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By Ilyce Glink
10/22/2008 8:00:00 AM
If you don't have a job, you're not buying a house -- at least, you're not buying a house unless you're paying for it in cash. And for most folks, cash seems to be in short supply at the moment.
The credit crisis continues to grow in scope and scariness. Third-quarter 401(k), 457, 403(b) and IRA statements are out and mental calculations are being made about how much the numbers have dropped since the statement arrived in the mail.
With rising unemployment, a hotly contested U.S. presidential election in less than two weeks, and central banks around the world working in concert (for the first time ever) to lower interest rates, it's no wonder that even the most optimistic real estate agents are quaking in their shoes.
You can say what you want about the economy, but all real estate is local. If your local economy has the sniffles, the local real estate market is likely to catch it too.
As the U.S. economy falls into a recession, jobless numbers have increased to the point where more than 750,000 jobs have been lost in 2008. The unemployment rate (as of Oct. 7, 2008) was officially 6.1 percent. Some unemployment experts believe that the true rate of unemployment in the U.S. -- if you factor in those making less money than they were two years ago (including real estate agents) or those working at part-time jobs rather than full-time jobs because they can't find the right situation, along with those who are underemployed and those who have just given up looking for a job and have fallen off the rolls -- is approaching 10 percent.
Most economists, including Nobel prize-winner Gary Becker, believe unemployment will rise, although nowhere near the 25 percent unemployment the U.S. experienced in the 1930s.
Still, the connection between unemployment and a faltering real estate market is strong because lenders won't give you a mortgage these days if you don't have a job with enough income to cover the payments.
In Michigan, unemployment during August officially rose to 8.9 percent (up 1.7 percent since August 2007), according to the Michigan Department of Labor and Economic Growth. The state has one of the highest levels of foreclosure in the country, and very soft existing and new-construction home sales.
On the plus side, if you have cash, you can buy an enormous McMansion for not all that much.
The credit squeeze has reminded banks and mortgage lenders that credit scores (while perhaps a good predictor of whether someone has the desire and financial stability to repay a mortgage) don't actually pay the bills. They don't take into account whether someone has a lot of cash on hand for emergencies or is just making ends meet. A medical emergency, job loss, divorce or death can disrupt the best-laid plans.
On the other hand, if you have a job, and you've maintained a good credit score, the time is coming when you may want to talk to your lender about refinancing.
First, for those who have adjustable-rate mortgages (ARMs) tied to United States Treasury bills, your ARM may reset lower than where it is now, perhaps even in the 4.5 percent range. (Yes, you read that right -- around 4 percent.) How could this happen? If one-year Treasuries are at 1.5 percent and you have a 3 percent margin attached to your loan, that adds up to a 4.5 percent interest rate.
If you have an ARM tied to LIBOR or some form of interest-only loan, some lenders are offering to lock in adjusting rates for a small fee of $250 for the life of the loan, or even the next five years. Find out when and at what interest rate your loan will adjust and then see what it would cost you to convert your ARM to a fixed-rate loan. This could be a great deal, especially if you're sick of not sleeping at night.
In other news: HSBC North America is expanding a program with Money Management International (MMI), one of the nation's largest nonprofit credit counseling agencies, that will give homeowners who have had a temporary financial setback up to $7,500. The program, Preserving Homeownership and Savings Education Strategy (PHASES), provides financial counseling along with cash to help homeowners get caught up on their mortgage payments. Funds might be limited and not everybody will qualify, but at least it's a help for those who qualify and can enter the program.
The MMI PHASES program is currently available to homeowners in Arizona, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, New York, Ohio, Pennsylvania, Texas and Virginia. To find out if you qualify and if the program is open, call toll-free 888-589-6959.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
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