U.S. housing boom goes pop

The May issue of Harper's magazine was a keeper. The cover illustration featured a sepia-toned man of middle age physically bearing the burden of a house (brick, two-story, detached), leather-strapped to his back. A whisk, a tin cup, a ladle and a wooden spoon were pictured hanging from the foundation of the home, heightening the Depression-era mood of the image.

The title of the cover story, The New Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse, signalled the clear views of the essay's writer, Michael Hudson, a professor of economics at the University of Missouri-Kansas State.

"Housing prices have swollen to the point that we've taken to calling a mortgage — by far the largest debt most of us will ever incur — an investment," wrote Hudson. "In the odd logic of the real estate bubble, debt has become equal to wealth." This was a curious state of affairs, continued Hudson, seeing as how debt through history "has been little more than a slight variation on slavery."

Thematically, Hudson wasn't breaking new ground. Warning bells about the fragility of the U.S. real estate market had been ringing in some quarters, including The Economist magazine the previous June and, certainly not least, the office of then Federal Reserve Board chairman Alan Greenspan, who cautioned last autumn that house prices had risen to "unsustainable levels" and that "exotic" mortgage products had perilously wooed "marginally qualified, highly leveraged borrowers" into the land of home ownership.

The great strength of Hudson's essay was his 20-point examination as to why it was all going to come undone, each accompanied by a gripping graphic. Particularly striking was the graph that showed U.S. mortgage debt on track to surpass the gross domestic product of the United States by the end of this decade.

As for individual homebuyers, Hudson predicted that growing numbers who availed themselves of those "exotic" lending options would, in the face of falling house prices, no longer be asset rich, but rather "negative equity." And in that state, these same homeowners would find themselves indentured to a lifetime of debt service — hence the "serfdom." The whole economy would suffer as a result as the great U.S. engine of economic growth, the consumer, retreats to his or her foxhole.

There were many loud voices then protesting that no such bubble existed. But as the estimable Charles Kindleberger once wrote, "a bubble is an upward price movement over an extended range that then implodes." In other words, you have to wait for the popping sound to know that it is so.

We now know that it is so in the United States. Many observers have seized on the recent dire news from Toll Brothers Inc., the Horsham, Pa., based company that bills itself as "the nation's leading builder of luxury homes." Profits are down. More arresting, the company has substantially reduced its land position, thereby red-flagging its declining confidence in future sales. Robert Toll, the company's chief executive officer, assessed the situation this way: "The speculative buyers of 2004 and 2005 are now sellers; builders that built speculative homes are trying to move them by offering large incentives and discounts; and some anxious buyers are cancelling contracts for homes already being built."

As Paul Krugman wrote in The New York Times: "Pop!"

House sales are falling. Foreclosures are up. See Massachusetts, where foreclosures increased by more than 50 per cent in July from the same period the year prior. See Detroit. See Dallas, where the Dallas Morning News reported last week that mortgage defaults in the Dallas-Fort Worth area are up 30 per cent.

Those holding firm to the belief that housing woes exist only in such pockets could not have welcomed yesterday's news from the Washington-based Office of Federal Housing Enterprise Oversight, which reported the sharpest quarterly decline in home prices since its house price index was launched in 1975. "[T]he deceleration," said director James Lockhart, "appears in almost every region of the country."

Of course, it takes a real live person to hit the story home, as it were. And so we meet Eric Fenton, who told the Dallas Morning News that as his mortgage payments rose on his adjustable rate mortgage by $200 a month, and as the cost of utilities rose too, he had no choice but to put his house on the market. There were no buyers.

About the time that Michael Hudson's piece appeared in Harper's, GE Money, the Canadian consumer lending arm of the General Electric Co., said that it was launching a 40-year amortization mortgage option, and that it was the first lender in Canada to do so. The date was April 28. I know this because I wrote the words "tipping point" in red ink in my day book.

Two months later, Canada Mortgage and Housing Corp. announced that it would now offer mortgage insurance on interest-only mortgages for up to the first 10 years on the purchase or refinancing of a home. "This new option will give borrowers greater flexibility in managing their cash flow," the CMHC said in its press release.

