UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

August 12, 2009

REPORT: TWO THIRDS WITH MORTGAGES OWE MORE THAN HOUSE VALUE

Marshall Auerback, Counterpunch - Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG estimates. The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report.

In December 2006, only a few months after the peak of the housing bull market, the total value of U.S. residential property stood at $21.9 trillion. Prices have dropped by 31 percent since the end of 2006, so the estimated value today is about $15 trillion; however, the mortgage debt remains more or less unchanged and stands at $10.6 trillion. In other words, whereas debt-to-equity in the U.S. housing market was 48 per cent as recently as in December 2006, it is now 70 per cent and will rise to 80 per cent once house prices have mean-reverted.

Although painful, a rise in debt-to-equity of that magnitude would actually be manageable if it were not for the fact that income and wealth in the US is extremely skewed. The top 1 per cent of income earners in the U.S. account for more than 20 per cent of national income while the median household has seen no improvement in income for the past ten years. Within the median household sector itself, then, there is still a tremendous financial vulnerability which has not been addressed at all by the Obama administration. Home ownership in the U.S. is far greater than in most modern economies. Equity ownership is also high. The bursting of the real estate and equity bubbles has destroyed the wealth of the U.S. middle class to a devastating degree. And it is with this middle class that the high private indebtedness lies. If there is going to be a further financial crisis in the U.S. it is probably going to be focused on the household sector. If balance sheet recession dynamics are going to depress aggregate demand through wealth destruction and debt repayment, it is probably household sector demand where this will surface.

Almost one-third of all U.S. households have no mortgage. If you adjust for that, the 70-80 percent debt-to-equity ratio suddenly becomes a major challenge because it means that the two-thirds who do have a mortgage already face a debt-to-equity ratio in excess of 100 per cent. Even worse, once the mean reversion has run its course, two-thirds of US households will be facing a debt-to-equity ratio of 120-125 per cent on average. U.S. consumers are effectively broke.

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