A record 10% of U.S. home owners are now delinquent on their mortgage payments or entering foreclosure. Never before in U.S. history have so many home owners been unable to repay their mortgages.

What makes the figure more shocking still is that it’s dated as of September 30, 2008. In other words, the huge drop in the stock market during October 2008 — and its effects on Americans — hasn’t even showed up in the statistics yet.

Furthermore, Jay Brinkmann, chief economist for the Mortgage Bankers Association, says you can’t get an accurate picture of what’s really happening unless you look at what’s called the “roll rate.”

Brinkmann said a clearer picture emerges when you compare the number of newly delinquent loans in one quarter with the number of loans entering the foreclosure process the following quarter.

That foreclosure “roll rate” was about 10% to 12% nationally in the 1990s and ran from 12% to 15% for most of this decade, Brinkmann said. The percentage is now 30% nationally but has reached 79% in California and 65% in Florida, he said.

“This is nothing like anything we’ve ever seen before,” Brinkmann said. “We were shocked when we saw the California roll rates.”

Obviously, the highest jobless rate in 34 years is being blamed for the record number of defaults — that combined with Adjustable Rate Mortgages that continue to inflate monthly mortgage payments.

But another factor that hasn’t received as much attention is falling home prices.

In Arizona, home prices have fallen around 30-40%, depending on the area. Some of my relatives who live there are now $100,000 upside down on their mortgage because of the drop in home prices.

Since they want to sell their house, they looked into whether or not their bank would approve them for a short sale. Unfortunately, they discovered the bank won’t consider it until you stop making payments and approach foreclosure.

My relatives’ realtor told them as much and suggested they simply stop making payments. And so that’s what they’re doing.

They plan to live in their current home for 3-6 months without making any mortgage payments. They will save up some money so they can move. When the bank finally approves them for a short sale — or gives them the boot — they’ll go get a rental somewhere else.

Since it would be impossible for them to bring $100,000+ to the closing table… just to SELL their house… they feel this is the only way out. (And I would have to agree.)

My relatives aren’t the only ones who feel this way. A friend of mine says a couple on his street haven’t made a mortgage payment in nearly half a year — and have yet to be kicked out!

So while the economic news might be grim, there is a silver lining. That is, banks are literally being forced into giving home owners a break. I expect this trend will only accelerate in the months ahead.

Too much debt leads to all kinds of symptoms.

For instance, stress. Late fees. A sense of impending doom.

We even have a phrase to describe the symptom of spending too much on a house. We call it being “house poor.”

In other words, you’ve got all your money tied up in the house — so you can’t afford anything else.

These symptoms are bad, of course. But they are not nearly as catastrophic as the new symptom of too much house debt.

It’s called a “voluntary default.”

I’ve mentioned it before on this blog. And now, voluntary defaults are becoming so commonplace that it’s being covered by mainstream media.

The potential for a voluntary default happens when:

1. A homeowner has overextended himself to buy a house he can’t really afford.

2. The price of the house drops below the mortgage balance.

3. The mortgage interest rate begins to ratchet up, thereby increasing the monthly payment.

When this happens, a homeowner wonders: “Why am I paying more money every month for a house that couldn’t even be sold to pay off the mortgage balance?”

Rather than continue paying, the homeowner decides to walk away.

Hence, “voluntary default.”

Many times, the homeowner won’t even contact his bank to try to renegotiate the terms. He’ll simply move out and get a rental before his credit score drops.

The BBC describes the current housing market in the U.S. as a “time bomb.”

If things don’t change, we could see a tsunami of voluntary defaults that brings the banking industry — and the world economy — to its knees.

It seems the consequences of too much debt is finally catching up with us.

Over the weekend, I wrote a “Pros/Cons” list to help decide whether we stay in our current rental home or try to buy a home.

After finishing the list, I had four items listed as “negative” and 16 items as “positive.” The cons were against buying a home, while the pros were in favor of buying a home.

Big difference.

So this weekend we spent time looking at “inventory” homes — basically, new homes that had been built on speculation, but hadn’t sold yet.

There are literally hundreds of these homes available in almost every major city. They’re sitting empty, so they cost the builder money every single month.

When the builder starts to have cash flow issues, he’ll heavily discount a spec home just to get it out of his inventory.