Twenty years ago, when I purchased my first home, CMHC was the stern, faceless housing agency that insisted on a 25-per-cent down payment before I could consider being a home owner. The notion of waiting a decade before even touching the principal on the biggest debt burden most consumers will ever bear was unheard of. In those days, banks, wisely, were aggressively marketing accelerated amortizations. "Cut seven years off the life of your mortgage!"

Some of us remember confident assertions that the Toronto housing market would not deflate because Toronto was immune. Like Manhattan! Some of us remember the subsequent pain suffered by negative equity neighbours, not to mention 18 per cent rates of interest.

Times change. Interest rates have stayed pleasingly low. House prices have inflated to such a degree that it's easy to feel "rich." As an economist I spoke to on this topic said, homeowners would assay the increased value of their home and head out to enjoy a fine dinner "on the house." Without the real money to do so, you understand.

Home-equity loans became all the rage, and then interest-only home equity loans. If one's home is valued at half a million dollars, surely it deserves a stainless steel Sub-Zero "monument to food preservation," a.k.a., a spiffy refrigerator.

In such an environment it seemed not at all appropriate that CMHC would be marketing the very same exotica warned of by Mr. Greenspan. (An aside: the Australians have taken to calling 50-year mortgages, which I understand are on offer, "death-bed mortgages." You don't pay them off. You will them to your kids.)

The optimists persist in the view that Canadian real estate investors have nothing to fear. There is no bubble here.

Still, a recent report out of TD Bank Financial Group flashes what it calls "warning lights" because of dramatic price gains in Edmonton, Calgary and Vancouver. Here's a big number: in the second quarter of this year, resale home prices vaulted 43.3 per cent in Calgary. But, added Craig Alexander, the bank's deputy chief economist, affordability appears not to be an issue in that city, nor in Edmonton, where household related costs were 18 per cent of median household labour income.

Vancouver is another story. There the affordability ratio climbed from an already lofty 39 per cent in 2005 to 50 per cent last year. "In my mind the Vancouver market is the one to watch," Alexander said. "We won't know if it's a bubble until after the fact."

As for Toronto, price growth, said Alexander, has slowed to more historic norms. That's a comforting thought: no sudden movements. Less comforting in my neighbourhood are the For Sale signs that have popped up on a string of town homes that were initially sold preconstruction. It just smells like speculation to me.

We can hope that that's not true. But the news out of the U.S. has moved from denial, to segmented worry, to awful. Will that lead to a down-shifting in the U.S. economy? Absolutely.

The skittishness level is rising. Economists hate that. Why? Because it's unquantifiable. All it takes is a turn in investor sentiment and then, as Paul Krugman said, "Pop!" Or, as Michael Hudson phrased it, "Only the debt itself will remain."

Avoiding Foreclosure: Five Important Steps To Take

There's no doubt that owning a home is part of the American dream, a marker in life that shows economic accomplishment and social status. Yet it's also true that even households with great credit are sometimes threatened with bad breaks, hard times and the potential for foreclosure.

"Foreclosure is a terrible event," says James J. Saccacio, chief executive officer at RealtyTrac, the nation's leading online foreclosure marketplace. "In the first quarter of 2006 we found that foreclosures nationwide were up 72 percent when compared with a year earlier. The tragedy is that many of these foreclosures could actually have been avoided. How? You have to know how the game is played."


Top 10 Metro Foreclosure Rates - Q2 2006

Metro Area % of households #households for /National Avg.
in foreclosure every foreclosure
1. Indianapolis 0.987 101 3.532
2. Atlanta 0.904 111 3.235
3. Dallas 0.891 112 3.188
4. Denver 0.784 128 2.807
5. Austin, Texas 0.706 142 2.528
6. Houston 0.691 145 2.472
7. Memphis, Tenn. 0.682 147 2.440
8. Stockton, Calif. 0.649 154 2.323
9. Salt Lake City 0.607 165 2.171
10. San Antonio 0.601 166 2.151



Few people who buy real estate pay cash for their homes. Instead, the common path is to buy property with little down and finance the balance. The money that's been borrowed is then paid back over time or when the property is sold or refinanced.

