Unemployment Takes Toll on American Dream

Mortgage delinquency rates and foreclosure rates are rising as the unemployment rolls swell. Another 500,000+ people lost their jobs in May. I can see how one's financial world can unravel so quickly especially here on Long Island. Housing is super expensive and the majority of it is classified single family - good old suburban glory at its finest. Unfortunately, if you are a homeowner, it will be downright difficult to survive a protracted unemployment if you are without adequate savings or adequate credit; though tapping credit during unemployment only compounds one's financial predicament. Unemployment benefits in NY are a maximum of $405 a week plus federal stimulus of additional $25 a week.

It is fairly obvious that the best and most effective way to cut expenses is to reduce one's housing expenses. Unfortunately, as of April 2009, the median home price is $350,000 for houses in contract and the median income is around $65,000 in Suffolk County and $85,000 in Nassau County. Property taxes are among the highest in the nation and average more than $7,000 per year. In addition, if one has to COBRA health insurance costs, even with the 65% subsidy, the average family plan will cost over $500 a month.

Those in rentals have more flexibility to downsize but homeowners, on the other hand are stuck with few alternatives. Many have put their homes up for sale but home sales are weak due to the economy and stricter lending standards. New buyers need at least 20% or $70,000 for a downpayment to purchase a home on Long Island at today's rates and it takes about 3 months just to close on a house in NY. Also, if you bought in the last five years, selling for even close to what is owed in mortgage is difficult; only those fortunate to have lived in their home long enough can "afford" to accept a cheap price to facilitate a fast sale.

Sadly, many homeowners are left with no alternative but to fall behind on their mortgage and as we can see this is happening in droves nationwide. Not everyone is a deadbeat, many are middle class Americans whose livelihood crashed along with the economy.

In the scheme of things, I certainly wouldn't mind moving to where the jobs are but what would I do with my house? In many cases, the American dream of home ownership becomes a nightmare the moment you lose your job. People are doing what they have to do to survive but for many, with ruined credit, depleted retirement savings and little left in available funds, it will be a long road back to personal financial recovery even if they do find a job.

Housing Market on Long Island Still Depressed

Today I heard some disturbing news about the state of the housing market on Long Island. There is now a 31 month supply of homes on the market; over 35,000 homes for sale. In the last 6 months a little over 1000 homes were sold. Now that prices are declining, there are more interested buyers, but declining values will put more of those new home buyers of the last 2 or 3 years underwater where the amount owed on their mortgage is greater than the market price of the home. It may also put many of those who tapped their home equity based on peak market values underwater as well.

While there may be glimmers of hope in some pockets of this turbulent economy, the reality is that homeowners in Long Island and downstate New York are in trouble. Sadly, due to the high cost of living in this region, those homeowners who are laid off, underemployed, or whose wages have been reduced for any reason barely stand a chance of survival for very long unless they have ample savings. Many of those home buyers of the last 2 or 3 years were financially stretched when they purchased the home in the first place. But, they feared missing out on the opportunity to own a home when prices started to skyrocket putting any chance of home ownership out of reach for much of the middle class. Now, that home is a financial burden in itself.

Unfortunately, the financial safety nets that cheap money provided such as the ability to tap home equity if one needed extra funds or the ability to pick up another credit card on the fly, if times got a little tight, are gone. What will the homeowner turn to when he or she needs to make ends meet? We are facing a lot more foreclosures on the Island and a lot more desperate homeowners in New York.

Meanwhile, Albany is behaving as usual, jacking up the budget by $10,000,000,000 over last year, making underhanded funding deals with the MTA, granting all unions basically a stay of financial execution and a myriad of other deplorable financial conduct in a state that ranks in the top 3 for the highest taxes and cost of living nationwide and where taxes associated with Wall Street account for 20% of the state budget and we know how well they are doing. Long Island suffers from the same pigheadedness that New Yorkers do, too big, too important, too powerful to fail.

