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<a href="http://www.ft.com/cms/s/2/f64a9e36-9da3-11de-9f4a-00144feabdc0.html">A confession from a home ownership advocate</a>
The game of finding someone to pin the blame on for the US housing market collapse has gone on long enough. Are the bankers responsible? The analysts who didn?t see it coming? The McMansion mums who bought homes that they couldn?t afford? No. I did it. It was me. In 2003, I worked for one of those well-meaning organisations that promoted home ownership in low-income communities. Our line ? like that of hundreds of non-profit organisations across the US ? was that people who bought their own homes could gain increased financial security, freedom from the landlord ? the American dream.
But I was not like the people running the organisation. I knew full well that buying a house could be a financial time bomb. I hadn?t drunk the home-ownership-leads-to-prosperity Kool-Aid. But I had drunk enough cola to rot my teeth. I led people down the road to financial collapse ? and I did it for the dental insurance.
EDITOR?S CHOICE
More from Reportage - Nov-24
It all started out innocently enough. In March 2002, fresh out of college, I got a job at the Center for Economic and Policy Research (CEPR) in Washington, DC. Soon after, one of the co-directors, Dean Baker, began looking into soaring housing prices, and, by the end of the summer, he had begun railing against the housing bubble. ?I just don?t think there?s any consequence to getting it wrong,? said Baker, during a talk at the New America Foundation in April 2003. He criticised the Fed, fund managers, economists, analysts and reporters for missing the stock-market bubble ? and for keeping their jobs so that they could go straight on to miss the housing-market bubble. ?I?m not saying I know when the [housing] bubble will end, but it will end. And it?s going to be really, really bad when it does.?
Dean?s argument was compelling: if house prices rose significantly faster than rents, that meant people were buying homes as an investment, not for shelter. As more people saw housing as an investment vehicle, prices would rise, even though the underlying value of the property would not. It was the textbook definition of a bubble ? and even if others weren?t taking him seriously, I was. But after more than a year at CEPR, I had itchy feet. I had gone straight from the suburbs of Washington to an Ivy League university to an economic think-tank. For a fist-in-the-air activist, it was all a bit ivory tower. I wanted experience working with the people getting screwed by bad economic policy before ? inevitably, I assumed ? I spent my life as a policy wonk.
So, like any good leftie from a privileged background, I started my job search on idealist.org, where I ran across a posting for an associate position at an Individual Development Account programme in Los Angeles. IDAs are an anti-poverty measure to encourage low-income individuals to buy ?productive assets? ? purchases meant to provide financial security for the future and encourage a habit of saving. The programmes encourage savings by providing financial education classes and ?match savings?. In the case of the LA programme, for every $1 someone saved, up to $1,000, the person would receive a $4 match. Participants, who had to be referred through government-funded agencies serving low-income residents, could use the money to start a small business, go to school or buy a home. The buy-a-home option should have raised a red flag. But I was eager to get a ?grass roots? job, and I reasoned that people who met the programme?s incredibly low-income requirements ? no more than about $36,200 per year for a family of four ? were in no position to buy a home, $5,000 in savings or not.
So I wiped the problem from my mind, unaware that easing lending standards would make loans accessible to people who would never have qualified for a mortgage before. Besides, the job sounded great. I pictured myself giving financial advice and seeing my work have an impact on real people. I composed a letter declaring my dedication to ?reducing persistent and cyclical poverty through asset development?, and applied for the job. After a series of phone interviews, I was hired as a financial counsellor and flew out to LA to get a sense of the place.
The Community Financial Resource Center (CFRC) is located in South Los Angeles ? formerly known as South Central, a name that conjures up images of gangs and riots. The almost-windowless building stood across from a windowless food-aid office. Barbed wire protected the parking lot. The McDonald?s on the corner was just a block away from a cheque-cashing store. Cars poured down the street, but no one braved the muggy air: the sidewalks were desolate.
The heavy metal gate was open, so I walked into the centre?s vestibule. My new managers gave me a tour of the office and took me to lunch. By the time we returned, police vans had surrounded a building across the street and a police helicopter circled over it. ?Well,? I thought, ?I was looking for grass roots, and I found it.? I took the job.
. . .
It didn?t take long for reality to set in. By the time I joined the centre, many of the clients had been roped in to the programme by their case managers. ?To buy a home or to start a business sounds too good to be true, too hard to believe!? one letter told members of a family development network ? and that they were eligible for an ?exciting opportunity? where they could be helped to do just that. But the programme still wasn?t full, so my manager and I gave orientation sessions. Mostly, we?d describe the programme, but invariably the benefits of home ownership would come up. We sold the American dream to willing buyers. We even told them, on a fact sheet about the scheme, that ?this same thinking has been behind government initiatives like the Homestead Act of the 19th century and the GI Bill following World War II?.
