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Richard Benson

Richard Benson

Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980's…

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Goodbye Middle Class; Hello House Poor

There's no question that home building, home sales with large capital gains, and record mortgage financing drives the economy, creating millions of jobs and generating billions of dollars in wages and tax revenues each year. Nothing plays a more crucial role in providing individual financial security for millions of Americans than homeownership. Obviously, the drivers of homeownership are a good steady income and cheap and readily available mortgage credit. Indeed, looking at housing prices rocketing up, our government tells us we have never had it better!

For many households, however, who have not stepped onto the first rung of the housing ladder, affordability conditions have deteriorated, especially among lower income households. The homeowner rate is less than 50 percent for households in the lowest income bracket, while it surpasses 90 percent for those in the top income bracket. Higher income clearly widens the choice of available homes for purchase and increases the likelihood that a household will qualify for a mortgage. Around 1980, when asked what level of personal income would qualify as middle-class, George H.W. Bush replied: $50,000. Only 5 percent of the U.S. population made that amount of money at that time. With inflation, that's over $100,000 today.

While the United States has traditional values of hard work, entrepreneurship, and individualism, we have a large and growing number of people in our country who live hand to mouth and paycheck to paycheck. Since factories are no longer built in our country and the cost of living is increasing at an astounding pace, it's likely that the lower-middle class will struggle to own a home for generations to come. The working poor are dreaming about white picket fences and becoming middle-middle, while the middle-middle aspire to become upper-middle and beyond so they can afford to build one of those Mc-Mansions we've all seen that absolutely dwarfs the older, split-level homes the baby boomers grew up in.

There are five separate social classes in American society. They are the Upper, Professional Upper-Middle, Middle-Middle, Lower-Middle or "working poor", and the Lower. America used to be a land with a few upper class, some lower middle class and the rest were somewhere in the professional upper-middle and middle-middle category. Factory workers were middle-middle. Now when a worker loses their job at the factory and takes a job at Wal-Mart for one-third of his previous wage, are they still in the middle?

A new class seems to be developing. I call it the "House Poor". In this over-heated real estate market where homes are selling above list prices and speculative buyers are quickly flipping properties at a record pace, the House Poor are keeping up with the rising cost of living by paying the bills through home equity extraction, home-equity loans and cash-out refinancing. While many homeowners believe they can live like the upper class and appear to be wealthy, they'll be the first to end up in the poor house. Those easy money real estate speculators who purchased several investor properties are now beginning to see that renters are more difficult to find these days but the bills to maintain their properties keep coming in.

Indeed, homes have a tendency to actually make you poor because they need to be finished and furnished; older homes become deep money pits; roofs need replacing; drains clog; termites gnaw at foundations while squirrels and mice move in; pipes break; furnaces fail, and, in the south, mold and mildew can't even be insured; walls need paint; bricks cry out for tuck-pointing and yards need constant care. Worse yet, when it comes to the state and local government, they are always looking for someone to tax. As soon as you buy a house, you have just raised your hand and announced "please tax me"! While some localities offer tax breaks to primary residents, second home and investor property owners get hit full bore on tax increases!

(Historical trends indicate less than half of Americans owned their homes at the beginning of the 20th century. Homeownership remained fairly stable until the onset of the Great Depression during which many homeowners lost their homes. In the subsequent two decades, the homeownership rate rose dramatically with the rate easily topping 60 percent by 1960. Modest gains were made during the 1960s and 1970s, but during the 1980s the rate leveled off. Homeownership once again trended upwards during the 1990s as mortgage rates steadily declined and the economy expanded at rates not experienced in many years. (Statistics today indicate about 69 percent of Americans own their homes - a record high. However, the statistics count people who have purchased a home as owners yet many homebuyers today will never really own!).

A growing number of homeowners are realizing they can no longer afford to live in their home even though they're "mortgage free"! The conservative sane homeowner who purchased a home over five years ago and refinanced a 30-year mortgage - without taking money out - is now stuck paying higher inflated taxes. Indeed, the home's value hasn't really gone up because the price and the cost of everything associated with maintaining it is spiraling out of control. In a very real sense, as the house price rises, the value is forced down because it becomes so much more expensive to pay for the darn thing!

In paying so much for real estate today, it's virtually certain the middle class homebuyer will never really own the home outright. With a mere 5 percent or no money down, today's buyer rarely uses his own money to buy. Besides, the mortgage is so big, they would have to win the lottery to pay it off. Moreover, who in their right mind would grossly overpay for an investment property?

Nationwide, 23 percent of homes purchased are investment properties, with some localized markets well over 50 percent. Today, about 15 percent of homes purchased are bought by sub-prime borrowers, and a majority of those need to use an ARM mortgage to qualify. Mortgage payments, as a percent of income, are steadily rising and approximately 10 percent of Americans spend more than 50 percent of their monthly income on the mortgage payment. While the statistics say 69 percent of people own their homes, at least a full 10 percent have no stake in the property and with the slightest disruption in income, will give the house back to the bank. For the investment property market, I really wonder how many people will stick around to pay the insurance, property taxes and mortgage when the price is going down. Calling them homeowners is a joke. If you really own something it means it is paid for and it can't be taken away!

Only the upper class can really afford what was once a middle class house unless, of course, you are willing to "take cash out of your house" just to pay for living in it. When housing prices cool down but the cost of living keeps going up, the "phony equity" in the house will quickly vanish. When that occurs, today's buyers will be literally eaten alive by housing costs. So, when it comes to class, the Middle will lose it and truly become the House Poor.

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