In most cases real estate financing is the cheapest money you can borrow. The reason for low mortgage rates is that real estate loans traditionally represent little risk to lenders. At any given time only about 1 percent of all real estate loans are in the "process" of foreclosure, which means the vast majority of home loans are on track to be paid off on time.

And of the homes that enter the foreclosure process because of delinquent payments, most don't end up on the auction block or repossessed by the bank. Why? The answer is fairly simple: Like you, lenders don't want to be involved with foreclosures.

Even with mortgage insurance, lenders can experience huge losses every time a home is foreclosed. No less important, many lenders are overseen by state and federal regulators. To regulators, foreclosures are evidence of poor management and a need to tighten lending standards. To lenders, more regulator oversight means tougher lending requirements and reduced profits.

This is good news for homeowners facing short-term financial distress because it means that most lenders will allow some wiggle room to right their financial ship and avoid foreclosure.

But what happens if a more permanent tragedy -- like your employer shutting down or your community being hit by a hurricane, tornado or other natural disaster -- affects your ability to pay your monthly mortgage? And what can you do to avoid foreclosure if you've lost a job, gotten sick, had an accident, lost a spouse or now face divorce or separation? Here are the five key steps to avoid foreclosure, even in these types of situations.

Step 1: Don't Panic

Most households have a surprising array of assets that can be used to make payments and delay foreclosure. Unemployment insurance, disability insurance and savings are each potential cash sources. Household budgets can be slashed. Big, expensive cars can be traded in for cash. Retirement funds are often available -- but be aware that withdrawals may result in penalties and additional income taxes.

Saccacio says borrowers should not forget about friends, family, co-workers, religious congregations and community groups. "You may be surprised by the number of people and groups who will lend a hand when times are tough," says the RealtyTrac executive.

Step 2: Deal With Late & Missed Payments

If problems cannot be delayed or deferred and if mortgage payments will be late or unpaid, then you MUST contact the lender as soon as possible.

"The usual way to start such contacts is for you or your attorney or legal clinic to call the phone number used to service your loan," says Saccacio of RealtyTrac. "Most often you can ask for the 'loss mitigation department.' Be sure you to have your loan number handy as well as the latest statement with your mortgage balance and other information."

At this point your goal is to help the lender create a "workout" agreement that effectively modifies your mortgage so that a foreclosure can be avoided.

"Since most lenders also want to avoid foreclosures, everyone has a reason to work together," Saccacio says.

A group of national lenders has set up a national hotline, run by the Homeownership Preservation Foundation, for homeowners in default. If you are in default or in danger of default, you can call 888-995-HOPE to get advice about how to avoid foreclosure.

Step 3: Look At WorkOut Options

Once you enter into discussions with a lender or a "servicer" -- the company that services the loan for an investor -- any number of options are open. While lenders are typically NOT required to modify loan arrangements, many will. The usual choices include:

* A deed in lieu of foreclosure: In this situation the lender accepts the
return of your title. "But be aware that the lender may not have to
accept your title," says Saccacio of RealtyTrac. "Also, in many states
a lender may sue for any loss, ding your credit report and report any
uncollected loss to the IRS as taxable income to you."

* Claim advance: If you bought with less than 20 percent down then either
the loan is self-insured by the lender or you have private mortgage
insurance (PMI). In some cases PMI companies will provide a cash
advance to bring the loan current -- money which is sometimes interest
free and need not be repaid for several years.

* Disasters: Most lenders, but not all, will provide substantial relief
in the face of hurricanes, earthquakes and other terrible events.
Typical measures include a suspension of late fees, no late payment
reports to credit bureaus, a pause in foreclosure actions and modified
payment schedules. To get such benefits you must contact the lender as
soon as possible after the disaster.

* FHA loans: If you financed with a loan guaranteed by the Federal
Housing Administration, call 1-800-569-4287 or 1-800-877-8339 (TDD) to
reach a HUD-approved housing counseling agency for assistance and
advice.

* Forbearance: This is a temporary change in mortgage terms, such as the
right to skip a payment or make smaller payments for a year or less.

