Upside Down And Nowhere To Go

Seems like the goverment and various groups are trying hard to stem the tide of foreclosures in the US housing market.  They have introduced FHA secure . Community projects such as NACA, backed by Countrywide, Bank of America and more recently Chase. We now even have Hillary, Henry Paulson and even the Prez himself trying to grab the headlines. Its called the ARM Freeze.

However, none of this addresses the real problems facing the entire real estate industry nationwide. The real problem of course is the most fundamental concept of all. Supply and Demand.

There is an 8month inventory of houses on the market in the United States. The highest it has been in who knows how long. Builders overbuild, buyers overbought, investors overinvested, Lenders overextended themselvs, and Realtors oversold.

But when the inventory reached a certain point, houses were not selling anymore. The demand went down because there was no longer huge appreciations. Naturally this caused the appreciation to stop altogether. Then people started scrambling for cover. Everyone and their dog put their house up for sale, hoping to still sell while prices were high. Same with builders, and investors.

With any ‘boom’ or ‘gold rush’ , the speed of the boom will invariably equal the speed of the CRASH. Lenders could not lend out money to anyone for any reason.  Borrowers could not refinance or sell to get out of foreclosure. Lenders  couldnt count on flipping the property to recoup monies on foreclosure either. Losses started to pile up. Lenders began retracting their dubious products to protect themselves. Without the dubious products, a chunk of the housing market dissapeared immediatly.

But it was too late. All of 2005 and 2006, ‘experts’ were predicting a ’soft landing’ . When we look at the statistics, and history itself, these media release must surely have been a bald faced line in retrospect. 

The biggest thing about any boom is the alarming number of people in the market simply to ‘flip’ the thing for a profit, much like the stock market. If they cant sell the house, then they have to continue to pay the mortgage, and sooner or later simply walk away from it.

All the powers that be stood around and did nothing about this for quite a long time. Until it became painfully obvious the market was crashing deeper and harder than anyone was willing to admit. I bet they knew all along , but was hoping against hope it wouldnt come true.

Now these 1/2 baked programs have come into effect to ’save’ people. Except they fail to mention none of them actually fix the real problem.

There are millions of people whom bought at the height of the housing boom. This means they bought at boom prices. Whether they have a 30 yrs fixed, or ARM payment or whatnot, it still little comfort that their house could very well be worth 50% of what they bought it for .

None of the programs address all these exasperated homeowners who are now ’upside down’ in their house. Regardless of fantastic credit and good income. How long will it be before they realize their home will never be worth the boom price for at least 5 years, and walk away from the thing to save tens of thousands of dollars in property tax, home isnurance, PMI, homeowner association dues, and mortgage payments.

They can simply rent for cheaper, and their credit will be right back up to where it is now after 5years. Nobody predicts another real estate boom within 5 years. So why waste all this money to stay in the house? Homeowners will save a huge chunk of money by handing back the keys and renting until houses stabilize, then purchase the same damn house for 1/2 the price.

Therefore, none of these programs will stop the huge avalanche of foreclosures that are coming, and thus the home prices will continue to fall. Until they help the homeowner underneath their houses, nothing will change in the slightest.