Commentary: Financial Slavery Doesn't Work, Even in America

by Buddy Mix

I consider myself one of the lucky ones during the mortgage meltdown we’re seeing on Wall Street and across the United States.  I bought my first home in Los Angeles, California in 1998 for eighty-five thousand dollars.  It was a modest three bedroom fixer.  And I mean a fixer.  I spent the better part of a year getting it livable and then started on the landscape.  So, the price was reflected in the condition at the time.  I was confident I could turn my investment into more equity, but knew it was going to take work.  What I didn’t expect was to see the sudden rise in equity go unchecked.  From 2000 to 2006 when my home increased in value 500 percent.  That’s why by February of 2006 I had sold all my property in California and moved to the Blue Ridge Mountains.  I knew in my gut this couldn’t possibly last.

Now the banks are crying because people are defaulting left and right on their mortgages.  No surprise, property values are declining for the first time in 10 years and the ARM’s  (Adjustable Rate Mortgage) are coming due and mortgages are going up.  So what you see is the inability of folks to pay their mortgages and/or refinance their homes because they have no equity.  100 percent financing has gone the way of the dinosaur.  A fixed mortgage loan will only cover 80 percent of the value of a home.  So if you bought a home at five hundred thousand and it’s now worth four hundred and fifty thousand you have to come up with the difference if you want to refinance.  If you happened to get an adjustable rate for 100 percent of the value of the property, you’re in deep trouble.  In order to refinance your home you have to come up with the difference of the lost equity and instead of a 100 percent financing arrangement, (which are no longer available), the 20 percent difference.  That means lost equity plus lost lending power.  So in this example, you’d have to come up with the 50 thousand dollars lost in equity, plus the 20 percent down or 90 thousand dollars.  That’s $140,000 cash in order to refinance you home.

This may sound extreme, but it’s not.  It is very reasonable to expect a 10 percent correction in the price of homes.  In fact we’re seeing more than that right now, it’s just that you only hear about it a month at a time; 1 percent this month, 2 percent that month, half a percent the next.   Never the bigger picture, because reporting has to be responsible.  That’s too scary for the masses.  On a five hundred thousand purchase, 10 percent is fifty thousand dollars.  If you bought anything over that amount the damage only gets worse. 

Back in California home prices are dropping everywhere.  Foreclosure signs are popping up in every neighborhood.  The ripple effect to this depreciation is a frozen market.  People stop buying because they don’t want to be the next sucker holding the bag as the value in their home declines.  I personally have two friends who have lost hundreds of thousands of dollars this past year in equity.  As a result they have had to take a loss on the sale of their property because they couldn’t afford the mortgage increases.  For them it was sell of default.  Either way they’re on the street with a hefty loss. The deposit is gone, the interest is gone, the value is gone.   Buh-bye!

A recent article in the Los Angeles Times declared the default rate in California was up 800%!!!!!  At the same time people are loosing their homes, apartment rents are on the rise.  Why?  Well, if you could afford to service a mortgage, insurance, taxes, and utilities for a home, you certainly can afford an increase in rent.  It’s like sharks sitting and waiting for the bait to break ranks and widen the circle.  It’s just a matter of time before the feeding begins.  A two bedroom apartment next to the freeway in Woodland Hills on the third floor will cost you $2,500 a month.  Add utilities and you’re a little under a mortgage payment, but this time with no where to go.  And absolutely no chance of ever seeing your money appreciate.

Pundits will tell you that “Sub-Prime” loans only equal 1 percent of the overall housing market and theirs nothing to worry about.  Over 40 percent of homes are owned free and clear.  The housing market is in good shape.  Bah-Humbug!  These guys are living in class towers.  The problem with the rich is they start to believe their own press.  Lower the interest!  Raise the prices!  Then raise the interest again!!!!  That’ll make us all rich.  What they don’t seem to understand is there are not enough people out there to support their greed.  The masses can’t support financial slavery.  It’s been tried before, but it just doesn’t work.  Now reality is starting to set in.  Now the big guys are starting to feel the pain as more and more of the little guys go belly up.

Country Wide shares have gone down from a high of $45 a share in 2007 to under $25 a share.  The increase in share price was due to the increased interest returns and now the decrease is a reflection of the defaults hitting the market place.  Take that Country Wide!!! You and your cronies screwed me out of my American Dream now it’s your turn.  The fact is, when home values were increasing at a modest rate of 1 to 3 percent a year folks could live with it.   But when they started going up by 100’s of percents per year, well, it’s just not possible.  The pundits will tell you the “correction” is over, but I doubt it.  Just my gut, but I believe we won’t see the down ward spiral of home values until at least 2010.  Yeah 2010!  Don’t forget we have a war to pay for.

If you took out the extreme valuations from 2000 to 2006 and adjusted a home value from $125,000 at 3 percent per year, that same home would be worth approximately $3,750 more the next year or $128,750 in 1999.  Then again the next year add $3,862.50 (3%) and it’s worth $132,612.50 and on an on, etc until 2007 where the same home would be worth less than $200,000.  Of course that was a modest 3 bedroom home in a middle class neighborhood in Los Angeles in 2000.  Prices vary, but you get the idea.  We really got greedy.  Home Depots, Lowes, financial institutions, and yes Uncle Sam, (That’s us) will all have to kick in to pay the losses.  Can we do it? Of course, but at a price.  Financial slavery doesn’t work, not even in America.

Hunker down folks and keep your powder dry, now is not the time to buy.  I doubt even by next summer.  I think we’re a long way off from seeing the bottom of this housing market, but I’d be happy to be wrong, after all I have a home here in the hills I might like to sell someday.

 

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