* Modification: "This option should be considered when the borrower
experiences difficulty making regular mortgage payments as a result of
a permanent or long-term financial hardship," says Liz Urquhart with
AIG United Guaranty, a leading private mortgage insurance company.
"Reducing an above-market interest rate to a market rate and/or by
extending the original terms of the note may enable the borrower to
continue making payments and, thus, avoid foreclosure. Permanent
interest rate reductions appeal most to borrowers, but even a temporary
rate reduction of one to three years can provide substantial help."

* Private mortgage insurers: Mortgage insurance companies typically
require lenders to begin foreclosure proceedings once a delinquency
reaches 150 days or when a sixth missed payment is due. However, such
requirements may be waived in areas impacted by natural disasters and
for other reasons.

* Re-amortization: In this case your missed payment is added to the loan
balance. This brings your account current. However, says Saccacio,
"since your debt has increased, future monthly payments may be larger
unless the lender agrees to lengthen the loan term."

* Refunding: If you have a loan backed by the Department of Veterans
Affairs, the VA may buy the loan from your lender and take over the
servicing. If you have the ability to make mortgage payments, but your
loan holder has decided it cannot extend further forbearance or a
repayment plan, you may qualify for refunding, according to the VA.

* Reinstatement: Imagine you missed two or three monthly payments. With
a reinstatement, or what is also known as a "temporary indulgence," you
bring your loan current, pay late fees and other costs, and the loan
continues as before.

* Repayment plans: Say you must miss a payment and that each payment is
$1,000. With a repayment plan you might pay $1,075 a month until the
missing money is repaid.

* Short sale: An arrangement where the lender accepts less than the
mortgage debt in satisfaction for the entire loan amount. Also called
a "compromise agreement" with VA loans. Be cautious: RealtyTrac's
Saccacio says in some instances money not repaid may be regarded as
taxable income. Also, lenders in some cases may sue to recover any
shortfall.

Step 4: Refinance Toxic Loans

Since 2001 millions of loans with new formats have been issued, permitting low monthly payments for the first several years of the loan term and then much higher monthly payments thereafter.

"If you have an option ARM, an interest-only mortgage or a negative amortization product and can't make the required monthly payments you can lose your home," says Saccacio of RealtyTrac.

Saccacio points out that in some cases monthly costs for principal and interest can more than double when the loan resets at a higher rate. He says that in such situations, switching to a mortgage with monthly costs that are higher than today but far lower than next year or the year after with current financing is a smart lending choice.

"There are no conditions under which it's good to lose a home," says Saccacio. "If you have to switch loans and go to a mortgage which now has a bigger monthly payment -- and if that means you must trade in the luxury car for something more modest to save money or that you need a second job or more hours where you work now -- that's fine. These are much better options than being homeless."

If you have a loan where soaring payments are a certainty, don't wait to refinance. Do it now while you have a strong credit profile and no missed payments.

Step 5: Sell The Property

In some situations there is no workout or refinancing option which can save a property. If a job is lost, medical payments are overwhelming or mortgage payments are rising to the point of bankruptcy, the only plausible choice may be to sell the property.

"You have to be realistic," says Saccacio of RealtyTrac. "If the situation is headed downhill, if the situation is worse every month, you have to protect your interests and sell the property. This is a hard, difficult choice, but if you sell before foreclosure looms you'll get a better price for the property and you'll preserve your credit standing."

Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 80 newspapers.

Attention Military Personnel

Are you in the military? If so, under the Servicemembers Civil Relief Act of 2003 (formerly known as The Soldiers' and Sailors' Civil Relief Act of 1940) you can be entitled to important financial protections.

If you're on active duty, or if you're in the Reserves or National Guard and have been called up, then the highest mortgage rate you can pay is 6 percent. To qualify you must notify your lender if you go on active duty.

Also, foreclosures are generally not permitted while service personnel are on active duty and for 90 thereafter. For details, speak with your base housing office.


by Peter G. Miller

What's (Not) the Matter With the Middle Class?

For more than a decade, the Democratic Party -- the self-proclaimed party of the middle class -- has consistently lost the middle class at election time.

