The economic crisis as we have experienced it thus far has been rather devastating.  I have close friends who are out of work, who have been forced to sell their homes for less than they owe, and who have lost everything they have.  I’m thankful that I’m able to be there to help them through this time.

All but one of the homes that I have sold in the past 2 years has been under water.  I also haven’t placed a buyer in a non-distressed home (short sale or foreclosure) in the same time frame.

Some said that we would be out of this mess by now.  Reality dictates otherwise, and it’s been that way for a while.  We can continue down a road of denial steeped in a bog of irresponsible optimism, or we can open our eyes and see the housing market for what it is.

If you’ll recall, when the market shot through the roof sporting unsustainable prices, it was a direct result of lenders offering incentives (free money) to people who weren’t in a financial position to buy stamps, let alone a house.  When you give money away, you are effectively stealing future business from the marketplace.  In other words, millions of people who would have otherwise not purchased a home until a future date were lured into buying.

The consequences of those purchases resulted in a surplus of homes, and if you know anything about the laws of supply and demand, when there’s too much supply, the price of the product naturally falls because the suppliers (home sellers) are forced to compete against each other, which means lowering their prices to be competitive.

Many economists share the opinion that the free market can take care of itself without intervention.  One example of intervention is minimum wage.  Minimum wage is an example of a price floor.  In other words, we artificially set a price for the supply of labor regardless of the demand.  It’s manipulation of the basic laws of supply and demand, and it doesn’t work.

In the real estate market, we recently went through a period where the government offered $8,000 to anyone who entered into a purchase contract to buy a home before April 30th.  Sound familiar?  By offering money to people who would have otherwise not purchased stamps, let alone a house (see the pattern?) we have yet again borrowed from the future to acquire buyers to buy now.  Naturally, when the dangling carrot is revoked, sales fall off, and the market begins to correct itself.  Unfortunately, like any swing, it will over-correct by swinging past the balancing point, and this will lead yet again to more foreclosures, more short sales, and more unemployment.

It’s 2010.  We are nowhere near recovering.  In fact, we are in the midst of a wave of mortgage rate resets that are going to devastate the 2nd batch of unsuspecting home-owners who had no idea what type of loans they were getting themselves into back in 2005 and later.

So what makes me think there’s a problem?

Option ARM mortgages.  These are miserable products, and there are billions of dollars worth of Option ARMs (Adjustable Rate Mortgages) that are resetting over the next 2 years.  Option ARM mortgages have a very low rate of interest in the beginning, and even allow for the borrower to go negative on their mortgage.  In other words, their payment can be so low that the balance of their loan increases instead of decreases as they may payments.  What a bargain!  In the midst of declining market values, your loan balance is going up.

The risks of an Option ARM place you on a very slippery slope akin to betting your life savings on one company’s stock.  Most borrowers will suddenly be hit with “payment shock” as their payment is reset after a period of time has passed.  Option ARMs can negatively amortize up to 110-125% of the home’s appraised value at the time of purchase.  Once this happens, it caps, and the payments are amortized based on a normal 30 year period, or other similar terms.  Either way, most mortgagors (home owners) suddenly see their payments skyrocket to an unaffordable level.  That means distressed home-owners, which leads to loan mod applications, short sales, and foreclosure (in that order.)

What’s the Solution?

It’s time to get real about your money.  It’s time to get real about the future of our economy.  In the most uncertain economic times that we have known, with speculation that we’re entering the Greater Depression, and being witness to some of the most heinous fiscal decisions our federal government has ever considered, it’s time to get to work.  It’s time to start going without those little luxuries that you’re accustomed to.  Adjust your lifestyle to fit a greater vision of how you see yourself in the future and save your butt off.  Stop spending other people’s money with the justification that “it’s a low rate of interest,” or “it’s only $7.00/month extra,” or “I’ll just pay it off the next time I get paid.”  You may not get paid again, and then where will you be?

Don’t be fooled by what the optimists are saying.  We are not out of this mess yet, and it will be a long while before we ever see what we used to know as “normal” appreciation in the real estate market.  Bottom line?  This is going to hurt, for a while.