charles hugh smith-Weblog and wEssays: "That's $6.5 trillion, which means all 50 million mortgage holders are left with a grand total of $1.5 trillion in net equity. If housing values decline 15%, that's a $2.85 trillion haircut off net equity. If we set 2/3 of that against mortgaged real estate, (the other 1/3 being a decline in the value of free and clear homes), then the decline collectively suffered by all mortgage holders is $1.9 trillion--enough to put them in a negative equity hole.
This is a staggering conclusion, for it suggests just how a 'mere' 4% delinquency/foreclosure rate could trigger a 'modest' 15% decline in housing values, which would put the nation's mortgage holders (if taken in aggregate) under water: the nation's household debt would exceed the value of the mortgaged residential real estate.
So let's put this together. With the Pareto Principle in hand, we can foresee the distinct possibility that when a mere 4% of outstanding mortgages enter delinquency / foreclosure, then a 'tipping point' will be reached, triggering effects which far outsize the proximate causes.
Please examine the chart above carefully. Over 69% of the population are homeowners, and another 26% are in poverty. According to the FDIC, the recent surge in ownership from 64% to 69.5% has created a pool of 'at-risk' borrowers who couldn't have purchased a house with a conventional mortgage. Of the remaining 4% who are not homeowners or those living below the poverty line, the recent stalling home ownership rates at about 69.1-69.7% suggests these households are just above the poverty level and unable to buy a house, not yuppies renting penthouse suites who are now ready to buy a McMansion. "
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