A dagger pointed at the heart of global banks…

13th January 2011

Mort Zuckerman has a piece in the Financial Times today, which supports arguments long made by an old friend, Dean Baker of the Center for Economic Policy Research in Washington. Both add valuable data to that posted in yesterday’s blog about the fragility of the US housing market, and the exposure of Britain’s globalised banks to that fragility.

Baker, in a recent Guardian column notes that:

House prices in the United States are again declining and most of the economics profession remains clueless. The Case-Shiller 20-city house price index for October (the data is released with a two-month lag) showed a decline of 1.3% from September. This implied an acceleration from the prior month’s decline, which is now reported as 1.0%. In other words, house prices are again declining at double-digit rates. A more careful examination of the data reveals the underlying logic. Prices are declining most rapidly in the bottom third of the market. Prices for this bottom tier of the market were in freefall in recent months in several cities.


The further decline in house prices will have predictable consequences for the economy. If house prices drop by another 15%, completing the deflation of the housing bubble, this would imply a loss of $2.5tn in housing wealth. If consumers spend 6 cents for every dollar of housing wealth (near the middle of the range of estimates), this would mean a fall in consumption of roughly $150bn or 1% of GDP. This will be a substantial drag on growth over the next two years……

Zuckerman adds:

we have had a dramatic decline in prices and home equity values. The latter have fallen by some $9,000bn since 2006 according to Zillow.com, the property information service company.

Estimates of homes either with loans in delinquency or at some stage of foreclosure are as high as 8m. Equally worrisome is negative equity, where the mortgage exceeds the value of the home. An estimated 5.5m US households are tied to mortgages that are at least 20 per cent higher than the current home value. These are the borrowers most likely to default. For these families, the American dream of home ownership has turned into a nightmare.

The other important part of this story is that many more homes will go underwater, and there will be new losses for banks.

Zuckerman notes further that the US has

an overhang of unsold properties threatens to smother any incipient recovery.

Estimates of homes either with loans in delinquency or at some stage of foreclosure are as high as 8m. Equally worrisome is negative equity, where the mortgage exceeds the value of the home. An estimated 5.5m US households are tied to mortgages that are at least 20 per cent higher than the current home value. These are the borrowers most likely to default. For these families, the American dream of home ownership has turned into a nightmare.

The raw material for foreclosures – delinquencies – remains on the rise, foretelling a significant increase in the roughly 25 per cent of home mortgages already under water. The Mortgage Bankers Association estimates 8m homes are 30 days or more behind on payments or in foreclosure. Few of these delinquent loans are being cured.

More than 3m homes have been repossessed by the banks since January 2007. The result is a dead weight dragging down homeowners, the financial world and the wider economy, with little prospect for improvement.

All of this contributes to the expectation that home prices will continue to decline for at least a year and perhaps for two. The estimates are that prices will fall a further 10 to 20 per cent, which would bring the total decline from the peak valuations of the first quarter of 2006 to about 40 per cent.

The stabilisation of housing prices is simply impossible given the amount of real and shadow inventory. In fact, median resale prices have been declining at an accelerating pace, according to the National Association of Realtors, as lenders continue to tighten already-restrictive standards. As David Rosenberg of Gluskin Sheff put it: “If home prices don’t decline at least another 10 per cent, then the laws of supply and demand will end up being repealed as far as it pertains to residential real estate.”

The result is that millions more American families remain at risk of losing their biggest asset, their home equity. Since mortgages average approximately 50 per cent of total home values, the 30 plus per cent decline in home prices to date has already reduced homeowners’ equity by over 60 per cent.

All previous postwar recoveries have been able to depend on a growing US housing market. That is not the case this time.

Indeed, the continuing decline in the housing market is a dagger pointed at the heart of an incipient economic recovery.

And as Dean notes: “that will, no doubt, surprise most economists”…..To which list we may add: central bankers, private bankers, UK Treasury officials, and British politicians……..


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3 comments to A dagger pointed at the heart of global banks…

  • Matthew Platte

    Your quoted material is light gray on a white background – it’s as if you didn’t want me to actually read the words. 🙁

  • larry brownstein

    It appears that the only way that the average person will get any justice in this affair is for the banks to undergo another crisis, which it must be said, some of them are working quite hard to achieve. Putting millions in debt isn’t the same as sending millions to death camps, but bankers’ attitudes about what they have wrought doesn’t seem realistic either. They just don’t get it, … yet.

  • Ann

    Matthew…apologies. Hope it is clearer now. Ann

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