54% of Americans own their own home. This is marvelous! Of course those 54% don’t own them free and clear, but theoretically, if they make the payments for probably 30 years, they will have them free and clear. Free and clear is a total misnomer of course, because we must all pay our dues to the local school board, county, city and state, for their property taxes. A pretty good average of one’s property taxes in the states, shows that about three quarters of it goes to the public school system. The public school idea, like communism maybe, or socialism, was thought to be a great idea. Like communism and socialism, it just hasn’t worked out, and can’t work out, because if there is no profit motive, nothing can be efficient.
Still, there is a certain comfort in knowing that if one makes the payments, one is secure. Or are we? Real estate prices have gone up for decades, and most practitioners of the real estate sales profession, will tell us that they will go up forever, that your home is your castle, and it is not only life’s biggest investments, but the most secure. It has proven to be so for so many years, that like the stock market, no one ever thought it would not be so always. As the NASDAQ reached 5,000 and the Dow 11,000, all but a few figured we had arrived at a new economy, which would go on forever, and never go down. There were a few of us who realized that with no profits, and huge increases in stocks that were new, IPO’s, and whose prices had gone straight up, there had to be a correction. There was, and $5-7 trillion was lost. $5-7 trillion simply evaporated, bankrupting many, and ruining hundreds of thousands of retirement plans. “Well, at least we have real estate,” might have been the comforting thoughts of most.
I live in a $500,000 house which I paid $150,000 cash for 13 years ago, and have spent maybe $50,000 on it. I have $200,000 in it. Built in 1887, a wonderful brick Victorian or 3350 square feet, with huge trees surrounding it, and hundred year old lilacs. Great, but why did the house “go up” in value? Did it really go up in value, or just price? My son had a 2600 square foot home in Southern California, which he paid $455,000 for, and which he sold for $700,000. He had improved it a lot, but still had less than $500,000 in it. If he still had it, it may now sell for $750,000 or more. He figured that California prices were so absurd, that he had better get out while the getting was good. The problem with markets in a screwed up economy like we now have, is that no one knows when to “get out.” No one can predict tomorrow. We can only look at the facts and make decisions which we think match the facts. I knew silver and gold would go up, and especially silver. I was correct. I knew the stock market would crash, and I was correct. I think the Dow will go lower than its previous 7200 also. Maybe at 3,000 it will cross gold at $3,000. I think that is a distinct possibility. No one knows what will happen in the future. If we did, we could all be billionaires. Currently, there is a lot of flack about the potential of Yellowstone blowing up as a huge volcano. It may happen tomorrow, and it may not happen for a hundred years. No one knows. As far as real estate is concerned, we do have some facts that to me, are alarming.
My home will never be sold, because I love it and the small town in which it is located. Besides at 70, no one wants to move. It’s too comfortable staying put if the “put” is pleasant, as is ours. But suppose one is a middle age person, say of 40, with a wife and three kids. Suppose their home is a $200,000 home, with a large mortgage of say $185,000. They bought it with low down payment, and to make it easier to pay for, they got an ARM. An ARM is an “adjustable rate mortgage.” The interest on these is considerably lower than for a fixed 30 year mortgage. Maybe even a couple of percentage points lower, and in a $185,000 mortgage, the interest alone is $11,100 per year. In an ARM of 4% the interest is only $7400 per year, or $308 per month less. Our family maybe used the extra $308 lower payments to buy a new car, furniture, or other luxury. Now that mortgages are plentiful, perhaps they were coaxed into taking a second mortgage out for the full $200,000 current selling price of the house, thereby adding additional payments. So far, so good.
ARMS are held by 20% of Americans, it is estimated. These run for a maximum of five years, and sometimes as little as two. In other words, these mortgages must be re-financed at the end of the ARM period. Will interest rates be higher at the end of these millions of ARMS? I say they will, and the higher interest rates will make continuing the ownership of the home difficult. Mom is already working, as well as Dad, to keep current now, and if interest rates went up 2%, plus settlement charges and points for a new mortgage, it might well be a nut that is impossible for our family to crack. My point is that 20% of Americans with mortgages have ARMS, and even Sir Alan has said that interest rates will go up. Within five years then, hundreds of thousands of Americans could be at the breaking point, even if they hadn’t lost jobs, had property taxes and insurance rates go up, or other unforeseen circumstances. That worries me.
Then there is the employment situation, which not only is not getting any better, but daily more and more jobs go overseas, more factories close down, and it seems as if the only jobs being “created,” are in government. Having just returned from Washington DC where I grew up, I can assure you that DC is really swinging. Government grows daily, and hires more and more. The home I grew up in, is a 6 bedroom row house of three stories in a good neighborhood, which my parents bought for $3500 in 1935, and sold for $16,500 in 1956. The current owner paid $235,000 for it a few years ago, and says she can possibly get close to half million for it now. Is it the same house? No! It has been ruined as far as I can see with stupid ’modernization,’ which involved cutting floors out to “open it up.” A once beautiful home with fancy woodwork, two beautiful fireplaces with ornate mantles, etc is now a “modernized” mess, that may command $500,000. In DC, housing may be secure, thanks to government and its acolytes, hangers on, and devotees, (all on various payrolls), but I am not so sure about Philadelphia 140 short miles north. Philly is a disaster.
Jobs are fleeing the US people. Factories are closed, or are still closing, and when white collar, blue collar, and even tax preparation jobs leave, there will be far more than the current 5 million unemployed, which is the “official” figure. When jobs disappear, incomes do the same, and payments become difficult or impossible to make. Bankruptcies and foreclosures are already at record levels, and they will only go higher in my opinion. If they do go higher, and homes are left to mortgage holders, they will want out, and want out quick. They will put the foreclosed residences on the market pronto, and as long as they can get more than is owed, a sale will be completed very fast. There could be hundreds of thousands of homes listed for sale, if times get worse. With lots for sale, and few to buy, guess what happens to prices? The same as happens to a stock market, or any other market, when there are lots of sellers and few buyers. Prices go down.
If these hundreds of thousands of houses, which are mortgaged to the hilt, go on sale because of foreclosures, our family may find their home is worth many thousands less than is owed. Suppose they keep their jobs, but several in the neighborhood don’t? Suppose several homes go on sale, and are difficult to sell? Prices will go down till buyers are found. If you owed $200,000, and your home was saleable for $150,000, and you had a 30 year mortgage, what would you do? You’d probably try to sell, thereby exacerbating the situation. You’d want to get out, so you could take your cash and buy either a better or cheaper home with lower payments. This is when a real estate crash can happen, and it would really be scary. More next week. Protect yourself.