Often, when a builder has a large number of spec homes, he could be forced into bankruptcy.

This is just what’s happening in the Denver area.

In the Sunmarke neighborhood south of where I live, the builder pulled out, leaving empty lots filled with weeds sandwiched between owner-occupied homes.

A builder of paired homes in the same area has a handful of units he can’t sell — and he was already telling me how much he was willing to reduce the prices before I even expressed any interest.

And another builder (Neumann Homes) went bankrupt, leaving a similar situation as that in Sunmarke: Empty weed-filled lots, brand new bank-owned homes, and (I’m sure) many disgruntled home owners who feel stupid for buying in that neighborhood.

So the outlook is not good for sellers. But it could potentially be good for buyers.

And we wanted to at least investigate before we made a firm decision.

Our conclusion: It’s best to stay where we’re at for now.

Home prices are still simply too high. Anything worth buying out here starts in the low $300s. Homes in this range are usually nice homes, but are poorly located. For instance, they might butt-up to a major road or intersection.

The prices go up from there, of course. To get a really nice home in a good location, you’d pay about $375K to $425K.

And remember: Our family is a bit unique. Since we have three kids and I work from home full-time, we need at least a 3-bedroom home with a study; preferably 4 bedrooms and a study.

So the decision, for us, is to wait a little bit longer — despite having more reasons to move than not to move.

Which brings me to a question: What’s better — a higher home price with a lower mortgage interest rate… or a lower home price with a higher interest rate?

I bring this up because a TIME magazine article posed this scenario in an article published in February 2008. One of the builders (Village Homes) had made photocopies of the article and was using it as a marketing piece to encourage people to buy now instead of later.

Here is their hypothetical case study:

As you can see, the author of the article, Dan Kedlec, uses this example to make his case against waiting to buy.

He argues: “Finance costs will rise as the economy recovers, so trying to time real estate might not pay off.”

Translation: If you wait, home prices may drop, but interest rates will rise, negating any advantage you might have gained from waiting.

That’s his logic.

But does it hold up?

I don’t think so. Here’s why.

When you buy a home, the price is the most important factor, not the interest rate.

That’s because you can’t change the price of the home after you buy. After you’ve bought, you’re “locked in” so to speak.

Interest rates, on the other hand, fluctuate quite a bit. So while you might pay a higher interest rate later (emphasis on might), chances are you’ll be able to refinance to a lower rate sometime down the road.

Furthermore, Kedlec’s conclusions are based on the idea that you will make minimum payments and take a full 30 years to pay off your mortgage.

But what if you want to pay off your mortgage sooner? Would you rather pay off $197K or $218K?

The answer is quite obvious.

All things being equal, I would MUCH prefer to buy a home at a lower price with a higher interest rate vs. a home with a higher price at a lower interest rate.

That’s why I think Kedlec’s argument against waiting to buy simply doesn’t work. It looks good at first glance, but doesn’t stand up to scrutiny.

Given the current market conditions — and the probable economic crisis that’s coming — I feel it’s best to exercise some patience and postpone a home purchase for at least six months.

What happens when debt levels spin out of control?

Bankruptcy, of course.

And foreclosure.

Banks have seized so many properties that 18.6 million houses, apartments, and condominiums now stand empty.

In case you didn’t know, that’s an all-time record.

But don’t wait for a recovery any time soon. We’ll probably see foreclosures spike during fall 2008 and spring 2009.

Which means even more empty houses.

This is the single biggest reason why I don’t plan to buy a house for at least another year.

The U.S. economy is growing weaker by the month. Here are four major factors that will cause the U.S. economy in particular, and possibly the world economy in general, to collapse during the next 6-18 months.

Factor #1: Foreclosures

The housing market continues to take a beating. All you have to do is search for “home sales” on Google News and you’ll see dozens of dismal headlines. The rate of foreclosures is increasing every single month.

And the worst is yet to come. Here’s why:

Starting in April 2009 we could see a major acceleration in ARM recasts. Basically, when an Adjustable Rate Mortgage (ARM) recasts, the interest rate ratchets upward. Since most Americans are tapped out as it is, even a small increase in mortgage payment can put them on the brink of foreclosure.

And that’s exactly what experts are forecasting. According to an excellent BusinessWeek article “The Next Real Estate Crisis”:

With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset.

