Friday, September 26, 2008

15% of American Mortgage Owners Spend 50%+ of Income for House Payments

Just a staggering figure - even surprised me. Again, I truly think many on Wall Street have no idea what is going out in "Middle America" - I've repeated that countless times since summer 2007. Those who simply want to live in a home have to "pay up" to the same level the levered speculators drive up the local market, just to live in a home. Normal people (teachers, policemen) with normal jobs could not afford homes in many of the top 15 markets in America - northern VA, most major cities in CA, Seattle, NYC, parts of New Jersey, parts of Florida, even Phoenix, Portland and the like caught up at the tail end of the bubble. [What Should Median Home Prices be Today?] The sick thing is the government, with its continued interference is trying to stop home prices from falling - which would help many in the country by lowering their cost of living. Of course at the expense of those already in homes.

But this is what an era of easy money and low interest rates creates. Combine it with financial illiteracy that swamps the nation and you have "the Black Swan" event. And all the actions we are doing now, will create moral hazards and unintended consequences which will create the Black Swan of 2014-2015. Humans are nothing if not predictable.
  • Al Ray is so strapped for cash, the only time he eats out is on Wednesday or Sunday, when the local McDonald's sells hamburgers for 49 cents. Ray lost his engineering job last November, and has been working as high school tutor, scratching out about $1,000 a month — if he's lucky. He struggled to make his $1,400 monthly mortgage payment and $330 monthly homeowners' association fee until May, when he stopped paying. Ray, 44, is looking for work and renting out a room in his two-bedroom condo in Davie, Fla., for $500, but his monthly income doesn't match his expenses and he's facing foreclosure. "I barely have money to survive," he said.
  • Ray is one of more than 7.5 million people — almost 15 percent of American homeowners with a mortgage — who are spending half of their income or more on housing costs, according to 2007 data released Tuesday by the U.S. Census Bureau.
  • Traditionally, the government and most lenders consider a homeowner spending 30 percent or more of their income on housing costs to be financially burdened. But that definition now covers almost 38 percent of American homeowners with a mortgage — 19 million of them.

  • Though home prices have fallen this year, in the most expensive markets where home prices tripled during the boom, many working families still cannot afford to buy a home The data underscore the serious affordability problems in this country and highlight how the slightest financial problem — from a lost job to higher gas prices or insurance premiums — can put a family behind on their mortgages and into the realm of foreclosure. (sort of like the slightest health problem for the uninsured sends the same people into a financial death spiral)

  • But now, an estimated 10 million homeowners owe more on their mortgages than their homes are worth (we call these the "underwater" owners - and we predicted a year ago this number would swell - it will swell even further during the next 10-20% drop in home prices)

  • Dolly Hanna, 51, and her husband, who bought five homes in the San Francisco area over the past 20 years, and were enjoying life during the housing boom by renting them out. But her husband's overtime at his mechanic's job was cut, and the Hannas now find themselves overextended at a loss of $15,000 per month and trying two sell two of the homes. Getting a loan during the boom was easy, Hanna knows. Too easy. "All you had to was massage the information enough to fit it into their round hole, and they gave us a mortgage," Hanna said. (remember, regulation kills innovation - all regulation must end)

  • In San Francisco, more than one out of five homeowners with a mortgage spends half or more of their income on housing. That's also true in 13 more of the largest 100 metro areas analyzed by the Associated Press. Other places include California metro areas of Stockton, Los Angeles, Riverside, Oxnard-Thousand Oaks, San Francisco, and San Diego. Also in the top 10 are the Fort Myers, Sarasota and Orlando metro areas in Florida, and New York-Northern New Jersey-Long Island

  • Harvey, 64, lives on about $3,300 a month in social security and disability payments for herself and her four disabled grandchildren. She nearly lost her home this summer after her adjustable rate mortgage payment jumped. "I did not understand that in two years, this would adjust out of control," she said. "Nobody deserves what I've had to go through." (nobody appears to have the time to read documents that are longer than 1 page - even if it contains a loan for $200K, $300K, $400K - it is "just too hard")

And the latest data from CA is in...
  • California home prices tumbled a record 41 percent in August from a year earlier as foreclosure sales pushed down values in the biggest U.S. state. The median price of an existing, single-family detached home fell to $350,140 and will likely fall further, the Los Angeles- based California Association of Realtors said today in a report. Sales increased 56.7 percent from August 2007 and 1.8 percent from July.
  • More than 101,000 California households received a default notice, were warned of a pending auction or foreclosed on last month, RealtyTrac Inc., a seller of default data, said on Sept. 12. That was a third of the nation's total and represented one in 130 homes in the state.
So bulls will spin this as "sales increase 56.7%!"
Bears will spin it as "home prices fall 41%!"
Both true, but it is funny how economics always works in the end - lower prices will stir demand. Funny - the government simply does not want that (lower prices) to happen. Can't wait to be the proud owner of all these defaulted mortgages.

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