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.

Highest Inflation in 17 Years

Woke up this morning to see an Excite article to see that inflation is the highest that it's been in 17 years.

Of interest to note, is that the two items that rose the highest last year were energy and food costs. Energy costs were up 17.4 percent, and food costs were up 4.1 percent. This is the highest that it's been since 1990.

The report, issued by the Labor Department, said that inflation outside energy and food costs were tame. I don't know about you, but energy and food costs just happen to be the two things in my budget that are not fixed, and there's only so far you can squeeze them.

Now I'm pretty good with the food costs, and there were several weeks last year that I got by with spending $25 for the week (out of necessity), and that included diapers, but that's primarily because I always shop for things when they are sale and I always have a surplus because I buy this way. People still have to drive to work and back though.

What does a typical person's budget look like? Not the numbers, but whether something is fixed or not. I'll give a breakdown of my budget, and I guess I may be semi-typical, other than I don't have credit cards:

Mortgage - fixed
Car payment - fixed
Student loan - fixed
Trash - fixed, but subject to increase
Sewer - variable
Water - variable
Internet - fixed, rates locked in for now
Vonage (phone) - fixed, but subject to increase
DirecTV - fixed, but subject to increase
Electricity - variable
Gas - variable
Food - variable

I may have other things but I can't think of them. The three largest items in my budget, outside of the mortgage and car payment, are variable. There's not much you can do to decrease them. And they are also the three items that went up the most in 2007.

Because I'm pretty budget conscious when it comes to groceries, I really notice when the prices go up. Surprisingly, around here, the price of ground beef has remained fairly stable, I can still get that for $2 a pound not on sale. There was even one week last year when they had beef on sale for $1 a pound and I was able to buy 20 pounds or so. Milk has gone up, however, as well as soda, processed foods like chili, bread... I even saw a higher price for frozen vegetables two weeks ago.

The question that I'm wondering is... why is the federal reserve keeping interest rates so low? Haven't they been saying for at least 10 years that inflation has not been a problem and that keeping interest rates low was promoting economic growth while keeping inflation down? Since inflation is going up, shouldn't they raise interest rates to try to curb it?

When my parents bought their home in the 1970s, they were lucky because they didn't have to pay a double digit interest rate on their mortgage. Interest rates that high are unheard of today. But maybe they should be closer than that, rather than sitting at the ridiculous lows that they've been at for nearly the past decade.

There is one downside, of course, to raising the interest rates... all those people in adjustable rate mortgages that are already crunched in their budgets. With skyrocketing home values, property taxes have gone up to keep pace with it... I know that our property taxes have gone up nearly $200 a month in the last 2 years... and we don't have an ARM. So I get that raising the interest rates will eventually cause more people to not be able to afford their homes and have to foreclose.

However, the whole point of an adjustable rate mortgage is that it is adjustable. There are usually limits on how much and how fast and ARM can adjust, but the whole point is that they do adjust. They are usually a very stupid idea, because you never know what the future can hold. Everything can seem rosy one minute, but anything can happen... especially when it comes to the economy.

If they don't raise the interest rates and inflation for the things you have to buy continues to skyrocket, everybody will suffer... including the people with ARMs. If they do raise interest rates, maybe the government can keep the dollar from freefalling and maybe we can curb inflation. Course raising interest rates will probably send the housing market into a tailspin and create a lot of foreclosures.

What a choice. Inflation and a weakening dollar, or the housing market going into a tailspin. Tough call.