By ‘End Times’, I’m not referring to the significant global decrease in food production, or the Far East trade war over sand (I’m not kidding–Indonesia has declared a sand embargo against Singapore). Putting those two news items together does have an apocalyptic feel to it. No, what I’m referring to is that mortgage foreclosures and homeowner vacancies have reached record highs (also see here).
Over at Tapped, Dana Goldstein describes a cause of the phenomenon:
The story is always the same: clever marketing campaigns prey on families in blighted neighborhoods, promising them the American dream and then some. Once the potential buyers are reeled in, developers and lenders offer short-term perks like reduced or even free rent and make outsize promises about the property’s potential value. And when these working class families agree to buy, they are often overcharged, even as they rely on subprime loans, since low credit scores mean they can’t qualify for conventional mortgages.
…When financially insecure families purchase a home through an adjustable-rate mortgage, they become more likely to foreclose, not less, as the value of their property increases. When the housing market booms, interest rates go up, shifting the value of the home from the borrower to the lender as monthly mortgage payments increase. Since incomes aren’t growing as quickly as other sectors of the economy, people aren’t able to keep up with their bills. The result is a crippling cycle of debt that prevents families from climbing back onto the real estate ladder.
One of the supports of the housing bubble has been the oversupply of credit to those who, frankly, probably should not have it. As this ‘shaky’ money floods the market, housing prices rise. (an aside: call me old fashioned, but I always thought that home lenders wanted solid loans with a high rate of repayment, not shaky ones. Perhaps that no longer applies in the era of usurious credit card fees?).
If we protect consumers from foreclosure, this would dry up this source of credit, furthering the housing construction stall (and lots of bad things would happen there). On the other hand, artificially high housing prices based partially on a supply of ‘shaky’ credit is bad too. If you compare the number of divorces and the number of foreclosures, they are roughly equal; both can be traumatic for children. On the economic side, high levels of housing debt for the middle class does not help consumer spending.
I don’t see any good way out of this.
Update: to her credit, Sen. Clinton has raised this issue and offered solutions, although I think a better solution would be stricter regulation on the terms of loans that lenders can offer.