Ray, 44, is looking for work and renting out a room in his two-bedroom condo in Davie, Fla., for $500, but his monthly income doesn’t match his expenses and he’s facing foreclosure.
“I barely have money to survive,” he said.
Ray is one of more than 7.5 million people — almost 15 percent of American homeowners with a mortgage — who are spending half of their income or more on housing costs, according to 2007 data released Tuesday by the U.S. Census Bureau. That is up from nearly 7.1 million the year before.
Traditionally, the government and most lenders consider a homeowner spending 30 percent or more of their income on housing costs to be financially burdened. But that definition now covers almost 38 percent of American homeowners with a mortgage — 19 million of them.
Though home prices have fallen this year, in the most expensive markets where home prices tripled during the boom, many working families still cannot afford to buy a home.
“We had a bubble,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. “This is a case where we absolutely want the market to adjust.”
During the dot-com era, people were willing to invest millions of dollars on businesses that had no hope of ever showing a profit. Sure, you could ‘flip’ them, but everyone knew that businesses based on no profit plus ‘flipping’ would peak, then fall. A lot of people ignored that fact, and they lost a lot of money.
However, the government didn’t finance the dot-com bubble and the majority of the population wasn’t using dot coms to provide warmth and shelter. This housing crisis will move slower and it will be much larger. The dot com bust was like a tornado. The housing crisis will be more like Katrina.
Bankers were willing to lend money to just about anyone because house prices were going up. As long as house prices kept going up, the mortgage system thrived.
However, anyone who thought about this situation would have to realize that housing prices could not continue to rise indefinitely. There had to be a certain point when real estate prices would peak, then fall. This isn’t rocket science, it’s basic physics – economics – life.
But no one thought about it. Bankers, financial experts, stock brokers are educated people. But they didn’t think about where they were going or what they were doing. They didn’t think outside of their little box. Why should they, when the box had such a nice view and the $300-per-bottle vodka was so smooth?
We have to wonder why educated people don’t think. Why do they base their actions and their fortunes on a obviously bad idea?
And what will the next bad idea be?