I read an article in the New York Times on March 20th entitled “Up in Smoke: The Deposit Vanishes”.  It has been bothering me ever since.

Up in Smoke: The Deposit Vanishes

Whether you read the piece or not you may appreciate an alternate perspective to that of the New York Times.

In brief, the article was about an unlucky couple named Pham who lost their entire life’s saving due to the collapse of the mortgage market.  The Phams had placed a $93,000 deposit down to buy a $957,000 condo under construction in New Jersey.  The couple was pre-qualified for a mortgage for the remaining balance at the time of the deposit.

In the new reality credit availability has changed dramatically.  Mortgages that were available a year ago no longer exist.  When it came time for the Phams to close on their purchase they were no longer qualified for a mortgage.  Lenders are now requiring 20% down for vanilla mortgages and the Jumbo market is even more stringent.

The article lamented the Phams’ terrible luck, the injustice of such situations and the collapse of the American Dream.  The problem is the entire article is written from the wrong perspective and its conclusion will be proven to completely incorrect.

First of all, the Phams were not unlucky they were foolish.  Placing one’s entire life savings down to buy an overvalued condo while the economy is deteriorating, national housing prices are collapsing and the primary industry within you local market (Wall Street) is being eviscerated is not bad luck, it is irresponsibility at best, gambling at worst.  Caveat Emptor!

Far more interesting, though, is the reality that the premise of the entire article is wrong.  The Phams were not unfortunate.  They were extraordinarily lucky.  For three years most of the people who have bought houses like the Phams, even those who supposedly got deals from desperate homebuilders or through distressed transactions, have gotten slaughtered by collapsing values. 

The best thing to ever happen to the Phams financially was their lender denying them a mortgage.  Sure they are forced to realize the loss of their down payment.  But the reality is that their down payment was lost the instant they made it.  They simply have yet to recognize this truth and were not required to account for the “paper loss” until now.

If the Phams received a mortgage today and they closed on the property, their real troubles would begin.  The entire equity value of their down payment has already been eroded.  New York area real estate is collapsing.  The price of their condo will decline by hundreds of thousand of dollars in the years to come, but they would still be on the hook for the full $864,000 (until the Government decides to revalue the Phams' mortgage with your tax dollars).  In the article “Interesting Analysis of Case-Shiller Home Price Data” it appears likely that the New York Housing Price Index has at least another 41% decline in store just to get back to inflation-adjusted, pre-bubble levels.

Not once in the article was it pointed out that New York real estate prices are collapsing or that the Phams may have caught a break.  Twelve months from now the Phams, and maybe even the New York Times, will recognize the truth of this dynamic.  As bad as the couple obviously feels today, they will be far better off renting for the next few years and buying their dream home at half price.  But by that time they may not actually want to buy it.  (Most people generally prefer to buy high and sell low.)

The Media’s Failure

The media has consistently reported on the Housing Collapse incorrectly and almost exclusively from a perspective which favors the homeowner.  Going back to 1996 when homebuilders were handing out free counter-tops and pools to entice buyers, the media reported about the great deals.  When foreigners rushed over to take advantage of the Federal Reserve devaluing the dollar, they were getting bargain prices for American property.  Price declines, short-sales and foreclosures have been covered the same way; a great time to buy.  How about pointing out what a potentially terrible idea these purchases are or that it is not really a “deal” when the free counter-top costs you $300,000.  Better yet, return two years later and do a story that shows the devastating effect of succumbing to these discounts and sales tactics.

Conversely those homeowners losing money or navigating foreclosure are inevitably portrayed as victims.  Rarely are they portrayed to be speculators, having over-extended themselves or committed mortgage fraud.  Nor is it pointed out that most people who lose their homes to foreclosure because they can not afford their mortgage have access to equivalent shelter at far more favorable rental rates. 

According to the New York Times the Phams did not overextend themselves or enter into a foolish purchase agreement; they are merely victims of the credit crunch.  They are just two people struggling to pursue the "American Dream" of buying over-valued property with excessive debt.  And when the Phams actually got lucky and circumstances beyond their control saved them from a real financial disaster; it is qualified by the New York Times as a human tragedy.