In 2004, voters with family incomes between $30,000 and $75,000 went for Bush by 6 percentage points, while Congressional Democrats lost this group by 4 points. Among white middle-class voters (one-third of the electorate), Bush won by 22 points and Congressional Republicans by 19 points.

What's the matter with the middle class? Democrats like to pin their defeats on national security and culture issues alone, but the progressive economic message is also to blame. What progressives generally say about the economy is unrelentingly pessimistic -- stagnant wages, rising costs, overwhelming burdens of debt. It's a message that doesn't resonate with the middle class -- not only because it's overly negative (by itself political poison), but because it's simply flat out wrong.

Don't believe me? Believe the numbers:

* $63,300. That's the 2004 median household income of people in their prime working years, ages 25-59 (it's $70,000 for married households and nearly $80,000 for two-earner households).
* $248,700. That's the median net worth of pre-retirement Americans, ages 55-64.
* Zero. That's the median credit card debt for all American households.

Drowning in debt? Squeezed to the gills? Living paycheck to paycheck? I don't think so.

These numbers all add up to this one: $23,700, the household income at which a white voter was more likely to vote Republican than Democratic in the 2004 congressional races.

No question, the middle class faces challenges, such as rising costs for health care and college tuition and the declining real earnings for non-college-educated men. There's also no question that the wealthy have received the lion's share of economic growth over the past 25 years. Nevertheless, absolute living standards for the middle class have only improved, even if relative increases in income don't match the gains at the top.

Let me take on the three most repeated overstatements about the middle-class "squeeze:" first, that middle-class incomes and standard of living are slipping backward; second, that middle-class families are "drowning in debt;" and third, that employers are abandoning their obligations to provide health and retirement benefits to their workers.

The myth of the stagnating middle class:

It's true that the middle class is shrinking -- but that's because more families are better off. The share of prime-age adults in households with real incomes above $100,000 rose by 13.1 percentage points from 1979 to 2004. The share of households making less than $75,000 dropped by 14 percent. Fully 41 percent of prime-age American adults are in households with incomes above $75,000.

Among married-couple households the picture is even brighter. In 2004, the median income for these households was $70,000, and $78,000 for couples with two earners.

I focus on prime-age households (age 25-59), which are 68 percent of the population, because including the very young and the very old distorts the picture of what's really happening with the middle class. Many young workers get paid very little, but few will keep their low salaries as they move up in their careers. Older Americans distort the wage and income picture because they're no longer working. Their incomes may shrink, but their standard of living may not diminish. Indeed, Americans age 55-64 have greater net wealth than any other group.

Two final points: even assuming household incomes have risen, isn't it just because wives are working longer and harder? And aren't higher prices eroding the middle-class standard of living? No and no.

Wives certainly contribute more to household incomes -- their earnings now make up 30 percent of total earnings for middle-income families. But incomes for everyone except the very poor would have risen even absent longer hours on the job by wives. Holding wives' working hours to their 1979 levels, incomes for married couples have still increased by 4 percent for the 30th income percentile; 9 percent for the 50th; and 22 percent for the 70th.

On the question of living standards, the cost of some items, such as housing and health care, have risen much faster than inflation. But other equally important items have not. For example, in 1960, the average family spent 24 percent of its income on food. Today, that percentage is 13 percent, and half of that is on meals eaten out. Finally, despite rising housing prices, homeownership is at record highs even for young adults.

Drowning in debt -- or investment?

Another major source of angst is the rise in consumer debt, which is at historically high levels. But in focusing exclusively on debt, progressives ignore the other side of the ledger -- assets. Consider:

* A majority of Americans have no credit card debt. And of the 46 percent of Americans who do, the Federal Reserve's Survey of Consumer Finances says the median balance is $2,100. Moreover, Pew surveys from 2004 through 2006 found that only 9 percent of Americans said that they "owed a lot more [in credit card and installment debt] than they could afford."
* Middle class assets are up. Real median net worth for all households rose from $69,000 in 1989 to $93,000 in 2004 -- an increase of 35 percent.
* Most household debt is mortgage debt. Mortgage debt as a share of total debt has increased from 71 percent in 1989 to 79 percent in 2004. For the vast majority of people, their major source of wealth is equity in their home.
* Bankruptcies are rare. Only 1.5 percent of households declare bankruptcy in any given year.

