Our government not only subsidizes home ownership through the home mortgage interest deduction, but it has created a variety of tools to enable lenders to make home mortgage loans to more people.  Lawmakers have always believed that broad-based home ownership is an inherent societal benefit, because they believe it creates a greater stake in the well being of the community.  Independent of whether owning a home is a good investment, American lawmakers want as many Americans as possible to own, rather than rent, their residences.

However, is this a good idea?  For someone who has a limited amount of discretionary income or asset base, using most of one’s discretionary assets to acquire a home may be a very bad idea.  If a person invests all of his or her savings in a home, the decision violates many principles of good financial management.

Don’t put all your eggs in one basket.

Buying a home with your savings is truly putting all your eggs in a single basket.  It is worse than that.  It is putting those savings in a highly illiquid asset that can only be bought or sold in its entirety.  One risk management tool any of us can use with stocks and bonds is to cash in a portion of our investment to protect the rest of the investment.  That option is not available for the purchase or sale of a home: it is an “all-or-nothing” proposition.

Don’t invest in an asset in which there are many independent factors that could significantly depress its value.

When we buy the stock of a public company, the Securities and Exchange Commission makes publicly traded companies describe a wide variety of risk factors.  The most common thread among these risk factors is the existence of single points of failure.  Companies have to disclose risks such as the dependence on a single product’s revenues, a single large customer, a single regulation, or a single patent or trademark.  In cases in which companies disclose these risks, they are considered “single points of failure.”

Airplanes have redundancy built into every critical system because airlines and regulators demand systems that cannot fail because of a single defect.  There are back-up engines, power systems, and controls.

Yet there are many single items that can cause the value of a home to drop significantly.  My wife and I experienced this with the first home we bought 32 years ago.  The federal government forced the state of Connecticut to allow trucks exceeding 80,000 pounds to use I-95, which was not far away from the home we had bought a few months before.  The increased noise and vibrations from the larger trucks significantly depressed our home’s resale value. We lost every bit of our equity.

We invested in a cooperative conversion project in New York City a few years ago.  We lost every penny of that investment because of tax law changes, and because New York City required every newly renovated or build housing unit to be 100% accessible to people with disabilities.

While we had successful real estate investments along the way, we learned the hard way that a single change in the law or some other factor outside our control can wipe out an investment in a home.

Don’t invest in something in which the other party has inside information and you do not.

The U.S. government, as well as every state, protects everyone who buys or sells a publicly traded security from the disadvantage caused by a party on the other side of the transaction who gains unfair advantage by having material inside information. However, there is no such protection in residential real estate transactions.

Buyers have the ability to get a home inspected and to do their own investigation about a home’s market value and the factors which affect it.  However, if a seller knows that someone is considering an action that will affect the home’s value and the buyer does not, the buyer is out of luck.  Similarly, if a buyer knows that a business is considering building on a piece of land and will pay premium prices and the seller does not, the buyer has a huge edge.

Don’t invest in something in which you have open-ended liability.

Homes are money pits (there was even a film by that name starring Tom Hanks some years ago), especially older homes that are often the ones available to first-time home buyers. My wife and I have had basement flooding, a leaky roof from the ice accumulation this past winter, and an underground oil line leak from a poorly insulated oil line.  Although we had sufficient resources to correct all these problems, they resulted in huge, unbudgeted expenses, even after insurance claims were paid.

When my wife and I were about to sign the contract on building our current home in 1993, our attorney Tom Skidd, from Cummings & Lockwood, told us that, before we signed our contract to get the home built, he would bring over something we had to review.  I expected to get a legal memorandum, or some educational materials on the legal risks of buying and owning a home, or an instructional videotape.  Instead, he gave us a videotape of the old Cary Grant-Myrna Loy film Mr. Blandings Builds His Dream House, a wonderful movie that depicted not only the financial and technical problems of building and owning a home, but the relationship tensions a home buying or building process creates. He was and is a very wise person, and we avoided many pitfalls because of him.

