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R MacDonald | 06-08-2007 05:08 AM
The Myth of Home Ownership as Investment in the Casino Economy The Myth of Home Ownership as Investment in the Casino Economy It only takes two eyes and a short memory to realize that houses in the U.S. just keep getting bigger and more ostentatious, especially over the past five to ten years. Families are getting smaller yet the average home keeps getting bigger. Millions of Americans have been taking out home equity loans and second, or even third, mortgages to buy a bigger home or add on to the existing one so they can compete with the neighbors who are doing the same thing; it’s ridiculous. One of the main reasons is this pervasive belief that owning a home is a sound ‘investment’ so the more money the ‘investor’ dumps into it the better. It’s practically taken as fact within American culture that owning a house is a great investment and anyone that doesn’t play along is just throwing money away on rent. Albany, Ohio 2007 Certainly this belief has become very big business for the banks and mortgage companies dealing out the loans, for the real-estate agents selling the properties, for the home improvement stores like Lowe's and Home Depot (the other Wal*Marts), and for the construction contractors, but not so much for the (often illegal, mostly Hispanic) immigrant laborers who end up doing all the arduous construction work. Even state and local governments have a vested interest in perpetuating private home ownership because property taxes are a major source of funding for government services at the local level. So you can see that bias towards home ownership is systemic and thus it’s not too surprising that so much hype and myth about personal home ownership as a prudent investment emerges from this situation. Hypothetically if you stay in the same house for 30 years you can pay off your mortgage and own the home but it's fairly rare for that chain of events to actually occur. Most people move into a different price market, refinance their mortgage and extend it out for cash up front or do something else that extends the payments beyond the standard 30 years for a typical home loan. Even if someone manages to pay off their entire mortgage loan the payments don’t stop entirely, you’ve still got to pay for maintenance, insurance and taxes. And the taxes in some places are pretty steep, so steep that many retirees on fixed incomes are forced to sell. So where’s the gain? The bank owns the house because they hold the loan, so where’s the personal ownership? Investment or Liability? One of the standard lines used to justify buying a house is that it’s not just a bunch of sticks and plaster, it’s an investment. Everyone needs some kind of domicile to live in but If you can’t sell it then it’s not really an investment it’s a liability because you must preserve it. If you own two homes then one can legitimately be considered an investment but the one you have to live in is still a liability. If, like the vast majority, you only own one home then you have one liability. The proponents of home ownership argue that it increases in value over time, but so what? The entire housing market increases in price so even if you sell your one house you just have to buy back into it at around the same price to get the same quality and quantity of house! Because prices rise along with your own you just end up paying more in taxes. Plus all the maintenance time and cost associated with keeping a house functional and at a level where it can be sold just for a break-even price. And then there’s the mortgage. The money paid on a 30 year mortgage consists of about half or more in interest paid to the bank, rather than the principle. The loan holder doesn’t actually pay on the equity until about two thirds into the 30 years! So the majority of the loan time is just paying interest to the bank that lent you the money. So much for actually owning the house! Truth is, banking and finance has a higher profit margin than any other sector of the economy, better than oil even; and why not? Everyone else does the work for them. For example, Citigroup has a 25% yearly profit margin while Chevron only has 10%. Every single month millions of Americans send a major portion of their personal income to the mortgage holder, creating a mammoth industry. And now they're paying more than ever because they believe the marketing hype telling them it’s a smart investment. Yeah it’s a real profitable investment – for the banks! 'And the more you buy the more you save!' Total outstanding home mortgages in 1999 were US$4.45 trillion and by 2004 this amount grew to $7.56 trillion, most of which was absorbed by refinancing of higher home prices at lower interest rates. When Greenspan took over at the Fed in 1987, total outstanding home mortgages stood only at $1.82 trillion. On his watch, outstanding home mortgages quadrupled. Much of this money has been printed by the Fed, exported through the trade deficit and re-imported as debt. From: Why the US sub-prime mortgage bust will spread to the global finance system, by Henry C.K. Liu, March 16, 2007. Home Ownership as Pseudo-Equity Owning only one house means you have to trade it for another one and you can’t sell it and walk away with the proceeds like you could from selling stock or cashing in a bond. Buying a house makes for a poor investment strategy for several reasons not least of which is the relatively high transaction fees and the continual expenses associated with maintenance and value competition within the neighborhood and regional market. How does this [investment] compare to housing? Costs vary significantly by location, but for urban areas, annual property taxes are typically between 1% and 2% of the current property value. Annual maintenance costs can add another 1% of the property value. If your down payment is less than 20%, you will also usually have to pay private mortgage insurance. Add property insurance, and the annual expense ratio associated with homeownership can easily reach 3% or more. The big hit, however, arrives when