Debt, Mortgages, and How They Affect Your Life

There’s been tons of hoopla in the media recently about mortgages, especially high-risk mortgages that have been defaulting.  If you haven’t heard something in this vein, you’ve probably been living under a rock, deliberately avoiding current events.  Event though that’s what I normally do, I thought I should crawl out for a bit and echo the voice of doom.

Now, I’m sure most people are confused.  So a few poor people defaulted on their home loans.  What’s the big deal?  the banks foreclose, someone new gets the land and pays for it, everyone is happy.
In order to a clearer view, I need you to think back to your days of high school economics.  You know, supply, demand, all that good stuff.  I’m not sure if you recall, but somewhere in that course, you probably talked about how economic growth was judged – what the factors for positive growth were, and what factors were part of an economic downturn.  At that time in my life, the economy was fairly stable, as judged by two key factors – unemployment, and building.  Characteristically in this economy, people stay employed if it is worthwhile to them – if it is more cost effective to go to work for a wage than to stay at home and collect unemployment.  In a healthy economy, 3% should be the rate of unemployment.  It makes sense – if a small number of people are unemployed, more people are making a better wage, and are hence able to buy more things, growing the economy.  The building market works in much the same way – when people have more money, they are more willing to invest in a house, hence more housing is needed, hence more building occurs, creating more jobs and shooting money back into the economy in a widening cycle.

For the past several years, this has largely been the apparent cycle – better wages = stronger economy= more building = stronger economy.  The problem comes with speculation.   It’s almost become a part of the American dream to own a house – a good job, a good family, a home and two cars.  And with the housing market booming, everyone wanted some of the action.  People looking to expand their portfolio invested in real estate and housing instead of more traditional investment.  With the building boom, most property values were expected to increase as a demand for land grew.  In addition, to sate the American dream of those with lower credit ratings and lower incomes, mortgage lenders took on increasingly risky prospects.  Bad idea.

Basically, the rules that were developed to see if a person qualifies for a mortgage were put in place for a reason – to sort out those who could actually pay for a house over the long term.  While it’s true that the rules currently in place may be discriminatory, biased, and unfair,  that does not mean that everyone should be able to buy a house.  It’s not necessary for happiness, and I’m not sure it should be a part of what we see in our future.

But that’s all water under the bridge now.  The point is, how does this affect you?   Remember the high school economics?  Basically, enough big lenders and banks have invested in poor mortgages that it affects everyone.  When these lenders start posting downturns, it affects the market.  building slows – the market slows.  The value of housing and real estate goes down as the demand for it lessens.  Those with mortgages continue to pay the same monthly rate while the overall property value they are invested in decreases.  With jobs in the building industry falling off and banking institutions cutting costs in staffing, unemployment rises.  The market goes into a downturn.

What can you do?   Avoid debt, if possible.  Interest is going to be high, and creditors unsympathetic if you default.  If you have property investments and can afford to hold on to them, do so.  It may be a long ride, but eventually, property values should increase again.  Don’t be afraid to spend, but don’t feel forced to either.  Economists and other market watchers are asking for continued spending to help boost the economy.  There’s nothing wrong with that, and with the deflated spending pattern, you’re likely to get the goods you want at a bargain price.  Still, it’s also a good time to invest, with stocks priced low and interest rates high.  Basically, we could end up with a continued and lengthening downturn, but it shouldn’t get to the point of another Great Depression, or force us to starve.  So I’m pretty content with that.