Are we facing another recession?
Last week’s employment numbers, revised GDP numbers, and other economic indicators certainly pointed in that direction. The Federal ReserveThe Reserve is the amount of money set aside by a condo, co-op, or homeowners' association for future capital improvements. Bank started making noise about a third round of securities buying. The stock market had a lousy week, as Europe’s worries rattled bondA Bond is a government's (federal or municipal) or a corporation's obligation to repay you your principalPrincipal is the amount of money you borrow if you're getting a home loan. If you're buying a bond, the principal is the amount you're lending. Typically, you'll buy bonds with a face value of ,000. If you buy a ,000 bond, your principal is ,000. plus a certain amount of interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds. over a fixed period of time. traders, who pushed the 10-year bond prices even lower.
Just when you thought mortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home. interest rates couldn’t get any lower, mortgage lenders started touting a 15-year mortgage for 2.97 percent. That’s right, a 15-year loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interest. fixed at 2.97 percent for 15 years. It’s enough to make us contemplate refinancing all over again.
What would another recession mean to you? If you own a home, it could mean your home value would drop for another year or two. This is particularly true if you’re living in a top foreclosureForeclosure is the legal action taken to extinguish a home owner's right and interest in a property, so that the property can be sold in a foreclosure sale to satisfy a debt. city, like Chicago, Atlanta, Phoenix, and Las Vegas, or a top foreclosure state, like Florida or Michigan.
Thinking about home values dropping really scares homeowners. Lack of equityYour share of ownership in a company. Stockholders are often referred to as equity investors, because they invest in the equity of a company. equals lack of flexibility – you don’t have as many options when your home is underwater. If you sell, you either have to come to the table with enough cash to make the lenderA Lender is a person, company, corporation, or entity that lends money for the purchase of real estate. whole, or you have to go through a painful, and often protracted, short sale process.
If you’re unemployed and underwater, moving to take a job becomes next to impossible. If you can’t rent your property and cover your expenses, you will either have to do a deed-in-lieu of foreclosure and hand the keys to your home back to the bank, or just abandon the property and let it go into foreclosure.
Having 14 or 15 million homeowners underwater makes mortgage lenders nervous. What will be the tipping pointA Point is one percent of a loan amount., where all of these folks simply abandon their homes to move forward with their lives?
It could be the early end of unemployment insurance for the long-term unemployed. For more than a million Americans, unemployment insurance has been the only thing keeping the lights on, food on the table, and the mortgage paid. Ending unemployment insurance could force another million (or more) Americans into bankruptcy and foreclosure.
We got a letter from a reader this week that didn’t understand why her house appraised for $26,000 when she originally paid $150,000 (she lives in Atlanta). But it turns out that she is in a neighborhood that is filled with foreclosures, all of which are selling for $26,000 to $30,000. She didn’t think it was fair for the appraiser to use the foreclosures to value her home.
“I’m not in foreclosure,” she wrote. “I have been paying my mortgage on time for years.”
She has been doing it right all along. The trouble is that recessions in general, and Great Recessions in particular, affect everyone. Those who are hurt the worst lose their jobs and remain unemployed for years, subsisting on a meager handout from the government and perhaps a local food pantry.
But even the homeowners who are doing it right get hurt in a recession. Home values are so depressed in so many markets that it could take decades to climb back to where prices were in 2005 and 2006. Most homeowners won’t be in their homes to see it.
Going back into recession would put another big dent into the American dream. And that would be bad for everyone.