Widespread ignorance of personal finance principles may mean the end of our real estate markets as we know them.

Chipping away at a boulder

April is financial literacy month. Yes, in a nation where capitalism underpins our very existence, determines all social intercourse and ultimately guides the direction of our lives, we devote one month a year to teaching people that 28% is not a good interest rate.

Okay, perhaps that’s unfair. A number of organizations are beginning an earnest effort at effective financial education. The Consumer Financial Protection Bureau (CFPB), for instance, has recently announced its Community Financial Education Project.

The CFPB is partnering with the Federal Deposit Insurance Corporation (FDIC), the U.S. Department of Agriculture (USDA) and the Institute of Museum and Library Services to provide financial literacy resources via public libraries nationwide.

The CFPB is not the only group joining the crusade. Online education powerhouse Khan Academy recently announced a partnership with Bank of America to create the free financial education website, BetterMoneyHabits.com.

Even our very own California Bureau of Real Estate (CalBRE) actively participates in financial literacy initiatives. Last year, CalBRE spearheaded the Financial Literacy Outreach Program. While CalBRE has no plans to take the lead on any additional events for financial literacy month this year, it is participating in California’s Financial Literacy Resource Fair and Managing Your Money Week.

The stark reality of financial literacy

But the best efforts of our bureaucracies to improve the public’s financial awareness don’t seem to be working. The results from the National Foundation for Credit Counseling (NFCC) 2014 financial literacy survey reveal a dire need for more aggressive action and a different strategy.

  • 61% of U.S. adults say they do not have a budget (highest in six years);
  • 32% do not save any of their annual income for retirement;
  • 65% have not reviewed their credit reports in the last 12 months;
  • 41% give themselves a grade of C,D or F on their personal finance knowledge; and
  • 73% agree they would benefit from professional financial advice.

Such dramatic results beg the question: why are American’s so financially illiterate?

The most pessimistic among us might say that financial stupidity is a structural necessity in our economic system. A financially savvy consumer simply would not subject themselves to the terms of most credit and loan agreements. Wall Street and our most powerful financial institutions, in other words, thrive on the public’s ignorance.

There’s also the psychological thesis. Most American’s do not have a choice but to accept financial terms that are decidedly not in their favor. Thus, we live in denial so as not to crumble under the depressing reality of our dependence on debt to maintain our standard of living (including the “American dream” of homeownership).

But, as many researchers, economists and journalists have been inspired to report since 2008, our ignorance is only compounding the problem. A refusal to face the daunting task of managing our personal finances is leading most Americans further down the primrose path of income inequality, unemployment and a lack of personal savings, for retirement or otherwise.

Another inconvenient truth

This April, in celebration of financial literacy month, we’d like to take the opportunity to state an inconvenient truth. Just as the Great Depression marked a world-changing economic paradigm shift, so too has our recent financial crisis and Great Recession — a paradigm shift that has totally changed the status quo for our real estate markets.

Yes, we crawled out of the quagmire of the Great Depression thanks in large part to the huge productivity and innovation surges that were born of WWII. But we also entered an unprecedented growth period due to magnificent amounts of liquidity generated by Wall Street and introduced into circulation via consumer debt.

The paradigm has shifted once again as the debt bubble burst and the liquidity trap has tightened the availability of credit. With stringent limitations placed on mortgage finance such as the qualified mortgage (QM) and ability-to-repay (ATR) rules, the homebuyer of the future is now constrained not just by their verifiable income but also by their ability to manage it appropriately.

The necessity of financial literacy

It’s easy to blame the financial crisis and the current condition of secular stagnation on the greedy grifters of Wall Street. Their counter argument is that capitalism runs on risk and competition. So goes their infernal refrain, “Nobody forced these people to take out a mortgage they couldn’t afford.”

And perhaps this is true. But, in the era of the financially illiterate homebuyer, the societal pressure to acquire property and the shameless profiteering of our financial institutions has created a game the middle class simply cannot win.

Once again we confront a matter completely dependent on perspective. The moneyed classes fear the public’s reaction to a greater awareness of how deeply and routinely they are economically exploited. But considering the paradigm shift in housing finance, a financially illiterate buyer won’t be able to muster up the ante to gain access to credit. Thus financial education has become necessary in the strongest sense of the word — not just for markets to thrive, but even so they may continue to function.

Immediate action required

Unfortunately as real estate agents you can’t intervene in your client’s financial education at an early age. You are the gatekeepers to California’s real estate, however, and you do have the power to share the vast sums of knowledge you’ve gained from your licensing and continuing education courses. Imagine if in 2004 the majority of agents told their clients, this property is overpriced or this market is in a bubble, now’s not the time to buy. 

This is, in fact, a crucial aspect of your duty as a real estate agent: shepherding your client through the process with as much care and caution as if the transaction were being brokered with your own hard earned savings. The term “fiduciary” is bandied around a lot in the real estate world. Next time you think of your fiduciary, consider the results of this financial literacy study and don’t take your client’s financial understanding for granted.