The Economic Stimulus nobody is talking about

Do REO's and short sales have an upside?

The increase in bank owned homes has provided the media the opportunity to highlight the personal trauma that losing a home can cause. The financial hardships that make a seller pursue a short sale are equally stressful.  Families losing their homes because of overwhelming debt is hard to watch.  These are the painful consequences that accompany a market correction. Unfortunately, Phoenix Az has been at the forefront of foreclosures and homeowner defaults.  The government reacts by trying to stop the inevitable with ineffective programs that waste taxpayer money and increase the national debt, which increased by 22.7% in 2009. (Un-believeable!)  Is there any positive news to be gleaned from our current situation?

The answer can be found in the March 12th edition of The Wall Street Journal, front page article. Total household debt fell 1.7% in 2009, the first annual drop since 1945.  This "deleveraging" has been caused by a wave of defaults on mortgages and obligations.  In 2009, banks and investors wrote off an estimated $200 billion in mortgage debt alone which is more than four fifths of the total drop in household debt according to The Wall Street Journal.  This leaves many people with more cash to spend or save instead of sending it off to the bank, helping to create a consumer directed economic stimulus instead of leaving it to the government to choose the recipients. 7% of $200 billion is $14 billion per year that can be saved or spent to stimulate the economy.  And this will only grow as REO's and short sales are in our midst. 

It is very hard to observe the impact on homeowners and families that is part of this correction, but in the long run it will strengthen the economy as it frees up cash that will help stimulate the economy. Consumer spending in the last quarter of 2009 grew at an inflation adjusted annualized rate of 1.7%.  But there is still more adjustment to be made. At the end of 2009, total household debt stood at 122.5% of annual disposable income, down from 130.6% at the beginning of 2008. Economists believe 100% is closer to a normal and more sustainable level. 

Before a homeowner decides to allow their house to go back to the bank, they should consider their alternatives such as a short sale after talking to qualified professional professionals including an attorney, CPA and real estate agent.  For detailed real estate information including short sales in Gilbert, Chandler, Mesa, and the Phoenix area, contact Gordon Baker at 480-326-8571.