Subprime fact of the day

Even with about a tenth of all subprime mortgages now in foreclosure, only a
small share of all American families — about 0.3 percent — own a home in

Here is the link, from Mark Thoma.  This is one big reason why I’m not yet convinced by the economic pessimists.  The article also notes how many estimates of the S&L crisis of the 1980s were exaggerated, and suggests the same tendency may be happening today.

Addendum: This piece is a good statement of the case for pessimism.


OK, I don't fall with the real pessimists, the people who write about the yard sale economy.

On the other hand, I look at the savings rate and the home equity ratio and I see something that does not look sustainable.

What will the inflection look like? Can consumers return to savings while servicing debt and keeping shops afloat?

Is it pessimistic to expect a mere recession?

As Bob pointed out, leverage can be a problem. Recall that for the LTCM crisis of 1998, the total amount of money involved in the bailout was a mere $3.6 billion, but LTCM's positions were about $1.25 trillion and it was rightly felt that its failure would have posed a huge systemic risk to financial markets. It would have been naive to claim that there was no problem because $3.6 billion is a relatively small amount compared to the overall economy.

In any case, the problem will accelerate in 2008 as non-subprime mortgages (option ARMs in particular) blow up. House prices in places like California will need to fall about 30% and possibly as much as 50% in real terms.

Wall Street was not the only one leveraging:

"Median household debt rose by almost 34 percent between 2001 and 2004, while net worth went up by just 1.5 percent, according to the latest Survey of Consumer Finances (SCF) report."

This crisis is not about home mortgages, it is banks and others placing bets on home mortgages. Credit default swaps and other derivatives allowed phenomenal, and still largely unmeasured, leverage against the underlying securities. Whatever the total dollar value of the risky mortgages, or their percentage of the total mortgage market, these derivatives could multiply the total dollar default risk by a factor of ten (or one hundred). Talking about individual borrowers is missing the point.

Jim, isn't it conventional wisdom that "consumer confidence" is important for the economy? I mean you are asking Peter to justify it, but when the "go shopping" thing is a Presidential response to crisis ....

In any case, the problem will accelerate in 2008 as non-subprime mortgages (option ARMs in particular) blow up. House prices in places like California will need to fall about 30% and possibly as much as 50% in real terms.

The causal chain from the former to the latter seems weak to me. For instance, kill off a couple of the bigger manufacturers (certainly a possiblity), and you'll see the overhang shrink pretty quickly even at the current level of sales. Can you spell out how you see the linkage in greater detail?

The estimate is from John Berry-- someone with close contacts with the Fed Board and staff. My question is this the data he is getting from the Fed and does it reflect their thinking about the magnitude of the problem?

Can you spell out how you see the linkage in greater detail?

The case is set forth here (I'm not the author).

Basically, he's saying that houses were only "affordable" to people with ordinary incomes through the help of exotic mortgages with low teaser rates, and nobody offers such mortgages any more or is likely to soon. So the pool of potential buyers at today's prices has drastically shrunk and unsold inventory has ballooned (we end up with "90% fewer qualified buyers for five times the number of homes").

Note he's referring specifically to California -- he's not predicting a nationwide 50% drop.

[Your observation that households with ballooning mortgage payments will be spending less on output of the economy only implies inadequate demand for output of the economy if the people who receive those mortgage payments are less likely to buy output of the economy than the households would have been.]

the people who receive the mortgage payments are banks, not individuals, and their main use of them will be to rebuild their capital ratios (ie, literal hoarding) rather than to pay them out as dividends to people who might spend them.

Robert, don't make that bet. Recall that Japan, throughout the 1990s, did not have a recession (in the technical sense of three consecutive quarters of negative growth). There are plenty of possible negative outcomes that don't get called recessions.

When financial products sound more like adult toys (teaser ARMS and honeymoon sweeteners) than sound lending practices, that's the first clue.

A back of the envelope calculation brings that .003% foreclosure rate to, oh, $74 billion. That's certainly not pocket change!

- US population: 300mm
- Avg. family size: 2.4 person per house (pph)
- Homeownership including investor property: 72%
- Median home value: $275,000:
Calc: 300,000,000/2.4*.72*.003*$275,000
=$74 billion

Certainly I won't go into a long drawn analysis about the $74 billion, or mortgage backed securities, non-performing banked owned real estate assets, property devaluations or the estimated absorption rate of the estimated 270,000 foreclosed properties, my only comment is markets don't turn over night, including the real estate market. Add to the mix oil at $100 barrel, a non-existent US auto industry, record commodity prices - including gold, and analysts commenting that 2008 could be even a tougher year for real estate, all point to, perhaps, a slowing US economy.

And if the number's don't work for you, go to your local Home Depot on any weekend, if you don't have to wait in line for any length of time or you actually get someone to help you, that should indicate something rather obvious (hint: it's not because Home Depot is improving their customer service).

I don't talk about that brian, for the simple reason that I don't understand it, but when people lay it out like that it certainly looks bad.

Is there is a potential feedback between the financial sector and consumers who perhaps need even more debt to stay afloat?

Is Peter Schiff right that we are heading for a Crunch Time?

One item not being discussed in the concentration of the foreclosures. If the foreclosures were relatively evenly spread out over the country, then they could more easily be absorbed. But a high percentage of the foreclosures are taking place in California, Florida, Michigan, Texas and Ohio. Because of the concentration, the foreclosures are having a multiplied effect on the local real estate market as it relates to price. So even people who obtained their mortgages legitimately, paid on time and have decent credit scores are trapped in their home due to the decline in price THus the economy loses labor mobility which then resonates thru the economy.

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