Monday, January 28, 2008

The Housing Market of Cards

The news of the day is that new home sales showed their worst performance in 16 years in 2007. This is only in addition to all the mortgage defaults and tumbling prices for homes going on.

60 Minutes did a report on mortgages last night, focusing on Stockton, California, where a lot of the skyrocketing housing prices started. They had a map showing houses that were starting the foreclosure process, houses that had gone into foreclosure, and houses that went up for auction but did not sell. The map was full of blue and red dots.

So it's evident that a lot of people are going through hard times. I've talked to so many people from around the country lately who have said that they are having trouble making ends meet, they need to save on groceries, etc. A lot of them are homeschoolers so they generally try to get by on one income or have a small part-time income from home, but one person's story really caught my eye - her family was a two-income family, and her husband was considering looking for a second job because they still were having trouble... they were already behind on their mortgage payments and were having trouble paying their electric bill and the like. Made me feel fortunate.

A lot of factors have contributed to this. People were getting adjustable rate mortgages, figuring that they'd refinance later when the rates went up (but the party stopped before they had the chance). The costs of the most basic things you need to survive, like food, gas to get to work, and energy to heat your home, have continued to go up, while wages have pretty much stayed the same. Skyrocketing property values have added to the problem by increasing property taxes. I know that our property taxes have gone up $200 a month in the 2 years that we have lived here, and our house is only worth $150,000.

There is one thing that disturbs me in all this, and one thing that I think is just plain ridiculous.

The disturbing thing to me is the people that can afford to pay for their homes, yet they are walking away from their obligations because their home is worth less than their mortgage. I've signed one of those mortgages (and the billion pieces of paper that go along with it) and I didn't see anywhere in there that you can just decide to stop paying if your home goes down in value, rather than up like you expected it to. Sometimes that happens, that's the risk that you take when you buy a house. If you think your house is overvalued at the price they want for it... don't buy it. It's a little like the stock market... if they are selling shares of a stock at more than they are worth, it is foolish to buy.

A lot of people lost their houses during the Great Depression, but it was not their choice. They saw home prices fall too, but their mortgages were also remaining the same, just as they are today. Unfortunately, a lot of people were losing their jobs and were given pay cuts and/or a reduction in working hours, so many couldn't continue to pay for their mortgage. People like the couple on 60 Minutes, who decided to stop paying for their house because it was worth less than their mortgage, probably existed, but there was a lot more shame to not paying your debts back then, so most didn't default of their own free will.

The other thing that is bothering me is the number of houses that the banks can't sell at auction, and therefore are just sitting there. ??? What are the banks waiting for, for housing prices to go up again? It makes just about as much sense as spraying a field of crops with poison so that nobody will eat it, when there are starving people out there. Perhaps they should consider auctioning them at whatever market value will pay for them, rather than holding on to them in the hopes that they will be worth more later. 60 Minutes showed some people being given a tour around foreclosed homes... one of the tour guides said something like "the price has been recently reduced, now it's only" and then he gave a price that was slightly over $300,000. That's why they have so many homes up for auction that won't sell, if they're still expecting people to pay that.

Of course the one downside of selling the houses, no matter what the price, is that the price that people are willing to pay might turn out to be a lot less than what the houses around it are supposedly "worth," which will just cause their property values to go down, which will make more people voluntarily give up their homes, which will cause property values to go down perhaps some more. Which was a cycle that occurred during the 1930s, when one house sold for a ridiculously low price that was below the mortgages on the other houses, the other houses were automatically worth less.

Some of the biggest losers in this whole mess are those people that decided to invest in REITs (Real Estate Investment Trusts). Anybody remember a while back where you'd see these advertisements about investing in real estate, but you didn't have to even buy a house? They saw quite a loss in 2007. If you had them, hopefully you got out when things were still good.

We're probably in for more rocky days to come. But it's probably needed to balance out the insanity that has been going on for so long. Not that balancing is fun.

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