People Magazine or WSJ?

In Friday’s Wall Street Journal was an article titled “The Accidental Renters” with the subtitle “After Losing Homes to Foreclosure, Tight Rental Market Poses More Indignities”. The article ostensibly covers the difficulties that people who lost lost their homes face trying to rent.

It is incomprehensible to me how the WSJ, which usually is a very well written newspaper, occasionally slips in an article so badly written, conceived and executed that I think I am reading People magazine. Isn’t that why they have editors? Let’s take this apart…

The most typical flaw of mainstream journalism in my opinion is 1) “humanizing” a complex problem with a few interviews or out of context “examples” 2) not challenging basic flaws in logic in these “examples” 3) failing to add a knowledgeable and topic-based analysis of the facts at hand based on experience.

Here are the examples in the article:

“Ray and Trish Vangas recently found themselves contending with the indignities of renting. The couple lost their first home… after their adjustable rate mortgage reset and the bill jumped by about $900 a month, to $3300… the couple moved into a rented townhouse… almost immediately, they discovered problems, including a deck that wobbled, dead electrical outlets, missing smoke detectors, and bad plumbing. With the help of the town’s health department they moved out… paying $2250 a month. “I can’t believe I worked so hard for a house, only to lose it.”

The interviewer never takes the Vangas to task for their obvious mistakes. They picked up an adjustable rate mortgage which was scheduled to reset to a level of payments that they could not afford. Why did they do this? And the odd part is that the mortgage didn’t reset very far – it moved from $2400 to $3300, a large but seemingly manageable increase. Were they living that close to the edge? The article doesn’t mention them losing a job or suffering any sort of financial crisis, so that doesn’t seem to be an explanation.

Then the Vangas talk about their rental experience – they were apparently surprised by things that would be OBVIOUS to any renter worth their salt – when you are going to rent an apartment or house, you should walk in, turn lights on and off, check the water pressure and shower, and look for things like a “wobbly” deck and smoke detectors. It isn’t like these items were a surprise or something – I doubt the landlord pulled the smoke detectors and messed up the water pressure after their visit. Did they inspect the house first? The journalist should have asked.

Another item to note is that when the Vangas, who were foreclosed for a modest increase in their adjustable rate mortgage (duh – did you notice the term “adjustable” next to the word “mortgage”) and then apparently moved into a rental without doing even minimal due diligence, needed to get out of their lease, they contacted the town’s “health department”. What a bunch of jerks! They don’t mention anywhere that there were rats or other items that would be a health scare, or that the landlord didn’t try to make amends. They didn’t like the rental for (mostly) obvious things that they should have known in advance, so they go to the city health department. I hope their next landlord runs a check on their name and this pops up and then he / she will know that these people will run to the government the second things don’t go their way.

The last line also goes without comment – he worked so hard for a house, only to lose it. He lost his house because he couldn’t afford it, and he obviously didn’t work that hard for it, since he didn’t put much down and didn’t take things seriously enough to have any kind of safety net in terms of savings for changes to the mortgage. The journalist should have noted that the real problem wasn’t “losing” the house, it was buying a house that he couldn’t afford in the first place.

The second example is “Michael Ryder, an information technology analyst”. His example is more typical – he used equity in his house to buy a second house and add improvements, and then got divorced, which ruined his finances. He lost his home in foreclosure, and lives in a 2 bedroom apartment which seems crowded when his kids come to visit. “he wants to start building equity again… ‘I want to leave something behind for my kids’ he says”.

The journalist leaves unsaid the fact that buying two houses and remodeling them didn’t work out too well for Mr. Ryder the first time around… and that “building equity” isn’t the only way to leave something behind for his kids – the savings from renting (and not paying mortgage, taxes, and to fix up the property) can be saved and reinvested which will also build wealth. Probably the journalist, too, believes that everyone is best off owning a house, when this clearly isn’t the case (but I am only speculating, because the journalist doesn’t offer opinions or even informed commentary).

The next example is Matthew Cooper, an advertising salesman. His payments started at $2800 for an interest only mortgage and went up to $4500 / month. At least he learned something – “he will insist on a fixed rate loan” the next time he buys. But Mr. Cooper has to end it with the ludicrous statement that ‘Buying is the only way to accumulate wealth’, which the journalist leaves unchallenged. Particularly in Mr. Cooper’s case, he is now paying $1700 / month in rent, so he has at least $1100 – $2800 more in his pocket than he used to (figuring that the tax savings is netted out against increased property taxes and maintenance expenses). If he saved this money, the journalist should have pointed out, he could certainly ‘accumulate wealth’, even in a fixed rate CD.

The final example is a couple (the Fry’s) in Minnesota who are renting for $2000 / month, with an option to buy the house for $441,000 at the end of three years, which is what the owner paid for it. Mr. Fry “figures the house is a bargain”.

Aaarrgh. On what basis does Mr. Fry think the house is a bargain? The current owner can’t sell it for what he paid for it, and assets are only worth what other people are willing to pay for them (unless they generate cash, which a house clearly doesn’t, and you can value the imputed rent which doesn’t add up to a value of $441k).

While renting vs. buying is a complex situation, the continuous statements and implications that buying is always superior to renting and that renting should be a temporary (and un-dignified state) just flat out isn’t true. The analysis is too complicated for those types of pat analysis, and if the journalist has to have their “human interest” story, they should go out and get one, of a renter that avoided over-buying during the boom and accumulated wealth that otherwise would have gone into a house payment.

Cross posted at LITGM