We are now effectively five years into the government’s 2009 stimulus program. How’s that going for us? To save the banking system and revive the economy, the government tried TARP, tax cuts, tax hikes, and stimulus spending. It went nuclear with QE, and then went nuclear again with QE2 and QE3. I suspect this will go on for QE-ternity. All this to say: When it comes to stimulating the economy, the government is all thumbs.
The government believes it can achieve prosperity through fiat—that the right combination of regulation, spending, and tax hikes will produce wealth. This is folly. Reallocating resources within an economy does not create wealth; it merely shuffles it around, often less efficiently than when left to the market.
Nowhere is this more acutely clear than in the student loan market. The government decided everyone should go to college, and so the government has essentially nationalized the student loan market to make loan terms as attractive as possible. And so students are accumulating tens of thousands, if not hundreds of thousands, of dollars in student loans to acquire worthless degrees.
Of all consumer debt—whether for auto loans, consumer credit, mortgages, etc.—the only type of debt that has not declined over the last 10 years is student loan debt. Nationally, student debt is worth over $1 trillion. And it’s rising fast. As more individuals finance their educations with cheap credit and drive up demand, schools raise their tuition. Thus individuals take out more debt and colleges raise tuition more. This is what’s known in the field of economics as a Stand-Back-It’s-Gonna-Blow Death Spiral.
If you tour a college campus like UCCS, you’ll notice a flurry of new construction. Universities are booming from this incredible, debt-fueled bubble. Beyond the campus, however, graduates are being crushed by their newly acquired debt. They can no longer afford cars, homes, or furniture; they will be stuck servicing their student loans for decades. The government has, through generous student loan programs, allocated future resources to today’s universities. But the future arrives quickly, and once it does everyone is left wondering: Where’s my wealth?
This is the sad state many young adults are finding themselves in. But the consequences of their past, very thoughtless profligacy can be overcome. To start, they can begin prioritizing their purchases. Instead of iPads and sneakers and $100 a month in iTunes purchases, they can direct this money toward a mortgage. “But Jay,” you ask. “What if they can’t afford the down payment on a house?” To which I say: “Ask to borrower it!” There is nothing wrong with accepting down-payment assistance from parents, friends, or relatives. In fact, 1 in 3 home purchases involve borrowed or gifted funds for the down payment.
If you’re considering homeownership, now is a perfect time to re-structure your student loan debt and take on a mortgage since interest rates are still historically low. I mentioned this during the radio show, along with a long, but not exhaustive, list of observations about the home-buying process. I encourage everyone to head to the archive and listen to the full list. But for our purposes in this blog post, a few will suffice:
- People have a tendency to shop outside their price range. They settle on a budget, then immediately make allowances for homes with new kitchens, whiz-bang gadgets, and extra rooms. Before you start shopping, settle on a budget. Then find a mortgage broker a get pre-qualified according to that budget. That way you won’t be able to exceed your budget.
- Ever notice how the minute you buy a car, you start noticing them everywhere? The same happens when shopping for a home: You start noticing all the agents and brokers and builders and advertisements out there! But this is a great thing. Once you realize just how many services and how much information is out there, you’ll be able to take advantage of it.
- If you think there are a lot of advertisements out there while you’re shopping for a home, just wait until you actually own it. A new homeowner is every retailer’s best friend. And once your name and address are public record, every window cleaner and carpet scrubber and hardware store and furniture gallery in a 25-mile radius will be sending you pamphlets.
- By the time you close on your home, you will despise your signature. Thanks to the Dodd-Frank Act the number of disclosures you’re required to sign at application and at closing has exploded.
- Similarly, before you’re settled into your new home, you will not only know every shade of every hue of every color of paint known to man, but you will hate every single one of them.
The second hour of the show was stuffed with similar observations, along with tips on choosing brokers, real estate agents, and builders. If nothing else, spend 40 minutes listening to that portion, and you’ll not only have a better grasp of the current buying and lending environments, but you’ll be ready to put this knowledge to good use as you navigate the home-buying process and negotiate with all the parties involved.
4-19-14 Government Stimulus & Buyer Beware: Jedi Mind Tricks When Buying a House
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