3. Small business owners use their homes to obtain business credit. According to the 2009 Gallup/NFIB survey, 16 percent of small business owners finance a business with a home mortgage, and an additional 6 percent pledge that real estate as collateral. As a result, business borrowing of more than one in five small business owners is tied to the value of their homes.
As home prices have fallen, small-business-owning households have seen their personal balance sheets weaken. And the NFIB survey shows that 9 percent of owners owe more than their homes are worth.
The more fragile financial position of small business owners has made expansion difficult. In addition, as home values have fallen, the 22 percent of small business owners whose business debt is linked to residential real estate have faced demand for more collateral by lenders. The weakened balance sheets and demand for additional collateral has meant that fewer small business owners have been able to expand.
One of my friends is filing bankruptcy today. At one time, he owned a home in a nice part of the city. That home appreciated from his purchase price of 290k fourteen years ago to 790k two years ago.
He used the 200k of the equity in the home to finance a start up business which ultimately failed. Now he's on the hook for 490k in debt on a home that now appraises for $475k.
What's interesting is that they received an offer just before the crash for $720k that they declined because they thought they could get more.
So for all the douche bags out there who want to jump start the housing industry, here's a real life case study on what over inflated real estate values did to people during the past two years.
First, by creating all these home ownership programs, which included stated income loans (liar loans), the feds created an environment for speculators in the housing market.
Second, if this market had more normal rates of returns, this guy would never had the equity to speculate in a business (which I thought was a loser from the get go).
Third, too many business owners knew they could keep borrowing on their house believing the rates of return would keep skyrocketing. Shit, why sell at $720k when I can get $820k next year! In addition, I have all kinds of equity to do a plant expansion.
Fourth, the banks got Viagra like results when they could take a home as collateral. The thinking was "hell, people won't let their houses go". How'd that thinking work out? I know of banks doing 150 percent loan to value home equity loans. That was bad enough but combine that with an appraisal industry more than willing to be an accomplice in inflated appraised values and you have a giant real estate Ponzi scheme.
During the time of all this, I counseled (some would say lectured) my clients on the importance of treating housing like any other consumable item..........not an investment.
I also lectured clients on the importance of not rolling other debt on the house; credit cards, auto, or otherwise.
But it's like spitting into the wind an entire industry and the feds are promoting houses for everyone.
More......
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