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Grandpa on the USA Housing Crisis
By admin | June 17, 2008
While many in the world are either worrying about the impending collapse, or gloating about the recession in the US, here’s a new perspective (mostly the observations of a bright friend who from time to time mails things like this out to his list…) who is doing just what he says the last paragraph.
There are about 75,000,000 single-family houses in the US today. A third of these are fully paid and free and clear. That leaves 50,000,000 mortgaged homes. Over half of these properties were been bought pre-2000 at a much lower cost that their current book values. The vast majorities of these owners have either not dipped into their ‘home equity’, or did so early in the housing boom. The vast majority have serviced their mortgages ever since.
That Leaves 20,000,000 mortgages. About three quarters of these are owner-occupier mortgages in the heartland and small town America. The loans are being serviced just fine.
In other words, 5,000,000 houses MIGHT be the sub-prime crisis generators. Of these at least half are investment properties, or vacant properties that were to be “flipped” They will be foreclosed and resold at below market prices resulting in losses for the investors & lenders, but will not result anyone being homeless. That leaves a maximum of 2 million owner occupied homes purchased at grossly inflated prices and with little or nothing down. The buyers knew or should have known that if interest rates went up, or if they lost their jobs, they would have difficulties & would have to go back to where ever they were before they bought a home they couldn’t afford. The vast majority of these troubled properties are in the areas where the housing market was the hottest. States like California, Nevada, Florida as well as a few cities that stood out in other states, such as Houston, Denver, Hot Springs, etc.
Prices in many other cities (Redmont, Boston, New York, Washington, Dallas) are stable… Prices in many smaller cities in the Midwest are actually still rising.
In other words, the ‘banks are writing off’ bad loans to poor risks that should never have been made. The loans were based upon inflated values. They were NOT traditional “75% loan to value” on conservatively appraised properties. Further, the buyers were not qualified to buy. “Sub-prime” always really meant “highly likely to default.”
So, whatever is really going on, a very small percentage [if any] qualified home buyers are involved. There is NO housing or mortgage crisis. Not any more than has happened in previous cyclical property market downturns. These happen with boring regularity every decade or two. Some “hotshot” banks are using the “crisis” as an excuse to write off nonsense securities & senseless loans that they have used for years to inflate their imaginary profits & share prices.
Some stockbrokers, insurers & other firms who securitized & sold these loans to the public & guaranteed them against losses [these are the derivatives people talk about but don't understand!], are of course going bust. They should have known better! But of course anyone who bought or guaranteed “sub-prime” loans was always dealing in “junk” with a high risk of default. Why did they do it? Mostly in return for fabulous fees, commissions or if stupid “investors”, a very suspect, unsustainable, high rate of return. The people involved (on the profit making end) always operate through corporations and thus are immune from any personal liability.
In virtually all the USA foreclosures, the sub-prime home buyer was really stretching to get into a deal. They were people who bought grossly overpriced property, had no savings to cover a year or 2 or payments if things went sour; they were usually paying more than the 25% of income that should be allotted to rent or loan payments. Above all, they were in deals where unless interest rates stayed the same [which they were unlikely to do] and property values went up forever [also unlikely] they would be facing payments & charges they could not afford, i.e. foreclosures.
HOW TO PROFIT FROM THE SITUATION?
Cherry pick among the debris. Surely you’ll find a few a choice location properties at super bargain prices. If you [or your investment corporation] qualifies, you can even get a good fixed rate loan and rent the properties at more than enough to cover your payments. It probably takes sifting through 100+ deals to find one gem. You will need a bit of dough for a down-payment, & more for cosmetic refurbishment. In the background, a business or secure job giving you the income to qualify for any loan you might need.
A friend of mine, Doug Casey, once told me that in Chinese, the printed character for “Crisis” was the same as for “Opportunity.” That’s the way to think! Of course, it’s always best to start a corporation to own your properties and thus, keep your name off the public records for privacy & insulate yourself from any personal liability. For PTs their corporation will probably be “Offshore.”
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