The Wall Street Journal reports that nearly 1 in 6 homeowners are “under water,” meaning they owe more than their homes are worth, on their mortgages. Worse, “among people who bought within the past five years, . . . 29% are under water on their mortgages.” Given a 30% drop in home values, it is unsurprising that this is up sharply from last year, but
having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home’s value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
And unemployment is rising, even on the publicized figures which have been manipulated to understate the problem, which probably means there will be more “borrowers in financial trouble.” The Journal notes that “No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.” It doesn’t note that many people have been using home equity which will no longer be available to refinance their credit card debt.
According to preliminary figures from the Federal Reserve, outstanding revolving credit dropped in August to $969.0 billion from its July high of $969.6 billion. That’s still up nearly $200 billion from 2003 levels with a rate of increase that about doubled in 2006 and which was higher than that through the first quarter of this year. It appears that delinquency rates are rising.
This adds to what Gary Dorsch, writing for Market Oracle, calls a “reckless decision to allow Lehman Brothers (LEH) to fail,” that left bondholders high and dry. Writing for the Asia Times, Doug Noland explains,
At this point, there is clearly insufficient credit expansion to support inflated asset markets; incomes and household spending; corporate cash flows and investment; and government receipts and expenditures. Lending markets are frozen, securitization markets broken, corporate and municipal debt markets in disarray, derivatives markets in shambles, and the leveraged speculating community is engaged in panic de-leveraging.
As a consequence, the over-indebted household, corporate and state and local sectors now face a devastating liquidity crisis.
This is not going to help employment. And unless someone can explain how a lot more consumer debt is not going to go bad, this looks to me like the beginning rather than the end of a vicious cycle. A year ago, I started wondering what would happen in a couple years once Barack Obama was president and we were still in Iraq and the economy was a disaster. There’s still a year to run on that question. It looks like we’ll be finding out.