Posted by: loungekitten | October 15, 2008

The Blame Game

I saw 20/20 on Friday night, and the way the interviewers attacked individual borrowers in their piece is really bothering me.  Look, I’m not going to absolve people of their personal responsibility to know what they can and can’t afford.  I feel that Americans, on the whole, need to learn some fiscal restraint.  But in my eyes, the signs and symptoms of this economic downturn is due to a systemic problem in the real estate and financial sectors.  The stories below will illustrate my point, I think.

In 2003, I was looking for my first place to buy.  I was so worried, it was hard to know how to price anything.  I found a 1-bedroom condo I liked and thought would be good for my first place.  Even though I eventually out-bid the other interested buyer, I didn’t get it because the seller was offended by my first “low-ball” offer – which was a few thousand dollars over the asking price.

I continued to look for another place and my mother, convinced that I needed some practice, dragged me to open houses in her neighborhood.  We were looking at a house a few streets over from her, and I was walking through the house with my mother while she made her comments about the owner’s interior design aesthetics.  I said, “Well, I don’t think this house is worth this much money.” In front of the real estate agent.  She was offended, and immediately chirped, “Oh, but the outlook for the real estate market is projected to grow in the long term!”  I countered with, “But for how long?  I want to live in a place for a while before I need to sell it.  I’m thinking in 5-10 years this house won’t be worth so much.  I’d rather pay a lower price for a house with a higher interest rate mortgage, because you can refinance a mortgage but you can’t retroactively lower the price of the house.  The price you pay for it is the price you pay, there’s no undoing that.”  The real estate agent continued to smile a brittle smile, and my mother dragged me from the scene post-haste.

So why is it that I was “right”?  Because I learn from history!  When I was younger, we lived in suburban Boston.  My mother wanted to sell our house and move to suburban Philadelphia to be near her family.  I remember looking in the paper and seeing our house listed for $275,000.**  The house had been purchased for $100,000 only three years earlier.  My parents pulled the house off the market after about a month, because there were other obstacles to our moving out-of-state, but the market at that time and in that area was similar to the market in 2003; we would have had no problem selling the house for more than the asking price.  Six years later, we made our move to suburban Philadelphia.  The second time, our house in Massachusetts was listed for only $250,000, and it took a long time to sell.  My mother had wanted me and my siblings to start the school year in our new schools, so she ended up accepting an offer for $235,000 a week before school started, and of course because of the closing we moved about 2 months later.  But it was disappointing for her to accept such a low offer.  It turns out that we were pretty lucky.  Within 2-3 months of our move, most of my mother’s friends were telling her she was lucky she sold her house when she did, because real estate values had decreased dramatically.

So, yes, Virginia, real estate prices really do go down.

Back to my original point:  the real estate and banking industries must bear the burden of blame for what has happened.  In our economy, people are rewarded for “finding a niche” and specializing.  We pay for people to be experts in the area in which they are working.  When I worked in accounting, people didn’t come to me for help with estate planning, because my specialty was in a different area.  In fact, I know people that have built successful careers by being experts on one paragraph of tax code.  In medicine, if you need your colon resected you don’t go to a cardiologist.  Thus, I don’t think it’s unreasonable to expect that real estate agents and bankers should be held accountable for the advice they give.  That real estate agent I encountered above certainly didn’t give out sound advice, but I’m sure she collected her commission all the same.  Individuals don’t have insight into the real estate market, that’s why we rely on and pay for real estate agents’ advice and expertise.  Bankers develop formulas and exercise judgment to determine who will or will not get a loan.   People don’t always have the financial knowledge (that they should!) when seeking a loan, so when a banker tells them they’re approved for a loan, they tend to believe they can afford the payments.  The bankers have sound financial judgment since this is what they do, day in and day out, right?

**I’m not divulging the actual figures – it’s not my intent or place to reveal any details about my parents’ finances in this forum.  However, the magnitudes of the fluctuations in price is accurate.

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