MoneyWeek piece on the dire state of the US housing market, now of bubble proportions in many, mainly coastal, areas, and responsible in large part for a significant proportion of the US economy. What happens if/when it bursts and isn't the situation just as dire in the UK ? ....
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"Six months to housing hell ................ ....Our estimate is it will take about six months for sellers - particularly speculators who never intended to live in their properties but whose sole intention was to "flip" them for a profit - to realize they are toast........................"
That will be a v small proportion of the people who have bought houses,assuming there is anywhere that has seen that a 20% drop, which wont be many areas.
So, for most people, lower prices, should they occur, would be a good thing. Some people will lose, but that will be more than balanced out by people who gain. So, a good thing on average.
You omit all those who have borrowed on the 'strength' of the inflated value of their homes. But of course it all depends on your particular circumstances - a fall in house prices would suit me because I've nearly paid for the damned thing and so I'd be able to trade up at no cost. Those that have succumbed to the remortgaging trap, well, they'll be f***ed - and I suspect a good number falls into that category both in us and uk.
That would require getting an appraisal on every house and then comparing that to outstanding mortgage balance.
If you are trying to argue that this is not a problem, I would say you haven't been paying attention to the news. As a nation, we spent more then we earned, by .5 percent. Much of that spending was done by borrowing money using a personal residence as collateral.
That is sensible. More people are going to be put in this position as their loan interest rates rise, which mose home equity loans are doing right now.
You are in a *risky* situation when you owe more than it is worth. I am sure you will agree with that statement.
That would require getting an appraisal on every house and then comparing that to outstanding mortgage balance.
If you are trying to argue that this is not a problem, I would say you haven't been paying attention to the news. As a nation, we spent more then we earned, by .5 percent. Much of that spending was done by borrowing money using a personal residence as collateral.
That is sensible. More people are going to be put in this position as their loan interest rates rise, which mose home equity loans are doing right now.
You are in a *risky* situation when you owe more than it is worth. I am sure you will agree with that statement.
Perhaps you can tell us how many people have remortgaged above 80% of value(20% that was your figure for the hypothetical house price drop) and how many of those would be unable to continue paying their mortgage? And also where the area is that has seen a 20% drop and how many people who ahve remortgaged or bought above 80%, are in that area?
Your statement is akin to the current panic struck news reports, which seem to say something like;
"if the dead swan infected some other birds and if they then infected poultry and if the virus then mutated and if that mutation was deadly to people and if that mutation also meant the flu was transmissible between humans and if that meant that lots of people were infected, then lots of people would be infected"
Or in your case 'if house prices dipped by a percentage which meant that a very large number of people were in negative equity, and if that was large enough to cause an economic problem, then we'd have an economic problem". Unless you can tell us what the numbers are, and the chances it will happen, its just bird flu scaremongering.
Fair enough. I sense that it is a problem, based on news reports and various debt statistics I have seen. I cannot give you the number of people who have used their houses to extend their debt beyond their means, only that many people have extended their debt beyond their means...hence the nagative savings rate.
Maybe it's all with credit cards and all those millions of people refinancing aren't cashing out and won't have a problem if pricing falls 20% and variable rate refinance mortgages rise to 8 or 9 or 10 percent.
So, yes, I guess maybe everything is rosy in the housing financing area of things.
AFAIK the situation is fundamentally different in the UK than it is in the US. The mortgage lenders in the US have been not only extremely aggressive but more than a little creative in digging their own hole. For years now they have been offering Interest Only loans to people who can't afford to pay off the principal portion of a traditional home loan. Recently they have started to offer Negative Amortization loans where the purchaser of the home pays only a portion of the scheduled interest every month, the unpaid portion is added to the outstanding principal. I do not believe that either of these options are available to borrowers in the UK.
Add to that, the fact that a significant number have "cashed in" the existing equity on their homes to fund their life styles and you end up with a population that is more levered now that at any time in the past.
Loan to Value Ratios (mortgage amount : property value) for these mortgages are also at an all time high. The higher the LTV is, the more it costs the bank or thrift to write and hold the mortgage..
If house prices fall the LTV goes up, so too do the costs to the bank, putting pressure on the banks to raise rates and to discontinue the more aggressive lending. This will take some of momentum out of the market.. the higher rate environment and tighter loan restrictions will further lower prices. If that cycle continues too long at some point people may be looking at mortgages that are significantly higher than the current value of their house, even with the new US bankruptcy laws there are going to be some who simply walk away from their debts.
If enough do that then the S&L meltdown in the eighties will be as nothing compared to the crash you hear as the thrifts go down..
Will it happen? Impossible to tell, but if it does it will be a real mess, and the hell will not be restricted to housing. Personally I plan to be as liquid as possible in any non USD currency for the next couple of years.
Maybe they wont, though its more likely prices wont fall by 20%, and mortgages wont rise to 8 or 9%. But if all that happens, sure there will possibly be a problem. have you sold your house and moved into rental on the strength of your convictions?
So, carry on guessing then, but dont't confuse that with knowledge :-)
I'll continue the guessing game, and guess that you have not sold your house and moved into rental on the strength of your convictions.
Doen by 17% in denver over the past three months according to an article I read on Prudentbear.
The US ain't in control of that. The Chinese, Japanese and Hedge Funds get to decide. That's the price of being in debt.
Note that as predicted, Fannie Mae and Freddie Mac are in trouble and that's been playing hell with housing finance in the US. There's evidence other bonds players are picking up the slack, but who's to say they're any more careful with their finances than Fannie and Freddie.
I'm as reluctant as ever to call timing, but that and the recent ructions in the bonds markets makes me think the credit cycle is turning right now. An inverted yeild curve and then the long end swinging back out has been a most regular marker of turns in great credit bubbles. Kindleberger noted it as one of the portents in his analysis.
Interest only mortgages are certainly available. They ask you if you have a repayment vehicle in place, and you are supposed to say yes. But they don't check to see if you actually pay any money into it.
They aare already starting to fall in many places...
A variable rate, home equity loan? They are already above 7%...
No, I haven't leveraged any of the equity, either, though.
My guess is as good as yours ;-)
That is a good guess. But, it isn't 1st, mostly fixed rate mortgages that are going to be a problem for most people. It is going to be the credit card and 2nd mortgages that really hurt.
I am not sure how to interpret your comments. Are you of the opinion that everything is humming along fine with regards to debt in America?
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