Wednesday, August 29, 2007

A Million Dollars in Debt

An AP story this morning laments the recent hesitation by banks to issue new million-dollar mortgages to home buyers. Specifically, the issue has to do with “jumbo” mortgages, those over $417,000. Home mortgages over this limit cannot easily be resold by banks, which are stuck with them if anything goes wrong. Home buyers, according to the lending and real estate specialists interviewed for the story, have picked up on that hesitation and in many cases are not even shopping for a home unless they really need one.

The situation is frustrating to real estate agents, who now find it hard to sell homes that, from the agents’ perspective, the buyers can easily afford. Yet in the bigger picture, this may be a good thing.

Because when you look at what it means to “easily afford” something, it is not really a question of qualifying for a loan and being able to make the biweekly payments. Taking the buyer’s point of view, unless you want the banks to end up owning most of your money, you cannot “easily afford” to buy a home if you have to borrow a million dollars, or half a million, to do it.

This kind of high-stakes borrowing adds to the volatility across the economy because of the economic inefficiencies and losses involved in the occasional bankruptcies and defaults that follow. An economic downturn can trigger millions of bankruptcies, which in turn magnify the economic downturn. The economy, then, is on a more solid footing if these high-stakes loans are kept to a minimum.

Of course, some people need to borrow money to buy a home or other building, but it works out better in the bigger picture if people don’t borrow much more than they really need, and don’t borrow at all if they don’t need to. There are even people who need to borrow money to buy million-dollar homes. But for most people who find themselves in that situation, it makes good sense to put off that purchase for a few months or a year or two so they can save their money and borrow less, or perhaps not borrow at all. Apparently this is what many high-end home buyers are thinking now. They’ll save a small fortune in interest charges and fees and eliminate some personal risk, and as a bonus, it makes the economy more stable too. And even if it took a small economic crisis to get people to look at this approach, the fact that they are doing so seems like a good thing.