Here We Go Again with Adjustable Rate Mortgages

While virtually every other country in the industrialized world is in the beginning phase of a sustainable economic revival, [despite having single-payer healthcare for all their citizens] the U.S. GOP-led Congress is trying every way they know how to toss millions of Americans off of healthcare for profit, trickling down the backs of 99% of the country, and to top it all off, is in the midst of the revival of the very instrument of destruction that caused the last economic disaster in the waning days of the last GOP president’s term of office. 

Adjustable-rate mortgages, shunned until recently as one of the triggers of the George W. Bush era housing crash, are making a comeback. Even a two year old learns not to stick its hand in a fire after getting burned, but apparently American home buyers require less subtle lessons.

ARMs represented one-third of all home loans of $417,001 to $1 million originated in the last quarter of 2013, according to The Wall Street Journal. By comparison, the percentage of ARMs stood at just 22 percent a year earlier. Combined with the other private debt problems facing Americans, it’s one more leak in a damn leaking worse than Trump’s White House.

In previous columns, I’ve talked about some of the top economic land mines set to blow the legs off of the U.S. economy. On top of the sheer enormity of the sub-prime auto loan market, the student loans that will likely default, the rapid advancement of technology and robotics that are irrevocably replacing Rust Belt manufacturing jobs, and the economic sinkhole of the imminent bankruptcy of huge private pensions that will leave literally hundreds of thousands of retirees with no means of support when they’re ready or forced to retire. Moreover, the devastating decline in retail jobs will make the cliff that America is going to fall off of even deeper.

And yet—we start again with the Venus fly-trap of American home buyers.

One would think that Adjustable Rate Mortgages (ARMs) making a comeback would scare the bejeezus out of the SOMEBODY. As a matter of fact, it has.

“When you talk about middle-class buyers getting an ARM, that’s when you have to ask a lot of questions,” notes Polyana da Costa, senior mortgage analyst at Bankrate. “I would only recommend an ARM if they know for sure they won’t keep a house for more than five or seven years. Otherwise, the risk is just too big.”

ARMS work by offering a lower initial rate which resets at period end. The hazard is that the rate reset might jump considerably. When housing prices fell during the last financial crisis, homeowners were unable to sell their homes or refinance into lower-rate loans.

And the primary similarity now that mirrors those times before the Great Recession, is the resurgence of the McMansion.

McMansions became the definitive symbol of living beyond one’s means. Unlike your standard mansion, McMansions aren’t just large — they are vulgarly so. These look-a-like houses are often decked out with sub-standard details, like chandeliers and foam-filled columns. While their features mean they can command a decent price, many of these houses are poorly built.

As Americans have started building and flipping houses again, they are once again buying McMansions. Since 2009, construction of these homes has steadily trended upward, according to Zillow, a real estate website, shows. The median home value of McMansions is also rising, at a pace that far exceeds the increases for standard homes.

Despite common misperceptions, younger people who are starting families are still moving to the suburbs for more room, she says. About half of all millennials that purchased a home last year did so in the suburbs, according to Zillow data.

Their decisions are clearly reinforced by cheap energy costs, which make it affordable to commute, and the astoundingly long duration of low mortgage rates. Like the McMansion and the tick-up in the housing market, it’s another frightening source of deja vu.

The culture of house flipping focuses on deceit via certain aesthetics, like the addition of colossal marble islands and palatial foyers designed to grab the attention of buyers. The result was that they gave these houses even more of a cookie-cutter feel. “It’s about invoking the imagery of having a lot of money, but not spending a lot of money on the house,” says Wagner.

Today, the U.S. housing market continues to recover — making flipping more and more popular, as median home prices hit record highs. Some, like Chris Rupkey, chief financial economist at MUFG Union Bank, openly fear there could be a new bubble in the making.

Gee, ya think?

The difference this time around will not be simply because of the collapse of home values however, it will be unsustainable levels of sub-prime auto loans, a collapsing labor market, corporate America under-funding private pension plans. The return of ARMS is just the latest indicator that Americans have the attention span of a coked-up, caffeine freak.

Labor

“The U.S. labor market has lost some of its mojo,” said Master of the Obvious, Sho Chandra and Patricia Laya at Bloomberg. May’s jobs report was much weaker than expected, the Labor Department revealed last week, with the economy adding just 138,000 jobs, well below what analysts had forecast. Despite the unemployment rate continuing to fall, it appears to be due to 10,000 baby boomers retiring every day since 2014 [and will continue to do so for at least another decade] and nearly 430,000 people have simply given up on finding full-time work.

