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").

Sources:

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

Main Street Economy vs Wall Street Economy

Oh, the economy is doing great. The Dow Jones Average just passed 13,000.

Another interpretation has it that the US Federal Reserve is facing a crisis, and that the Dow Jones is a reflection of that. Seems like a conundrum until one considers the following chain of events.

Back in 2002 the stock market took a dive. A lot of money ran out of stocks and into real estate, swelling a speculative bubble of historic proportions. Now, the real estate boom is deflating and is causing defaults among home owners, mortgage companies and global anxiety reflected in a worldwide stock plunge back in March 2007. The Federal Reserve stepped to buy bonds, thereby pumping money into the banks that sell the bonds, which in turn put some of this into stocks, and Voila! Wall Street economics look great. Unfortunately, it's artificial, and the people on Main Street aren't sharing in the so-called great economic situation.

Worse, the Fed is stuck between an rock and a liquidity hard place. This is a new version of "stagflation." The Fed wants to tighten money supply due to inflation concerns; however, it's forced to increase money supply for the reasons described above. In other words, the economic situation is out of control. Add on top of that the global imbalances in which the US has become a major debtor nation with a weak tax base by which to service its debt, and the Wall Street economic indicators start to look pretty hollow.

Update:

On May 6, 2007 we read the following in an Associated Press article:

Still, worries linger about stagflation — slowing growth amid soaring prices — and what the Federal Reserve would do about it.

We also read the following, which reflects the disconnect between the Main Street Economy and Wall Street Economy:

Recently, it has seemed as if nothing can derail the stock market's climb....on Friday, reports that Microsoft Corp. might be mulling a buy of Yahoo Inc. nudged stocks higher despite lackluster jobs data.

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