For a brief time last week, there was some buzz on Capital Hill about Fannie Mae (and maybe Freddie Mac) essentially forgiving the negative equity in the real estate mortgage market. The idea has apparently perished for now, but they were basically saying something to the effect of if you owe $500,000 on a $400,000 home (that obviously was worth more a few years ago when you bought it), then you now owe $400,000.
I think it is an interesting concept that warrants discussion.
I am not smart enough to analyze the macroeconomic effects on the entire economy and whether bailing out more entities, institutions or debt-laden consumers with tax payer money is a good or bad idea. I will leave that to the folks who do these types of studies for a living. What I am saying, is in the micro, the idea has merit and this is why.
Right now, I would make the argument that there is the largest percentage of people in the US who are ‘incorrectly housed’ than ever before. I am pretty sure that ‘incorrectly housed’ is not an official statistic tracked by some agency (can you imagine the Incorrectly Housed Americans Department or I.H.A.D.) but if it was, it would track those people who are in houses that are either too small, too large, in the wrong location or designed in a way that no longer fits a lifestyle. This demographic of IHAD’s is larger than ever before.
While we have been living through the effects of an economic meltdown during which almost all economic activity ceased, other facets of life didn’t stop changing. Aging has not stopped…families expanding has not….children growing and leaving has not….children moving BACK home has not….moving to another city for a job has not….in other words, life has not stopped.
The inputs that define whether or not a home is efficient for your stage of life do not change because the value of the home has changed but the ability to do anything about it has. Living inefficiently has its own costs on the market that no one speaks about. Heating and cooling extra space and longer commutes are obvious negatives but what about the stresses caused on young couples living in condominiums or townhomes who now have children and a need for green spaces? It is a real issue and I can name countless examples.
The common thread in all cases is that the market is frozen in place and people are stuck. No amount of stimulus can fix it until you fix debt/equity ratio. As a seller, EVEN if you are able to break even on the sale of your home, the mortgage products that exist now to buy the next one are much more restrictive. Selling your house is a battle, but finding the down payment to go to the next home is even more challenging, and consequently, people stay in place.
Unlocking the ability to allow all of us match our houses to our situation will balance the market better than 3.75% interest rates. Interest rates, while low, do not erase debt or create down payments. Until those two factors are back in balance, we will not see balance in our market.
What do you think?
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