you sell a property. Real estate agents will collect 6% of the selling price, while, lawyers, inspectors, title companies, and banks will collect additional fees. These fees appear as though they will remain stubbornly fixed for years to come. If you flip properties as though you are actively trading stocks, the only folks getting rich will be real estate agents. Meanwhile, transaction fees for stocks and mutual funds have plummeted in recent decades, to the point of falling below $10 per trade at several discount brokers. From: The Worst Investment Ever, by Robert Aronen, Yahoo! Finance, May 18, 2007. If you still believe that by buying one house and living in it you are ‘investing’ your money, think about this: For any time period longer than the past few years, residential housing prices fall far behind these returns. Perhaps the best measure of housing-market appreciation is the S&P National Home Price Index. This index represents the actual appreciation of the same house over time, whereas a portion of overall housing-price increases occurs because new houses are generally much larger than old houses and people frequently spend substantial money upgrading and expanding their houses. Looking at the index, from 1987 to 2006, we see that the overall average appreciation in the U.S. was only 5.6%. Even cities showing huge gains during the final years of the housing bubble -- including San Diego, Las Vegas, and Washington, D.C. -- showed gains slightly above only 7% for the 19-year period. If we adjust these returns for inflation, we end up with real returns on housing in a range of 3%-5%. Subtract our annual expense ratio of 2%, and the return gets pretty thin. This index is relatively new, and the data ends at the top of the final eight years of the biggest housing boom in U.S. history. Longer-term data paints an even less encouraging picture. Piet Eichholtz studied records on home sales in Amsterdam's premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns. … Those who think renting is "throwing money away" should consider that mortgage interest, maintenance, taxes, and insurance are also "thrown away." Having a place to live costs money no matter what, and a rational evaluation of your local market should let you know which one is a better value. [ibid] Home ownership is only an investment if you are able to acquire more than one house or if you plan to bequeath the house to your descendants and you’re thinking in the long term, i.e. over 30 years. For most everyone else home ownership as an investment is a nifty scam that sustains the economic elite by creating the illusion that the average guys can get a piece of the action for themselves by buying a home and turning it into a mansion. In reality the price inflation only makes the rich richer through rampant speculation and at best everyone else treads water. One way the banks have successfully perpetuated this trick is through home equity loans. Home equity is the difference between a home’s current value and the remaining mortgage balance. Banks will give the home owner a loan based on the differential between the current inflated house price and the total cost of the remaining mortgage. As long as the average house price continues to rise rapidly this is usually financially sustainable but if the price falls, as in the collapse of a speculative bubble, then the home owner is stuck in a negative equity trap – they owe more to the bank or loan company than the house is worth. Housing is a primary human need, so along with food and clothing shelter is a public good. Fulfilling the primary need for housing shouldn’t be a burden for anyone working full time or more. Yet that is exactly the situation today in many places around the world, not just the U.S.A. Indeed, unaffordable housing is a worldwide problem. Guangzhou in southeastern China is typical of the rapidly developing parts of the world. In Guangzhou, the average price of housing rose from 3,888 yuan per square meter to 7,729 yuan in February, up 100%. [1 US Dollar is equal to about 7.6 Yuan] In China, skyrocketing housing, education and medical-care costs have become the three major sources of growing public discontent. In Guangzhou, even middle-ranking officials have begun to complain about high housing prices. Ding Jianhua, deputy chief of Guangzhou's Tianhe district, openly said at a government meeting on January 21 that he rented an apartment in Guangzhou and didn't own his own home because he could not afford one. "Civil servants can hardly afford to buy housing on their regular incomes," he said. From: Guangzhou aims to cool property market, by Sally Wang, Asia Times Online, April 12, 2007. With loads of hot money, rampant real-estate speculation and rising demand many would probably be surprised at how much urban eastern China is beginning to look like the United States. With few investment options available to them Chinese are plowing their wealth into real-estate and building ever-bigger mansions for their families American style. Buyer Beware Price inflation isn’t the only concern for home buyers. Once you mortgage the rest of your life away as a home owner you usually have little recourse for purchasing poorly constructed homes or getting stuck with a house built on polluted ground. Home sellers are generally supposed to reveal environmental hazards to buyers. The specifics vary from state to state, but owners who find surprises in their new homes are often out of luck. Crude Awakening In the early '90s, Trendmaker Homes built houses atop an old oil refinery in Houston. Residents complained of skin and respiratory problems, their dogs dropped dead, and sludge seeped from their lawns. Some owners who took the builder to court in 2002 were forced into arbitration and won nothing. Another lawsuit is pending. All Wet In the mid-'90s, the buyers of a Florida home built on stilts learned the hard way that most of their land spent four months of the year underwater and infested by alligators. They sued, but the judge told them they should have seen it coming. This Old Dump When garbage oozed out of the ground, an