Published: March 18, 2008 11:29 pm            

John Cannon: Boom has gone bust: 3/19/08

A few years ago, my brother-in-law drove me through some new subdivisions being built in Lincoln, Neb. We must have passed hundreds of beautiful new homes, each one costing several hundred thousand dollars.

Our conversation went something like this:

“Who is buying these houses?” I asked. “I can’t believe there are so many rich people in Lincoln who can afford these houses.”

“There aren’t,” he explained. “Most of the people who are buying these houses are only paying the interest on the loans.”

“Then how are they ever going to build up equity? If they keep doing that, they are going to end up owing as much on their home in 10 years as they did the day they purchased it. They are never going to own the home.”

“But they know that. They know they can’t really afford the house they are living in.”

“Why would they buy something they can’t afford?”

“They are betting that the value of their home will go up so much in the next few years that they will be able to sell it and still have money left over after paying off the loan. That’s how they build up equity and make money.”

“But what happens if the value of the house goes down?”

“Then they are stuck. But so far that hasn’t happened.”

“No, but it will. And when it does, they are ruined.”

Of course, since that conversation, the housing boom has gone bust, and hundreds who gambled by buying a house they could not really afford are now looking at bankruptcy. Frankly, I’m having a hard time feeling sorry for them. They gambled and lost. That’s a risk every gambler takes.

I also don’t have a lot of sympathy for the mortgage companies that approved loans that were higher than the purchaser could reasonably be expected to repay, particularly if the value for upscale homes did not increase or — heaven forbid! — actually declined. They are the victims of their own greed.

But then what do I know? I’ve lived in the same house for the past 29 years. It is the fourth home I have owned, one in each of the communities where I have worked on newspapers: Bowling Green, Clarksville, Tenn., Gallatin, Tenn., and Ashland. Each of those home was a little nicer than the previous one and cost a little more. Each one I sold for a nice profit, which I immediately reinvested in the next home.

(Confession: I do own a home that my wife and I purchased for our daughter and granddaughter. Since their move to Lexington, I have been renting it. However, since I have no plans to ever live in that house, I don’t count it as one of my “homes.”)

Based on what my current residence is assessed at for taxation, I could not afford to purchase it today. But in 1979, I could afford it, particularly since I had made a $20,000 profit on my home in Gallatin.

When I purchased my first home in 1972, I was told by the bank that my monthly mortgage payment should not exceed 25 percent of my income. I even remember the payment on that first house: $113 a month.

Even if I had oodles of money, I don’t think I would sell my house and move to a nicer one. Instead, I would do more repairs on my house. The house is 77 years old, and there is no shortage of things that need to be done to it. But it fits the needs of my wife and I just fine.

The only reason I would ever sell it is if our health declined to the point where we could no longer climb up and down stairs. There are a lot of stairs in the house, and you can’t get far without going up and down steps. That’s one reason why it would be difficult for either one of our aging mothers to live with us, although they are welcome to move in at any time.

I know that Congress is bound to do something about the mortgage crisis, and that’s probably necessary for the overall economic health of this country. Nevertheless, I don’t like the idea of bailing out people who got too greedy for their own good.

But then 10 or 15 years ago, I didn’t have sympathy for those who lost money by investing in .com companies that went belly up. I know, I know, those who got in early and exited before the bust made a lot of money. But when the shares of companies who had never made a dime in profit were soaring, I thought people were crazy for investing in them.

But, like I said, I’m an old fuddy-duddy who thinks the value of companies should be based on their profit-and-loss statements.

Which brings me to one final point: After reviewing the balance sheets on the old Big Three automakers in recent years, I wonder why no one ever complains about companies with “obscene losses.”

I guess only the profits of oil companies can be “obscene.”

JOHN CANNON can be reached at jcannon@dailyindependent.com or (606) 326-2649.

        

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