My daughter's bad news for the housing market

Celeste, my daughter, lives in southern California. A middle-class Hollywood neighborhood, to be precise.

Recently she gave me an update on the dismal mood of homeowners down there -- an attitude that doesn't bode well for the economy in general, given the importance of the housing market.

Celeste and her husband both have good jobs, for which they're thankful. They bought their house, after selling a condo, at close to the top of the housing bubble. Now their home's assessed value approximates their mortgage balance, since values have dropped considerably the past few years and they wisely put 20% down.

It was surprising to hear my daughter talk about how renting is the dream of southern Californians now. A couple she knows was able to sell their house before the market began to sink like a stone. They're renting a very nice place and looking forward to moving to an even better house when their contract is up.

Celeste said that for the price of their mortgage payment, they could rent a much larger house. Figures, I guess, given how tough it is to sell a house in southern California (or just about anywhere) these days.

According to Celeste, homeowners in her neighborhood are in a funk. They (and she) feel trapped. Mobility, such as moving to take advantage of a better job, is at a standstill. Whereas before people looked at home ownership as a way to get wealthy, now their houses are an anchor dragging down their net worth.

Most disturbing to me was the tale my daughter told about trying to get a home equity loan from the bank they've done business with for a long time.

Again, she and her husband have good jobs. They did things right with their mortgage: 30 year term, 20% down. They have little debt besides their mortgage. In short, they're the sort of solid people who are the backbone of our country's middle class.

They wanted $100,000 to remodel their small, 1920's era Hollywood home. Their daughter will be four next year; a family room and additional bedroom are badly needed. Plans in hand, they sat down with a bank employee.

"Nope," he said. "Why?" they asked. "The loan would be guaranteed by your signatures [salaries, I assume he meant}. That's the sort of thing that got us banks in trouble before."

Geez, deeply irritating.

Financial institutions got themselves in trouble by lending to people willy-nilly, and then trading those mortgages like they were Monopoly money, making huge risky bets. And now you're telling people such as my daughter and her husband, who had nothing to do with all that crazy wheeling/dealing crap, that they can't get a loan for a remodeling project that would give some construction guys some much needed work?

I'm no economist, but something is screwy here.

Banks are getting essentially free money from the Federal Reserve. They pay zero interest, or close to it, for the money that could be lent out. Yet they're sitting on it, choosing to say No! to people with solid jobs and decent incomes who want to invest in some home improvements (or business investments).

My daughter is a strong Obama supporter. But she clearly is disappointed with how economic recovery policies are tilted toward Wall Street and away from Main Street, where she and her family figuratively reside.

Sure, the housing bubble had to burst. The market is southern California, as elsewhere, was way overheated. However, now it is way too frigid, from what my daughter tells me.

When people are depressed about home ownership, they're not going to be eager to buy other big ticket items. So until the housing market shows some signs of life, the economic outlook for the U.S. will be pretty dismal.

Banks aren't helping, from what my daughter tells me. They should be leading, given all the aid Congress and the Federal Reserve have thrown at them.

Comments

[Randy]

The really bad news is that the housing market has not hit bottom and will probably not come back in our lifetime.

See Chris Martenson's Crash Course and the Damon Vrabel lectures on You Tube.

The only decent strategy for many upside down homeowners will be to walk away and go rent that larger home.

[Blogger Brian]

Randy, my daughter said the same thing, but I forgot to mention it. She told me that she knows quite a few people who are walking away from their southern California mortgages. I asked about what this does to your credit score. Apparently after seven years, or whatever, the walk-away is expunged.

Regardless, these walkers can't think of anything else to do. Otherwise they're stuck in a crappy situation, seemingly forever (or at least a very long time). Like you said, renting is the new buying. Meaning, the advice used to be, "Buy a home, you can't go wrong." Now it is "Rent a home..."

[tucson]

Surprisingly, people are making money in this market according to my accountant who has clients who do this. Guess how? Flipping! Yes, it is still possible if you buy right. Some forclosure deals are below market value, even depressed market value. Add a little paint, mow the lawn, patch the holes in the drywall put there by the previous vindictive, frustrated owner and, viola', you have a house that will sell for market value which could mean a profit 4U. But you better know what you're doing.

Another thing that is happening is that the banks are letting upside down owners stay in the house even though they can't pay the mortgage. This is happening to a friend in Ashland, OR. The bank can't sell the house even for the outstanding mortgage amount, so rather than take a loss they are letting him stay in the house figuring he might get back on his feet and start paying again. Also, since he is the owner, the logic is he will take care of the house if he has a chance of staying there. But this won't last forever. He's prepared to get the boot.

Finally, you can buy rental property at foreclosure prices. An attorney friend bought a triplex this way. He has full occupancy and a positive cash flow.

Unfortunately, I agree with Randy. Prices probably have not hit rock bottom and won't appreciate for a long time, except in certain areas. There's always money to be made somewhere, somehow.