Let’s kick start this one with everything that is wrong with the world in a single run-on sentence: North Korea is threatening nuclear war, unemployment ticked back up to 9.8%, the average 30-year fixed mortgage rate jumped up to 5%, the Federal Reserve described their own progress towards our economic goals as “disappointingly slow” (nooooo, really?), the European Central Bank is resorting to quantitative easing immediately after they criticized us for the same dang thing, and Bernie Madoff’s son hung himself with a dog leash.
Yeah. What the hell, world. I thought we were all supposed to be in the holiday spirit or something.
Alright, in fairness things aren’t necessarily all bad. Stocks have been kicking booty lately. Many financial analysts are upping their forecasts for 2011’s domestic growth. Consumer inflation came in at a tepid pace of +0.1% in November for both headline and core readings (dragged down by rental deterioration, but we’ll ignore that and just be happy for low inflation for right now). Heck, Obama and the GOP finally agreed on a tax relief bill that passed Senate’s vote today. I guess Boehner’s heart grew three sizes that day.
Quick side note, have any of you noticed that every political news headline says something about “Obama and the GOP,” not “the Democrats and the GOP?” It’s like all the Democrats just became a conglomerated wart on Obama’s mighty backside. Uncool of them to make Obama face the Republi-cans alone, because Republicans have guns.
On that line of thought, I am interested to see what sort of aftermath results from Judge Henry Hud-son’s decision that the provision in our recent health care overhaul that mandates all citizens must carry at least basic health insurance was unconstitutional. That has ‘political bloodbath’ written all over it.
Anywho, the dead horse I would like to kick today is the pervasive state of negative equity in this country. Let’s be honest with ourselves: a lot of people are upside-down on their mortgages right now (they owe more than the current marketable value of the property). Some of them will either walk away or strategically default, but most won’t. And just because they’re upside-down doesn’t mean they can’t necessarily afford their payments. But I’ll guarantee you it is dissuading them from making home improvements. Without equity in their homes, they can’t leverage any more debt to finance big ticket item purchases. And they certainly aren’t going to move into a bigger place.
Think about the math: to sell your house and move up you would need
1) Enough cash to pay off the existing mortgage...
2) ...plus an extra 6% for the realtor’s fee…
3) ...plus 3.5%-20% (depending on what kind of mortgage you get) down payment…
4) ...plus closing costs for the new home purchase.
So, if you want to think about how many people are upside-down (or not right-side up enough) to clear that pile o’ bills, the number jumps from 22.5% of American homeowners to just shy of 50%.
Yet we somehow wonder why things aren’t exactly clicking along in the lovely land of real estate.
I don’t mean to gloom and doom you. I stand by what I said in an earlier newsletter about real estate returning to it’s normal pattern of slow and steady growth off of the floor we are putting in. All I am trying to say is that there is somewhat of a vicious cycle working in real estate that will have an enormous ripple effect across all industries. Housing isn’t just about housing: housing is about wealth.
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