PROPERTY FALLS, MORTGAGES STAY THE SAME
While property prices have fallen 30% over the last two years mortgage debt remains larlgely unchanged from peak levels. Housing Story asks if the de-leveraging is a myth? Have we really started down the path of debt reduction and “cleansing” the system? As the largest asset on the US consumer balance sheet it’s easy to make the argument that housing remains the key to any recovery. The current evidence points to continued weakness in housing prices going forward (see our outlook here). And this means we might have a far bigger burden on our hands than many are willing to admit:
“My speculation is that the fate of bubble-mortgage debt remains as our key obstacle blocking recovery (Unbelievers should rent the Godzilla movie “Eating the Lost Decades of Japan” for further enlightenment.). Total mortgage balances remain almost unchanged from the peak of the bubble –$11.68 trillion today versus $11.95 trillion at the peak (see chart below).”
I highly recommend readers take a look at the full story on Housing Story.
Cosumers are first paying off higher effective rate non-deductible debt.
I read that many households are simply not paying their mortgage, but are paying other debt eg crdit cards and store cards.
TPC: Still believe in the “work out” scenario? Or maybe it is really what is behind door number D.
Theoretically, excess outstanding mortgage debt can be lowered overnight, since the government now owns most of it. But that takes enormous political will, since it would be debt-forgiveness for a specific subset of citizens (who are not even Wall Street banksters!). So, it has to be done gradually through short-sales and foreclosure, thus drawing out the depression (just as propping up banks has drawn it out).
Ditto walden’s comment. Also, if the headline was “financial assets fall; book value in investor’s portfolios stay the same” what would that mean? The other impact is on the USD via the indirect liability.
The debt has remained high only because it is still being carried on the books at full value or close to it. If the debt is non-collectable, then it can be argued that it doesn’t even exist.
Another question might be –Whats the Banks coverage ratio for these loans ?–Or has JPMorgan says Tomato / Tomoto–its just ink on a piece of Paper
Oh my…what a revelation….gee do you think that when the quasi-government Fed decided that they were going to change the rules and allow banks to lock the value of their non performing RE loans at the height of the marker vs requiring them to mark them to market as they were allowed to do on the upside that this statistic somehow would reveal another truth.
Delusion has replaced reason as the last pillar supporting financial valuations and our economy since 1982.
I’m still of the same opinion as walden, that a massive debt writedown will have to be down, perhaps in stages, perhaps all at once, as a matter in the interest of the public and national security. This means a default on US Debt obligations, most likely. Otherwise, we simply leave this debt noose tied around the necks of Americans until some time distant into the future, maybe 10-15 years. Too many other things will have to go right, all at once, for this to end positively. For instance, sudden increase in employment, coupled with continued easy rates by the Fed, and probably a loosening of credit standards, which seems impossible from where I stand. That’s the only way to get property values stable or climbing steadily again.
All of the growth from 2002 to 2007 was done on a debt binge. Now, we must pay the piper. We pulled forward demand from 10 years out. I don’t expect a healthy US economy for at least 4-5 more years.
Japan-like process unfolding. That ain’t 4-5 years. If market forces ever get the lead position in front of government intervention … we all know what will happen. Seat belts tight.
Here’s an even better synopsis, largely in support of this article.
http://www.ritholtz.com/blog/2010/07/the-4-trillion-dollar-question-2/
Deleveraging is not a myth.It’s happening as the graph shows but at a much slower pace than the fall of homeprices. And that’s precisely why the banks are in (extremely) deep trouble.