The Role of Government
Well, as Tax time approaches, I began to think about the role of government in our lives. Especially this year. The governments role in the economy has been in the forefront through this “housing crisis” or “mortgage meltdown” - which ever scary phrase works best.
I’m not sure how popular my opinion on this issue is with “the common man” but I believe that the government should get out of the oil, housing, health care, retirement & even education industries. I’m a strong believer in free market economics. I studied it in college and I’ve seen it proven time and time again in history. I’ve also seen that government intervention in these industries have only created more problems and the perceived “need” for more intervention.
With out getting too detailed, I’ll explain what I mean using the current housing slump…
There was an up tick in the housing market a few years ago and homes were selling like hotcakes at IHop! There was no end to this in sight. More and more people were flooding into the market to BUY. Investors were flipping homes FAST! They could buy on Monday, fix all week and sell on Friday and take away several thousand dollars for their troubles! If you needed to move, no problem. Just get to your new area and put an offer on a home because your old home will sell in three months and it will sell for more than you are asking for… almost guaranteed! These were the days of the “boom”.
In this market, many home owners took advantage of the increased home prices and took out second mortgages on their property. They borrowed against their equity because the rates were just 6% and some people could double what they paid for the house. This was mistake #1. This is similar to borrowing against a stock portfolio that you have, but you never sell the stocks to realize the gains. If the market ever goes down, you are upside down on that portfolio. That is what happened with homes
On top of that, when the appraisers worked for the home owners on this home equity line of credit or “heloc” they would feel free to appraise the home for a little more than actual value knowing that the prices were going up, up, and away. This was mistake #2. This inflated home prices for everyone!
Also, during this time of property & prosperity, many lenders were utilizing “No Doc Loans”, “Stated Income Loans”, ARMS, etc… These are some of the riskiest loan programs available. Some of these were given with “good intentions” but they were not smart. The ARMs started to break when the rates began to adjust as the market was stabilizing. For instances: Lets say I took out an ARM on a $100,000 property that would adjust after 3 years - when I thought that I would be moving anyway. I paid 4% for those 3 years and now it was time for me to move or the ARM would adjust up. Well, change of plans, and for whatever reason, we aren’t moving. The ARM adjust! I try to catch it and refinance, but when I do, I found out that I purchased that $100,000 home at the peak of the market and now it is only worth $90,000. See the trouble? I’m upside down $10,000 and that is a high % home loan. I can’t sell because I’d take bigger loss. I shouldn’t have ever taken out the ARM in the first place. The “No Doc/Stated Income” loans are just dumb! Would you invest in my company if I told you we make about $600,000 a year and I had no documents to prove that the company existed or that we made that much money, but I said the loan was to purchase our building? NO! of course not! So why did the underwriters? Because the % of default was far less than the % of return. This was BIG mistake #3
There were many more mistakes: such as over supply from “pick-up-truck & a cellphone builders” as well as unprofessionalism from part-time get rich quick Realtors. But back to my original point: the government sees all of this happening and says, “We need to do something!” Why? The media starts freaking everyone out with doom and gloom reports because it is an election year and they are determined to make the current administration into monsters. Politicians are getting called from people who have loans adjusting and who can’t sell their house. People that have made unwise real estate investments based on the future return vs realistic current values, and people that have bought the loans that are now facing default. Some of these people have deep pockets and will help politicians in the future. Other people have nothing and it will “look good” to help the downtrodden.
So, they pass a few bills and bail out a big mortgage backer. This was a bad move. It will only prolong our pain. In a free market, prices are always in flux based on supply and demand. This is NOT a bad thing. When prices drop, more people can get into a home, investors purchase properties, supply decreases and then the prices start to move up again until everyone and their mom is trying to sell to make some money… then prices began to drop due to the supply… and so on. This is not rocket science, it is basic economics. So, when the government jumps in, it keeps us from hitting the bottom. It allows the market to hover in this state of confusion. No one moves. The sellers are hurt because the buyers aren’t going to buy with out knowing where the bottom is. It hurts buyers because they are having to hold their cash and wait. They are not making any money from investments! The rental market is hurt because there are so many available properties to rent (used to be sellers) that rents are low. Government intervention is hurting everyone in this housing market.
Can the government do ANYTHING to help?
YES! Here are my recommendations:
- Encourage home ownership by giving tax breaks for property owners! Reduce property taxes for those in their primary residence. Give more deductions and tax breaks to investors who buy up “problem homes” and restore them. Help the “lower income” by protecting them for predatory/pay day lenders. Educate them about budgeting. It is NOT the government’s responsibility to “nanny” the poor so they can own a home! It is the “poor” person’s responsibility to bring themselves out of that situation. We all have the same opportunities. We live in America!
- Stay away from the bail outs! Bailing out Bear Stearns was one of the worst things they could have done! Let them FALL & let them FAIL. In life, FAILING is not bad! We learn more from FAILING than we do from winning… but now, what have we learned? Make risky investments and if you have enough money, the government will bail you out and screw the little guy who is getting foreclosed on. The can of worms here is that now the government must help everyone!
- Realize that home ownership is not a right. It is a choice made based on affordability. Not everyone should own a home. “Low income housing” mandated by the government is a bad idea. This does not fix the problem. Those who are on low incomes can afford any homes if they make different decisions with the income they have coming in. RENT CHEAP until you can afford to buy! Work more jobs, work smarter and get a promotion, make a budget and watch every dime, get rid of credit cards, make wise choices with your money, put money in the bank for emergencies, keep doing that until you have a down payment, buy a home! 15 year fixed with 20% down is the best option.
- Tax payers are not in the business of paying off defaulted loans and bailing out risky investments! That is not why they were elected!
- Realize that the borrower is slave to the lender and get our country out of debt!
- Defend and protect our country and stay out of the free market.
Real quick on one of the other issues: Oil: price goes up due to increasing demand. Government demands more eco friendly oil (ethanol) alternatives to “lower the price on oil” - farmers switch crops to corn (ethanol) because corn prices go up. Fewer farmers are in wheat, veggies, etc… . Wheat & vegie prices increase due to lack of supply. Government should have allowed drilling of our OWN resources to increase the supply of oil, lowering the price of oil and keeping corn, wheat, veggies the same!
Well, that is my two cents before I have to send those two cents in with my tax forms. I’d love to hear any comments!
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