When is the "Recovery"????? Where is the end???

This needs to be addressed as it is the most common question to real estate professionals and economists in newspapers, radio programs, and news programs on TV.

"When is the recovery??? DO you see a recovery in sight??? When will the foreclosures and economic difficulties that we are experiencing end?"

People ...

I have to break it to you ...

THERE IS NO CRYSTAL BALL 

It does not exist ... no one can give a conclusive answer to that question. 

But ... at the same time ... when using simple knowledge of economics, arithmetic, and just plain old common sense ... we CAN come up with a plan to move to the end of this meltdown a little quicker.

But before any real solutions can be explored and presented - we need to understand how we got here in the first place so we can learn from our mistakes and try to not repeat them.

The real estate market is one of the very last truly "free markets" ... the pricing of real estate is set by what buyers are willing to pay for properties and not much more than that. It really IS that simple. Add to this the fact that real estate and the use of it for the most part provides the most BASIC of human needs ... shelter. Residential real estate is not a luxury therefore ... it is a necessity. Now ... there are LUXURY real estate properties that provide a whole lot more than just shelter - but basic shelter is and always will be the primary use of residential real estate. The point is that people need real estate for shelter - that is the logical part of this free-market equation ... but they will also pay for more than just the basic shelter needs according to their own preferences, lifestyle, and emotional needs. Logic dictates the need ... emotion and circumstances dictate the price. That is why in many cases ... logic would dictate that a simple house near decent schools with comfortable living spaces and at a price that allows for an income buffer in the household budget is ideal. But the other part of the equation is the emotional one - the emotions that say we need to show others up with what we HAVE instead of who we are. The emotions that say we have to have it all and have it all now. The emotions that say we are indispensible in our careers and will never have to worry about not being able to afford anything we really want at any point in our lives. And the emotions that trully just plain fall in love with the property and believe that no other could possibly make them happy. It is the emotional side of the equation that put this crisis in motion many years ago.

And what has happened???

Lenders KNEW very well how strong the EMOTIONAL side of the equation was and how much of a part it truly made in making the decision to buy that property no matter what ... especially the emotions that say in America ... we can have it ALL and we can have it NOW ... it does not matter if we can truly AFFORD it or not ... the answer is to borrow a great deal of money to MAKE it happen now. Not work hard and save ... GET IT NOW ... figure out how to pay for it later. Lenders knew this and they took advantage of it ... but people did not use their logic either ... they used their emotions. Logic would have kept many loans from even being considered by borrowers had they been thinking logically instead of emotionally.

So ... here we are learning some very hard lessons ... as a country ... together.

The first lesson we have learned is that money is not free - it is not cheap - and in fact it can be very very expensive. We learned that the mortgage we thought we could afford and would figure out how to afford later when interest rates on ARMS adjusted (maybe get a second job). When a house is mortgaged and interest is ammortized ... the borrower essentially pays THREE TIMES what the amount originally borrowed was when everything is said and done. Now think about that ...

THREE TIMES

Has it sunk in???

If you bought a house for 100,000 ... when you have made that last mortgage payment and stayed there the entire time ... you would have paid the lender back the 100,000 PLUS an additional 200,000 in interest payments. Do you realize that the lender then makes about 200 times their initial investment? Where else can ANYONE get that kind of return on invested money - show me - 200 percent return in total. The lender is NOT making 5, 9 or even 12 percent in REALITY ... 5 percent would be a total of interest paid back in the amount of only 5,000  -  9 percent would be 9,000 and 12 percent would be 12,000. 200 percent ... people are signing up to pay a total of 200 percent in interest payments for the very BASIC need of ...  


SHELTER


No ... logic cannot possibly be the driving force behind the willingness to pay a total of 200 percent back in interest on borrowed money.

But ... with that said ... people are so mobile now that we move several times in our lifetimes these days ... the chances of that mortgage being paid for the entire terms are slim to none. The lenders KNEW this too ... (are you starting to realize that a great deal of psycology and study of modern human behavior plays a great role in how these loans are structured to begin with?) ... and because they knew that people will not sit still too long for the most part in one place ... they decided that the MAJORITY of their interest payments would be paid in the first several years of the loan. I just finished a payment history analysis of one client who was shocked to realize that out of over 60,000.00 in total payments to her lender ... her principal paid was only 5,000.00. The original loan was for 500,000 which means she truly OWNS at this point ... THREE years later ... 1% of that house free and clear ... she owns the south-west corner of the living room and nothing else. After this reality was discovered and the initial shock wore off - she said that if the bank tries to repossess the house ... she is taking that corner with her and they can have the rest.

No ... money is not free ... and as hard as so many people work to pay that mortgage ... thinking that they are working to OWN their home - the truth is that they are really just leasing it from the bank that lent them the money to buy it. Three years and 60,000.00 later ... one client of mine OWNS 1% of her home ... the BANK owns the other 99%.

What an expensive lesson to learn about what money REALLY costs and how tens of thousands of dollars are spent to in reality - only RENT-TO-OWN our homes from the lenders.






This topic will be continued tomorrow ... much more needs to be said ...



Maureen