Foreclosures

   It has been estimated that there will be over a million foreclosures in America during 2012. So what do you do when your home is gone? For most people it will be rental accommodation or sleeping at the local vagrant’s drop-in and for the most unfortunate ending up in a tent, a car or on the street; however, some creative people have discovered other means of housing. The person in the video turned a garbage truck into his own personal living space.

 According to About.com:

With 1 million homes in the "shadow inventory," housing prices will remain depressed --- and so will homeowners! For some reason, the Federal government seems oblivious to this threat. Freddie Mac's Mid-Year Housing Report said that homes sales should increase, along with GDP and the economy.

Instead, just the opposite is happening. The shadow inventory is keeping home sales down, which is dragging down the rest of the economy. The Federal government needs to stop focusing on the made-up debt ceiling crisis, and do something constructive about the real crises - housing and jobs.

  Unfortunately the recent debt ceiling agreement has taken away many of the tools which the American federal government needs to address this problem. Obama may be talking about jobs but the emphasis of the agreement is on cutting spending. Those millions of people who are already on unemployment insurance will not get an extension. From Huffpo:

White House officials confirmed that there would not be an extension of unemployment benefits as part of the final package. The administration had insisted that an extension be part of the grand bargain it was negotiating with Boehner. But when those discussions fell apart, so too did efforts to ensure that unemployment insurance was part of a final package. A senior administration aide added that the president would push for an extension in the months, if not weeks, ahead.

 

   Small business employs the majority of the workers in America and it’s on the ropes. As CNN reported, many small business owners are pawning personal items to pay their suppliers and employees.

"We have lost a trillion in credit card lines. We have lost a trillion in home equity lines. And those are -- or were -- the two primary sources of financing," said Bob Coleman, editor of the small business lending industry publication, "Coleman Report." "There are different things that are filling that void until banks ramp up."

 

   There is still a credit squeeze for small business since the banks are requiring higher collateral for lines of credit and also expect a higher interest rate to be paid. This hurts businesses which have a fundamental structural imbalance since their expenses are current but their revenues are received over time. This used to be addressed by companies that specialized in bridge financing but many of these firms went bankrupt during the recession and the large banks that are left want to maximize their financial rent by taking it out of small business. This doesn’t bode well for the immediate future.

The last thing is that the homeowner’s mortgage tax deduction which is a huge financial gift from the federal government is on the chopping block and this alone will put tremendous downward pressure on home prices in the US. In the Kansas city newspaper:

First of all, the revenue the government forgoes because of the deduction is huge; more than twice the entire budget of the Department of Housing and Urban Development. And there are better, more cost-efficient ways for the tax code to encourage homeownership, economists argue. Plus, the benefits of the deduction go disproportionately to the upper middle class, whose bigger homes and mortgages bring bigger tax write-offs.

In fact, the average value of the deduction increases with income, from $91 for those who make less than $40,000 a year to $5,459 for those who earn more than $250,000, according to a 2010 report by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, two center-left research centers.

For most homeowners who take the deduction, the tax savings it provides doesn't make the difference between owning and renting. It simply helps them afford more expensive homes.

   Finally, most of the mass media are playing number games. The usually quoted figure is that 28% of homeowners in the States are “underwater” i.e. the debt on the house is greater than the current market value of the home but most sources don’t add the caveat that this is only the first mortgage and if you included second mortgages and home lines of credit the percentage of homeowners “underwater” is closer to 40%. This freezes up the housing market since most folks don’t want to sell their homes at less than their debt and lock in their losses. This stops people from selling down to a home that they can really afford. Also most families’ finances are one job loss or health issue away from a cash flow crisis which leads to a cascading series of financial events (overdraft fees, non payment of mortgages on time with overdue penalties etc.) leading to foreclosure.