CalculatedRisk: 16 Million Homeowners Underwater

Posted by nithi.vivatrat on August 6, 2009

Amidst the signs being cited as proof of a recovering economy, other data still shows a rough road ahead. Yesterday, CalculatedRisk highlighted two such reports from Deutsche Bank (reported by Bloomberg) and the Wall Street Journal. The Bloomberg report indicates that:

The percentage of properties “underwater” is forecast to rise to 48 percent, or 25 million homes, as property prices drop through the first quarter of 2011, according to [Deutsche Bank] analysts Karen Weaver and Ying Shen.

According to Bloomberg, Deutsche Bank also believes that a large segment of the newly underwater homeowners will be prime borrowers (conforming and jumbo), not subprime or option ARM borrowers as has been the general case thus far.

WSJ reports an increase in the number of homeowners upside-down on their mortgages:

Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.

Overall, 16 million homeowners are “upside-down” on their mortgages, up from 10 million, or 15% of owner-occupied homes, one year ago.

Rough times ahead for a lot of homeowners, despite any improvement in the economy.

How the fall of home prices deflates the consumption balloon

Posted by nithi.vivatrat on June 25, 2009

I’ve always felt that a balloon was a better analogy than a bubble (in no way am I claiming to be the first) to describe an economic contraction in a particular sector or area, such as housing or consumer spending. It’s not that the market in question “pops” and disappears — it just deflates to a different size after the “air” get sucked out.

The lost “air” in our economy was inflated consumer spending fueled by borrowing — borrowing largely leveraged against rising housing prices. Thus, as housing prices have fallen, consumer spending has dropped as well — causing this significant contraction of our economy. If you don’t believe me, see today’s post by Atif Mian and Amir Sufi of the University of Chicago Booth School of Business in WSJ Real Time Economics (thanks to CalculatedRisk for highlighting the post). A key finding:

Using this methodology, we find striking results: from 2002 to 2006, homeowners borrowed $0.25 to $0.30 for every $1 increase in their home equity. Our microeconomic estimates suggest a large macroeconomic impact: withdrawals of home equity by households accounted for 2.3% of GDP each year from 2002 to 2006.

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