The mortgage boom of the early 2000’s is always told as a story of greedy banks pushing derivative investments. But, it takes two to tango and that’s not the whole story.
The rest of the story belongs to the borrowers. It’s not fashionable to hold people responsible for their actions today, but if we don’t learn the lessons of 2008 I’m afraid we’re doomed to repeat them thanks to “Tony Stark” himself.
But, what does Elon Musk have to do with the borrowers that contributed to the world financial collapse of 2008?
Running the Numbers
The moment Musk unveiled the Tesla solar roof, the world rejoiced. It was heralded as another brilliant move by the world’s most brilliant man.
Okay, I’ll bite. Let’s do the math.
According to Roofing Calculator, the average home roof costs $9,000- $14,000 to replace with traditional shingles. According to Forbes, it costs $58,200 to replace 70% of a roof with Tesla solar shingles. The article leaves out a critical calculation; 30% of your roof is still open to the heavens.
The average price between $9,000 – $14,000 is $11,500. 30% of $11,500 is $3,450. Adding $3,450 to $58,200 our new 70% solar roof costs $61,650.
What a bargain!
The Tesla Solar Roof: The New Adjustable Rate Mortgages
We ran the numbers, let’s hear the pitch.
“To help combat the sticker shock, Tesla also noted the tax credits associated with buying solar. For the 70% solar roof, homeowners may be looking at a tax credit of $15,900, while a 40% solar home can expect a $10,000 credit. The company also explained that over 30 years, a 70% solar roof will generate $73,500, meaning a homeowner could net profit $31,200 over 30 years.”
Did you catch that? A net profit … over 30 years? Where have I heard that before? Ah yes, mortgages. The typical mortgage amortizes over 30 years. Everyone knows you end up paying millions for your home at the end, but we keep doing it.
It’s a convenient lie we tell ourselves. One day we’ll pay off our houses. But we won’t. The average American in 2017 doesn’t live like the average American from the Great Depression when the 30-year mortgage was invented.
Back then people stayed in their homes for life. We’re constantly on the move. The 2007 Census found the average American moves 11.7 times in their lives. The number of people who plan to live in their home for 30 years today might as well be zero.
But this sort of certainty is what made adjustable rate mortgages so attractive. They adjusted in 3 years, but until then you had a stupid-low interest rate. When the three years were up, you could refinance again at a low rate … or so you planned.
We all know the rest of that story. Mortgages adjusted. Defaults ran rampant. 100-year-old banks crumbled. Millions lost homes. The Great Recession was on.
So where’s the tie-in you ask?
The Slow Burn
Earlier we discovered the true cost of a 70% solar roof is $61,650. Even after a $15,900 tax credit (which is some healthy corporate welfare if I’ve ever seen it!), the roof still costs $45,750.
Let me ask you a question. How many Americans do you know with $45,750 in the bank? Where do you suppose people are going to come up with $45,750 to pay for a sexy roof that allegedly gives them a $31,200 profit over 30 imaginary years they won’t be in their homes?
BINGO! They’ll borrow it on credit. Credit that is intrinsically tied to the value of their homes. But since that loan will theoretically create $31,200 over 30 imaginary years, it will naturally drive up the “value” of their homes.
We’re here using quotes again because in reality, the roof isn’t worth a dime until your loan is paid off. Until then, it’s a liability. That’s basic economics. However, in the imaginary world of $30K+ returns on roof shingles — the world where banks and borrowers produced the financial meltdown, a.k.a. the same world we live in today — it “will” drive up the “value” of these homes.
The Bush Administration started pushing home ownership in the early 2000s.
“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” – President George W. Bush, Oct. 15, 2002
It took roughly 6 years for that policy to end in disaster. If Musk realizes his vision and coats America with the Tesla solar roof, it’s anyone’s guess on how long it will take for the unseen consequences to manifest.
If history is any indicator, getting Americans to “invest” massive amounts of “money” into their homes in the form of loans that in no way reflect the actual value of their homes is a really, really bad idea.
Tell Me If You’ve Heard This One Before
Artificially low interest rates round out the story of the mortgage meltdown. By keeping interest rates low, the Bush Administration was able to stick to its, “The fundamentals are sound” story … until they weren’t.
We already recapped where that lead, but let’s look at it through a different lens. The government colluded with private industry to interfere in the economy. This created a toxic lending environment, which led to toxic speculating by borrowers, and the downward spiral that culminated in the stock market disaster of September 29, 2008.
Rates are still at historic lows. If artificially low interest rates could lead a homeowner to take out a second mortgage to pay for a pool that will “add $20,000 in equity” to their homes (something borrowers regularly told me when I was a mortgage banker) in 2008, what makes you think tax credits and artificially low interest rates, coupled with a “visionary” leader who has the world sold on his infallible genius can’t create that climate in 2017?
Call me a cynical Detroiter who lived at Ground Zero of the economy collapse, but I remain skeptical.
What Do I Know?
Granted, I could be wrong. I could be laughably wrong. I could look back at this article in 10 years astonished I could be so naive… stupid, even.
Then again, that’s how I look back at things I said and heard in 2008. Let’s hope I’m wrong again.