Robert L. Sharp: We have met the enemy ...

11/22/2008 12:30 AM

11/22/2008 12:35 AM

Walt Kelly, whose long-running comic strip "Pogo" deftly skewered politicians of the day, famously gave us the phrase: "We have met the enemy and he is us."

It's only natural to deflect blame away from ourselves. The current financial mess is a good case in point, pointing fingers at "Greedy, corrupt Wall Street," "evil bankers," "Washington bureaucrats and politicians," "oil companies," "speculators."

But there is a long debate over whether bribe-givers are more reprehensible than bribe-takers, drug dealers worse than drug addicts, temptation more to blame than giving in to excess.

At the heart of today's economic problem were years of easy money (blame Alan Greenspan), lenders offering mortgages we couldn't afford (blame Fanny Mae and Freddie Mac for buying that rancid paper) and Wall Street (blame them for repackaging that paper and rating agencies for blessing it).

There is very little blame aimed at people who bellied up to the trough of a chance to get into a nice home they couldn't afford. We have been living beyond our means, primarily due to the availability of easy credit.

Maybe I learned thrift because I was born at the tail-end of the Great Depression, and my family -- who had started as well-off -- had a difficult time teaching me to save bags and string and jelly jars for drinking glasses. I actually remember what a darning egg was used for.

My parents bought their first house in 1947 when they were in their early '40s in little Linden nestled among the walnut, peach and cherry orchards. Two bedrooms and one bath for $6,000; 60 percent of my father's annual salary as principal of the high school.

Mortgage money wasn't available in those days, so some money was borrowed from my grandmother. Not bad compared to Japan until recently as a "salaryman" bought his first house with his lump-sum retirement payment.

My wife and I bought our first house, a two-hour commute by bus to Wall Street from the Jersey shore, a distance which translated into a price we could afford: $18,000 on a salary half of that, 10 percent down due to being a Navy veteran and the blessings of the FHA. My mother was very nervous that we had undertaken such a large debt.

Later, the rule of thumb was one month's rent times 100, equals the cost of a single-family house -- even with the requisite 25 percent down payment that sober savings and loan companies demanded in those days, and a 40-year loan. Rents pretty much covered the carrying costs.

Little by little, I bought some properties in areas I knew: Davis (to house my daughter at UC Davis), Stockton (on the other side of Highway 99 from Linden), Fresno and elsewhere. Big cities had more capital-gain opportunities, but rent vs. value was a safer return for a non-gambler like me.

The 1970s oil crisis generated huge inflation, which isn't supposed to be good for the economy, but it was very good for the value of my properties. I got out of many of them too soon for the big run-up in prices, but you can't go wrong taking a profit.

Here's an interesting statistic from U.S. News & World Report's latest editorial:

"In the decades since WWII, home prices as a multiple of annual rent have generally averaged 15 times. In the recent bubble they reached a multiple of 26 and remain at 22."

The editorial's point is that housing prices have a way to drop yet to reach a level relative to personal income -- at least not without the lax mortgage financing that produced the bubble in the first place.

In my own experience (in New Jersey), before the early 1970s oil crisis, the monthly rent vs. the cost of a house, was a multiple of 8.3.

Of course, in the case of New Jersey, property taxes were high, which put downward pressure on house values.

In the case of California, with relatively low property taxes due to Proposition 13, a home's value was higher. The point being, people have only so much they can afford for a house, whether divided into the cost of the monthly mortgage or property taxes.

Maybe I am lucky not to have been active more recently when mortgage brokers, who made their commissions whether borrowers could repay their loan or not, were around to tempt me. But lack of financial prudence on the part of Main Street makes us as much at fault as Wall Street encouraging us to live beyond our means.

Robert L. Sharp grew up in Linden and spent most of the following 30 years as an international banker in Asia after four years as a Naval officer in that part of the world.

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