The Current Economy

An important economic effect of the current housing situation in the U.S. is that it is likely to displace homeowners and their families. In recent years, many people signed up for mortgage structures that were financially disadvantageous to them. The impact of the adjustment on adjustable-rate mortgages has been to revise monthly mortgage payments so dramatically upward that homeowners became unable to make payments. The main benefit of an adjustable-rate mortgage is that, initially, the interest rate on the mortgage is artificially low--that is, a rate that is below prime rate, or subprime--for perhaps two years, at which point the "real" interest rate on the deal kicks in, which in turn raises the monthly payment on the mortgage by several hundred dollars. Homeowners who are not prepared to pay the extra money and/or who have not refinanced their mortgage at a fixed and affordable interest rate are thus positioned to experience foreclosure and lose their homes (Leonhardt 2007).

Where such people are likely to relocate is unclear. Some may move in with relatives. Others may find apartments. The human costs, however, are buried in the fact that the actual properties mortgaged have been revalued downward. The decline in asset value means that it is possible for homeowners to owe more money on their mortgage than is the actual cash value of their houses. Krugman (2008) cites "negative home equity--that is, [] mortgages that exceed the value of their houses."

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Category: Economics - T