US$5 Trillion in Housing Wealth gone: The Impact of the Housing Bubble Bursting was written by a guy named Dr. Housing Bubble, which is such a weird name that one can only shake one’s head in wonder at what in the hell his parents were thinking when they named him!
But unusual moniker aside, he figures that the Fed and the banks providing unlimited amounts of money to create the real estate bubble (which I sarcastically note was created by the Fed and Congress to bail out the busted stock market bubble in 2000, which the Fed also provided the financing for) has created US$5 trillion in “bubble wealth”.
The significance of this is that “US$5 trillion in bubble wealth has created an extra US$250 billion in consumption that would not be present if it were not for the housing bubble. This works out to be 2 percent of our GDP; in other words, without that wealth we would already be in a recession.”
And now it’s gone. You do the math.
And speaking of houses, in Barron’s this week we learn that Macro Mavens estimates that “based on the share of ARMs in some state of negative equity at the end of last year and the decline in home prices so far in 2007, a stunning US$693 billion in mortgage loans are already in the red.” Wow!
And even worse, “Assuming lenders are able to recover 70% of those assets – which seems optimistic given the massive amount of housing inventory yet to be unwound – that means mortgage lenders are already grappling with US$210 billion in outright losses.”
And worse – much, much worse – is that based on the insanely risky degree of leverage that is so pandemic these days, “the total financial exposure to these claims is many multiples of that”.
Mike Larson at Money and Markets hears me absently babbling incoherently at this shocking revelation, and adds to my misery by saying, “The Mortgage Bankers Association says 0.58% of ALL mortgages entered foreclosure in the first three months of this year. That’s the highest level in US history!”
Grabbing a calculator instead of an Uzi (as is my usual response to stark terror), I find that this means that about 1-in-200 homes in America are in foreclosure! Yikes!
But Mr. Larson is not impressed with my impressive math skills, and ignoring me completely goes on to say, “A whopping 14.51% of a specific group of subprime mortgages made in the second half of 2006 are already either being paid late, in foreclosure, or in a position where the underlying property has been seized. That’s simply amazing considering these loans are less than a year old!”
And it gets worse when he reports that loans made in the first half of 2006 are performing even worse: “almost 18% of them are failing”.
I was going to ask, “What about the ones made in 2005?”, but I sensed that I would discover that I would rather not know, so I kept my mouth shut for once in my life.
And the news that “foreclosed properties are popping up all over the place” is made worse because, “They typically aren’t as well-maintained as inhabited homes or even ‘regular’ homes for sale. Some have even been stripped of all their fixtures, wiring, and piping.”
So how does a gutted, derelict eyesore affect surrounding property prices? Ask my neighbours and find out! They never seem to tire of telling me how my ratty little house has ruined the values of the whole neighbourhood and how gun barrels sticking out of the windows aren’t helping, either, and all this aside from the fact that I am hateful and dangerous and blah blah blah.
So, attempting to be a good neighbor, I helpfully and politely try to convince them to just pack their crap, move out and go someplace else, which I do by thoughtfully throwing my garbage on their lawns all the time. But then – get this! – they get all bent out of shape about that, too! I mean, I’m damned if I do, and damned if I don’t! You can’t please those jerks!
But this is not about how my neighbours are all a bunch of whiners who can’t mind their own business, but about money and mortgages, and if people don’t have the money to pay their mortgages, then that may explain why consumer credit rose at an annual rate of 6.4% in May.
The stunning statistic was that the majority of the additional borrowing was by people using their credit cards, and their “total debt and death by plastic” increased at an annual rate of 9.8%! Yikes!
And what were they buying? Well, I hear that an estimated 700,000 of Apple’s new iPhones were sold on the first day they were put on sale. And most iPhone buyers opted for the more expensive eight-gigabyte model, too, which retailed for US$599!
Until next week,
The Mogambo Guru
for Markets and Money