Trump’s “massively tremendous” tax cuts for the wealthy and corporations has pushed stock markets to all-time highs, but Trump’s lack of interest or knowledge of actual solutions, and the GOP Congress is focused on throwing citizens off of healthcare and tax cuts than job stimulus—which would put more money into stable jobs that would bring wage stability and demand for goods and services—and would be a REAL prescription for economic growth, instead of stubbornly worshiping at the alter of the mythical “supply-side, trickle-down” god of more tax cuts for the top 400 people in the country to park offshore, said Alexia Fernández Campbell at Vox.

Working-class men who have dropped out of the labor force, “frustrated with the lack of well-paying jobs,” voted in droves for Trump last November. But the share of workers, ages 25 to 54 participating in the labor force, actually dropped from 81.7 percent to 81.3 percent just in May, down from 85 percent during Obama’s term of office.

Another reason for our below-average unemployment rate is “above-average level of economic anxiety,” said Patricia Cohen at The New York Times. Even workers with jobs are finding it harder to earn a consistent paycheck. Forty-one percent of all hourly workers “are not given more than a week’s notice of their upcoming schedule. “For many families, income can vary as much as 70 percent from one month to the next,” according to Cohen — and that kind of volatility that can plunge family finances into bedlam. Expenses are just as erratic, because just one “uh-oh” expense — usually in the form of unexpected medical, home or car repair bill — can wreck a family’s bank account and increase anxiety. If the ACA is repealed, that anxiety could turn into downright despair.

Private Corporate Pension Plan Mishandling

With more than 10 million U.S. workers and retirees covered by 1,400 private pension plans—many of them in Trump-supporting U.S. Rust Belt states like Ohio and Michigan—and as many as 200 plans are severely underfunded or already insolvent, the resulting sudden collapse of fail-safe backstops that insures millions of Americans would be catastrophic.

“This is going to be a national crisis for millions of retirees and their families eventually. It’s going to open the floodgates for a governmental crisis.” said Karen Friedman, executive president of the Pension Rights Center.

Then there’s the silent crisis rapidly getting out of hand in retail jobs that are disappearing faster than the Arctic Ice Shelf.

Brick-and-mortar retail is having a meltdown, and economists are just beginning to open their eyes to the effects in the job market.

Overall retail employment has fallen every month since Trump took office. Department stores, including Macy’s and JC Penney, Sears, Kohl’s, have shed nearly 100,000 jobs just in just six months—more than the total number of coal miners or steel workers currently employed in the U.S.

During the presidential campaign, Donald Trump paid lip service to lament the job losses suffered by manufacturers and miners, but continues to import steel and Ivanka hasn’t brought home a single job from overseas slave labor markets. And there’s no denying that the loss of these jobs has been devastating to many cities and towns. But retail stores have lost 18 times more workers than coal mining since 2001.

The list of problems continues to grow as Republicans, owning both GOP Houses of Congress and the White House, have wasted precious time trying to toss as many millions of people of healthcare as it takes in order to give “the poor, beleaguered, top 400 taxpayers in the country” another 800 billion dollars in tax cuts and rolling back the oversight for the bigger-than-ever banks free reign to start playing bait-and-switch with home mortgages again.

Like so many times before, history could easily repeat because we complacently ignore the signs and let hucksters like Trump and the GOP Congress distract, distort and deflect. When, not if, the perfect storm brewing comes together, Wall St. will skate away unharmed, while the poor and middle class who decided to believe that “Only I [Trump] can fix it” will be among the ones to suffer the most….and somehow, some way, the GOP will convince voters that too many regulations and Democrats were the cause because Democrats just cannot learn to speak with one unified message.

It’s impossible to predict exactly when the dominoes will start to fall, and maybe, hopefully, we’ll find a way to avoid the massive pain and suffering of a deep, lengthy recession/depression. Maybe Americans will wake up and realize that a 50% average turnout for elections is a pathetic example of American un-exceptionalism and laziness. Maybe we’ll realize that healthcare for profit is barbaric and is the actual root of our healthcare crisis, not health insurance.

Maybe, Maybe. Maybe the GOP Congress will, just once, put the good of the country before the good of their party—and maybe pigs will fly out of my butt before I go to sleep tonight.

Harvey Gold

 

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