November 4, 2007

Unaffordable Mortgages

Andrew Jakabovics explains the mortgage crisis from the perspective of the home owner:
Many families who bought homes using an adjustable rate mortgage in the past several years face a Catch-22 situation highlighted by today’s home sales and price data: they face a rate reset with payments they can’t sustain, they will have difficulty refinancing their current mortgage because they now have negative equity, and they will be unable to sell quickly because of the glut of homes in the market.

This mess was predicted years ago. Back then, when debating whether or not there was a real estate bubble, I asked skeptics the following question, "How many times have you heard a friend or work colleague say, 'At today's prices I couldn't afford to buy the house I currently own.'" You didn't need higher math or economics to know we were facing a bubble.

In his October 24, 2007 piece on the Center for American Progress web site, Jakabovics looks over the horizon to see where this is going:

There are more than 2.8 million families with mortgages that reset in 2007 or 2008. The average monthly payment these loans will spike 37 percent when the reset happens. It is estimated that the new payments will cost the average family an additional $10,000 per year in mortgage costs.

At an average of 2.6 people per household, the 2.8 million families cited above translates to over 7 million people directly facing foreclosure in the next year or so, or about 2.4% of Americans. Many more millions of friends, relatives and work associates will be indirectly affected. Many marriages will fail and jobs will be lost in the process. Some will act out in violence and others will commit suicide during their ordeal. This is just another example of the disparity between the Main Street economy and Wall Street economy.

The Federal Reserve is pumping money into Wall Street, but little of that is trickling down to Main Street. Instead, the money is being used to offset the losses of large finanical institutions. These institutions are too large for the Fed to allow them to fail (read "monopolistic").


Center for American Progress, Andrew Jakabovics on New Housing Numbers, October 24, 2007.

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