Negative Equity Becoming the Norm in U.S.A.

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Global banks have written off nearly US$500 billion in bad mortgage debt. But it’s not over yet. Not only do you have Alt-A and Option ARM loans getting ready to take centre stage in the credit crisis, but falling house prices are putting more Americans underwater on their mortgage. Disturbing.

U.S.-based real estate valuation company zillow.com says one third of Americans who bought a home in the last three years have negative equity. Many of the folks who bought at the top are facing the most brutal of double whammies. First, the last-in, first-out-in-the-street buyers had high loan-to-value ratios. That means that they borrowed 80%, 90% or even more of the value of the house.

And now the value is falling, the second whammy. You can see the problem. The loan (the liability) is fixed. The value (what you can actually sell the house for) is variable. The simple truth is that these people in negative equity never owned their home. The bank did (or whomever bought the CDO the loan was buried in). These folks owned a mortgage, which gave them the privilege of trying to pay down a massive liability to the bank for the rest of their lives.

As we said in 2004, home ownership pursued at the top of a credit cycle is the surest way to modern day serfdom. But then, everybody owes somebody these days, don’t they? Perhaps instead of trying to encourage consumption (let’s lower rates!) it wouldn’t be a bad idea to rediscover thrift, prudence, and a modest bit of frugality. Perhaps it won’t be a choice for a lot of people anymore.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. This is an interesting study isn’t it? Also saw it reported in the Times. Hre’s a more optimistic view on the housing market :)
    http://www.thinkmoney.com/expert-remortgage-views/1200/housing-market-reasons-for-optimism.asp

    Reply
  2. […] Negative Equity Becoming the Norm in U.S.A. addthis_url = […]

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