Among the big winners in the current mortgage crisis are a large subset of those who complain bitterly that they "played by the rules" and "used good sense" and "didn't take on mortgages they couldn't afford" -- and now feel put-upon because they think they might somehow be forced to subsidize those who, from their perspective, took advantage.
The unnoticed winners (and perhaps whiners) are those who, over the past few years, sold their previous home for a price that was inflated by the eased availability of low-priced mortgages. At the closing table, they pocketed value that they didn't create, and patted themselves on the backs for their wisdom and goodness and hardworking efforts over the preceding years to pay the mortgage which made this day possible.
They turned around and used the home equity they had so painstakingly* built as a downpayment on a higher-priced home. That they could afford a higher-priced home** was a function of several factors:
- the home equity created by the larger pool of buyers in the marketplace;
- the home equity created by relatively low property taxes -- that is, taxes which failed to collect the economic rent, and the implied promise that future economic rent would continue to flow to the property owner, rather than be collected by the community;
- a gradual -- very slow -- increase in wages, much slower than was the case 20 years earlier, when young people could generally count on rising wages to make it possible for them to carry easily after a few years a fixed rate mortgage that was initially a stretch. That increase in wages was also fueled by having more families where both spouses worked more hours, often despite the presence of young children;
- low interest rates, which made it possible both for their buyer to afford to borrow more principal, and for them as a buyer to borrow more
* "Painstakingly" is a bit tongue in cheek. First, most coastal states and major metro area homeowners' home equity increases have come not as a result of paying down the mortgage so much as they have resulted from increases in land value. Second, many have refinanced their mortgages to get lower rates (for the moment, I'm ignoring the cash-out refinancings), and therefore have repeated, sometimes several times, the Groundhog Day experience of paying the first year of the mortgage over and over and over.
- On a 30-year mortgage at 5%, 78% of one's first payment is interest; at 6%, 83%; at 7%, 88%.
- At the end of 5 years, these percentages have dropped to 71%, 78% and 83%, respectively.
- At the end of the first year, the "homeowner" will have paid off 1.48% of the principal at 5%; 1.23% at 6%, or 1.02% at 7% interest.
- Only after 6 years has even 10% of the mortgage been paid off, on a 5% interest rate; at 7%, it takes nearly 8 years.
- And each refinancing has extended the payoff date by another year or two, and increased the number of mostly-interest years.
** That higher-priced home may not be larger, newer or fancier. It might simply be better located: in a better school district, closer to work, closer to public transportation, closer to cultural amenities or shopping, parks and recreation, better served by taxpayer-provided and community amenities. All these things contribute to land value; the previous owner did not!
So those move-up buyers, who were enabled to buy move-up houses because the relaxed mortgage lending practices permitted them to sell their previous house, ought not to castigate the purchasers.
And, yes, there is an alternative to this lunacy. Explore this blog to learn more about why Land Value Taxation is the sane, wise, just alternative to the madness we create for ourselves by undertaxing land and relying on taxes on wages, sales and buildings to finance our common spending.
We are playing by rules that work to the detriment of the community and of the ordinary person. Should we pat on the back those who play by the rules, or those who seek to change and make rational the rules?
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