Lofty Matters

I took my kids for a walk around our neighborhood yesterday and I was dismayed as I started to notice the number of homes for sale within a few block radius of my house. I easily counted 8 and it’s very possible I missed a few. This is alarming when you think about it. Why are all of these people putting their houses up for sale?

Homeowners are selling as they are becoming unable to keep up with increasing mortgage costs. Recent research shows that for every home that was repossessed last year at least an equal number was sold as owners struggled to make mortgage payments.

Home prices are crashing. Almost half of the borrowers who took out subprime mortgages in the last two years are not going to have any equity left if home prices drop an additional 10 percent. The bad news is that home prices are forcasted to decline 4.5 percent this year and 2.6 percent next year after falling 2.2 percent in 2007. This, according to Fannie Mae.

Refinancing won’t be an option for homeowners who have negative equity and who have mortgage rates that are spiking. Approximately a third of U.S. borrowers have adjustable-rate home loans. These people will not be able to refinance and they will be under mounting financial strain as their rates adjust. Credit card and student loan defaults will also become common.

By the end of 2008, up to 5 million American homeowners may have mortgages that exceed the value of their homes.

Economists call it a negative wealth effect. When the wealth effect starts reversing, people find that the value of property, shares and other financial assets are in a freefall. US families are getting poorer for the first time in over five years. Asset prices are falling and debt levels are rising.

A negative wealth effect means that increased spending will not be fueling the economy and will not lift it out of a recession.

The looming recession is a product of a decline in home values. Homeowners have borrowed against the increased value of their property to buy cars, send their kids to college, and take exciting vacations.

Things look dismal. Unemployment rates up, consumer confidence down, housing starts down, retail sales down, industrial production down, dollar down. And yes…the stock market will continue to be turbulent.

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