Recently, and for some unknown reason, many people have asked me about the state of the real estate market. I have no idea why they ask me this, as I have some clients in the real estate area, and Im an attorney, not an economist.
However, for the remaining two or three people that are interested in my take so to speak, here it goes. And heres a spoiler alert my take is not very pretty at all.
At this point, I believe were beginning to go down the slope of the recent recovery. There are a number of factors for this dip, including the number of loan modifications that were completed approximately six to eight months ago, rumors that the monetary supply will be increased before the end of the year, and the struggles that home valuation has experienced for the past three years. Lets take them in order.
First, ever since the advent of the Obama Plan that allowed a streamlining of loan modifications, as well as the requirement that banks give them a shot began about a year ago. The problem with loan modifications are that they really dont modify much at all. People have this expectation that if their monthly mortgage payment is around $1,500, a modification (with its attendant mathematical mumbo jumbo) should reduce that monthly payment to around $1,100. This doesnt happen.
Traditionally, the most Ive ever seen a monthly payment reduced as a result of a modification is about $125 per month. Now, $125 is a great deal of money; I would hate to say what I would do for that amount of scratch. But if youre in serious financial difficulty, an extra $125 isnt really going to do a whole lot for you. Yes, it may allow you to pay a minimum or two on a credit card, or a few extra tanks of gas a month, but thats about it. Usually after eight months, and a savings of about $1,000.00, people will begin to realize that their only feasible options any longer are foreclosure or a short sale.
Second, I always get chills down my spine whenever I hear that the Fed wants to inject more money into circulation. I am of the age that I remember President Carter on television complaining about the malaise that gripped the economy in the late 1970s. In an attempt to kick start the economy, more money was released, and both interest rates and inflation went sky high. Thats just what we need right now more difficulty to borrow money and higher prices for daily necessities.
I also remember pictures from Weimar, Germany during the 1920s where people were paid three times a day because the value of their payments were so low as a result of hyper-inflation. Workers would take wheelbarrows to work, as they were paid in cash. Once they got home, they would burn the money, as it was cheaper than wood. Thats a pretty picture.
Finally, those who have big houses and jumbo loans (by that I mean any loan for $450,000 or above) are beginning to think Man. Why am I keeping this house? I owe a ton of money on the thing, and it's worth about half of what I owe, and the market is never going to come back to where I break even on the thing. If I refinance or sell it, Ill have to write a huge check. Screw it Im outta here.
These people will also see that foreclosure is not an economically devastating event that they may have assumed it would be. Theyll gladly take the ding on their credit (a ding that a slew of other people had weathered) and move on with their lives.
Think about the ramifications of this act. Banks will get slaughtered, as these jumbo loans are a significant amount of revenues for them. The loss of said amounts could be catastrophic; more banks may be blown up as a result. Neighborhoods good neighborhoods will see a further loss in their property values, causing a domino effect. Finally, local and state governments will get killed with the loss of that property tax revenues. Schools, infrastructure and government employees will be laid off, and, as a result, more foreclosures will occur.
Christopher L. Markham is a general practice attorney. He can be reached at firstname.lastname@example.org.