Broad Oak: your emotional support animal

Saturday, December 19, 2009

House prices: the second wave down?

Edward Harrison looks at statistics for US housing and quotes Frank Veneroso*, who guesses that, on average, houses with mortgages have almost no equity left in them:

"... the flow of funds accounts tell us that the total value of residential real estate is $16.53 trillion. The share owned by households with a mortgage is probably $10 trillion to $11 trillion. Total mortgage household debt now stands at $10.3 trillion. In effect, for all households with a mortgage taken in the aggregate, their loan-to-value ratio is now close to 100% and perhaps close to half of them have a zero to negative equity."

For some US housebuyers (especially if they haven't taken out a second mortgage or secured loan on the property), the law relating to their loans says that they can return the house to the mortgage lender and if there is any debt left over after selling the house, that's the lender's hard luck - there's no pursuing the buyer. So if a homeowner is in negative equity and interest rates rise, the easy thing to do is strip the house, rent a van to move the stuff, and mail the house keys to the mortgage company (this is jocularly known as "jingle mail").

In some cases, the paperwork on the mortgage (written in haste in boom times) is so sloppy that mortgage lenders may not even be able to legally foreclose and seize the house.
Others, suspecting that the market will go down further, may wish to sell to get out what equity they can while there still is any. And actual or imminent unemployment may force still others to leave - the official US unemployment rate is around 10%, but some say that if looked at properly the true rate is more like 17%. (Update: John Williams says 22%)

I have also seen graphs (like this one) to show the large number of low-initial-fixed-rate mortgages that are going to return to variable rate in the next year or two, just as (it seems) interest rates may be on the increase.

So there are a number of reasons why banks, the housing market and the economy generally may still face very testing times.

*Veneroso also believes that for years, central banks have held far less gold than they would like us to believe. If this is correct and the currency comes under pressure, there may be a steep rise in the price of gold as the Federal Reserve and others buy back hastily, to reassure us that the currency does indeed have some kind of backing. But please remember (a) this is speculation and (b) gold has already appreciated very considerably in the last couple of years.

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