Meanwhile, from Phoenix comes news that a new wave of defaults is about to slam into the mortgage industry. Commercial properties, retail space, office complexes, apartment buildings are hard to rent. You can see why. In 2007, America was already outfitted with far more retail space than it actually needed. Americans had gone on a shopping spree for the previous ten years...prompting builders to add more and more space. By 2006, the United States had 10 times as much retail space per person as France. This was the bubble phase of a boom in consumer credit that began in 1945.
When you get to the bubble phase, few people stop to ask questions. Instead, everyone assumes that the trends in place will remain...and even intensify. So even into 2008, in Phoenix as well as other growing areas - principally in the sand states - the building continued. And now it is 2009. Where are the shoppers? Where are the renters? Alas, they are thinner on the ground than anticipated...and the developers are having trouble paying their mortgages. Commercial mortgage backed securities are carrying 5 times the unpaid balances they had in June '08, says Bloomberg.
Imagine how disappointed lenders will be when these loans default. And then, imagine how American investors will feel when a new wave of mortgage defaults and foreclosures is hits the commercial property market.
A new wave of foreclosures and falling house prices may be approaching the housing market too. Alan Abelson, in this week's Barron's, reports on the outlook as described by Amherst Securities. The research group estimates an overhang of 'hidden inventory' of some 7 million units. These are properties owners would like to sell - if and when the market strengthens. Trouble is, the market may not strengthen soon enough. Then, many of these hidden properties could come right out in the open, as mortgages are reset, marriages break up, and people move on. Amherst says these people are in the "delinquency pipeline" which eventually flushes out the market. And it calculates that another 300,000 properties enter the pipe every month.
Falling prices have reduced 'owners' equity' - the part of the house the homeowner owns free and clear of a mortgage - to only about 43%. This number includes people who have no mortgage at all - more than 50 million of them. Abelson speculates that the actual equity in the hands of the 'owners' of mortgaged houses must be substantially less. Pushed by joblessness...not to many life's other, normal hazards...many of these people are surely going to default. Of those in the "delinquent pipeline," nearly 10% haven't made a payment in more than two years. Sooner or later, the banks and mortgage holders will be forced to take action...and more houses will come onto the distressed property market.
Eager to put this recession behind us? Hey, don't be in such a hurry. Recessions do good work. Depressions are even better (see essay below....)
More and more people get something from government. Fewer and fewer are net taxpayers. This is the basic formula that bankrupts democracies. The political system becomes skewed towards spending; then, there's no stopping it. Once the majority of voters and special interests has an interest in increasing spending - even by borrowing - rather than in limiting taxes and debt, the game is practically over.
USA Today reports on the number of children whose lunches are furnished partly at taxpayer expense. The figure rose from 24 million in 1990 to 31 million today. That is, the welfare program increased by a third during the biggest boom in history. Think what will happen during the bust.
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- Another Big Wave of Foreclosures
- Subprime Loans Caused the Initial Illness, Option ARMs will Cause the Relapse
- House Prices in California and Las Vegas Hit Hard by Wave of Foreclosed Properties
- REIT Investors Grown Complacent About Risks in Commercial Real Estate Market
- The Interest Only Mortgage Option
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 Bargeass on 5 October 2009:
The economy of the United States of Norhern Mexico is cactus and Australia's socialists are trying their hardest to follow suit
Comment by Justin on 5 October 2009:
Meanwhile, here in Australia;
What's pushing rates up
"If interest rates rise tomorrow, as a number of traders now expect, nobody should be in any doubt as to the cause – house prices are being sent way too high by supply constraints". So says Robert Gobbliebsen over at Business Spectator.
I'll take that as a contrarian indicator, rates will stay at 3%.
Comment by Gerry on 5 October 2009:
"USA Today reports on the number of children whose lunches are furnished partly at taxpayer expense. The figure rose from 24 million in 1990 to 31 million today. That is, the welfare program increased by a third during the biggest boom in history. Think what will happen during the bust".
Yes Bill, in the biggest boom in history there were a significant percentage of the USA population amongst the "working poor". Not talking about dropouts or unemployables just the genuine workers in a skewed system. They needed some welfare because the long hours they worked did not return a livable wage for the family, whilst the fruits of their labour contributed to the multi million dollar salaries and bonuses of others built on a myth and false accounting.These people are the first ones discarded.I agree with you..."Think what will happen during the bust". The main future for farm boys has been in the army..and that does not necessarily increase ones life expectancy. The spotlight is now on "illegals" who did the menial work and are no longer wanted.The american dream?....I think the myth is busted.
Comment by Gut Feeling on 5 October 2009:
Excellent comment Gerry
Comment by tar and feathers on 6 October 2009:
Well there goes the Aus stimulus package, money wasted waiting for the US to pull out of its hole.....so you see how the Aus stimulus was provided mostly for the construction industry? For a quick recovery. Instead of building a skills based recovery, fixing our health care, transport infrastructure....future affordable housing will take the form of tents imported from China......a previous US stimulus, the Hover Dam provided workforce of cheap labour, hmm, but it was WW2 that really pulled the yanks out of the depression.....we're getting there, to the 'final' stimulus 'solution' for mankind.
Comment by Luri on 6 October 2009:
Strategic Defaults: When Homeowners Walk Away From Mortgages They Can Afford
When Americans shaft the Banks and Government that they no longer have trust or confidence in, its happening and will only continue to grow.
Comment by Rock Wall on 6 October 2009:
Great Article, many of those who dig a little deeper to find information as to our dire situation clearly see the rock wall we will soon hit. I for one know time for stopping the bullet train of collapse is far behind us , so instead of asking how do we correct a situation that is obviously not possible to correct, I will try to enjoy these few remaining years cheering on any attempt to hide the rock wall from my view a little while longer. What I find so ironic is the number of random people I talk with who actually believe the United States is the richest country in the world and the recession will be over soon.I have made preparations as best I can for myself and my family and will continue to do so, as for those who haven’t made any preparations I can not imagine the pain and hardships they will endure.
Comment by Curt on 6 October 2009:
Yes, I'm afraid you are right. The housing market is going to take another step down and perhaps only inflation will be able to put a bottom under it.
Comment by Bargeass on 6 October 2009:
Australian property prices will get hammered as the RBA is forced to counteract the Rudd socialists welfare stimulus with rate rises. It's all downhill from here.
Comment by mortgage | Mindrich on 4 February 2010:
A major component, to be covered in a future Mortgage Matters, is a total revamping of the Truth In Lending Disclosure.
Comment by Dan on 4 February 2010:
Well, I know a lot of us have been complaining how unnatural the housing market is, particularly the last few years. Maybe now we'll be finding out how much this is the case.