Aug 20, 2009

What's the Deal With the Housing Market???

In simplest terms, the deal with the housing market is we are reaping a whirlwind. What that means is, a lot of people made poor decisions a few years back, and now the consequences are settling in.

In 2005 when the housing market was at a peak, too many people, watching HGTV for inspiration no doubt, bought more house than they could really afford. They figured the value would keep appreciating, as it had been doing for years, and they'd live happily ever after. Meantime, the mortgage banks lent too much money to people who were ill-equipped to pay it back, thinking oh hey, I can't discriminate based on low income or lousy credit history - that would be politically incorrect. Banks earned money on loan origination fees as well as interest. Appraisers produced appraisals with the "necessary" values to get a loan approved, so that banks would send them more appraisal business, wink wink. Housewives became real estate agents, and real estate agents came out of the woodwork, churning sales for commissions. Builders bought up farmland and built subdivisions of McMansions. Everyone was happy when the mortgage banks made all these low-teaser-rate adjustable rate loans. Happy happy happy.

Well, the party's over and it's hangover time. The teaser rates have expired. The 3-year adjustable rate is not a low teaser any more. Higher interest rates on home loans kicked in. House payments went up. [It was a double whammy - interest and insurance - for those who lived near the water; homeowner insurance rates doubled and tripled - even for those who live 10 miles from the water and never filed a claim.] Home owners couldn't afford the new higher payments. Many just walked away. Some trashed the house and then walked away. Some left starving dogs behind and walked away. Some stayed on, as squatters, until the sheriff was called.

As house after house foreclosed (defaulted on the debt that was owed) the price of houses dropped. Too many houses for sale means that you have to lower your price in order to compete. Housing prices go down down down. Everyone is selling. Hardly anyone is buying. Real Estate agents had to find another job. St. Joseph is buried all over town...

Another domino to come tumbling down in this scenario is the public school system. In areas where the housing market had been going up up up, the school system was reaping large amounts of money in property tax, which is based on the value of your house, as determined by appraisers who work for the county. If property values were now falling, where would the school get its funds? Uh - oh, better fire the cafeteria ladies and janitors to trim the budget! (How insane is this???)

Here's your plan for creating a successful family:

One, don't fall for teaser rates. It's a trap. Lock in a 20 or 30 year fixed loan for a house, and see how much you can really afford. Why does a family of 3 need 4,000 square feet? Assess what you can realistically pay each month, given your downpayment (include principal, interest, property taxes, and homeowner's insurance) and DO NOT buy a house that costs more. Don't count on your income going up in future years - you don't know that it will. You don't know what may happen, so leave yourself the cushion of peace. You will be amazed how little you really need. Don't be swayed by glamour baths and crown moulding. Shelter is shelter, whether hovel or highrise.

Two, don't default on a loan. Loans are moral obligations, not just legal ones. Signing a contract and not honoring it brings dishonor to your family. It's going back on your word. This is not the path to family success that you seek. If you have a hardship, lost job, whatever, CALL THE LENDER. Talk to a human (this could take persistence, but don't give up - keep going up the line until you are speaking with someone who has the authority to make a decision) and work out a payment plan. Defaulting is for quitters and losers, which you are NOT.

We are winners. Let's act like it.

No comments:

Post a Comment