Could Cars Have Caused the Mortgage Meltdown?

[Emeline]

In yet another analysis of the causes behind the current financial crisis, it turns out that vehicle ownership and a lack of access to public transportation may be just as predictive of mortgage foreclosure rates as low credit scores and high debt-to-income ratios.

Such are the results of a study, commissioned by the Natural Resources Defense Council, of foreclosure rates in San Francisco, Chicago and Jacksonville, Florida. The survey found mortgage holders were less likely to face foreclosure (.pdf) if they lived in “compact” neighborhoods with sufficient public transit to make owning a car optional. For example, a hypothetical borrower in the Chicago area with a credit score of 680, a debt to income ratio of 41 percent and a 20 percent down payment would be 2.7 percent more likely to default if the home is in a sprawling suburb instead of a compact urban area.

While it’s easy to dismiss the report as just another environmental advocacy group’s indictment of McMansions and SUVs, there’s a more nuanced interpretation of the findings that could affect future transportation and housing policies.

According to the study authors, living in a location-efficient area provides a greater buffer against volatile transportation costs, which even before fuel prices spiked in 2008 accounted for as much as 17 percent of an average household’s income. This also may explain why vehicle ownership was predictive of mortgage default. The term “location efficient” refers to communities with several transportation options beyond owning a car.



Read More http://www.wired.com/autopia/2010/02/could-cars-have-caused-the-mortgage-meltdown/#ixzz0eT29HWZV

[yellowrocker]

To me this study lacks a giant connect-the-dot step. There is no causality between car ownership and size/location of house. Both car ownership and house are the result of a common cause (living beyond your means). And living beyond your means was enabled through lax regulation of creditors and the utter, complete failure of agencies that rated mortgage-backed securities. I believe that well-meaning investors bought these securities relying on the ratings agencies (there were three of them) and these criminals have yet to be apprehended and prosecuted.

[goanna]

If a family owns two cars it is a real dent in the budget. Petrol, repairs, insurance, registration that all adds up. I know people who would like to own a house, but never entered into the market, because they bought two cars on loan. The value of these two cars is roughly the down payment for a house. And house prices are still up here.

[Aussie]

I just don't trust this type of study. They've looked at the percentage of income to debt and access to transport and car ownership and drawn conclusions from that.

Although there is no denying that car ownership is expensive there could be other factors that also cause people in sprawling suburbs to be 2.7% more like to default. (That's an awfully small percentage btw).

Perhaps it's because, in the case of this study, the people in the compact suburb had an higher income - and 59% (balance after debt payments) of say $150,000 is a lot more than 59% of $75,000. Perhaps the people in the sprawling suburbs had children and the compact suburb did not. There are variables that do not seem to have been taken into account in this study.

Logic though, does suggest that people that have to buy fuel and travel long distances to work will spend more money.

[EyesWideOpen]

I find this interesting, and at first glance think I actually might agree. Here's why:

I bought my KIA new off the dealer lot, a 2005 RIO with most but not all of the options, final price was $16K.

My payments were $240 a month, insurance another $200 because my divorce and a then teen son taking his anger out on my truck (pd for Ranger) and Nissan 1600 (also pd for and a surprising fast little car) jacked my premiums sky high even though I bounced jr from so much as looking at my car.

I bought the RIO because of the warranty and the Edmunds report that it was the most cost effective car at the time to own.

$440 a month doesn't sound like a lot. But I was only making around $18k that year-gross.

I know people who are spending close to a thousand a month per car-just the car. They're making about $30K.

Seems like make or break-we have to have a car because we do not have a public transportation system close enough to us. I even went online to the MARTA (metro-Atlanta rapid transit) tool to see if maybe moving to the service areas would offset the horror of living in a service area:) The tool showed me it would cost me twice-three times what I was paying for the car. My friends with higher car expenses would of course save money but like me, hate the idea of moving into the service areas.

I'm going to have to read the article linexline to be sure, but just skimming, yeah, I can see it.

[tofu2u2]

I agree that living in an area with good public transportation is a much more practical way to save money but the public transportation infrastructure just doesn't exist in most parts of the US. And people have to drive.  

Over the years, we have known a lot of people who make themselves "car poor" which dictates the rest of their budget and therefore, their lifestyle. This is a budgeting topic that drives me bugnutz:

I don't understand why people assume they can have it all: a new car (or 2) as well as a house?  the higher insurance premiums on new cars seem to come as a surprise to a lot of people  (yes, with a new car, you save on repair costs but I think the higher insurance premiums eat the savings from lower repair costs) and if you need more than 1 car (and most American suburban families need more than 1 car) why do people insist on 2 new(er) cars? What's wrong with buying a used car and learning how to do some repairs  yourself? (oh yeah, I know: it's hard. And everyone thinks life should be easy. All the time.)

 When my husband & I started out in life (married in 1975) we drove some really used cars (mostly volkswagons & tiny Japenese cars collectively known as "rice burners") and we did repairs ourselves. And we did this for about the first 20 years we were married (we didn't buy a new car till we were married for 17 years). We are older now so we pay for major repairs but my husband still does the minor repairs & maintenance. We drive our cars an average of 12 years so we keep them in good repair.  I know some of you are rolling your eyes but I honestly fret  what happens to that very large pile of metal when we finally retire a vehicle; my 1990 van is still in use as a ranch vehicle in Texas & when the engine dies, it will be used as a shed.

