What will your house be worth in 15 years?
Many of us are assuming that the equity we have in our homes will be used in part for retirement or upgrading to larger properties. In the current financial climate, it is worth checking exactly how much that actually is.
In August 2007, the ’sub-prime’ mortgage market imploded, leading to almost 10% of all North American residential properties either in foreclosure, or quickly getting there. What in the name of Martha Stewart happened?
It’s an example of how the investment industry has invented new and often inferior ways of selling exactly the same thing – stocks and bonds. Our Boom generation has so much money in invested in other people’s invisible worth (including debt), that we often make decisions on how to make some money without looking at all of dangers that lurk inside transactions that trade computerized hands globally at the speed of light every minute of every day.
Asset Backed Commercial Paper (ABCP’s) are a symbol of the ever-increasingly complicated Investment industry. These are short-term notes backed by securitized loans (ranging from everyday auto loans to immigrant loans) and many more long term debt, like unleveraged CDO’s, and more letter collections that we haven’t heard of. It results in a ‘layer cake’ of debt, each strata being a different form of debt, that is sliced into manageable packages, and passed onto financial institutions to hold for short amount of time. Like any kind of rental, banks and savings and loans, earn profit on the debt for holding it before passing on their ’slice’ around the tea table to someone else.
Now, what happens when someone receiving a slice of cake says:” These are a little too much for me, I’ll pass.” Too much in this case being too much risk to hold at once. For that split second, some institution (And many think it was Saudi or Chinese in origin), decided that they had enough debt on their plates for that split second, and the entire line stopped. Plates can’t go forward or back, and everyone looks at their debt more closely. Here, they see that there is so much residential mortgage debt attributed to everyday folks, whose only standard for receiving a mortgage was that their heart was beating in their banker’s office at the time.
When the line stops, the debt comes back to it’s originator - large scale investment banks, and we all know what happened to one of these. Bear Stearns has gone, under a mountain of returned debt, and the US government had to step in to sell it at a fire-sale price.
Because house owners do not have a close relationship with the mortgager, they simply walk when they can’t afford to pay a mortgage. House prices plummet (and it has happened in the last year or so) and, as a result – yours is probably worth no more than last year, and possibly less.
In a future post, we can examine what effect this has on towns and cities, so if you have a comment, or more facts, let’s have them and we can include them.
This is not getting any better, it’s getting worse. Some pundits realise that this could be the tipping point that sends North America into a 10 – 15 year recession. That’s the next 15 years before your property is worth what it’s worth now.
So check your property price, and imagine living on that after 15 years of more everyday price rises; or look back to 1993, and see what your house was worth then, and how far would that get you today?
The World is changing, and you need a New Future in order to get over this, and other new realities. Let’s get ready for change.
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