Bad Loans or Bad Homeowners'?
Koontz - The latest news from the Association of Realtors addresses one of the big issues with the slew of foreclosures occurring in this new housing market-the soon to be infamous, "refinance option".
This study is possibly a bit self-serving on the Associations side. When things go wrong in any endeavor there is first a need to assign blame and then there is a furious rush to duck blame. The most recent study by The Association of Realtors undoubtedly was undertaken with the hope that it would provide a way for Realtors to pass some of the burden of blame off their shoulders regarding the mess many of their clients find themselves in now. As it happens, and assuming the study is even half right, it was a good call on the Associations part.
What they found is that at least half of the homes that went into foreclosure in the last quarter did so because the homeowners refinanced their homes (on average, twice!), pulling out the equity the high housing market had given them. According to our local Association's president, homeowners used their houses "as the new ATM".
The results were higher loans on houses, no equity in the properties and often, no improvements in the houses. In other words, the equity pulled out was not reinvested in the property. Homeowners instead counted on a continuing rising market, which would have kept their home values at pace with their loans.
But that's not what happened. Instead, the market stalled and then slumped and home values started falling. Now owners have large loans on houses that don't appraise for the amount of money loaned against them and the equity has long since been spent on...what?
Everyone may have the latest flat screen TV now, but soon they may have no where to put it. (are flat screens the latest??? You get the idea, right?)
The dream of owning a home, that 'ole "great American dream", was until very recently, a long-term dream. You bought a house, spent 30 some years paying for it and by the time you retired, if all went as planned, you actually owned your home and when your income necessarily dropped because of retirement, you had dispensed with the largest part of your monthly expense-your house payment. It all seemed to work out.
But something has changed with the next generation of homeowners. Owning a home is seen as a means of increasing income in the short term. It's like a shell game. Buy, sell, buy bigger, refinance, sell, buy yet bigger.
In an earlier post on this blog, my partner, Jodi, talks about when you should remodel a home. She is pretty stringent-telling folks that not until your kids' college fund is financed do you invest money in "the good life" by investing in a remodel. I thought Jodi was too stringent, now I think she was the harbinger of things to come-like the ghost of Christmases to come.
It is never wise, regardless of the market, to exhaust the equity in your home. Your home is literally your port-in-the-storm. There are obvious emergencies where taping into your home equity may be your only option and the point is, you want that option to be there if you need it.
This may be advice that comes far too late for many-but for the few---pay attention. Remodeling is a luxury, not a necessity. We need to get back to that mind-set and be content with analog rather than high def. (Well, as long as they'll let us anyway).
This study is possibly a bit self-serving on the Associations side. When things go wrong in any endeavor there is first a need to assign blame and then there is a furious rush to duck blame. The most recent study by The Association of Realtors undoubtedly was undertaken with the hope that it would provide a way for Realtors to pass some of the burden of blame off their shoulders regarding the mess many of their clients find themselves in now. As it happens, and assuming the study is even half right, it was a good call on the Associations part.
What they found is that at least half of the homes that went into foreclosure in the last quarter did so because the homeowners refinanced their homes (on average, twice!), pulling out the equity the high housing market had given them. According to our local Association's president, homeowners used their houses "as the new ATM".
The results were higher loans on houses, no equity in the properties and often, no improvements in the houses. In other words, the equity pulled out was not reinvested in the property. Homeowners instead counted on a continuing rising market, which would have kept their home values at pace with their loans.
But that's not what happened. Instead, the market stalled and then slumped and home values started falling. Now owners have large loans on houses that don't appraise for the amount of money loaned against them and the equity has long since been spent on...what?
Everyone may have the latest flat screen TV now, but soon they may have no where to put it. (are flat screens the latest??? You get the idea, right?)
The dream of owning a home, that 'ole "great American dream", was until very recently, a long-term dream. You bought a house, spent 30 some years paying for it and by the time you retired, if all went as planned, you actually owned your home and when your income necessarily dropped because of retirement, you had dispensed with the largest part of your monthly expense-your house payment. It all seemed to work out.
But something has changed with the next generation of homeowners. Owning a home is seen as a means of increasing income in the short term. It's like a shell game. Buy, sell, buy bigger, refinance, sell, buy yet bigger.
In an earlier post on this blog, my partner, Jodi, talks about when you should remodel a home. She is pretty stringent-telling folks that not until your kids' college fund is financed do you invest money in "the good life" by investing in a remodel. I thought Jodi was too stringent, now I think she was the harbinger of things to come-like the ghost of Christmases to come.
It is never wise, regardless of the market, to exhaust the equity in your home. Your home is literally your port-in-the-storm. There are obvious emergencies where taping into your home equity may be your only option and the point is, you want that option to be there if you need it.
This may be advice that comes far too late for many-but for the few---pay attention. Remodeling is a luxury, not a necessity. We need to get back to that mind-set and be content with analog rather than high def. (Well, as long as they'll let us anyway).
posted by Remodeling Repartee at 7:26 AM
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