Think of a transaction, preferably a big one, that you had reservations about at the beginning, but came away feeling good about it.
Were you convinced in your own mind that your initial reservations were unfounded? Were you told that something you had never thought could be yours, could be? Were you pressured into entering into this transaction, because of what is known in sales as “fear of loss?”
We’ve already discussed how some of what columnist George Will referred to as consensual transactions might be something less than consensual, particularly for the buyer. We used the example of having to buy a refrigerator because yours broke down. Such a transaction is not as “consensual” as some might believe. The buyer doesn’t WANT to buy a fridge, he HAS to buy a fridge, whether he has the money or not.
Now, let’s look at the housing industry before and after 2008. The act of buying a house is usually a consensual transaction. Such transactions are anticipated eagerly by the buyer, and often just as eagerly by the seller. The job of the real estate agent is to find matches between buyers and sellers.
Then, there’s the issue of how the house will be paid for. If you can pay cash for the house, you’ve checked it out thoroughly and you like it, it’s a perfectly consensual transaction. The rub comes when the buyer has to get a mortgage. To get a mortgage, a buyer has to qualify for it. Also, the buyer has to choose from among several types of lending products one that best suits him.
Some buyers have great experience at this. Many of those are real estate investors. Usually, they choose the product that benefits them the most, and, usually, there’s no affordability issue.
The housing crash of 2008 was the result of wrong choices being made in mortgage lending products. We can discuss the whole chicken-and-egg argument about people buying too much house for their budget, people using their home equity as a piggy bank, people not foreseeing that they would lose their job and, as many argue, government policy encouraging home ownership: the American dream.
DREAMS THAT WERE SHATTERED
But dream is the key word here. The relationship between agent/lender and buyer, particularly an inexperienced buyer, is much like an adult vs. child. The buyers may be expecting to buy an average house to start, and trade up when they have more money to play with. The buyers may be entering the transaction with little or no down payment, expecting to have trouble qualifying for a loan.
Miraculously, the agent/seller, who wants nothing more than a sale, will tell the buyer he is qualified for a loan of a certain size, when he actually shouldn’t take on such debt. He may tell the buyer he can start with a low interest rate, and relatively low payments. Then, a few years later, the deal ends. He either has to pay a much higher interest rate, or refinance. In theory, he’ll be better able to afford the house by then, equity will have been built up and conditions would be just right to upgrade to a fixed rate – with more closing costs, bank fees etc. There goes much of the built-up equity, back to the lender.
In the years since 2008, those perfect conditions changed. Housing values plummeted. Once-secure jobs were lost. People owe more on their homes than they are now worth, and the banks, who were a catalyst in this tumult, either want their money or your house. (They don’t really want your house, but they’ll take it if you don’t have the money). Perhaps there are banks that will work to keep people in their homes, as opposed to collecting property, but, by and large, the buyer loses. Banks also lose, but, in most cases, are better able to absorb the loss.
Remember, the agent/seller was after one thing: a sale, with a commission. The risk involved with your debt probably has been sold to someone else. The agent/seller got paid for the transaction, and has no interest, for the most part, in your difficulties. How “consensual” is that transaction now?
Real consensual transactions occur when mutual interests are fully met and that happiness lasts. But, sellers sell dreams to buyers. The buyer ultimately doesn’t get what he thought he was buying. That fact that neither the seller nor the buyer had foreseen future trouble is of no consequence now. The rules of the American dream have changed.
Don’t let this situation discourage you from dreaming. Don’t let it take your general optimism about the future. If you visit www.bign.com/pbilodeau, it may encourage you to dream again, without ever getting your dream shattered.
Peter

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