DB: Half of Mortgages Will Be Underwater by 2010
The Business Insider had a scary post yesterday about a recent report from Deutsche Bank predicting that 25 million homeowners, more than half of those with mortgages, will have negative equity by next year. According to the Case-Shiller Index, average peak-to-trough decline nationally as of April 2009 was 33 percent, with New York only off…
The Business Insider had a scary post yesterday about a recent report from Deutsche Bank predicting that 25 million homeowners, more than half of those with mortgages, will have negative equity by next year. According to the Case-Shiller Index, average peak-to-trough decline nationally as of April 2009 was 33 percent, with New York only off 21 percent. Deutsche Bank thinks that national number is heading to 40 percent, with the Northeast making up for lost time; in addition, it’s the blue-chip loans that will comprise much of the next wave of the negative equity plunge (only one in seven prime loans is currently underwater). And why’s all this negative equity so bad? “Bottom line,” writes Business Insider’s Henry Blodgett, “More negative equity will lead to more foreclosures.”
Half Of US Homeowners Will Be Underwater By 2011 [Business Insider]
Japan is a special case. The reason that Japanese housing depreciates is that often the homes are not built to last. Many Japanese prefer to knock down the existing structure and build something new rather than move into something used that requires maintenance.
http://www.japantoday.com/category/commentary/view/200-year-rabbit-hutches
I don’t know if Deutsche Bank’s economic modeling and projections will come true, but I am certain that if people’s mortgages are significantly higher than rents for similar living spaces, they will walk even if still employed. I would have thought that shame, commitment or love for home would prevail but I know of 2 people who did just that. They could pay but they can rent the same downtown penthouse for half what they currently pay each month, and their $150,000 is already gone (and then some.). They couldn’t get the bank to agree on a short sale amount that would actually move the place, so they moved and let the chips fall.
Boerum Hill Replacement costs are down about 4 percent the past 6 months and will mst likley keep going down. Labor and materials are not in demand at all. The biggest question I have is what happens to the liar loan people when they have to refinance and cant? Should people who lied about income go to jail?
There are several traditional ways to measure asset values. One of the them is replacement cost. An existing house shouldn’t depreciate in value if the cost of building a new one increases (i.e labor costs and materials costs such as steel, copper, cement etc) go up over time.
All the more reason that banks should start getting smart about lowering monthly payments for home owners, even if it means (gasp!) decreasing the principal slightly.
A lot of people will pay off their mortgage when it’s actually in their best economic interest to walk away. People do it for emotional reasons–they love their house, they feel like they’re letting the neighborhood down if they go into foreclosure, they feel like there it is a bad personal character trait to default.
But if the cultural norms change, and people start to set aside these non-economic factors, the banks are in huge trouble. And these norms will change if we have enough banks foreclosing on houses.
Banks are being very, very stupid here. It was dumb to give people mortgages they couldn’t afford to pay back. But it’s even dumber to let defaulting on a mortgage become something lots of people do.
just came back from ireland, this is very much the case there
I clicked through the entire powerpoint presentation for shits and giggles.
There are a couple references to the last housing downturn from 1987 to 1991, and how homes lost 16% of their value (in Massachusetts). But the one thing that seems relevant to me, is not home price, but monthly payment. That’s what people pay to stay in their home. And so, when I looked up mortgage rates from that time period, i saw they peaked at over 11% in Oct ’87, and fell gradually over four years to 9% by Oct ’91.
So if anyone’s a genius out there, I’d love to see the average home price computed using the average mortgage rate to see a chart of monthly payments.
My guess is the peaks and valleys level out a lot.
But this isn’t Japan. It was also said that, in 1989, the Imperial palace grounds were worth more than the state of California.
In other countries, like Japan, homes actually depreciate in value over time. It is only the value of the land that retains its value. In a non-bubble housing market, one would expect a home bought new in 2005 to sell for less if sold in 2009. So basically, your 80 year old brownstone is worthless and only the value of the land would be considered in a transaction.