Home ownership is a fundamental building block in the American Dream. More than just shelter, owning a home is the best investment a family can make in its financial future. Right?
These are basic assumptions that help drive the credit union movement in its efforts to do the most good for the most people we can.
But something happened this week that sort of shook my world. I’m wondering if it might re-shape your vision, too, of how we do our jobs as trusted providers of financial services to our member-owners.
I’ve been to many meetings where credit unions talk about the risk of mortgage lending: credit risk, interest rate risk, and certainly the past few years, compliance risk because of TRID,HMDA, and more.
We’ve developed risk management tools and processes to mitigate these risks, and that’s helped fuel a boom in credit union mortgage lending as borrowers take advantage of the credit union difference. But are we really doing them a favor?
Like a mantra, we tell ourselves and our members that home ownership is a good long-term way to build wealth. Rationally, this makes sense and over the long run has proven to be true, as a general rule. But will it stay that way?
At a recent meeting, I was shown a set of data that showed why home ownership is actually quite risky, certainly more than I ever realized. The data looked at 5,000 ZIP codes around the country, broken down into metro area and then sorted into three equalgroups: highest median value, middle median value, and the lowest third in median value.
Not surprisingly, the great majority of ZIP codes 78% saw median home values fall from 2005 to 2010 as the Great Recession took hold. The national average was a 13.5% drop but many areas saw home values take a much larger hit than that.
The assumption now is that home values have been rebounding since 2010. And overall they have, up 9.5% from 2010 to 2015.
But here’s the rub: Home values fell in 26.8% of ZIP codes overall. More startling: a staggering 42% of ZIP codes in the bottom third of median prices saw prices fall.
Think about that. The bottom third of ZIP codes is probably where many first-time homebuyers are starting. It may be where those people trying to rebuild after the financial crisis are buying.
I would think for many credit unions this may be where many of our members are, and certainly those we’re targeting with special programs to make home ownership more affordable.
But now I’m wondering, given the data and what we know now, are these borrowers taking a long-enough view to understand the risk they’re taking. And are we sharing with them the right information they need to make a truly informed decision?Certainly if people are going to stay in their homes for seven or more years the amortization of a traditional loan will mitigate some of the risk of falling prices, but especially for people living in the bottom third of ZIP codes, seven years mayfeel like an eternity.
What do you think?