On March 28, 2008, The Wall Street Journal published a piece by Michael M. Phillips on the destructive behavior of an alarming number of disgruntled homeowners that have found themselves in the final throes of foreclosure and have taken it upon themselves to trash properties extensively prior to eviction. According to the report, and attributed to Campbell Communications, “real estate agents estimate that about half of foreclosed properties to be sold by mortgage companies nationwide have ‘substantial damage.’” The story later notes analyst predictions that “as many as two million homeowners could enter foreclosure this year.” If this prediction holds, as many as one million homes could be vandalized.
What is striking about the report is the sketch that it gives of the collective character and behavior of as many as half of all foreclosed homeowners. Mortgage lenders – a popular piñata in political circles these days – are looking at a potential scenario where they will have to hold the bag on the costs of repairing as many as one million homes. This scenario points to the underlying question of homeowner – and prospective homeowner – judgment. The homeowner that would resort to inflicting damage to property in the face of a foreclosure is demonstrating the same poor judgment that has become amplified through the financial markets to date.
This amplification is the undercurrent of the current recession – and it brings forward another question. Is the
In October 2006, Bankrate attempted to take a closer look at the national savings rate. “According to the BEA (Bureau of Economic Analysis), the national annual savings rate fell in 2005 to its lowest point since the great depression: negative 0.4 percent. Since then, it has continued to fall, registering negative 1.6 percent in May 2006 and negative 1.5 percent in June. Compare those numbers with 1985 when the national savings rate hit a record 11.1 percent and it is clear why economists are raising the warning flag.” The Bankrate analysis dug further into FDIC records during the same period and came to the opposite conclusion – on the surface – that American banks had more cash reserves than “at any other point in recent history.” The problem with the FDIC statistics is that they do not differentiate between personal and corporate deposits. So, the banks looked healthy – awash in corporate money – while the average consumer continued to pile on debt and eat away at savings.
Add predatory lending practices – as it has been termed in the media – into the mix, and bad judgments among debt seekers and lenders are yielding broader-scale meltdowns. This is at the heart of the recession the nation is experiencing. But was the American housing market in a bubble or were the wrong candidates buying homes?
Progressive analysis group, Tompaine.com, provides more color. “In 1964, existing homes sold for 3.32 times median income. By 2005, the housing bubble had priced existing homes at 3.78 times median income. Not much of a bubble. Moreover, mortgage interest rates in 2005 were less than 1 percent higher than they had been in 1964. That means that housing overall is about as affordable as it was 40 years ago.”
The U.S. housing bubble appears to be a fallacy, but the hard fact is that American consumers have acquired large-scale debt – well beyond their means – and this acquisition of debt is only know showing its face. The core policies of federal, state, and local bodies have centered on bail-outs and finger-pointing – but given the cultural scale of the financial ignorance directly tied to this recession, it may be more prudent for the government to focus on educating its citizens and enforcing guidelines on affordability.
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