The number of people who can't manage their debts is somewhat higher. Since 1989, the percentage of people more than 60 days late on a debt payment has risen from 7.3 percent to 8.9 percent, and the share of people whose debt payments take up more than 40 percent of their income is up by 2 percentage points. But no evidence suggests that large numbers of middle-class families are maxing out their credit cards to pay the rent or buy groceries.

The overstated pension and insurance crisis:

The third major worry is the purported decline in employer-provided benefits. One oft-cited analysis says the percentage of workers with employer-provided health insurance dropped from a peak of 71 percent in 1981 to 56 percent in 2003. But that analysis counts workers who are on their spouse's health insurance as uninsured. The Census shows that coverage varied between 72 percent and 76 percent of the workforce from 1987 through 2004. And in 2005, 98 percent of large employers (200+ workers) offered health insurance to their workers. In the last four years, the percentage of workers with employer-sponsored insurance fell from 74.4 percent to 70.7 percent, but it's too early to know if this is part of a trend or a blip caused by the Bush recession.

Sharply rising insurance costs have meant that both employers and employees are paying more. However, the share of premiums paid by employers has remained constant for the past 20 years.

Finally, the percentage of companies offering retirement benefits has scarcely budged since 1987. The big shift has been from defined benefit to defined contribution, but again, this is a mixed picture. While some workers could see lower benefits, other workers, such as women and younger workers, could get a better deal. Traditional pensions are ideal for workers who stick with one company for a very long time. Women tend to cycle in and out of the workforce and younger workers tend to switch jobs with some frequency. For them, a portable 401(k) is a better long-run bet.

---

The middle-class story of the last 60 years is largely one of success. The wealthy have done better than everyone else, and the bottom 25 percent (75 million people) often face tough times. But repeatedly highlighting the troubles of this bottom group is not likely to resonate with the rest of the population. And the Democratic Party can only continue to advance its proud tradition of expanding economic opportunity for everyone in society if it does better among middle-class voters.

Rather than documenting how the middle class is falling behind (it isn't), progressives might do better finding ways to help more middle-class families succeed. In its recent report, Politics of Opportunity, the group Third Way counsels progressives to adopt a message and policy agenda that looks to middle-class aspirations and seeks to create middle-class opportunity. One way to do this, for example, is to look at the characteristics of the top income quintile and use public policy to replicate that success.

Two things set the top quintile apart: people in the top quintile are much more likely to have finished college, and they are much more likely to be in married, two-earner families. We can move more people up the ladder by doing two things: one, by helping more students graduate from college, and two, by supporting two-earner families in balancing work and family. This means such things as broad-based tuition tax relief, paid family leave, and more tax breaks for child care costs.

Solutions such as these can help progressives go a long way toward winning back the middle class.

Stephen Rose is the senior economic fellow at Third Way.

Different Types Of Credit And Other Debt Consolidation

Debt consolidation services enable debtors to resort to a single monthly payment of a fixed amount, instead of payments for a number of high interest loans.

The debt consolidation loan allows lower interest rates than the credit card debts which carry a very high level of interest, often higher than that of an unsecured loan taken from a bank.

Credit card debt consolidation is often granted against an immovable asset that serves as collateral, which is equivalent to a mortgage. Since the risk to the lender is reduced, the interest rate that is offered becomes lower.
But credit card debt consolidation can prove to be detrimental, since most of the times, a temptation regarding the re-usage of the paid-off accounts arrive, which translates into a bigger financial problem. Therefore, a credit card debt consolidation must only be opted for if the rate of interest charged by the credit card companies is higher than the debt consolidation rates.

Credit card debt consolidation is a booming business, especially in America, where huge credit card bills have become the bane of society, due to the extravagant consumerist culture that prevails. The average American household credit card debt is close to an average of $9000. However, it is very important to keep an eye on the credit card debt consolidation program criteria, as your current situation and the amount of debt will determine which credit card debt consolidation loan you should opt for.

