Filling the Void of the Middle Class

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The private sector is still reacting to the reality of the housing market today, and though it’s predictable, it is also quite sad.

As I talked about several weeks ago in The Gorrie Details, since millions of “middle class” Americans can no longer afford to buy or own a home of their own, other market players are stepping in.

First, as I pointed out in an earlier article, it was private equity firms buying single-family homes by the bushel at fire sale prices.

Did I have a problem with that?

Not really. And I still don’t.

If firms wish to invest their investors’ money in single-family homes and get them rented, it’s better than having the homes sit empty or having squatters move in. No neighborhood benefits from either of those happenings.

It’s also better than the Feds buying them—or just taking them—and handing them over to folks who did nothing to earn them as a way to ensure voter loyalty…

You can imagine how that would play…

“Remember which Party puts food in your mouth, provides you free medical care, and gave you the house you live in…”

But I also noted that it’s a sad commentary on what is happening to the middle class in this country.

And it is.

REITs enter the single-family rental market

The latest version of the market filling the void is that of new Real Estate Investment Trusts (REITs) being formed to buy single-family homes that will become rental properties.

And again, why not? It makes good business sense.

The news here is that single-family homes are not the usual targets for REITs, which typically specialize in specific sectors of the commercial real market like office buildings, shopping centers, retirement communities, and so forth.

But with so many foreclosed homes on the market, so many banks with not lending, and so many Americans no longer in a position to buy a home…

REITs forming to fill that widening gap are a natural part of the market adjusting to new realities.

And the new reality is that Middle America is joining the poorer class and becoming a nation of renters, not homeowners.

And of course, both REITs and private equity firms that are buying the foreclosed single-family homes are doing so at great discounts.

That is not a problem, per se, either; the homes are empty, in need of repair, and were over-valued to begin with.

But there is one major flaw in this equation…

The bank foreclosure process is stacked against the middle class—in other words, those Americans who are still in their homes.

A huge bump in the road for those Americans who still own a home is their ability to refinance their home in a timely fashion…

Or even having the equity in the property to qualify.

It goes something like this…

You’re in your home, paying the mortgage on time and you still have equity in your home—or maybe you don’t, it doesn’t matter--but the interest rate is going to adjust soon…

You try to refinance your loan, but the credit requirements are now so strict and/or you owe more on the house than it’s now worth…

Either way, that end result is that you don’t qualify for a refinance or a loan modification…

The interest rate adjusts, the monthly mortgage payment doubles, and now you have to choose between putting food on the table and keeping the lights on or paying your new, very high mortgage payment.

What do you do?

You feed your kids and keep the lights on…

And 12 months later, your house is in foreclosure.

Later on, at an auction, the house that was once a home to a family is now sold at 30 cents on the dollar to a REIT or private equity group to become a rental property.

Does this really make any sense at all?

Of course it doesn’t.

Again, I’m not against private equity and REITs buying up houses that are sitting empty and renting them; it’s certainly an improvement…

But it’s not the ideal.

Banks versus the middle class

The ideal is to keep as many homeowners in their homes as possible. This applies especially to those who are current in their payments but facing interest rate adjustments which will make staying current impossible.

Forcing homeowners out of their homes after banks that wrote the loans against the property have already by bailed out by the federal government should not be in a position to gain extra benefit by “forcing” homeowners out of the homes simply due to interest rate adjustment on loan amounts…

Remember, not only have the banks been bailed out, but also, it was they who established home values in the first place, through their approved appraisers…

And it was also the banks that made money when they financed the homes at the approved values.

But now, by making refinancing very difficult, and by not making wise and fair adjustments on property loan balances…

They are putting more hardship on homeowners who are already under financial strain.

This is how and where the process is skewed against homeowners and is really a process that attacks and undermines the middle class.

Homeownership is good for families, it’s good for neighborhoods, it’s good for the economy, and it’s good for America.

When you get right down to it, if the middle class is no longer a class of homeowners, but renters, it ceases to be a middle class, doesn’t it?

And those are…The Gorrie Details.

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