When Will the Housing Market Get Better?

Some economists have been predicting the housing market bubble bursting for a long time. They said the residential real estate downturn would happen. That's negative juju - and at the same time sort of asking for trouble. But there are facts to back up their thinking, and those facts now show that the problem in the housing market could get much, much worse.

Yale University economist Robert Shiller now says that the subprime, mortgage, credit, foreclosure mess could spiral into "the most severe recession since the Great Depression". That said, I'm searching Google to find what businesses did well during the depression, and I'm going to investigate. Might as well be prepared.

The Federal Reserve slashed the federal funds rate by half a point to 4.75 percent in response to the credit market mess. Shiller says that the loss of a boom mentality among you and I may bring a drop in consumer confidence. That's what I mean by bad juju. You and I have to keep the blinders on and keep believing. Instead, you end up on websites like this and begin to "spiral" into every story about the market being negative.

Shiller said that the loss of confidence poses a "significant risk" of a recession within the next year. How nice. But not everyone thinks doom and gloom. Peter Orszag, who directs the Congressional Budget Office said that things won't get that bad. So who do we believe? This is all a story of belief. Here's what we know:

A 20 percent drop in home prices over two years would reduce the U.S. economic growth by a half of a percentage point - well, annually to 1 and a half percentage points annually after three years - so Orszag calculates. The risk is elevated for sure, but don't go jumping off bridges just yet. Seems that there continues to be some economic growth nonetheless. Where is that Google search?

Shiller's report came Wednesday, just when the feds announced they would raise the portfolio caps for Fannie Mae and Freddie Mac as I reported yesterday. This is supposed to pump cash into the mortgage market. It should. But here's the current government thinking:

Those subprime mortages with the wild ARM's are concentrated among homes that didn't cost that much to begin with - say they. Low income people will be hit really hard by this correction. Shiller is calling for some sort of Consumer Product Safety Commission for lender institutions - to make sure those guys are on the straight and narrow. Will that happen? Not soon.

When will the glorious rebound to the housing market happen? Not soon. Wednesday the Commerce Department announced that new home construction fell 2.6 percent in August - THE SLOWEST PACE in 12 YEARS. The National Association of Home Builders said that their builder confidence fell in September - how they know this before the month is even over is beyond me; must be really significant - they say it's the lowest level on record.

And finally, foreclosure filings in August doubled nationwide from 2006 jumping 36 percent from July - this from RealtyTrac - who when it's all said in done might not have much to do.

Can I Rent My Home in Foreclosure?

Often we are asked what is the best way to work out a foreclosure? The answer most want to hear is where the lender negotiates with the homeowner to take possession of the home and then rent it back to them at market rates.

This way the buyer does lose the house, but at least they stay where they are and can live there renting until - and that's the part that gets messy. Most foreclosure attorneys will tell you that in the case of renting back, you may be forced out of your home in the short term.

Naturally, no one wants to move out of there house if they don't have to. Foreclosure lawyers also advise that you should do everything you can to not be put into that situation. Here's what we advise:

First, look back over the past 90 days. Do you see a trend that you are steadily losing ground with your payments on credit cards or your mortgage? Can you see that you've sold things to get extra cash? What we are looking for here are signs that you need more cash to stay current.

Next, find out what extra time you have and get into emergency mode. Want to know how to stop from losing your home to foreclosure? Prevent from losing your home by getting another job in the time you are off from the main job. This may mean working odd hours at the local Starbucks, or fast food place. Pizza delivery persons make great tips if they are courteous. You can too.

Finally, if you think you should let your house foreclose, you're probably in a depressed state. A foreclosure lawyer can help and for free until you win your case and can pay them. Foreclosure attorneys are in the phone book or here online.

Government Help with My Mortgage

Our government Wednesday did something that may help you with your mortgage payments. They raised the investment caps for home-loan finance companies Freddie Mac and Fanny Mae in order to alleviate the pressure in the mortgage market.

The democrats have been pushing for something like this for awhile. This new cap allows Fannie Mae and Freddie Mac to take on about 2 percent more of debt. But democrats hoped for more.

What is called the Office of Federal Housing Enterprise Oversight, which overlooks Fannie Mae and the government brother Freddie Mac, said no last month to a 10 percent lift on the cap, which sits at $727 billion. Sen. Charles Schumer, D-NY, had been one of the most vocal proponents said this new increase is simply too small.

But how will all this help you and I?

These changes, the 2 percent raise, will make it easier for managing the companies Freddie and Fannie. The OFHEO imposed caps last year because of accounting practices at Freddie Mac and Fannie Mae. Now the new limit will give them flexibility. The trickle down effect to you is that it should be slightly easier to get refinancing or new loans.

Still, lawmakers are calling for 10 percent. Will that happen? Not likely. There has been too much corruption in the agencies for that to happen now. Too many deficiencies.

So, the Government can help you with your mortgage. There is 2 percent more money to be loaned.

Retiring with Mortgage

There isn't really one answer as to why there are some of us who are at retirement age but still have quite a mortgage left on the house. Before the problem with subprime loans, the statistics looked bad. For example, for homes with someone age 65 to 74, more than 32 percent had a mortgage on the primary residence. In 1992 it was only 19 percent. Just a picture of things to come.

But there is hope. Here's what you should do. Do everything you can to pay off that mortgage so you can live without it in retirement. That will free up a ton of cash, no? If you have a big savings account, simply pay off that mortgage. Many of us have cash in a money-market fund in a regular taxable account. Sounds bad, but maybe using that money to pay down your mortgage is a good move. Yes, your mortgage might only cost you 6 percent and the interest is probably tax deductible. But your money-market is probably only around 5 percent. And you have to pay tax on that income.

If you're dealing with IRA's and 401k's, a study by the AARP found that many employees leaving their jobs cash out their 401k's using the money to pay off some of their debt. But that is just crazy. A big 401k withdrawal means paying big income tax - so you're better slowly withdrawing to make mortgage payments. That way, you can use the mortgage tax deduction against the withdrawal and it works out.

If your mortgage right now is so large that paying it off will put you in a bind, you can refinance. Yes, getting that payment down is what is important. Better still, trade down, if you can. You can even refinance later in retirement further shrinking those payments. Banks regularly loan to retirees. Turns out they are a good risk.