When people borrowed too much to pay too high of prices on property, where did all this money go? Well, the money went to ‘us’. Americans. Those who were good enough or lucky enough to sell the property when it was overvalued, when it was high, when selling was the smart thing to do. So, how can ‘we’ (America) be broke, when we still have the money? When it just changed hands from the stupid, to the smart?Here's a true story. A widow used to live near our neighborhood. The young woman had a good job working from her home and thought the $150K home with big trees and several acres would be ideal for her three young children. She told the neighbors that she really loved the place and that the real estate agent had worked very hard to make sure she could afford to buy it. I concluded she had been able to purchase the house with a relatively small down payment and low, but variable, interest rate.
Her more frequent garage sales seemed to indicate a problem, and we did hear that her 'at home' job had ended and that she had to find another position. About this time, the interest rates on adjustable mortgages increased. Before we knew it, the widow and her children left to return to her family in California.
A "For Sale" sign was placed in her yard and remained there for eight months. During this time, the yard was not being mowed so the place was beginning to look rather bad. After almost a year, city employees mowed the yard.
The house now is in foreclosure. When one neighbor told me he had chased off three kids attempting to break into the back door, I decided to walk over to the place and see it up close. One of the large windows at the back of the house was broken. The real estate agent who formerly tried to sell the property explained that the loan bank had told him it was no longer responsible and the property had been turned over to the FHA. The agent had also been responsible for the first sale and says the original owner won't even drive by the house because he is so heart-broken over the way his formerly beautiful property now looks.
One of the nicest houses in the neighborhood now invites damage from vandals, vagrants, squatters, arsonists, and animals. Will the property likely lose a major part of its intrinsic value before it is sold? I'm no expert in real estate, but this former $150K house would probably sell today for no more than $110K.
The bank was never really interested in selling the house because it would have to show a loss on the books. The FHA is likely overburdened with foreclosures like this one and it takes a lot of time just to move the foreclosed house on the FHA/HUD list for bid. So the house just deteriorates and loses value.
One FHA foreclosure in the Greater Kansas City area shows the "as-is value" of a house is $183,000, but the asking price is $128,100--30 percent below the "as-is value." Another much cheaper house in a poorer section of Kansas City is reduced to $20,400--40 percent below the "as-is value," and this house is advertised to have an in-ground pool. All these foreclosed properties once had much higher intrinsic value because people lived in the houses and took care of them.
My correspondent asks "So, how can ‘we’ (America) be broke, when we still have the money? When it just changed hands from the stupid, to the smart?" The answer is that a good portion of property value has been permanently lost. A foreclosed house in my neighborhood is worth much less not just because of inflation/deflation/recession/depression, but because it has not been taken care of. This house (and many other foreclosed assets in our country) will be worth much less in the future if they are burned down by arson, or further damaged by vandals, vagrants, and animals. No matter how you cut it, losing intrinsic value means "going broke."