Secured credit card debt consolidation loans against your home (serving as collateral), is not a very good idea. This loan should be taken with caution, as a default on the home equity loan can result in the loss of your home.
The best way out when opting for credit card debt consolidation is to look out for credit cards that offer low interest rates or zero percent balance transfers. This kind of debt consolidation from a number of credit cards with high rates of interest to a single credit card with a better rate offer, can actually lead to a saving of a few hundred dollars each month, a really hefty annual saving.

Unhealthy loyalty towards a credit card, which charges unreasonable rates of interest, can only spell loss for an individual, with all the myriad available options in the financial markets. One should immediately do some amount of groundwork, and select a card that will suit the pocket.

To avail a credit card debt consolidation program:

•Send the credit card debt consolidation agent an application to consolidate all the due bills.
•Make sure the former bills are settled; credit card debt consolidation is not for someone with a bad payment history. To get the best deal, shop around for a debt consolidation company and compare the service charges and other related paraphernalia.

Debt consolidation can be a great solution, if it is used correctly and wisely. It can be the stepping stone to a financially free future.

Existing-home sales slack, hit 1 2 /2-year low

House hunters shied away from buying in July, driving down sales of previously owned homes to 1 a 2 / 2-year low. The inventory of unsold homes climbed to a new record high.

The new figures, released Wednesday, provided fresh evidence of how much the formerly sizzling housing market has cooled.

Prospective home buyers have turned cautious about making such a big-ticket purchase, as mortgage rates have gone up and uncertainty has risen over whether the economy and job creation will keep slowing, analysts said.

Existing-home sales dropped 4. 1 percent in July from the previous month to a seasonally adjusted annual rate of 6. 33 million units, the National Association of Realtors reported. That was the lowest level since January 2004.

The latest snapshot of housing activity was weaker than analysts expected. Economists were forecasting the pace of sales to fall to 6. 55 million.

Sales prices for homes are no longer bounding ahead, but some prospective buyers continue to wait for better deals — another factor in the weak showing, economists said.

“Many potential home buyers have been on the sidelines, some kicking the tires but mostly waiting for sellers to compromise on prices and terms,” said David Lereah, the association’s chief economist.

The median nationwide price of a house sold last month was $ 230, 000, up just 0. 9 percent from the same month last year.

The median price is the middle point, where half sell for more and half sell for less.

Meanwhile, the inventory of unsold homes in July rose to a record high of 3. 86 million. At the current sales pace, it would take 7. 3 months to exhaust that overhang.

That is the longest period to exhaust the supply of homes since the spring of 1993.

Sales tumbled 6. 4 percent in the West in July from the previous month. Sales fell 5. 9 percent in the Midwest and 5. 4 percent in the Northeast. In the South sales dipped 1. 2 percent.

For five years running, home sales had hit record highs as low mortgage rates attracted buyers.

But the housing sector has lost steam this year as mortgage rates have gone up and wouldbe buyers have grown cautious amid high energy prices and a slowing economy.

Against that backdrop the Federal Reserve earlier this month decided to halt a rateraising campaign that had pushed interest rates steadily higher over the past two-plus years to fend off inflation.

The Fed’s goal is to raise rates enough to thwart inflation but not enough to hurt the economy.

One of the things that Federal Reserve Board Chairman Ben Bernanke and his colleagues are watching closely is the housing slowdown.

If home prices and sales crash, that could spell big trouble for the overall economy. So far Bernanke has said the market’s slowdown has been fairly orderly and smooth.

Wednesday’s figures made some economists worry about the potential for a sharper slowdown in housing.

However, Lereah said he still expects a “soft landing” for the housing sector. But he urged the Fed to leave interest rates alone and refrain from bumping them up again — as some analysts have said is a possibility.

The housing sector’s transition from a red-hot market to a cool one has important implications for the overall economy.

Consumers who watched their houses rise rapidly in value over the past several years felt wealthy and more inclined to spend.

They also borrowed against their homes to support their spending ways.

But with home values nationwide not going up so much now as the double-digit gains seen in the past several years, consumers have tightened their belts. That has contributed to a slowing in overall economic activity.

“Once upon a time there was a housing market that allowed homeowners to print money. Those days are gone,” said Joel Naroff of Naroff Economic Advisors.