There was an article a couple of weekends ago in The Washington Post about the impending demise of charitable down payment assistance (CDPA) programs such as the Ameridream and Nehemiah programs. Builders, in particular, foresaw dire consequences to their industry without the existence of these entities. Featured in the article was a young couple that had just purchased a property. Their down payment of $7,500 came as a gift from a CDPA program. Without CDPA assistance, the couple had no money for the down payment and would have remained renters, which they had been for 5 years.
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Let’s go back in time 5 years. The young couple has just moved into their rental home. They decide that owning their own home would be preferable to renting and set a goal of owning their own home in 5 years. They calculate that they would need to save $7,500 and since they both have jobs, each would need to save $14.42 a week to meet their goal in the stipulated time-frame. They would have to sacrifice a latte here and there, drink tap water and maybe eat at a restaurant one less time a month but in 5 years, their savings goal would be met and they could purchase their first home.
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Americans do not save. We used to save but presently speaking, it is a skill we have lost or (hopefully) misplaced. It was the lack of saving that lead to the proliferation of 100% finance options in Real Estate. It was 100% financing that is at the heart of the sub prime mortgage morass and it’s gargantuan cousin, the collateralized debt obligation/credit default swap Black Hole. It does not pay to bet against human nature. That’s exactly what happened.
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The purchase of a home represents a vested interest. When that purchase includes some of your own hard-earned money in the form of a down payment, that vested interest is stronger than it is if the purchase were made using only other people’s money. That’s human nature. So when billions were lent to people who had a past history of not being real good at repaying debts incurred and there was no requirement for purchasers to take a monetary position in the investment, i.e. down payment, why was everyone so surprised when human nature kicked in?
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The era of cheap credit is over. Saving is something that we as Americans need to get back into. It will be good for us as a society to use some discipline and start living within our means. Perhaps that concept will even spread to our government.
;)
;)
