Getting a new home

Man, people are just crazy.

So, we all know about the problems with the housing market now. Getting the most publicity are the thousand upon thousands of foreclosures, as variable rate mortgages become too expensive for the mortgagees to afford. Secondly, with much less publicity, are the crazy high prices of houses. Maybe I just happen to feel it more than most, since I live in a very expensive part of the country. But prices have been steadily growing beyond what the average person can afford for a long time -- now it's just insane.

The foreclosure mess started around 5 years ago. At the height of the housing boom, the 'Flip That House' frenzy was in full swing, banks wanting to make more money through more sales began lowering their mortgage rates to all-time lows. Many greedy banks would make their rates crazy low, but as a variable rate, so it could go higher later. So what happens is thousands of people are suckered into this variable rate mortgage, hoping to fulfill their dream of owning a home. 5 years later, the market can't handle those extremely low rates, and so these "adjustable rates" start adjusting back up to previous years' numbers. Some even higher. The problem with a few percentage points' increase is that, when you're talking about several hundred thousand dollars, even a 1% increase in your annual percentage rate can, depending on how much the house costs, result in $2500, even $5000 annual increase in the price. Go up 2-3% and you're easily talking about an extra $1000 a month. Most people simply can't afford that.
Here's some statistics (from the 2006 Census Bureau estimates).

• There are approximately 115 million households in the US.
  
• Median annual household income in the US is about $48k (pre-tax) What this means, is that the majority of Americans actually bring home much less than $50k a year.
• Approximately 19% of all households in American make more than 100,000. Chances are, you know someone who makes this much money. More likely, a few. But you probably don't, yourself. (if you do, share the wealth!)
• About 6.37% of the people in our nation make 1/3 of our nation's wealth. This is why we use Median instead of Mean-- it would mess up the numbers.)
• BTW, the Mean income is just over $60k. According to these stats, about 1/3 of Americans earn more than that.
  

OK, having said that, the second problem, once again, is the price of housing. As the 'Flip That House' craze came into full-swing, I probably had a dozen people tell me how stupid it was to continue renting, and that I should take the plunge and buy my own home. Why not, I can live in it for 3-4 years, then make 10-20k selling it! I can't lose! Well, a lot of people did just that. And what happens when you sell a house for more than you bought it for? Er... it becomes more expensive! So now you've got many thousands of people who can't afford their mortgage, and they can't afford to move into another home because everything's more expensive than when they bought it! This doesn't help the foreclosure rate at all. And it makes it that much harder for the majority of Americans to afford their own house.

There's one other problem when bankers get greedy. As the housing boom progressed (and the value of the dollar declined vs. the Euro and other major currencies), many foreign investment firms found it a great bargain to invest in American real estate. Now that the bubble has burst, the entire world is suffering. This hurts a lot of peoples' investments, including mine. I'm sure the long-term effect of international investing will correct itself, but short term, it wont be pretty. But this might mean a return (for a while) in government bond investments. They almost never lose money, despite the fact that the gain barely equates with inflation. Better to break even than to lose tho, especially if your investment is short-term.

Well, this is what happens when people try to live beyond their means. I'm not much of one to point the finger, because I've done it too -- but I've learned my lesson. That's what this blog is for :)