Alabama man discovered that he'd built his new house an top of a landfill, He sued the site's previous owners. In 1991, the state supreme court told him that the doctrine of caveat emptor, or "buyer beware," meant he was on his own. Bombed KB Home built a new subdivision on a former Navy bombing range in North Texas in 1999. In 2005, 260 bombs were removed from owners’ lawns. Residents have been stuck in an arbitration process that in Texas tends to favor the developer. Driven Batty In 1999, an Ohio family had its new house inspected before moving in, but failed to check far bats. After they unpacked, the critters began to screech and scratch inside the walls at night. Dead bats clogged the basement drains. Too bad for the owners—they’d bought the house "as is." From: Not in Their Back Yard, excerpt by Josh Harkinson, Mother Jones magazine May/June 2007. Money, Money Everywhere There’s a huge amount of loose capital sloshing around in the global economy, much of it due to the inflationary financial policies of consecutive Presidential administrations that use the Treasury and Federal Reserve as political tools. Sound finance this does not lead to. Free capital naturally seeks the highest return and the housing market is just another gambling table in the worldwide casino economy, so not surprisingly prices have skyrocketed in most major markets around the world. The federal government in the U.S. has little if any real desire to protect the public from speculative pressures because they are too influenced by the wealthy elite and the banking industry to do anything to slow it down or regulate it. If the rich want to gamble then let them do it in Vegas or on the stock market – not with a public necessity like housing! But too many big players are getting rich off of the global casino and then using their wealth to buy political influence to see anything get fixed before it crashes, just like the financial authorities charged with protecting the public and the integrity of their economy won’t do anything about the explosion of derivative-based schemes, the ones that Warren Buffet calls “time bombs” because too many hedge funds are making billions of dollars for already very wealthy investors with black box cash machines operating on magical money making formulas hidden inside. With many hedge funds averaging 30% yearly returns nobody wants question the (mostly) Jewish wizards in charge, nor to look inside the black box to find out what’s really going for fear for of what they might find! The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk. But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system. Derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets - in effect buy insurance against market movements -, but have quickly become a means of investment in their own right. Outstanding derivatives contracts - excluding those traded on exchanges such as the International Petroleum Exchange - are worth close to $85 trillion [in 2003], according to the International Swaps and Derivatives Association. Some derivatives contracts, Mr Buffett says, appear to have been devised by "madmen". He warns that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998. From: Buffett warns on investment 'time bomb', BBC, March 4, 2003. "Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systemic problems." - Warren Buffett Foreclosure sign in front of a home in California, May 2, 2007The current sub-prime mortgage debacle is a classic example of this spreading 'screw-over the little guy' attitude. Thousands if not millions of homeowners that took high-interest loans just to get on the escalator to riches along with everyone else in the housing boom are losing their homes to foreclosures amidst rising interests rates and rigged, onerous payment plans that inevitably crush the loan holder if they lose their job or have any kind of financial difficulties, like a sudden medical problem and associated expenses. The elected leadership has basically done nothing for these people while the banking sector does all they can to downplay the risks of billions in bad loans to their own bottom line and the wider economy. Ignorant people are easy to exploit and manipulate Consumers continue to make foolish decisions because they take their information from a mass-media created by and for corporate interests, like the banks and loan companies, then they compete against millions of other people in the rest of the nation making similar ill-advised decisions! Both consumers and government spend more than they earn, leaving only corporate profits to drive most investment in the United States today. Consequently corporate values are being replicated throughout the country as they spend and build based on their own image. Welcome to the United States of Enron, a country governed by a venal leadership trapped in a corrupting system and directly influenced on a scale measured in dollars. This creates a national government that actively aids and supports predatory capitalists, eventually forming a self-fulfilling, dysfunctional culture of greed and short-sightedness where everyone is desperate to make a few dollars for themselves regardless of the consequences or who gets burned along the way. America is descending into a predatory culture based on theft and subterfuge, where individuals seek to morally justify anti-social personal actions through whatever insubstantial rationalizations they can concoct, unaware and unconcerned with the unseen forces driving their behavior. We must not ever have a government where outside money equates to internal power and influence, just as a government that no longer works towards serving the welfare of the public majority it rules over has lost its mandate to rule over anyone. The U.S. government is becoming an illegitimate regime, not a democracy, not even a Republic, but a plutocratic oligarchy, and this oligarchy is manipulating public competition to serve interests largely antithetic to the electorate. 02.06.07 CONTINUED HERE: http://www.holology.com/commerce.html#36

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