Thursday, 10 December 2009

$2 trillion of negative US real estate equity during 2010

This WSJ article provides a fascinating insight into the dire state of the domestic real estate market in California. Increasingly home-owners who bought during the boom years are abandoning their negative equity homes and taking advantage of much cheaper rental accommodation, often in the very same neighborhood as the homes with the impossible to service mortgage costs. The article makes the point that "California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default."

While the mortgage defaulter may suffer from negative credit ratings for many years, home ownership is a luxury that many home-owners can no longer afford or want to afford.

Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.

To appreciate how big a headache this could become for the various financial institutions that are entangled in all of the defaulting mortgages the article cites the following.

Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.

Although not spelled out the implication from the above is that there would appear to be at least $2 trillion worth of negative real estate equity for US households by 2010. That fact alone will act as a considerable dampener to consumer confidence for years to come.

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