"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.
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Annette on 15 February 2008:
I don't know what it going on here in australia, but on one hand every is whining about how hard it is to pay mortgages etc (looks like the Reserve will raise rates again in March), but then on the other they are spending up big, but wait, yes it is mostly on credit.
There is a definite head in the sand mentality with the belief that the good times will keep on rolling and house prices will keep on rising. Or maybe they think the Federal Government will rush in and save the day for all those overleveridged borrowers. I have yet to see any belt tightening here in Brisbane.
Comment by Yokum on 15 February 2008:
In Australia much is said about what is around the corner as to taking note of the USA creaking bearers. What we read above is not hidden "around the corner" as mentioned by some as if it is a way off yet; but looking down a short straight road with a black cloud at the end of it. It's like watching lemmings isn't it?
Comment by Kelaido on 15 February 2008:
I too have been emotionally affected by this endless increases in asset prices, from real estate to a simple roast chicken business in Melbourne. Recently I tried to figure out if a newsagency business is worth buying into. Reasonably secure in monthly takings and earnings but I wanted to know how that sort of business would hold up in a recession. I asked two accountants how the business will hold up in a recession such as one we had in 1990-1991. Both accountants had no recollection on that recession. It was that long ago. It is therefore totally understanable that the recent aggressive buyers of assets, mainly new migrants within my circles, have not fear for what a recession can do to asset prices. This is the biggest emotional burden for the so called 'prudent' investors now: chase and one faces risks of substantial haircut if and when the next recession hits; abstinence means underperformance against the masses. If you rent, should you buy? If you own, should you sell?