Early on in this real estate meltdown the subprime mortgage drew all the attention with its high foreclosure rates. As the default numbers mercilessly accelerated in the lower half of the market the prices in this category headed in the other direction, at an increasing pace. To many optimistic housing observers, including yours truly, the overall damage would largely be contained in the lower end. The argument went that prime borrowers knew how to budget better, that they had other investments to rely on in case of trouble, that they already were familiar with what home ownership entailed, and so on.
Well, now the foreclosure curse is spreading into the prime territory, into the upper half of the market spectrum. And proving the earlier theory dead wrong. Mortgage Bankers Association sums up the current situation like this: "The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures." There it is.
High unemployment attached to this nasty recession is clearly having a large impact on this trend. That's logical.
Perhaps an even bigger factor is the rapid erosion of home values. Let's say that a house in Las Vegas was bought for $900,000 in 2006 with a 100% mortgage, somewhere near the peak of the bubble. Since then prices have dropped at least 50% on average in Southern Nevada, but maybe only 30% so far in the higher end, so using that 30% figure this property is now upside down $270,000. A good chunk of money thrown into the wind. To many homeowners that might just be too much to take. Even if they could afford to make payments, the temptation is there not to do so. They may also calculate that for values to climb back up to their mortgage balance will take, say, 15 years, and then conclude it's not worth it. 15 years is a long time.
Moreover, if the homeowner in the above example wanted to sell the house and move out of town he couldn't do that unless he had an extra $270,000 on hand to close the deal. Anyone would think twice about that.
Nevertheless, the cycle theory is clearly at work here. First the lower half of the housing market plunged into the abyss and is currently clawing its way out of there, it seems. The upper half hung in there longer, but is now being sucked into the same cycle of market forces and has to go through the same painful motions before seeing better days ahead.
Comments(12)