What to do? Though Long Island is an aging suburb, it has the benefit of a desirable location and has plenty of options that it refuses to accept. Long Island could minimize its downward spiral simply by implementing a few of the recommendations proffered by the Island's best economic minds, Chief Economist Pearl Kamer, Martin Cantor, Director, Long Island Economic and Social Policy Institute at Dowling College and Irwin Kellner, Distinguished Scholar of Economics, and the Rauch Foundation's excellent economic overview, Long Island Index. Taken together they have researched, reviewed and recommended viable solutions that will help Long Island regain its financial footing.

Bold action is always recommended, even desired, but rarely ever implemented. So it may very well be that we will watch, defiantly, as Long Island and even New York State continue their downward spirals while everyone else is finding their way out.

Always Look on the Bright Side of Real Estate

On this April 1, optimism was abounding on all fronts for there is a feeling that the bottom is near for the economy. In typical fashion, Americans want things to turn around now; they don't like to suffer and are tired of the doom and gloom. The stock market surged again following up on its gains of last week on the belief that this should be the bottom yet investors found hope in data that was too arcane for most of us. The economic data to be published later this week and the upcoming 1^st quarter numbers will be a better indicator of the real deal.

For those of us, looking for data that we could feel joyous about, Newsday published an article today that made lemonade out of a sour real estate market. (See Buyers may find LI homes affordable now by Jonathan Starkey) No matter the economic conditions, there is always a bright side to the real estate market and right now it is brighter for buyers. The article quoted a real estate professional spouting the numbers,

“In February, the median closing price for a home in Nassau County was $400,000. That's down from $458,800 the same month last year and $502,500 at the peak in August 2007. In Suffolk County, the median closing price for a home was $309,500 in February, down from $359,500 in February 2008 and $420,000 from its peak in June 2007.”

The data cited should be welcome news for buyers but for sellers, the reality of the new pricing still has not hit home, so to speak. This is bad news for those who bought during those high periods because the odds are they are now underwater in their mortgage. This is also bad news for those who have home equity loan products that together with their mortgage lands them underwater. This is really bad news for those who want to refinance their mortgage just to find out that they are now officially underwater. This is really, really bad news for those who want to trade-up; the desirable next step for those who bought “starter” homes during the last 5 years or so. Many of them would probably have to sell for less than they paid if they are lucky to find a buyer. But, most of all, this is really, really, really bad news for the rest of us who are watching our home equity evaporate along with the rest of our savings and investments.

Anyhow, much of the article is geared toward the first-time home buyer – plenty of incentives exist to help them purchase a home, if they so desired, in the form of tax credits and the like. However, moving out to the island requires a much greater income than most people realize. Unless you are a first-time buyer, you need a 20% down-payment plus the ridiculously expensive NY state closing costs so at the Nassau average of $400,000, a buyer needs $80,000 down plus closing costs which can easily exceed $5,000, not to mention moving and move-in expenses. If you are a first-time home buyer and are lucky to get one of those FHA 3.5% down payment deals and you get assistance with the closing costs, you will still need at least $20,000 to cover the down payment and all of the other expenses. Since we have not been encouraged to save over the last decade, and any investments we had have tanked, where is that money coming from?

Technically, if we understand that banks have reverted back to the general rule of thumb of income to home price, a home price of $400,000 requires at least $125,000 in household income. A mortgage of $300,000 at today’s 5-6% rate is still a $1700 - $1800 payment plus at least $1,000 for taxes and insurance per month and that’s with no PMI (private mortgage insurance). Yep, nearly $3,000 a month for that average home. How many first-time home buyers can afford that?

Houses for sale in my community have been sitting, some for over a year now, and more homes are added to the pile weekly as the older folk realize they have to sell and leave. Since many of these communities are ageing, the sad fact is that there are very few young folk who can afford to take over. Back in the nineties, there was a similar housing decline on Long Island and it recovered nicely. However, the entire economy was not declining drastically across all sectors along with that decline nor did people have the high debt levels that they have today or were losing their jobs or having their salaries frozen or reduced to the magnitude that we are now experiencing. Most of all, there was a steady supply of Wall-Streeters and similar professionals who migrated out but now, even they have been decimated. Maybe there are some "dinks" (double income no kids) out there who continue to dream of raising kids in the suburbs one day and are still waiting to pounce on the housing market. Too bad there may not be enough of them this time around.