So, flush with our refi cash, we journeyed into the unknown-to-us realm of fabulous kitchen remodeling. Ha! At each and every turn, there was someone ready to be helpful and ready to get his or her cut. Before going any further, I have to exempt our architect (a veritable Virgil without whom we would surely have foundered) and our contractor (someone with whom we have worked before and highly recommend). But for the rest of it – what a racket!
I don’t have any data on this, but it seems probable that the kitchen renovation industry cyclically depends on the mortgage refinance business. There are obviously plenty of people with the wealth to self finance such projects, and plenty of other people who take a long-term, gradual approach to remodeling. But the “all-in” crowd probably has a pretty fair percentage of people who are coming straight from refinance into the showroom. “Welcome, welcome; step right up!”
A quick aside – we call our economic system free-market capitalism, which of course it is not and nor has it ever been and nor will it ever be. The “free market” shibboleth goes down easily enough as an ideological contrast to Communism but why we can’t get beyond that now is a bit of a mystery – it could be one positive thing that the libertarians could help accomplish. But the capitalism descriptor is a bit more slippery. Its origins from say Adam Smith forward are straightforward enough, but it seems legitimate to wonder whether the pervasive spread of debt and the increasingly esoteric metastasization of finance has so changed our political system that our continuing fealty to capital prevents us from fully recognizing our enormous dependence on debt.
Case in point, the mafia-like structure of the refinance business. On one side is our lucky couple whose home has appreciated allowing them to get access to pots of lovely money. On the other, we have the various dons, captains and made men of refinance each of whom first needs to get a taste. Our couple does not want to pay the vig, but this is Chinatown debt finance.
Appreciation has seemingly created value out of nothing, or more precisely, while the house’s use value has not changed, its exchange value has gone up. Since this is the case, the couple can now borrow more money from the bank – add to their mortgage debt – while lowering their debt-to-equity ratio from that of the original mortgage. Our couple has leveraged the new value of their house giving them both more debt and a fistful of ready money that they did not have to work for. And that is the psychological key which is the basis of the grift. If anyone had to pay all the refinance fees out of their paycheck they would be pissed off and maybe some regulation (cough, Senator Warren) might cut into the mark up. But as in some sense it feels like found money, everybody gets their take as the price of doing business, and our lucky couple exits the refi office properly schooled in getting fleeced. Now, back to the showroom!
If it is true that a fair percentage of all-in kitchen renovations are paid for with cash-out refinancing, it seems arguable that given its origins this sluice of debt sets an artificially high floor for the cost of such projects. At least that is the only explanation I can come up with for the cost of kitchen cabinets. (I know Ikea is the lower-cost alternative, but if capitalism, status anxiety and narcissism have taught us anything it is how unattractive it is to settle for something we can afford.) Perhaps we were simply naïve, but we were certainly unprepared for the cost of a few pretty wooden boxes.
Next up: Wenge