US Housing Bust and the American Dream
Housing-Market / US Housing Apr 07, 2008 - 02:57 PMBy: Mark_B_Rasmussen
Home ownership has long been considered “The AMERICAN DREAM” and with the recent paradigms of the “WEALTH AFFECT” and the “OWNERSHIP SOCIATY”……..(Really fraud and myths I have written about earlier on this site)…..See “Debunked Myths of 2007”.
It is estimated that 8 - 10 Million Americans owe more than their home is worth today, as the rate of housing price decline accelerates and the economy slows…(actually early recession).
According to Paul Kasriel and Asha Bangalore of Northern Trust, APX. 43% Of jobs created during the “Boom” were Real Estate related (Financial professionals of all stripes and huge numbers, realtors, appraisers, self employed contractors, appliance/ carpet/ window/ door/ concrete/ frame/ roofing manufacturers, sales people and installers, architects, landscape architects etc, etc.) What many of these people have in common is that they were self employed and independent contractors (Do not show up in unemployment data). Due to the job mix of the “Boom”, real unemployment is most likely understated by a record amount. Now that the housing market is declining the most since “The Great Depression”, one must wonder what is to become of all those housing related jobs. Perhaps it is not a good idea to have such an extremely unbalanced and single source economy…… (think Detroit and autos). Time will tell. Is there another bubble to replace all those jobs, income and wealth?
RICHARD'S STORY:
In 2005 Richard (A Real Estate Appraiser) bought a house for $380,000 which has a mortgage of $360,000 (At the time it was a bargain!) and is now worth $300,000. Richard now owns a home worth $80,000 less than he paid, and $60,000 less than his mortgage. Richard's payments are $2,800 per month. He can rent the same house on the same block for $1,200 per month! Now that Richard's income has declined by apx. 80% he can no longer afford to keep his home. Richard could never save the $80,000 paper loss and it will probably be years if not decades (Like Japan) before the value returns to his purchase price. It should be noted here, that since the value of the dollar has declined by at least 15% since Richard purchased his house, it would have to be worth in excess of $437,000 today to have the same, “Real” value (In terms of purchasing power) it had when he bought it in 2005. It's only worth $300,000 today and falling…….”The POVERTY AFFECT“.
The solution is simple! Richard lives in a trust deed state where the ONLY collateral for the loan is the house, PERIOD. Richard decides to preserve his other credit and stop making payments on his Deed of Trust (Mortgage). He now saves $2,800 per month and lives house payment and rent free….Good for Richard! The lender records a Notice of Default typically 3 – 5 months after the first payment is missed. After the Notice of Default is filed there is a 90 day statutory time in which Richard can cure (make current) the default with all late penalties and other costs. At the end of this period the lender publishes the date of the public auction for 21 days.
At the end of the 21 days the property is sold at public auction and since no person in their right mind is going to pay the amount of the mortgage ($360,000) when the house is worth $300,000 and falling, the lender will now be the proud owner of Richard's home and ultimately take a huge loss. At this point, the lender will process the home, assign an asset manager and local real estate agent and see if it is occupied. Typically (1 - 2 weeks) and can be substantially longer depending on the lender's backlog, processing system and efficiency. The real estate agent will offer Richard “Cash for Keys” AKA “Relocation Assistance. The terms of this offer are typically $500 - $1,500 and 2 - 4 weeks to move. The house must be “Broom Clean”…..No personal property left and reasonably clean. The lender does not want to pay and wait for an eviction (more time for Richard if he elects this option). The lender does not want Richard to stay in the house and damage it either.
LET'S SUMMARIZE:
Richard gets to live in the house with no payments for typically 8 – 11 months and save $22,400 - $30,800 for the new start…..Good for Richard!!
Richard has more time to pack, have garage sales etc. for the imminent move….Good for Richard!!
December 2007 the Mortgage Debt Relief Act made the $60,000 debt relief for Richard Non Taxable…….Good for Richard!!
Consult your attorney, accountant or read the legislation.
Richard now can live in an identical home for less than ½ of what he was paying. The Home owners insurance and any problems with Richards's new rental is the owner's problem…..Good for Richard!!
Richard does take a hit to his credit score but his credit history is excellent otherwise (credit cards, auto etc.). This defect in his credit history can be repaired over time and Richard has learned a priceless lesson about credit, speculative manias and Federal Reserve/U.S. Government Fraud….THE “OWNERSHIP SOCIETY” and the “WEALTH AFFECT” (The Frauds).
Many people in Richard's position choose to let their credit card payments become delinquent (adversely affecting their credit score), liquidate what little savings they might have, invade any retirement plan they may have and try to make their mortgage payment at any cost. This often forestalls the inevitable, leaving the victim with poor credit, no savings or reserves and no home. In the event the foreclosure is certain, paying credit cards, car loans and other credit is preferable, otherwise the entire credit record is damaged rather than just one derogatory entry.
There is a growing contingent of Americans that can afford their homes but have decided to cut their losses. Businesses and investors do this every day. In fact, legal counsel for some major Financial Institutions recommended that their clients default on their commitments to fund many private equity deals. The advice was that their losses from default would be less than if they funded the deals. So we have precedent that lenders have no problem defaulting/reneging on a commitment if it is their economic interest. Should the standard be different or higher for the “AMERICAN DREAM” victim?
