“Mortgage crisis spreads to those with good credit,” says a front page headline in yesterday’s International Herald Tribune .
It was bound to happen.
“As the world’s largest economy grapples with the worst housing slump in two decades, people with good credit histories are falling behind on house payments, auto loans and credit cards at an accelerating pace,” says the article.
“This collapse in housing value is sucking in all borrowers,” said economist Mark Zandi at Moody’s.
House sales in Southern California are at a 20-year low. And foreclosures are on the rise. This is having the obvious consequence – more houses on the market… sold at distress prices.
In 2007, 17.5% of all the houses sold in Nevada were ones that had been foreclosed. The figure was 15% in Colorado and 11% in California. These foreclosed house sales are pushing prices down further.
As prices go down, more people are tempted to walk away from their mortgages and their homes. Bloomberg provides an estimate: by the end of this year, 15 million U.S. households will be “upside down,” meaning, their houses will be worth less than the value of their mortgage loans. Almost half of the people who took out subprime loans over the last two years have no equity in their houses, says Bloomberg. And of the people who bought two years ago, 39% are already upside down.
Over the last five years, trillions of dollars was “taken out” of U.S. housing values. In 2006, for example, owners took out $318 billion by refinancing their houses, and another $142 billion from home equity lines of credit. We predicted that the day would come when they’d have to put back money into their houses. That day is now here.
Of course, how much they’ll have to ante up… how many will go into foreclosure… and how many will walk away depends on how far houses go down. Estimates are all over the place – maybe 5% more… maybe 15% more… maybe 50% more. The total value of U.S. housing is $20 trillion. A 10% loss takes $2 trillion of implied wealth out of the economy. Ten percent is no big deal to the fellow who owns his home outright… or has substantial equity. But one of the starry eyed delusions of the bubble era was that Americans were really saving much more than the numbers reported. They were buying houses and the houses were going up in value. This was the equivalent of savings, we were told.
Well, not exactly. Those savings are now disappearing… causing huge problems for the heavily leveraged, marginal housing speculator of the ’97-07 period.
Markets and Money