The National Urban League and many of its affiliates, and Operation HOPE, a financial counseling firm, have done great work counseling first-time home buyers, and I am proud at what the Urban League has particularly accomplished under Marc Morial’s leadership in the last few years, since he reacted to the housing crisis with a far more expanded set of offerings than had been the case before that.

Final observations

The biggest single lesson from all this is that we need to rethink some long-held assumptions about the benefits of home ownership.  Having a stable and engaged civil society and people committed to the betterment of their communities is critical to the effective functioning of representative democracy.  Whether home ownership is the right way to achieve this goal needs to be re-examined.

When I was growing up, my parents were exceptionally frugal.  They acquired nothing until we needed it, and they acquired it in the least-costly way possible.  We received items others did not want and made good use of them.  I remember when a cousin of mine gave us a suit he was going to throw away because it had a tear in it.  My mother had the suit rewoven by one of her sisters, and I wore it for several more years.

We borrowed things and used them.  My dad used to repair televisions in his spare time.  Aside from getting a little bit of income, our family had the benefit of not having to fight over who watched what program because the televisions would stay with us a few extra days after they were repaired, usually because the person who had requested the repair could not get over to pick the television up until the weekend.

We bought used items whenever they were sufficient.  I wish I had saved the wooden-shafted golf clubs my parents bought for me when I was 11 years old.  I used them until I was 18 years old, and, unfortunately, my parents gave them away when I stopped using them.

They moved into progressively smaller living spaces as each of us left home.  When I was a second-year law student, my parents sold their home and moved into a one-bedroom apartment.  They told me I would always be welcome if I were willing to sleep on a pull-out bed inside the living room sofa.

Curiously, I always felt a great sense of abundance because of the way we lived.  Because we shared so many things with relatives, we felt like we had access to the wealth and possessions of many families.  We also felt like we could get more by simply applying ourselves more aggressively to making more money.  Two of my mother’s sisters became experts at flea market buying and selling, and used to make good profits during the summers when we all lived at lake cottages.

We tended to believe that extra possessions we did not use were a burden, rather than evidence of extra wealth.  We also tended to want to donate what we did not need to those less fortunate, because we felt they would appreciate them more than we would.

Although this is one of the most frightening economic and social environments in our lifetimes, it actually has caused me to try to remember back to the way we lived when I was growing up. 

I do not want to make my childhood sound more idyllic than it was.  We did not have the most comfortable homes or living situations.  I did not have air-conditioning where I lived or slept until I was 25 years old.  We had one car, one bathroom, and one small living room, dining room, and kitchen.  We spent a great deal of time on labor-intensive chores, like dish-washing, leaf-raking, snow-shoveling, car washing, and window washing.  We also had to haul the garbage cans to the curb twice a week for collection.  We burned more calories because we walked more to play, to school, and to shopping. 

My dad took the bus to work, and I took two buses to get to my high school, the first of which I boarded at 6:30 am on even the coldest Rochester, New York, mornings. 

However, what I remember and what is most useful today are the twin abilities to live with less and feel richer while doing so.  Those abilities are more important for all of us than ever, and I am fortunate that I had a whole childhood to enhance them.

• Most people who work in dedicated offices are not in those offices most of the time.  They either travel, attending meetings outside the office or in another part of their office building, go to a cafeteria or restaurant for lunch, or are away on vacation or for holidays.  Yet we give them exclusive right to use that office when they are employed in a particular position.
• Most of our household possessions are similarly unused most of the time.  We buy expensive athletic equipment that occupies space in closets or unused rooms.  In fact, many people use only a few of their rooms in their home most of the time, and many people have homes they use only a portion of the time, and the very wealthy have multiple homes, each one of which is in use only at certain times.
• Much of our public utility capacity is built for peak or near-peak load, and is underutilized the rest of the time.

