The US economy is now growing at a rate that is less than the rate of population increase. In other words, if it keeps growing at this rate we’ll all go broke.
Housing corrections take a long time. There are now 700,000 new houses for sale…and more houses for sale, overall, than any time in history. It will take years to work down this inventory, because sellers typically resist price cuts…as long as they possibly can.
Money Magazine has done a series of “Scenes from a Bubble,” referring to the housing bubble:
“MONEY has obtained more than 100 emails and faxes sent by loan officers to appraisers across the country. The language varies from asking if a predetermined value was possible to promising more business if a number could be hit.
‘”Many homeowners are finding out that the equity they were led to believe they had in their house is not actually there,’ says John Taylor, president of the National Community Reinvestment Coalition.”
MONEY took an example. Mr. Kim obtained a no-money-down US$642,000 mortgage, based on an appraiser’s estimate of the value of his house. MONEY’s own appraiser judged the place worth only US$580,000.
The result: Kim now owes US$62,000 more than his house may be worth. How many people are in that situation?
How long will it take them to reckon with the negative equity in their home? We don’t know that either. How did they get in that jam? That, we do know. MONEY continues:
“Wall Street’s rocket scientists keep finding more sophisticated ways to repackage and resell mortgages. As a result, lenders stopped worrying so much about credit standards and learned to love risky loans.
“Now a lot of that lending looks foolish. Mortgage delinquencies among so- called subprime borrowers have risen to 13%, the highest in at least 10 years. The market for the lowest-credit-quality mortgage bonds has tanked. And investors in CDOs may be in for a rude shock.”
Meanwhile, yesterday, yields on the long bond – closely linked to mortgage rates – rose to 5.06%. Not good for the housing market.
Markets and Money