True Lack of Deleveraging in the Housing Market
Has there been significant deleveraging in the US housing market? Not really. Instead, with already $7 trillion in home equity lost, mortgages have come down only $270 billion. It’s a significant discrepancy that’s going to have to come into alignment somehow.
Jesse’s Café Américain explains:
“This debt must be resolved. There are two major ways to do it: repayment and default.
“Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ‘ just mail in the keys.’
“Straight up default, writing off the debt even through foreclosure, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.”
This is while of “986 bank holding companies in the US, 980 [banks] lost money last year. The lucky six were the TBTF banks on major government subsidy.” To support his thinking, Jesse goes on to cite an Automatic Earth piece, Is It Time to Storm the Bastille Again:
“That is, what Americans’ homes are worth, their equity, decreased by $7 trillion — from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that’s right: US homeowners lost more, by a factor of 26, than they ‘gained’ through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333.”
The government bailouts, already a failed experiment, didn’t help the vast majority of banks get profitable and also aren’t going to help homeowners pay mortgages. This debt isn’t looking to be liquidated without a prolonged period of tough times. You can read more details in Jesse’s Café Américain’s coverage of unresolved debt in the US financial system.