Should you repay $10,000 borrowed from a friend or family member? What about if you borrowed the same amount from a bank? Most people would answer the first question unqualifiedly, and the second question only slightly differently.
What happens if you don’t have enough money to make the loan payments? Strategic defaulters are borrowers who can’t pay their mortgage but don’t want to, and are often referred to as real estate borrowers. Prior to the real estate crash, six years ago, most people would not have held strategic defaulters in high esteem. This is becoming more common today, as home prices continue to fall and many people are disapproving of financial institutions. People have been known to do this and get to live in their house for up two years (foreclosures may take longer). They then buy new cars or go on vacation with the money they saved. This is dishonesty and disgusting behavior to me. However, it may be part of hitting back against “the man.” As a California note purchaser, I am a version “the man” when collecting on a realty note.
What should we do about institutions that have defaulted on their loans or are in the process of defaulting? In March, European banks borrowed $1.1 trillion from their central bank. Greece relies on other countries to lend more money. For four years straight, the U.S. has had a deficit of more than $1 trillion. All of these debts will be completely paid off at the exact same time that pigs can fly into outer space.
The U.S. government owns a unique tool that allows it continue to deficit-spend for many years. This tool is known as a printing press. It allows the Fed just to print more money to repay debts. The U.S. debt clock currently reads $15.5 trillion and will reach $16 trillion by year’s end. But almost no one is talking about it. Obama and Romney make occasional mentions of the debt but neither have any plans to reduce it. Theoretically, bureaucrats can continue to run up credit cards for many years without worrying about default. Higher inflation and higher interest rates will have an effect at some point but that can always be attributed to someone else.
There are two options for repaying a loan: you can make the payments or default. This applies to states, cities, businesses, and people like you. You can expect an “attaboy,” a letter from the bank, and a piece of paper stating that you have officially taken title to the property if you make all the payments on your house loan. You could lose your home or be eligible for a bailout from the government (taxpayer).
My expectation for the rest of this decade is that fewer people will be able to qualify for home loans. Two main reasons are behind this. Both of these factors also support my prediction of home prices continuing their slow decline. The first is that unemployment remains a major issue. You’ll be surprised at the actual unemployment rate if you disregard official statistics (which I usually advise). This includes both the long-term unemployed as well as part-timers who want to work full-time. Take the people who don’t work and the ones who have to take lower-paying jobs and you will find a large portion of the population without any chance of owning a house.
Second, many people in their 20s and 30s are already struggling with huge student debt. The combined student loan debt of 37 billion borrowers is $1 trillion. Over the last four years, federal student loans have quadrupled as more people believed that college education would lead to untold riches. The student loan debt exceeds the gross domestic products of all but 15 countries that are tracked by the International Monetary Fund (source John Burns Real Estate Consulting).
The most likely to buy a home for the first time are those between 25 and 34 years old. They won’t buy a house if they are working in low-paying jobs or have huge student debts. Older people in the food chain will also be affected if they want to purchase larger houses for their families, or have to sell.
The priorities of middle-aged and young people seem to have changed. According to some, “coolest” people have both an iPhone and a Starbucks coffee in their hands. Some people consider frivolous, while others see them as essential. These “necessities”, which are constantly purchased, reduce the ability to purchase a house or pay off debts.
According to the title of this article, debt does matter. Individuals seem to be more concerned about paying off debt than bureaucrats. Because the world is interconnected, our decisions have an impact on us all. It will be fascinating to see how the world reacts when sovereign nations default.
Adam Mcbrian, a California note buyer, and licensed real estate agent is