The challenges in addressing this wastage are to figure out why it exists and what workable solutions exist for it. Interestingly enough, the use of the Internet for both voice and data communications is an improvement on telecommunications that both reduces wastage and improves redundancy.  Historically, both voice and data were carried over dedicated lines intact from origin to destination.  The Internet introduced the idea of breaking apart voice and data transmission into packets which could travel over multiple paths and be re-assembled at the destination.  In essence, the Internet created a far more efficient use of resources than the traditional dedicated land-line.

• For each of the wastage areas I describe above, there are emerging solutions:
• For automobiles, there have always been public transportation, taxi, bicycle, pedestrian, and rental car alternatives.  However, a company called ZipCar  has introduced a new solution: a car that can be rented for a short trip, left in a parking lot, and picked up by another person for another flexible, short-duration rental, thereby keeping it continually in use.
  For office space, Cisco, among other companies, has introduced broad-based hoteling for the vast majority of its headquarters employees, and other companies, like Pitney Bowes, have used hoteling for contractors, field employees, and temporary workers.  Hoteling means that someone coming to the office occupies the first available office, not the same office every day.  Technology enables this to be non-disruptive, and the hoteling approach enables a business to provide space for a population that is far less than its total population on any given day.
• For other possessions, like athletic equipment, there are used equipment firms, and there are some rental facilities, but what is lacking is a ZipCar-like alternative which allows that equipment to be used for only a few hours for a very low price.

We need to think differently about assets.  We need to be less focused on owning and more focused on using.  We also need to recognize that a used asset may have enough value that we do not need to buy something new.  Finally, we need to dispose of what we do not need so that others can use it while it still has value.

Our society has a lot of capacity to reduce the cost of living by defining our needs more precisely.  I grew up in a working-class household in which my parents were experts at finding used items, re-using materials for other purposes, and taking something seemingly without value and finding a way to give it value.

The golf clubs I used when I was growing up were bought at a Salvation Army store and were so old that they had wooden shafts.  My first suit was given to me by a cousin who had torn a pant leg on the trousers.  My mother got the trouser re-woven and I wore the suit for years.  My parents used torn tee-shirts as cleaning rags, and used body lotions as mosquito repellants.  Vinegar was used to absorb cigarette smoke because we could not afford more expensive air cleaning systems at our home.

Today, the media is highlighting how desperate the lives of many people are, and they are right.  But we could do these individuals a great deal of good by giving them access to necessary goods and services in a less expensive way.  For many goods and services, this is a far better alternative than moving production and service operations offshore to create a lower-cost version of a new product.

I was pleased to see this issue get coverage because it is one of the biggest issues of our time. We are an aging society, and like every other developed country, we are facing the dual challenge of meeting our commitments to the elderly, while at the same time being able to meet commitments to the rest of our population. Before we can address the dual challenge, we need honesty and transparency as to what the commitments to our elderly populations are going to cost us.

We particularly need to understand the cost of government benefits because most states have either spending caps (like Connecticut) or balanced budget requirements imposed by statute or even constitutional amendments. Unfortunately, many of these retirement benefit commitments, very much like stock options granted to executives of public companies, were made when there was no financial consequence for the commitment in public sector financial accounting. While the private sector has been accounting for pension benefits since the late 1980’s and for retiree medical obligations since the early 1990’s, the public sector had no obligation to size the commitment, even on its balance sheet until fiscal years ending after December, 2006.

There is still a lot of confusion and inconsistency in how governments comply with this December, 2006, Government Accounting Standards Board pronouncement, so it will be some time before it gets sorted out in many states and localities.

In the next decade, citizens of every state will have to come to grips with the fact that basic government services may not be able to be delivered as they have been delivered in the past because these retirement benefit commitments are unchangeable. Very creative thinking will need to be done about how we maintain a good quality of life in our country when governments can no longer afford to deliver the services to which we have become accustomed. Solutions are out there, and I believe we have the potential to do breakthrough thinking, particularly in involving the private sector more actively in public benefit activities.