A productive asset ? the focus was most frequently on a home ? was ?something of value that is likely to return substantial long-term benefits to its owner ? benefits like security, stability and opportunities for more income?. And not all of the benefits were financial ? home ownership gives you freedom. Buy a home and you can have a yard! You can paint your walls any colour you want! You can have a pet! Little wonder, then, that half of the people participating planned to buy a home.
Yet people?s finances were worse than I had imagined. Few of our clients even approached the income cap. They tended to have a lot of debt. Encouraging people who had so little to buy what to me was clearly overpriced property was unconscionable, I thought. I decided to quit. I would load up my car and drive back to DC, consequences be damned. Two weeks after I had started my job, I would take the same type of principled stand that had got me arrested at a protest in the lead-up to the Iraq war, except this time it wouldn?t be futile. I would live my ideals. Of course, this was all in my mind. In reality, my teeth hurt.
Every time I bent my neck forward, two of my top molars felt like they were about to be pushed out of my head. And while I couldn?t see my upper teeth, the California sun shining into my bathroom revealed a series of tiny holes in my lower ones. I was sure that if I didn?t get help soon, I would need dentures. But since I was a new employee, I wouldn?t qualify for dental insurance for another three months. I started giving the financial education classes.
Participants had to start saving $30 to $60 a month and attend six 90-minute classes. Later, if they were interested in home ownership, they?d give up a Sunday to learn about buying a house. But in the meantime, the financial-education classes had some value. We helped participants develop plans to pay off bills, and if we found mistakes on people?s credit reports, we?d help to rectify them. I clearly amused the clients in my classes. I hadn?t a clue how to teach, and much of the material was so basic I couldn?t figure out how to stretch it out to fill the lesson. And I hated actually giving out advice. In the budgeting class, we talked about cutting down on unnecessary expenses, but our backgrounds were so different, and their luxuries so modest ? cable television, for instance ? that I felt it wasn?t my place to suggest where they cut back.
For the most part, I enjoyed teaching. The students were smart and hard-working ? and badly wanted a home. I started trying to find ways to justify the programme. Maybe, I thought, the housing bubble didn?t apply in low-income areas. So I went about investigating. The most reliable information I could find was from Rand California, but it was expensive. I could get it free on a limited-use computer at the public library, but I couldn?t e-mail it to myself. Instead, I?d have to print it up. So, after a trip to the library, I spent my spare time typing in years? worth of monthly data from hundreds of zip codes into an Excel spreadsheet.
A couple of weeks later I had an answer. Even in the lowest-income areas in LA, real home prices had, on average, risen by more than 20 per cent over the previous seven years. I e-mailed Dean, the CEPR economist, who immediately suggested we write a short paper on it. What do I have to lose? I thought. Just my teeth.
...
The game of finding someone to pin the blame on for the US housing market collapse has gone on long enough. Are the bankers responsible? The analysts who didn?t see it coming? The McMansion mums who bought homes that they couldn?t afford? No. I did it. It was me. In 2003, I worked for one of those well-meaning organisations that promoted home ownership in low-income communities. Our line ? like that of hundreds of non-profit organisations across the US ? was that people who bought their own homes could gain increased financial security, freedom from the landlord ? the American dream.
But I was not like the people running the organisation. I knew full well that buying a house could be a financial time bomb. I hadn?t drunk the home-ownership-leads-to-prosperity Kool-Aid. But I had drunk enough cola to rot my teeth. I led people down the road to financial collapse ? and I did it for the dental insurance.
EDITOR?S CHOICE
More from Reportage - Nov-24
It all started out innocently enough. In March 2002, fresh out of college, I got a job at the Center for Economic and Policy Research (CEPR) in Washington, DC. Soon after, one of the co-directors, Dean Baker, began looking into soaring housing prices, and, by the end of the summer, he had begun railing against the housing bubble. ?I just don?t think there?s any consequence to getting it wrong,? said Baker, during a talk at the New America Foundation in April 2003. He criticised the Fed, fund managers, economists, analysts and reporters for missing the stock-market bubble ? and for keeping their jobs so that they could go straight on to miss the housing-market bubble. ?I?m not saying I know when the [housing] bubble will end, but it will end. And it?s going to be really, really bad when it does.?
Dean?s argument was compelling: if house prices rose significantly faster than rents, that meant people were buying homes as an investment, not for shelter. As more people saw housing as an investment vehicle, prices would rise, even though the underlying value of the property would not. It was the textbook definition of a bubble ? and even if others weren?t taking him seriously, I was. But after more than a year at CEPR, I had itchy feet. I had gone straight from the suburbs of Washington to an Ivy League university to an economic think-tank. For a fist-in-the-air activist, it was all a bit ivory tower. I wanted experience working with the people getting screwed by bad economic policy before ? inevitably, I assumed ? I spent my life as a policy wonk.
