While some forecasters are predicting a bottoming out of the housing slump, I watch wondering if it’s just beginning. My fundamental reasons for believing a more serious housing crash is on the horizon have yet to be dealt with, especially this one: mortgages far exceed the ability of Americans to pay them off.
The situation is worst where the housing market boomed the most, because that’s where the most “creative” home loans were taken out. Many of these loans involved low interest-only payments that will skyrocket this year.
California, which is one of those places where the most extreme loans were taken out, default notices climbed 145 percent in just three months, reports the Los Angeles Times. It was the largest jump in default notices since 1998.
Why don’t these borrowers just refinance? Excellent question, one that I wondered myself. It turns out that it’s near impossible to refinance a home if it’s value has dropped below the mortgage amount. After all, what bank would want to loan $800,000 for a house worth $700,000?
And if more Americans default on these homes, won’t their value go down even more? Oooo, does “downward spiral” spring to mind?
There’s even more downward pressure to worry about: In many areas, home prices have remained lofty even as supply has surged. Why don’t prices come down to meet lesser demand? Because many of the sellers can’t afford to. Nothing is worse than selling a home at a loss of say $50,000-100,000. Then you have payments to make AND no house.
The question becomes: Will sellers eventually flinch and drop prices? Most won’t if they have to take a loss. Instead, they will hold onto the house – like James Brown mentioned in the Time story – until they lose it.
After all, there’s always a chance a new job will provide a cash infusion that would let you keep the house. Plus, lenders are more inclined to cut a deal than take possession of a house that would be difficult to sell in today’s market.
We’re taking a wait-and-see approach this spring. We are debating the merits of staying in a city rental, buying a condo, or moving to the near-suburbs. Each has their negatives – the biggest being cost of private school versus cost of expensive home – and it’s hard to tell what the best choice is.