But make no mistake about it: this is a crisis in slow motion, but a crisis nonetheless.

While the story is a tragedy, it brings to mind the urgency of focusing on teaching all Americans financial literacy. The National Urban League and its affiliates have specific financial literacy programs, specifically focused on first-time home buyers. Operation HOPE, headed by the very impressive John Bryant, is specifically focused on broad-based financial literacy. These are great programs, and they provide individuals with good nuts-and-bolts tools. Other notable mentions on behalf of the National Urban League in partnership with Honda amid the turbulent economic climate include their offering of personal financial management classes. The acclaimed “Know Your Money Program” seeks to provide economic empowerment and financial literacy to those individuals in communities seeking to change the attitudes about money and money-management. The program is highlighted in this Honda Blog post.

The story also suggests something else, which goes beyond literacy. We all get tempted to try to achieve our financial objectives by being more aggressive and taking higher risks than we should. Most of us resist the temptation most of the time, but some of us fall into the trap of trying to get richer more quickly than low or moderate-risk investments will allow. As cited in this Revolution blog, with 2008 becoming a financial turning point for millions, new financial decisions have become an imperative.

When I was young, one of my favorite TV comedy shows was The Honeymooners. Jackie Gleason played a bus driver named Ralph Kramden living in a dreary one-bedroom apartment in Brooklyn with his long-suffering wife Alice. The timeless humor from that show came from plots which, week after week, had Ralph get victimized by some get-rich-quick scheme.

My parents would talk with me and my siblings about the lessons from that show:

• Don’t put all your eggs in one basket.

• If something promises a bigger payback than normal and seems too good to be true, it probably is not true.

• Unless you understand what you are investing in, don’t invest.

I never violated all those rules, and, therefore, did reasonably well with investments in my adult life, although, as a former CEO of Pitney Bowes, I have put a lot of my eggs in one basket, Pitney Bowes. However, when my wife and I lived in New York in the mid-1980’s, we took the profits from my wife’s successful real estate partnership, and invested them in two real estate deals. We were tempted to take more risk to get more return because we did not have quite enough saved to make a down payment on a home. We also failed to understand how dependent these deals were on the then-current tax laws, which changed a few months after we committed to the investments. We lost everything we invested in the two deals, and we did not save up enough to buy a home until 1994.

However, there were two differences between us and the woman featured in the article:

• We did not put our entire life savings into one investment, and we had to certify that we could afford to lose everything. I still had Pitney Bowes stock and some other assets.

• I was 39 years old and still on the upward trajectory of my career when we had these losses, so I had the opportunity to recover from my mistakes.

The woman featured in the article was 74 years old, and probably has little ability to recover from her losses. In this respect, financial counselors could have helped this woman. They would have told her that, at 74 years of age, she should invest conservatively, and accept lower investment returns. Whether she would have taken their advice is unknowable, but it is mystifying to me why the Wall Street Journal would not have taken the opportunity to talk about the basic investment principles she violated.

Perhaps there should be a law that requires a court approval for someone over a certain age to commit the entirety of their net worth to a single transaction, and there should be a certification that a person is not committing all assets. That age could be based on whether the individual has retired from active employment. I am normally not paternalistic, but I feel differently about older people who are at a stage in their life at which they cannot recover from having lost everything. It’s worth thinking about. This is also why Federal Reserve Chairman Ben Bernake is rallying for the call to improve financial literacy that will essentially aid Americans in making better informed financial decisions at an early age, so that they are better prepared to navigate through the financial marketplace as they get older, as cited in this Wall Street Journal Blog: Real Time Economics.

We require people to wear seat belts and motorcycle helmets, and we are debating health care reform proposals that would insure that individuals cannot be wiped out by medical bills. We owe older Americans a similar vigilance on highly-risky financial investments.