Real estate investors are just walking away from residential property and lenders are getting stuck. Some lenders do not want to take title to the worthless property and the city has started a campaign called the “shaming sign” – placing signs on abandoned property with the names of the lenders’ executives. This has induced some lenders to take title and either fix up or demolish the abandoned homes.
This is a story from the Great Depression … except it is happening right now in Dayton, Ohio.
It’s starting, folks. And I predict it will be worse this time than it has been in the past.
Suppose you borrowed $500,000 with no down payment, and pay only interest, and your payments are higher than you can really afford, and you see that prices are not going up and maybe even starting down, what reason do you have to stay in that house? Why not just walk away, give the keys to the bank, and move somewhere you can afford? You really have very little to lose.
But the bank, that’s another story. The bank now has a house instead of a %500,000 loan on their books. So they have to turn that house into cash. They understand that they aren’t going to get $500,000 for the house and they’re going to put it on the market and take what they can get. So prices are now $450,000 in your neighborhood.
Meanwhile your neighbors have a $500,000 mortgage with no down payment and the monthly payment is more they they can afford. Some walk away and give the house to the bank, others just sell. Soon one of every five houses is for sale, but the buyers see prices going down so they’re holding out.
There is another element here — the speculators. People who purchased houses or condos intending to “flip” them for a higher price in a short time. They’re really on the spot here and really have to “unload” fast. And they keep a close eye on the market. So they’ll “dump” and soon. Now even more properties are on the market.
Desperate sellers lower prices. They need that money, and they are afraid prices will go even lower in a hurry. So they’ll make deals to sell their property. Others will see that the ones holding out for any decent price are losing their shirts, and lower their prices even faster.
Do you see where this goes? It’s called a “panic.”
Prices will get down to where they should be, probably in a hurry. Borrowers and lenders will be hurting. And most of the jobs created in the country in the last few years depended on mortgage lending and home construction. Do you see where this goes?
Start reading about the Savings and Loan Crisis. The amounts involved (and the corruption) will be much greater this time.
You and I will pay for it.