US Housing Market

I thought a thread on the US housing market might be a useful idea.  Given how much of the chaos came out of this in the first place, looking for direction on this might be useful.  It is worthwhile pointing out some of the major differences between US and UK, for those fairly new to it.

One of the important points is, depending on the region in the US, the borrow may not be liable for more than the value of the property in default.  So, if you owe say $300,000 for a house, and the property is worth $200,000 now, you can simply hand the keys back to the bank and walk away.  The bank sells the property at auction, for  knock-down price of say $150,000 and suddenly all the neighbours with mortgages find the value of their property has also declined, thus incentivizing them to walk-away and the cycle continues.   The states were this applies are:

Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington

Many of these, esp Ca, Fl and Az, are the states that had the biggest bubble and the most lending.  A fair point to ask was why did they extend so much credit to a market which left the lender such a risk on the asset.   To my mind this shows the insanity of the mortgage market.  Easier credit conditions make people more willing to take the gamble, menaing prices go higher, meaning lenders feel they are more secure as there is more equity.  This creates a market of rising prices and the default data (with rising prices and lower near term interest payments) suggests a very low default rate, thus allowing repackaging of debt of higher rating.

This is a rather cool heat map, but unfortunately the data is only for Q4 2008 so far, we know things have become significantly worse.  Florida for example now has approx 12% of borrowers more than 60 days or more past due.

http://data.newyorkfed.org/creditconditionsmap/

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It is hard to see what can bring a bottoming out of the housing market as the downward spiral seems hard to stop.  The securitization market is almost dead, which means loan originators need to consider things like ability to pay as the debt is no longer spirited away into some fancy bond.  The complex products, such as balloon payment, roll up mortgages and deferred interest mortgages are harder to find, thus moving people to traditional longer term fixed rate products (charging the rates borrowers would never have been able to afford).  Mortgage refusals are rising cause people to lose the money they have spent trying to get approval.   Efforts to allow borrowers to write off a portion of the debt were rejected by Congress as a result of lobbying by the banks.  The increase in foreclosures is causing more property to be sold at "distressed prices" which are becoming the benchmark.  With unemployment at 10% and individuals trying to save more given damage to savings plans I can see no return in the immediate future.  

When Japan's property bubble burst in 1990, there was not the extend of borrowing, nor the generous conditions for borrowers that you have in the US.  The BoJ kept rates low which protected those with capital, preventing inflation and did not attempt to reflate the bubble or create a new one, but now nearly 20 years later, property prices are still about 30% lower than the peak of 1990.  Is US housing set for a similar fate?

I would be happy to hear any stories people have and will leave you with a quote form Adam Smith.

"A dwelling house, as such, contributes nothing to the revenue of the inhabitant.. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue... Though a house , therefore may yield revenue to its proprietor it cannot yield anything to the public, nor serve in the function of a capital, and the revenue of the whole body of the people can never be in the smallest degree increased by it."

The name "money pit" is well deserved.