Mortgage-Currency Meltdown: Keep Your House as Long as You Can

The continuing decline of the U.S. dollar will only hurt you if you are holding U.S. dollars — NOT so much if you are holding real estate  — i.e, your home. Before you go overboard in panic mode, consider this, and hope…. 

The mortgage meltdown free money craze may have pulled the trigger, but the gun was decades of profligate spending on everything from congressional pork barrel to unnecessary “upgrades” to cell phones. Greenspan admits he missed the relevance of the housing boom in which prices rose at non-credible rates, but in his Republican ideology he believes that market forces will sort everything out. This is no better than evangelical rejection of science and no better than progressive spending programs. 

The U.S. dollar has been going down in value on world markets along with U.S. prestige and a precipitous decline in the trust of foreign investors in our financial markets and the players who perpetrated the largest fraud, so far, in currency, credit, and securities. 

Obviously foreclosures, defaults in all types of credit instruments and declines in consumer spending is going to slow the U.S. economy. Just as obviously, the dollar will continue its decline. Nobody knows where it will end up but it has already long since passed the point where a tidal wave of inflation will be felt here of such magnitude that it will receive attention in the economics textbooks, law books, and accounting standards. Yes, housing prices will have considerable downward pressure. And yes, those who point to the benefit to our “exports” from a weakening dollar sound like empty rhetoric.

Yet there is a grain of truth in what they say and it has a direct relevance to those sitting in houses that are lower in value, even upside down in equity. Buying has commenced from foreign investors. They are using currencies that did not decline, at least as much as the dollar has declined. So their buying power increased while our buying power has decreased. And the effect is magnified by the actual dollar decline in housing prices.  But don’t expect housing prices to stay down —unless inflation magically disappears. Right now all indications are that the Fed and the Bush administration are pushing dollars into the the U.S. economy. Like any other commodity, the more dollars are out there, the cheaper they become.

This translates for the lay person in an interesting turnabout. It if takes more dollars to buy milk and eggs than it did a month ago, so too will it take more dollars to buy real estate. So if your only major asset is your house, it might surprise you both as a hedge against inflation and as an investment. Put in simpler terms, the dollar cost of your home is going to go up as the value of the dollar declines. 

Let’s take an example. Suppose you bought a house for $400,000 in 2005. For the sake of argument, you put nothing down, so today in round numbers, you still owe $400,000. The fair market value of your home in our example here has declined by 20%, which means if you sold it you would get $320,000 less broker’s fees etc, leaving you with perhaps $300,000 in value. Thus you have a $300,000 asset with a $400,000 debt. This is the classic “upside down” reference — your equity is minus $100,000.  

And the situation seems even more bleak with projections of perhaps another 15% drop, which will bring you into the range of perhaps $250,000 on that $400,000 house. This leaves you with negative equity of $150,000. In other words, if you sold the house, you would have to come to the table with $150,000 to pay off the mortgage, just to be able to convey clear title. That’s pretty bleak. You could get some relief if your lender allowed a “short sale” and accepted the $250,000 as full payment and now under the new rules, that forgiveness of debt would no longer be income upon which you would be taxed, so that is good news. But how many lenders are going to accept the full $150,000 damage caused by this market. 

You might also ask, how any of this could have happened? The answer is simple, you were sold a $250,000 home for $400,000. And a whole bunch of people were involved in a tacit conspiracy to defraud you and the eventual buyer of your mortgage note. And of course you lost whatever money you put into your new house when you moved in — landscaping, furnishings, improvements etc.  You did get screwed, and there is nothing I can say that will change that. But the scenery might change and you might be sitting in a better position than you think — if you have the staying power.

The reason is that in round numbers, people in other countries have seen the value of their currency rise. A deposit of $1,000 worth of Euro or other currency a couple of years ago is worth 50% more than it was then.  Our loss is their gain. So that house that cost $400,000 in 2005 might only cost them $275,000 in their own currency. Let’s go further. That house that is now worth only $320,000 dollars in U.S. dollars, will cost the foreign investor around $225,000 in his own currency. it doesn’t get much better than that. But it will get better for these foreign buyers of U.S. real estate. The U.S. dollar will continue its decline. So these prices which are temporarily depressed, will get into “sillyville” when you factor in foreign exchange. 

This will result in at least a flattening of the decline in declining demand for U.S. real estate. And the continuing decline of the U.S. dollar will only hurt you if you are holding U.S. dollar — NOT if you are holding real estate.  

The likelihood is that foreign exchange induced inflation alone will increase the dollar price of your house at least another 15% over the next year. Add to that a modest increase in prices caused by increasing demand both from foreign investors picking up bargains and domestic buyers who still have cash and need to place the cash in some asset that will hedge against dollar inflation and you have a better picture than what is appearing from the pundits. It might not be all roses and good times. But the bleak picture might change to break-even or better, given 2-5 years.

This opens up the very real opportunity for lenders to get together with the buyers they screwed, the investment bankers that created the fraud, and the investors who got screwed holding collateralized debt obligations (CDO’s). If instead of foreclosing, they reach an agreement on sharing the losses and sharing the potential benefits, the inventory of foreclosed properties will cease to expand, thus providing a more stable marketplace for real estate sales and investment.

This in turn will magnify the effects outlined above and quite possibly provide a profit to all concerned.

Unfortunately the likelihood is that the players who caused this mess are more interested in blaming the victims and overing their tracks than in fixing the problem.

But the fact remains, that the undercutting of the U.S. economy and the U.S. dollar might produce results that [a] allow your personal financial situation to recover and [b] give you a decided advantage in paying off a mortgage later which far cheaper dollars than the ones you borrowed. You could still end up ahead of the game.

One Response

  1. […] SkiffnH… the plateau with $150000 to land hard the mortgage, foregather to be flourishing to interact land title. That’s pretty bleak. You could impart some richness if your pledgee allowed a “short sale” and recognized the $250000 as overpowered commercialism and today baritone the … […]

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