[...]

According to Credit Suisse, monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010.

The article goes on to quote William Purdy, a lawyer at Simmons & Purdy in Soquel, Calif., a firm that specializes in home refinance issues. Purdy says, “This year is going to be a blood bath.”

Proof: By some estimates, one out of every four homes for sale will be bank-owned by the end of 2008.

This will put an incredible amount of downward pressure on home prices. Home owners who are resistant to lowering their asking prices will be forced to compromise as banks slash prices to unload foreclosed properties. Not a pretty picture.

If I were the late ’80s action hero Crocodile Dundee, I might compare what’s already happened in the housing market to what is expected to happen like this: “That ain’t a crisis… this is a crisis.”

Factor #2: Inflation

Inflation is the systematic destruction of the value of a dollar.

Example: If there are 100 dollars in circulation and you add 100 additional dollars, the value of each dollar in circulation has effectively been cut in half.

This is happening at a rate never before seen in American history.

The trouble with inflation is that the prices of goods always go up before wages, which reduces your purchasing power.

Furthermore, additional dollars injected into the economy benefit those who receive those dollars first–before they’ve had enough time to actually effect the economy.

So average Americans like you and me feel the pain of inflation acutely.

Every week there is news of record prices for crops, oil, and other commodities. Some of the high-price issues we’re facing are caused by shortages. But they are compounded by inflation.

Ron Paul writes in The Revolution:

Any government that inflates the money supply runs the risk of hyperinflation, which occurs when the money supply is increased so much as to render the currency completely worthless. It can occur very quickly and suddenly, and has a very rapid snowballing effect. (p. 150)

What happens when a fiat currency is destroyed by hyperinflation? Take a look at Germany in 1923. Paul writes on page 151:

The result was the complete ruin of the German mark, which German children began gluing together to make kites and German adults burned in order to keep warm.

If you’re interested in learning more about inflation, I recommend reading this brief article: “Silver, Gold, and the IRS.”

Factor #3: War with Iran

The question is not if, but when.

Israel wants to bomb Iran… and soon. Their biggest fear is if Iran develops an atomic bomb. And so they’re intent on doing whatever they can to stop Iran before that happens.

The current political climate in Washington, D.C., is favorable to bombing Iran. Of course, Israel would love it if the U.S. would bomb Iran on their behalf. But their second choice would be to bomb Iran themselves with the approval of the U.S.

And so Israel is already planning to bomb Iran before President Bush leaves office. That is the hard deadline they’re facing. If they wait until after the election, the political climate could change so that the U.S. would no longer support an unprovoked attack on Iran.

Here is an excellent article that explains Israel’s position: “‘Mission Doable’: Israeli Ministers Mull Plans for Military Strike Against Iran.”

Of course, I’m firmly against any military action against Iran. But if the U.S. decides to become involved in any such military action, it will be funded by taxpayer dollars and–what else?–inflation! They’ll simply print the money they need to pay for the war.

The Global Europe Anticipation Bulletin (GEAB) concludes, “Iran: 70 percent probability of an attack by October 2008 confirmed.”

Factor #4: Price of Oil

Last but not least, the price of oil is the fourth major factor impacting the American economy.

Where I live, gas has cracked the $4 a gallon mark. It has dropped a bit since then, but I expect we’ll be seeing $4 gas for a while.

This impacts Americans on many levels. It reduces the total disposable income that can be produced by a job that requires you to drive to work. It cuts into the profits generated by the sale of physical products (both for manufacturers and retailers). It hurts airlines and truck drivers directly and tourism indirectly (because of the high cost of travel).

I just noticed an article today that reports a massive plummet in RV sales. Winnebago, an RV manufacturer, reported a 73% drop in 3rd quarter profits from a year ago.

I imagine this is not only a result of tightening credit, but also of high gas prices. Many Americans simply can’t afford to fuel an RV.

First, one industry goes; then another and another and another. It’s the domino effect. And since so many industries are dependent on cheap energy to survive, I expect businesses will continue to be negatively impacted.

******

These are the four major factors influencing the U.S. economy. Each one has significant implications for how we should live and how we should plan.

How long before the economic lights turn out? And what do we do until then? Perhaps I’ll write an article with some recommendations in the near future.