So, like any good leftie from a privileged background, I started my job search on idealist.org, where I ran across a posting for an associate position at an Individual Development Account programme in Los Angeles. IDAs are an anti-poverty measure to encourage low-income individuals to buy ?productive assets? ? purchases meant to provide financial security for the future and encourage a habit of saving. The programmes encourage savings by providing financial education classes and ?match savings?. In the case of the LA programme, for every $1 someone saved, up to $1,000, the person would receive a $4 match. Participants, who had to be referred through government-funded agencies serving low-income residents, could use the money to start a small business, go to school or buy a home. The buy-a-home option should have raised a red flag. But I was eager to get a ?grass roots? job, and I reasoned that people who met the programme?s incredibly low-income requirements ? no more than about $36,200 per year for a family of four ? were in no position to buy a home, $5,000 in savings or not.
So I wiped the problem from my mind, unaware that easing lending standards would make loans accessible to people who would never have qualified for a mortgage before. Besides, the job sounded great. I pictured myself giving financial advice and seeing my work have an impact on real people. I composed a letter declaring my dedication to ?reducing persistent and cyclical poverty through asset development?, and applied for the job. After a series of phone interviews, I was hired as a financial counsellor and flew out to LA to get a sense of the place.
The Community Financial Resource Center (CFRC) is located in South Los Angeles ? formerly known as South Central, a name that conjures up images of gangs and riots. The almost-windowless building stood across from a windowless food-aid office. Barbed wire protected the parking lot. The McDonald?s on the corner was just a block away from a cheque-cashing store. Cars poured down the street, but no one braved the muggy air: the sidewalks were desolate.
The heavy metal gate was open, so I walked into the centre?s vestibule. My new managers gave me a tour of the office and took me to lunch. By the time we returned, police vans had surrounded a building across the street and a police helicopter circled over it. ?Well,? I thought, ?I was looking for grass roots, and I found it.? I took the job.
. . .
It didn?t take long for reality to set in. By the time I joined the centre, many of the clients had been roped in to the programme by their case managers. ?To buy a home or to start a business sounds too good to be true, too hard to believe!? one letter told members of a family development network ? and that they were eligible for an ?exciting opportunity? where they could be helped to do just that. But the programme still wasn?t full, so my manager and I gave orientation sessions. Mostly, we?d describe the programme, but invariably the benefits of home ownership would come up. We sold the American dream to willing buyers. We even told them, on a fact sheet about the scheme, that ?this same thinking has been behind government initiatives like the Homestead Act of the 19th century and the GI Bill following World War II?.
A productive asset ? the focus was most frequently on a home ? was ?something of value that is likely to return substantial long-term benefits to its owner ? benefits like security, stability and opportunities for more income?. And not all of the benefits were financial ? home ownership gives you freedom. Buy a home and you can have a yard! You can paint your walls any colour you want! You can have a pet! Little wonder, then, that half of the people participating planned to buy a home.
Yet people?s finances were worse than I had imagined. Few of our clients even approached the income cap. They tended to have a lot of debt. Encouraging people who had so little to buy what to me was clearly overpriced property was unconscionable, I thought. I decided to quit. I would load up my car and drive back to DC, consequences be damned. Two weeks after I had started my job, I would take the same type of principled stand that had got me arrested at a protest in the lead-up to the Iraq war, except this time it wouldn?t be futile. I would live my ideals. Of course, this was all in my mind. In reality, my teeth hurt.
Every time I bent my neck forward, two of my top molars felt like they were about to be pushed out of my head. And while I couldn?t see my upper teeth, the California sun shining into my bathroom revealed a series of tiny holes in my lower ones. I was sure that if I didn?t get help soon, I would need dentures. But since I was a new employee, I wouldn?t qualify for dental insurance for another three months. I started giving the financial education classes.
Participants had to start saving $30 to $60 a month and attend six 90-minute classes. Later, if they were interested in home ownership, they?d give up a Sunday to learn about buying a house. But in the meantime, the financial-education classes had some value. We helped participants develop plans to pay off bills, and if we found mistakes on people?s credit reports, we?d help to rectify them. I clearly amused the clients in my classes. I hadn?t a clue how to teach, and much of the material was so basic I couldn?t figure out how to stretch it out to fill the lesson. And I hated actually giving out advice. In the budgeting class, we talked about cutting down on unnecessary expenses, but our backgrounds were so different, and their luxuries so modest ? cable television, for instance ? that I felt it wasn?t my place to suggest where they cut back.
For the most part, I enjoyed teaching. The students were smart and hard-working ? and badly wanted a home. I started trying to find ways to justify the programme. Maybe, I thought, the housing bubble didn?t apply in low-income areas. So I went about investigating. The most reliable information I could find was from Rand California, but it was expensive. I could get it free on a limited-use computer at the public library, but I couldn?t e-mail it to myself. Instead, I?d have to print it up. So, after a trip to the library, I spent my spare time typing in years? worth of monthly data from hundreds of zip codes into an Excel spreadsheet.
A couple of weeks later I had an answer. Even in the lowest-income areas in LA, real home prices had, on average, risen by more than 20 per cent over the previous seven years. I e-mailed Dean, the CEPR economist, who immediately suggested we write a short paper on it. What do I have to lose? I thought. Just my teeth.
...