I feel bad for Bernanke

Not only is there nothing Bernanke can do to prevent further meltdown in housing and erosion of the economy, but if there was he wouldn’t know what to do. From this AP article:

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,” Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.

You end up with low or negative equity two ways: you bought a house and then took a home equity loan based on the new appraised price or you were unlucky and bought an overvalued home before prices walked off the cliff. If home prices never went down low equity wouldn’t be a problem, but they are and they’re going down hard. As prices go down people start to owe more than the house is actually worth, still not a problem. The problem comes from not being able to afford the monthly payments on the home which means the borrower should have never gotten the loan in the first place!

So why does Bernanke want people to have equity in their homes? So they can tap it like an ATM and spend it on fancy cars and boats, pumping much needed money into the economy. But that money isn’t real and is being conjured from the perceived value of a big wooden box we call a house. Haven’t we learned anything from the past 4 years? Lenders have started returning to their senses and are requiring down payments and income documentation. Borrowers are realizing their overpriced McMansions aren’t worth holding onto and are walking away. Prices are falling, construction is slowing and inventories are going up. So where will things end up? Right where the market determines they should be. I think we’ll see the return of affordable single family homes in late 2009-2010.

2 Replies to “I feel bad for Bernanke”

  1. Exactly…prices could fall 99%…but you should still be able to afford your monthly payment. If you can’t afford your monthly payment, you’re a dope that got in over your head.

    I worry a little of prices falling….though recent sales of the places on our street haven’t shown any major declines. I’m hopping because of where we live, there will be a softer impact. But even if prices do fall a lot, that also means the houses I want to move into in the future are also falling in price. So instead of having to afford an $800k home in a good area it will only be a $600k home…and my income will be the same. That sounds good to me (assuming my house doesn’t fall 99% in value and I’m stuck here for 30 years). :)

  2. Once again, are you saying I shouldn’t have bought the Escalade, RV, and Tahitian timeshare with my home equity? Is that bad?

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