Another hot and humid Monday in Philadelphia! As I try to stay cool, drinking my iced coffee and reading the latest tweets and articles, I came across a rather depressing story on Philly.com. The article was about the hidden homeless in New Jersey, living in motel rooms that cost New Jersey $85 a night. One dad, who recently found a new job, lived in the motel with his 5 children. At $2550 per month you can’t help but wonder wouldn’t it have been cheaper to find an apartment for this family? This problem is not limited to just the homeless, we speak to many holders of structured settlements and annuities who end up living in motels because their situations change, be it a divorce, job loss or just a rough patch in their lives.
Homelessness and budget deficits are serious problems in this country. There are so many people who are unemployed or underemployed struggling to get by. Many states and charities are seeing an increase in people seeking assistance, yet their budgets have been severely cut. Times are tough for everyone and many people are doing less with more. So many bloggers and journalists have been writing about ways to stretch your dollar, how to budget as well as how to save. Yet this doesn’t seem to be the case with government.
In a groundbreaking study by the Department of Housing and Urban Development (HUD) in March 2010, HUD discovered that it was more cost effective to help the homeless obtain apartments instead of housing them in temporary solutions. Housing experts suggest that the housing bust and job losses have swollen the ranks of the homeless. Many are families who don't have the same mental illness and substance abuse problems of the chronically homeless. Obviously there is a need to address this situation from a cost stand point but the nation as a whole need to address how these people got into this situation in the first place.
Job training and creation is a step in the right direction. But the government needs to get their spending in check and spend their money wisely. Throwing money at the situation isn’t necessarily the right idea, it’s just a band-aid. Making sound decisions that look at the whole picture including the future is the only way we can thrive and stop the bleeding.
Most economics students know that markets react to changes in conditions. If supply or demand changes in some way, the market adjusts accordingly. If the market is out of equilibrium, the natural forces of the market will eventually adjust in order to create equilibrium or a state of balance. Due to inflated home prices, we are currently experiencing a period of market adjustment in the real estate market. Eventually home prices will become more stable but some individuals are choosing to walk away from their homes instead of waiting for a market rebound.
In recent months, we’ve seen many people lose their homes to foreclosure. While it is unfortunate, you can understand why or how it happens. However there is a new breed of homeowners using strategic defaults as a way of getting out from an underwater mortgage. Although they can afford their payments they have decided it is more advantageous to walk away from the home that has dropped in value and rent a cheaper place rather than wait for home values to stabilize.
Some strategic defaulters use the services of YouWalkAway.com, a company that advices people how to handle the walk away process. Others have yet to discover the long term affects defaulting has on their credit score. Joanne Gaskin, FICO’s director of mortgage markets states that defaulting severely affects your credit score no matter why you defaulted. However, if you plan on buying or renting another home, landlords and lenders tend to discriminate against the strategic defaulter, she explained. Credit history doesn’t just affect your ability to rent or buy; it can even cost more for you to get insurance or even a cell phone.
While a foreclosure can destroy your credit, it doesn’t always affect your ability to get cash. John Zepeda, Vice President of Rescue Capital explains, “Your credit score is not a factor when you sell your annuity payments because it isn’t a loan. With the interest rate environment being at all time lows many people have been selling their payments to avoid foreclosure, pay off debts or purchase a home.”
Foreclosures and strategic defaults are not good for anyone. The consumer, investor and the neighborhood all suffer. If strategic defaults continue to rise, we will continue to see the housing market decline. Some experts believe that legislation should be introduced to increase the benefit for people remaining in their homes and penalize people who simply choose not to pay.
The Case-Shiller index of U.S. national house prices fell again, stated Standard & Poor’s. The index, off 33% since it peaked in 2006, is greater than the decline during the Great Depression which was 31%. Unlike the Great Depression, the U.S. can’t rely on construction and home building to increase jobs and boost the economy because of the surplus of existing homes.
While many repossessed homes are in need of repair, these homes are sold at a heavy discount. Builders cannot compete with these prices. Unfortunately the sale of existing homes does not help our economy as much as the sale of new homes. This is because existing home sales only contribute the brokers’ commissions into the economy while new homes require labor, materials and shipping thereby
increasing jobs across many industries. Although wouldn’t home improvement stores have record sales if these homes are so desperately in need of repair?
Accounting for inflation, home prices are as low as they were in 1999. Combined with extremely low interest rates, why aren’t homes selling? Two reasons, lack of high paying jobs and lenders who are not willing to lend to individuals they consider risky.
So what’s the good news? If you have decent credit, a good job and the desire, you can buy a home at an affordable rate. First time buyers will benefit greatly in this market. If you are considered risky, you can try alternative financing or wait until your situation improves. Since interest rates are low, individuals with annuities looking to sell a portion of their future payments to generate money for a down payment will discover they can get more money than in the past. If experts are correct you have plenty of time to consider all your options. It took 19 years for the housing market to rebound from the Great Depression.