we can usually find contentment no matter where we live. Our approach—our integrity—is everything when looking at and accepting our present circumstance.
Richard Paille is a real estate and mortgage broker at Pacific Union in Santa Rosa. He’s also a director for the BAREIS MLS. You can reach him at (707) 539-2001 or richard@besthomemtg.com.
