Housing debt challenges the American Dream

US foreclosure Mar12.pngThe US housing market collapse has wiped out $6tn in wealth since it began in 2006. But even today, little is being done to solve the critical issue – that homeowners took on too much debt, which will never be repaid.

As a result, the situation continues to get worse, not better. And some influential commentators are beginning to worry that today’s falling prices, and rising debt levels, present a real challenge to key elements of the post-war American Dream:

Prices fell again in December, and are now down 34% since their peak
• S&P warn that “we might have re-entered a period of decline”
5 million homes have owners who are either delinquent on payments, or already in foreclosure
• In addition, 3 million homes are vacant but not yet listed for sale

One key problem is highlighted in the chart from the Wall Street Journal. It shows how foreclosure delays have risen dramatically since 2008:

• In 2008, the foreclosure process took an average 251 days for mortgages under $250k, and 261 days for those over $1m
• Last year, it took 611 days for $250k mortgages, and 782 days for $1m

• Most people heading for foreclosure stop paying the mortgage. So those with $250k mortgages gained an extra 12 months of ‘rent-free living’, and those with $1m mortgages gained 18 months
• This gave them more money to spend in the shops and on new cars

• But this is not ‘real demand’, as it relies on people not paying rent

There are many reasons for the extra delays. The system is overloaded by the large volumes of homes now threatened with foreclosure, and the paperwork covering the loans is often faulty. But now it seems to be moving back into top gear again. 24% of all home sales were foreclosures in Q4 2011, compared to 20% in Q3.

Equally, as former US Labor Secretary Robert Reich notes:

“We are witnessing a fundamental change in the consciousness of Americans about their homes. In the late 1960s and 1970s, baby boomers took out the largest mortgages they could afford. Homes morphed into ATMs, as Americans used them as collateral for additional loans. Most assumed their homes would become their retirement savings.

“The plunge in home values has changed all this. Young couples are no longer buying homes; they are renting because they are not confident they can get, or hold, jobs that will reliably allow them to pay a mortgage. Middle-aged couples are underwater or unable to sell their homes at prices that allow them to recover their initial investments. They cannot relocate to find employment. They cannot retire.”It clearly suits policy makers and financial markets to ignore these issues and hope they will go away. But their lack of attention is making an already difficult problem even worse as we transition to the New Normal.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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