The Washington Post, which could not see an $8 trillion housing bubble, still can't understand the simple arithmetic. It had an article today on the impact that high unemployment is having on foreclosures and just mentions plunging prices in passing. Yes, unemployment makes things work, but in normal time, a short spell of unemployment will not cause most people to lose their home. We can see this by a quick use of an obscure methodology known as "arithmetic." Let's say that someone bought a home four years ago for $300k and had a down payment of $30k or 10 percent. If we had a moderate 2.5 percent inflation rate, then this home would now be worth about $330k. With a 30-year fixed rate mortgage, this homeowner would have paid about $15k in principal over 4 years, which means that this homeowner would now have $75k in equity. Suppose that this person loses their job. If the monthly mortgage and tax payment comes to around $2,400, then it would take a bit less than $30k to cover the house payments through a 12-month spell of unemployment. In ordinary times, there should be little problem borrowing $30k against the $75k in equity in the home. Therefore, there would be no reason for a person to be losing their home. Maybe they should try teaching arithmetic at the Post. It would help its reporting immensely.
--Dean Baker
