NeighborHoodwinked: The Fallacy Behind the American Dream

Opinion

NeighborHoodwinked: The Fallacy Behind the American Dream

by Hassan Nicholás

hood·wink [hoo d-wingk]
–verb (used with object)
1. to deceive or trick.

Do you remember where you were when you the heard the POP!? – the defining moment that signaled the end of a hyper-inflated real estate bubble? I remember I was sitting at my desk, much like I am now, mulling over real estate news...probably finishing off some yogurt. Back then I believed in something called the “America Dream”. We talked about it in our workshops, counseling sessions. It even appeared in bold white letters on our workshop workbooks that we would pass out to anxious first-time home buyers. Now, many months later the once inspiring phrase has escaped me.

When most envision the American Dream imagery of houses guarded by pristine white picket fences, perfectly manicured lawns, and friendly neighbors comes to mind. It’s hard to ignore the temptation to want ownership of something, anything in this world. Whether it be a car, a home, or limited edition Jordan’s there’s an intangible value added that we could best describe as pride. Americans find pride in their homes (among other things), because for us it represents that we have succeeded, that we have arrived.

If you are a homeowner you deserve that feeling. Purchasing a home, for most people, will be one of the most significant purchases you will make in your lifetime. Fact. There are several

But now that we have arrived are we still living or striving for the American Dream?

Many pundits claim that house prices must fall an additional 30% to align them back to where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, thus a drop of 30% would be needed. Right? Nope. Though appealing on the surface, this simplistic analysis is flawed for a variety of reasons. The most important? It neglects the fact that a great majority of Americans buy their houses with mortgages. "And if one buys a house with mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house." Today the rate on a 30-year, fixed-rate mortgage is around 6.5%. Back in 1981, the rate hit 18.5%. Comparing house prices of today to that of the 1970s or even 1980s, when mortgage rates were treading on astronomical levels, is not only wrong but downright misleading.

We have been conditioned since birth to believe owning a home is one of the best, most secure methods of accumulating wealth. Many real estate professionals tout that owning a home is a better investment then the stock market. Though, studies have shown this is hardly the case. Homeownership is something great to experience and have, but it's not a guaranteed money maker. I was among the many that believed "real estate always appreciates". Many victims of our current real estate crisis probably repeated similar mantras, but it didn't do much to curtail the wave of price drops across the nation. The good thing about this (if anything positive can be pulled from this situation), is that I have been forced to think about homeownership in a different way. Now, feeling suddenly enlightened, I have began to explore the more realistic benefits of owning a home. And once you start thinking, you actually come up with many reasons why owning a home can be such a wonderful thing.

Just some of the reasons I came up with:

• Leverage. If you been to one of our workshops you've seen an example of how one can leverage a small amount of money to buy a significant piece of property. If that property appreciates well, you discover your gains are greatly compounded.
• The intangiblel. Cost of buying a home in El Sereno, $310,000. The feeling of buying your first home with a backyard big enough to house all three of your Irish Wolfhounds? Priceless. Emotions will definitely come into play as you decide whether buying is right for you. I feel it's very pertinent to consider the emotional outcomes, but don't let them the reason you make an irrational decision.
  
• Rent vs. Buying. Through some creative financing (and I don't mean ARMs, more like deferred loans) the costs to rent could be equal to or greater then the costs of owning a home of similar square footage.
• Ownership can help start/build generational wealth. On a social level, it helps build a "savings culture" and lift some families out of poverty.
• Etc. There are so many other benefits to homeownership that you will discover as learn more about the process and everything real estate markets entail. Have any to share? Let me know and we can continue this list.
  

A Success Story: Margarito Nava

December 1, 2005
Margarito Nava, Maintenence Worker and Cashier


Margarito Nava learned about CFRC’s Individual Development Account (IDA) program in the local Spanish Language newspaper La Opinion, and he wanted to find out if the program was really true. After attending an orientation, Mr. Nava enrolled in the program, which promised to match his savings with up to $4,000 that he could use for an asset purchase, including his desired goal of purchasing a home.

"[CFRC is] You are really doing a great
job to the community, Latino community. It is a big change. There isn't anything
like having your own space for the kids to jump and play--to do whatever they
want."

Mr. Nava attended the program’s homebuyer education and financial education courses. There he learned how to manage his money and budget, and learned about the homebuying process and how to get a loan. After accumulating his savings, Mr. Nava found a real estate agent to work with and then initiated his search for the house of his dreams. In about a month, Mr. Nava entered escrow. However, he was not satisfied with the deal he received.

"When we were in escrow, I didn't like
the loan. We were getting a 12% interest rate and excess in fees."

At the prompting of his CFRC financial counselor, Mr. Nava talked to a different lender, who was able to lower the interest rate on his loan by more than six percentage points. The reduced rate brought his mortgage payments to a comfortable, affordable level - even freeing up enough money to fund the addition of a new bathroom, new room and kitchen.

Although, Mr. Nava admits he is under more pressure to make his monthly mortgage and will have to become acostomed to making higher paments, like the old saying goes, si,vale la pena - that's Spanish for "It's worth it."

And for good reason. Homeownership is an opportunity that many wish for, but not all have the advantage of experiencing. Families like Mr. Nava's acknowledge this reality and seem to be up for the challenge - having to forego "a lot of things we didn't use to" and setting priorities in order to reach their goal of living in their own home. But throughout the entire process, Mr. Nava seems to be content with where he is in his life and definately appreciative of the support he received.

"I thank you for making my dream come
true. I hope you continue to help more families."