James,
I wanted to help explain some of the upside to general hyper-inflation. This current well managed hyper-inflation that has been rolling strong since about 1995 went first into the financial markets and then after the dot-com-9-11 went into the overheated housing market,. This inflation is a result of the massive infusion of dollars through fractional reserve bank financing creating new money by loaning out non-existent money.
We can likely expect the dollar value of homes to not drop too far if this alleged bubble pops as the fed much like in Australia and the UK central banks try to keep the money supply inflating at the rate of an average home.
This is not yet a general price inflation. Adjustable rate mortgage holders look to see if there is a limit on your interest rate you will not likely be able to keep up with increased payments in any case.
Once the general inflation hits and the dollar (and other currencies at the same time) drop like stones people will be surprised to find themselves paying off [fixed rate] 30 year mortgages with a few months of wages. The trick to this is a person has to find an income to support even these easy payments, a concurrent deflation may also strike the economy forcing wages down versus commodities, real estate, and imported items. In biz school you would learn that an unexpected inflation acts to transfer wealth. While
it is usually a central bank trying to shake off national debt a person with the right debt structure and little or no currency based savings can derive
benefit from this transfer.
Be aware financial conditions have never been as bad as they are in all of world history, [so] plan for the change now. We are about to witness history in a big way. Most nations after a massive inflation lop off a few zeros rename the currency (For example the “NEW” Israeli Shekels.) Be aware that there has been significant amounts of
scholarly work on a near term Euro type currency merger in North America (Amero). Kol Tov. – David in Israel
Mr. Rawles:
One thing often overlooked is whether the mortgage is a recourse, or non-recourse loan. Most first mortgages are “Non-recourse” loans – meaning that if you lose the house and the bank sells it, the foreclosed party is NOT responsible for the difference between the mortgage value and sale price if less.
However, with most loans over 100% of the equity (U.S. Bank was selling 125% home equity lines back in 1999.), or any Home Equity Credit Lines – if the house is foreclosed, and the house sells for less than the amount owed on the note, the bank has full recourse to go after the borrower for the difference between note amount and sale price.
Same as if you have a car loan, and you total the car for instance. Most insurance policies will pay market value for the car – and if you owe the finance company more than the market value, you are on the hook for the difference. That is a recourse loan, and most loans are just that, with the exception of first mortgages up to 100% of equity. State laws differ somewhat, but in general, that is the rule nationally.
A lot of folks may try to walk away, and are going to wish they had read the fine print at closing. The bankers are ALWAYS going to act to cover themselves. My folks were raised during the Depression, and my Mother would reach out from beyond the grave if I had EVER bought a house with an ARM, or didn’t pay off the debt as quickly as possible. Going to be a lot of financial bloodletting in the next 5 years. In the 80s it was commercial property, and now residential. Amazing how quickly we forget. And with the tighter Bankruptcy Code, a lot of folks are going to have much longer relationships with their bankers than they ever thought they would. Love the site! – Sawbuck in Virginia
Dear Jim:
Rather than a balloon [bursting], I think [the housing market collapse] will be more like a series of avalanches, small at first, but growing each time. We are seeing this now with the “inventory” of homes for sale at an all time high. The entire market sector has slowed substantially from the heated years of growth, driven in large part by low interest rates.
Remember, in many of these cases, the bank will be OK with the 1st mortgage, is these insane 2nd and 3rd ones that will be the real problem. Still many banks over-extended I suspect, and the FDIC is too big to save.
Jim check this out – and go to the end to see that bad and the good. Note how TX is so low on the scale, interesting.
CA, FL, NY – are of course the problem areas. – Rourke