Cheap Money, Cheap Credit and The American Dream

To me, I have always looked at success in America as owning a plot of land (or having air rights in the city). Home-ownership has fascinated me as an avenue to achieve the American dream. As many critics have pointed out today, home-ownership is becoming increasingly difficult for young Americans who are already burdened with loads of credit card, auto, student, and other miscellaneous debt. With all of these burdens, lenders are more inclined to be laxer on lending standards to fill up vacancies in properties.

I called my broker the other day and he informed me all that I needed was 5% down on a property if I was going to be living in it. I thought to myself this is ridiculous! If someone puts less than 20% down on a property, they end up paying between .5-1% more per month for the value of the loan. That’s equivalent to more than $80 a month on a $100K loan (cost of keeping up with the Jones’s). What this is meant to illustrate is that lending standards have relaxed to the point where the amount of money down on the property is insignificant, to the point where the buyer is being squeezed more every month, paying a higher interest rate and risks defaulting on the loan if one were to lose a source of income. Sound familiar?

There were several wrongdoers to blame for the 2007 financial crisis, and I believe the blame should be shared amongst all the players. As we have seen in the 2007 financial crisis, borrowers took on significantly more than they could afford. They were considered subprime (Less than 600 credit scores), had next to no down payment and often, had relatively unstable incomes. These borrowers wanted a slice of the American dream, and they weren’t being denied. Brokers worked to sell the borrowers a home in which they had no fiduciary duty if they could afford it or not. They wanted a commission and borrowers wanted a home. Several questionable matters would take place to get this borrower in the home. The lender then funded these loans and approved/pre-approved the borrower based on income, credit score, etc. They too didn’t face any immediate liability on the performance of the loan since they then sold off these loans to investment banks to securitize these loans as investments. Once when the crash came, borrowers were severely overextended and were often underwater on their property. When they lost a source of income, they were often forced to foreclose on the property. Greed, fear of missing out, lack of regulation and financial intelligence were the main principle causes of the 2007 financial crisis.

As the yield curve has inverted several times this year, I understand there is a downturn in the horizon (next 6-12 months). In my opinion, it won’t be a good time to buy until the crash occurs regardless of interest rates. Even with low-interest rates, property valuations are still very high. The questions with this downturn are how impactful will it be to the markets (20-60%) and what will the duration of the trough be? The next question would be, what do I do then? I think now more than ever, individuals should start to build an emergency fund, develop multiple streams of income, pay off all debt and develop a diversified and conservative portfolio. By doing these things, the individual will be prepared, confident and with a smile. Meanwhile, everyone else will be in panic mode, focusing on reduction and selling off assets at a loss due to emotional responses and living an overextended life for the past decade.

-Published 10/8/2019

Nothing stated in this article is a recommendation from Forehand Financial to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.  

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