The Mortgage Crisis
In my post earlier today I argued that the recovery would be constrained by the state of the job market and that we may well have two parallel economies for a while until the employment situation improved and sparked an increase in consumer confidence.
The latest data on home mortgages seems to support that view.
One in eight home mortgages is now one or more payments in arrears. And the trend is worsening. Foreclosures are also picking up steam despite the administration’s efforts to encourage renegotiation.
The states most affected are the usual suspects with Florida being the leader in both foreclosure and arrears: 12% of the state’s mortgages are in foreclosure proceedings and 23% of mortgages are in arrears. Those are awful numbers. Next on the list come Nevada, Arizona, and Michigan. There is nothing really new about the fact these states have real estate markets that have collapsed.
What is new is that the cause of arrears and foreclosure has shifted. At the beginning of the crisis the collapse was sparked by sub-prime borrowers failing to pay as their interest rates shot up from the original teaser rates. Now the bulk of the new problems stem from unemployment: people who have lost their jobs and are now unable to maintain their home payments. A consequence of this is that the kind of mortgages now in trouble has shifted: at the onset of trouble it was those sub-prime borrowers accounting for the bulk of the failures. Now prime loans account for over a third.
The conclusion is obvious: unemployment is beginning to bite hard. Even well constructed and sensible loans are falling into arrears as the job market takes its toll on worker incomes. This will, with certainty, limit the upside of the recovery until jobs once again become abundant.
Meanwhile consumers will remain very conservative and save more than usual. And the more they save rather than spend the more likely we will run into difficulty next year.
Excessive thrift may well be our biggest problem in 2010.
How odd is that?
