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.

In the recording industry, the intermediary is the record label.  In movies, screenwriters have to approach producers through agents, and film producers have to reach the marketplace through sales agents or distributors.  TV producers have to go through agents to reach TV networks and other content buyers.  This is similar to what I experienced and saw in the broader business world: there are always gatekeepers between product and service producers and the end customer.

What is great about the Internet is how it has the potential to give those who want to reach a customer the ability to bypass intermediaries and create a better balance of power with those intermediaries.  I love the fact that Paranormal Activity, a movie produced for $15,000, which used predominantly low-cost direct marketing channels, including social media, has grossed over $100 million since its release. Too many intermediaries would be threatened if that became the norm on how to get a movie to the public.

Related to this, I was so happy when my younger son became a very capable online seller during his senior year of high school, and my daughter learned about to get harp performing engagements directly without needing a booking agent.

I believe strongly that we will see far more prosperity and a more equal distribution of income and wealth if individuals have the skills to sell their products, services, and labor directly to those who need them.  Intermediaries can serve a very valuable role, and many are essential to the people they serve.  However, just like any monopoly situation, when they have sole or primary access to the end customer, they can get complacent and not do the best possible for the seller.  That’s why I like the potential direct marketing opportunities the Internet provides.  It gives any seller, including me, the ability to say to an intermediary: “Either be as passionate and single-minded about what I am selling as I am, or get out of the way.”

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.

Marc Morial’s keynote speech eloquently and meticulously described an Opportunity Compact that the Urban League has committed to as a mission for the people it serves, and that it wants government officials and partners to support as well. This compact, which can be accessed on the NUL website, NUL.org, consists of four cornerstone values: (1) The Opportunity to Thrive; (2) The Opportunity to Earn; (3) The Opportunity to Own; and (4) The Opportunity to Prosper. These cornerstones are supported by policy priorities described in the Compact.

The Urban League has been offering social services for 97 years and has over 100 affiliates around the country. Historically, it has been most known for its workforce readiness programs, and for supporting educational initiatives. More recently, it has focused on increasing homeownership among African-Americans.

What Marc has brought to the NUL in his four-year tenure as CEO has been a substantially increased focus on entrepreneurship to increase the pool of available jobs, and an even more significant focus on driving civic engagement through voting for African-Americans, and in having the Urban League play a more pivotal educational role in public policy debates.

The conference inspired me because four Democratic candidates, Senators Clinton and Obama, former Senator Edwards, and Congressman Kucinic, thoughtfully and positively presented their agendas to the attendees, and Senators Clinton and Obama specifically endorsed the Opportunity Compact.

I was particularly pleased that, through ground-breaking research led by Drs. Silas Lee and Bernard Anderson, we were able to validate that, at a minimum, the Urban League service network has delivered over $2.5 billion of economic value to America over the last three years.

I also had one-on-one meetings with members of the Urban League movement. Bonnie Boswell, a Los Angeles-based newscaster and the niece of Whitney M. Young, the NUL CEO in the 1960’s and a civil rights leader whose contribution to civil rights has been underestimated because of the low-key way in which he influenced events, is raising money to do a documentary on Whitney Young’s life. His leadership skills are noteworthy because they go far beyond what he accomplished as a civil rights activist. He united white and black Americans, civil rights activists, corporate leaders and governments, and other diverse stakeholders in ways that enabled them to work together far beyond the specific tasks that initially brought them together. I will be helping Bonnie get this project completed because I believe strongly in it.

I also met with Melinda Emerson, a former NUL trustee and now a successful entrepreneur with her company, Open for Business with Melinda Emerson at www.melindaemerson.com. She is both passionate and extremely thoughtful about the key levers for success for any small business, not just female and minority-owned businesses. She is focused on the specific needs of “Mompreneurs,” businesses formed and operated by working mothers, particularly first-time working mothers, but her insights on how to succeed are more broadly applicable: the focus on targeting the right customers and getting to know their specific needs, networking, delegating effectively well before women have less time to spend on the business because of child-care needs, and finding ways to build continuous, long-term relationships with the best customers of a business.

Marc, Bonnie, and Melinda are just a few examples of the kind of people that keep me excited about the NUL. Their focuses on driving thoughtful policy positions and measurable success in implementing them, driving and educating people about effective leadership, and role-modeling excellence in entrepreneurial small business leadership respectively are just a few of the reasons I continue to support this great movement.