Livinglies's Weblog

This is a republication of an article I wrote nearly 2 years ago. The current downturn in housing prices is just the tip of the iceberg. Both home prices and rentals have been far above viable standards — i.e., any level that most people can afford.

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For 140 years since data was compiled about this subject, the most reliable indicator of housing value came from a simple proposition: median income ultimately determines value because median income determines what people can pay.

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Since the 1970’s when credit cards and other forms of debt products saturated the marketplace, median income has stagnated as people started carrying more and more debt. The availability of credit replaced the availability of a living wage.

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The increase in debt, combined with new “indispensable services” like cell, cable, and IT subscriptions, further reduced the effective median income of nearly all households. Taken from that perspective, median income has actually suffered a precipitous decline buoyed only by the continuing availability of credit. That means that wage increases are an illusion as people go deeper into debt.

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According to the bureau of labor statistics, the median income in the U.S. in 2019, before the pandemic, was $68,703, During the pandemic, it was lower at least temporarily, because of the effects of COVID19. But home prices continued to escalate because the marketplace continues to be flooded with what appears to be cheap money. Wall Street investment banks are making fortunes on deals that are concealed from homeowners — and concealed from virtually everyone else as they stash money offshore.

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According to Federal guidelines, a transaction labeled as a loan is only viable if the payments do not exceed 31% of household income. *

So do the math. $68,703 per year is $5,725.25 per month. 31% percent of that is $1774.83 — the maximum amount that the household can safely afford to pay for a mortgage payment. The average 30 year fixed rate is 4%. So that payment could service a maximum “loan” product of around $360,000. And that is how a house zooms up in price but not in value.

The problem with those computations is that they are riddled with fallacies and lies. It assumes that gross income can be measured by the household wages when the first dollars that can be spent on living are around 20% less.

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So the real viability equation would reflect median household income to be around $4600 — a figure to which virtually every wage earner in America can attest. That, in turn, reduces the highest servicing payment for a “mortgage” payment to be reduced to $1426. So a “conforming” so-called loan is actually nonviable despite the apparent compliance with Federal guidelines. In fact, that family can only afford a mortgage loan of around $280,000 but they have a $360,000 loan.

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Add to that the inflated appraisals based upon remote comparables or even fictitious comparables, and you have the recipe for disaster. So even if somehow this beleaguered family had been able to put 20% down they bought a house for around $450,000 with $360,000 indebtedness of which they can afford to service, at best, only $280,000. And the house in a distressed market will fall below the median income level because of the usual panic in a  crisis.

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Since they were already underwater at the start of the deal, they (including their 20% down payment) will be wiped out when the foreclosures start — either directly by foreclosure or indirectly as the prices of homes come down relative to median income.

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The best they can hope for is a home worth less than $280,000 with a “debt” of $360,000, thus wiping out their down payment and all the equity they thought they had. In a cruel twist of law, unlike their commercial counterparts, homeowners cannot cram down the amount of secured debt or walk away. They are stuck — and that is before they lose wages from additional losses in the pandemic or the next recession and layoffs.

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Meanwhile the Wall Street investment bank that sold them that deal and who labeled it as a loan, never intended and never allied itself to be a lender who is required to conform to requirements in lending and consumer protection laws.  They paid the homeowner to acknowledge the existence of a fictitious loan transaction so that the investment bank could sell securities that were unrelated to ownership of the “loan.” They made at least $4.5 million on the deal with the homeowner (reported as $360,000).

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So in a rinse-repeat of 2008-2009, millions of homeowners will go into foreclosure, the economy will suffer from another recession, and the investment banks will laughing all the way to their offshore piggy banks that now amount to many trillions of dollars siphoned out of the U.S. households.

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This is happening because very few people are curious enough to learn what happened in the mortgage meltdown. You know what they say — “those who do not learn from history are condemned to repeat it.” So if the last crash is any example, then a small percentage of homeowners will retain title and possession to their homes as just compensation for the securities scheme, while the rest lose their homes in legal proceedings that are falsely labeled as foreclosures.