The at home car repairs saved us thousands of dollars over the years; in the early 1990s we crunched some numbers for the fun of it. We figured we had easily saved about $65,000. over the years in repairs. And by driving our cars for 5 or 6 years longer than the "average" 5 years that people own a car, we have saved at least $120,000. by not buying new cars every 6 years.  And when we do buy a new car, we shop for safety features rather than buying the car to get the cool new electronic gadgets that are installed:  for the love of god I don't understand paying for a built in DVD player or a built in navigation system; how hard is it to remember to leave the portable version of these devices in the car? There is just no reason  to pay for "option packages" that add thousands of dollars to the price of a car which also adds to the cost of insuraning the car anyway.

On top of all these fixed costs of car ownership, add the always rising cost of an ever depleting supply of gas: people invest far too much into buying, insuring and maintaining their cars when they could be investing their money in preps.

End of rant. Exhale.

[EyesWideOpen]

Tofu, you are so on it! I bought the new car to replace the two paid for cars that always needed a $300 something about every other month that I didn't have the time to learn how to do.

Looking back, I really wish I'd made the time to learn the newer computerized car repairs, and put the $ I spent on car payments and insurance in the mattress bank!

[tofu2u2]

oh, EWO, thank you so much for reading my rant. I get very worried that my mommish lecturing will be considered hectoring. Its just some of these topics are close to our hearts: we get frustrated with seeing people doing things the same old again & again & again . . . It has taken 11 years for one of my best friends to finally figure out that buying a "top of the line" vehicle that will "keep its trade in value", then trading that in for a new car where the dealer "pays off my old car payment so I can buy a new car" every 2 years really isn't a realistic way to pay for ones transportation.

The real shame is this woman works really hard at budgeting and taking great care of her family but she's always "car poor" because she does the same thing over & over & over again . . .

[The Black Knight]

Yup, I think you're on to something tofu2u2 also... I've never had a brand new car. Been buying newer totals with low milage and having the boys who work at the local body shop rebuild the vehicles.. A newer vehicle at about half the price while employing those in the area.

"I agree that living in an area with good public transportation is a much more practical way to save money but the public transportation infrastructure just doesn't exist in most parts of the US. And people have to drive."

I can't agree more, it sure has been "structured" that way.  Gee, just lately I've noticed that the public phone booths are just about a thing of the past, with very few being maintained and some just getting yanked out entirely... "The game" is slanted in such a way, it's near impossible to beat...   

[theozarker]

It does seem to me that the mortgage meltdown started after oil/gas prices went so high.  A lot of people (probably those who did not have access to good public transportation) were driven to the brink financially by the high gas and oil prices, including heating oil.  And even as the prices were coming back down, it left a lot of people so far behind, they couldn't catch up and things began to spiral.  Especially on non-fixed rate mortgages as interest rates were "adjusted". 

At least I always sort of had that correlation in the back of my mind.  So maybe the study isn't as far out there as we might think?

Linda

[gin]

short answer no.. wow there lots of myopic thinking going on in that article 

as overall cost of living increases do.. the rising cost of car ownership may have had a
contributing factor but only in part.. alone it would not cause the mortgage meltdown..

[goanna]

I think Aussie, you are right. It is maybe more the income or the mindset of people who move in areas were no public transport is available.  Maybe in the US and sure in many regions in Australia it is difficult with public transport though.
We have bought our second house now and we always looked that a train is nearby ( I don't want to rely on buses). When we sold our first one, it showed that this was really the best decision.
We still have a car, but the cheapest possible. I would never by a car on loan. Even if you pay 200 for repair each month (and who does this?) you are cheaper than taking out a loan. You can save a whole lot in being member of the automobile club (even if you don't like them very much), but they help you if you have a small problem. And old cars usually have small problems (if I would be a bit better in repairing, I have no idea).

400 a month is a lot of money, if you are canny it would pay your food bill.
400 might be the difference between foreclosure or not.

[suburban_junkscape]

The people I've known who've been foreclosed have all lived way the fuck out of the way of a big city and nowhere near a rail line.

[Doomsteader]

short answer no.. wow there lots of myopic thinking going on in that article 

as overall cost of living increases do.. the rising cost of car ownership may have had a
contributing factor but only in part.. alone it would not cause the mortgage meltdown..

Considering that many new cars nowadays, go for what our parents paid for their homes (and financed for 30 years at a fixed rate), and considering all the associated costs that come with a new car, and lastly, considering the economic meltdown and rapidly-rising unemployment figures since the beginning of `09, it's not hard to see how car loans may have pushed formerly(as well as marginally) solvent folks over the edge, leading to their defaulting on thir mortgage payments. As another poster on this thread said, $400 a month may mean the diference between hanging on, and forclosure.

[suburban_junkscape]

This stuff isn't rocket science. Just go to some of the outlying suburbs and look at the kind of people live there. You'll have to hand around awhile since everyone is either in their car or in their house. Then go to some gentrified neighborhood and look at those kind of people.

Its probably a variety of factors at work, people with money can afford to live near their job and who wants to commute an hour each way? But also outlying areas tend to be conservative and anti-tax and they won't elect politicians who would tax them to fund mass-transit.