Given that there will be millions like Richard, there is a very good chance that the adverse affect of a foreclosure on a credit report will diminish in the future for the millions of unfortunate Americans that believed (The Frauds). The reason, Lending
Institutions (Including Retailers) MUST loan money and extend credit. If the only credit
defect was a once in several lifetimes fraud induced financial disaster, this most likely
will be taken into consideration in future credit scoring. The alternative is that lending institutions exclude millions of Americans with otherwise good credit! Since the U.S. is a credit driven Nation, I put the probability of the latter scenario at about the same as Britney winning a U.S. Presidential Election or Pigs Flying.
One important consideration is that if Real Estate prices continue to decline, which is most probable, as historical top to bottoms are 46 months (33 months so far). What we are enjoying now is several orders of magnitude greater than any historical measure. If you were used to a cocktail at night and decided to drink the whole quart one night, would you feel different in the morning? By the time Real Estate prices bottom, Richard will have rebuilt his credit, saved some money and will be able to purchase a similar home for a fraction of what is costs today…..Good For Richard!!
THE STOCKTON STORY:
Recent prices in Stockton, Ca. are down 60% - 70% from their peak.
Bill and Nancy purchased their home in 2005 for $500,000 with a stated income 90% loan.
One day recently Bill says to Nancy “Hey Honey,” We can buy the same house we are living in, one block away for $200,000! What do you say we buy it since we have good credit, income and have refinanced so much money we can make a full 10-20% down payment?
Nancy replies “What do we do with the house we have now”.
Bill tells Nancy “That's easy. We can send the keys to the lender and let the lender foreclose and take the $250,000 loss or we can rent it short term until the foreclosure is completed (8-11 months) and then let the lender take the $250,000 loss. We sure could use the cash flow, Honey”.
Richard, Bill and Nancy couldn't care less about all of the bi partisan bank, er, homeowner rescue plans unless the mortgage is reduced to present market value at prevailing interest rates and maybe not even then. Remember how high those payments are and values are still declining.
BABY BOOMERS AND “THE AMERICAN DREAM”:
There are apx. 78 million Americans reaching retirement age over the next 10 years. The census bureau stated that at the end of the 3 rd quarter of 2007 there were 17.9 million vacant residences in this country.
One must wonder how many of those have mortgages and how long the owners will be willing or able to make those payments, particularly with credit contracting and values declining. Unfortunately, most of the 78 million are grossly under prepared for retirement.
Social Security is adjusted to the “Core Rate” of inflation but food and energy don't know and aren't included in the “Core Rate” of inflation! I guess retirees don't use food and energy.
There has been a collapse of savings for some time now. The latest American fad has been to invade ones IRA and Retirement Plan to make ends meet. You absolutely must investigate the new IRA debit cards……The perfect substitute for your home ATM….Another great idea (retire destitute). There has been a precipitous drop in defined benefit pension plans that could support a retirement (Unless, of course, you are a U.S. Senator or Corporate CEO). This leads us to the expectation and dependence of millions of Americans to subsidize there retirement with their “AMERICAN DREAM”!
Let's do the numbers. We are currently selling less that 5.59 million new and resale homes per year. An average of 7.8 million Americans are retiring every year over the next 10 years.
The big question is, how many of those 7.8 million are going to want to cash out or down size their “AMERICAN DREAMS” per year and who is going to buy them? This should profoundly affect historical supply demand dynamics for the next 10 years with enormous supply pressure……Translated (Lower Prices).
The Federal Reserve is now providing prudent savers and conservative fixed income retirees a very special gift. For the uninitiated, the Federal Reserve is not Federal (It's a private banking cartel) and has almost no reserves, (Unless you think the same reserves as Nigeria is adequate for the largest economy on the planet) - APX. .4% of the Federal deficit! That is like you having $400 in reserves against $100,000 in debt. Impressed? The very special gift is; the Federal Reserve has slashed short term interest rates so those savers and retirees can get 1.25% interest on safe 90 day Treasury Bills (Minus taxes) while the grossly understated inflation rate is 4.2%. If one deducts the decline of the dollar, these prudent savers and fixed income retirees should be broke in no time.
The flip side of the equation is: By lowering short term rates while longer term rates remain high, it steepens the yield curve and increases the margin/profitability of Financial Institutions. Now, you haven't seen credit card interest or mortgage rates decline by 57% over the last 9 months have you? And the winner is…….The Financial Institutions – At the expense of savers and fixed income conservative retirees! Ben has made it clear he is willing to do whatever it takes to save the Financial Institutions, after all, what are a few million Americans as collateral damage when we have a greedy, reckless, irresponsible and profoundly corrupt Financial System to rescue?
How many Richards, Bills, Nancys and baby boomers are out there? I am having very serious reservations about an imminent Real Estate Revival. That just isn't how speculative manias end and All the Kings Horses and All the Kings Men can't change it. It really doesn't matter who the next King is come November.
The good news is that 6.5 billion people sure can consume a lot of real, physical, tangible and finite stuff that can't be printed or created out of thin air and most have or are developing REAL Economies.
By Mark B. Rasmussen
Mark is a real estate appraiser/broker by profession
Copyright © 2008 Mark B. Rasmussen
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