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Upside Down Mortgages: Usspeak For Negative Equity

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We are now facing the previously unthinkable: a real lock-up of the mortgage market, followed by a sharp decline in housing prices. This would produce dramatic capital losses. It would reverse the wealth effect. The wealth effect is the emotional effect of a person's equity any party of his portfolio. He feels richer. He spends more. He saves less.

The poverty effect reverses this mentality. He spends less. He saves more.

The transition period is what we call a recession. Capital values in formerly booming markets fall rapidly. There is a rush for liquidity and safety.

We are seeing this in T-bill rates, which have been under 1.5% this month. This does not compensate investors for losses to inflation and income taxes. When people move to T-bills below the FedFunds rate, they are scared. This includes bankers who are borrowing from the FED at 3% and lending to the Treasury at 1.5%. They are taking a beating on their profit and loss statements, but not so great a beating as their balance sheets will take if they hang onto the mortgages that they are unloading on the FED at the TAF (term auction facility) window.

The housing bubble has burst where it was most prominent. There is no sign that housing prices have begun to rise there. When they do, and when this lasts a year, the rest of the country will be able to breathe more easily. That is not now.

March 12, 2008

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  • 296 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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