Here is what I think is going on...
I think millions of mortgage holders have figured out in the past couple of months that:
- They can't sell their home.
- They have negative equity.
- They are not going to have any equity for years and years and years.
- And all they have to do to get a year or 2 (or even 3) of FREE rent is: NOT PAY THE MORTGAGE OR THE TAXES.
They know that the mortgage holders are in no position to take physical possession of the property, and that they could not maintain these homes if they did.
The number of borrowers taking this position is overwhelming the system, and I think this is what you are seeing in the stock price of the financial companies in the market place.
As energy and food prices continue their spiral, these homes will by necessity be abandoned. The financial shock if this scenario is even close to accurate will bring the U.S. economy into an economic contractionary period not seen since the 1930's. I think the issue now is the "rate of change", and my money is on an acceleration in the decline of tax dollars, decline in employment, decline in home prices, and decline in energy availability.
I prefer precious metals and would avoid U.S. $ denominated assets where possible.
Oh, and by the way, the ability to get ANY new program funded, or more money for existing programs, is over. The Age of Personal Responsibility is here.
Good luck!
Mentatt (at) yahoo (dot) com
10 comments:
I’m expecting the reverse, in a year or so one will be able to pay off the note and probably spend more on the stamp than the payoff.
Dan:
In order for markets to function, there must be someone on the other side of every trade.
Good luck!
I’m not saying people would willingly go for it; they have already entered into contracts under incorrect assumptions.
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Please clarify
When existing home loans were written the underlying assumption was that things would continue much as they were. That hasn’t happened and the current trend is deflation in house prices.
In the near future hyperinflation seems likely for numerous reasons chief among these are the governments limited ability to raise capital in a recession and its massive debts that can’t really be reduced, such as social security.
I think this will overwhelm the deflationary trend in house prices and those holding mortgage notes will get hosed as inflation renders them worthless.
N.B. I would like nothing more than to be wrong, but I’m not seeing it.
What Dan suggests happened in Argentina during their economic collapse (2000-2003). Argentinians reported coming home and paying off their existing mortgage with a single paycheck, rampant inflation had effectively monetized it away to less than the cost of a week's worth of food. Assuming, of course, you still had some sort of income (but to continue to live in a hyperinflationary scenario requires such).
That also presumes there will be no "revaluation" of existing contracted debt downwards, in keeping with the deflationary trend in all similar assets. As you say, it's only worth what someone will pay for it. As a result, at some point the noteholder will decide that any payment is better than no payment + cost of repossession + cost of maintenance + cost of back taxes + cost of rehab and resale at a loss, and either accept less or right the whole thing off (perhaps for tax liability purposes).
According to US Treasury Sec Paulson, repossessed properties during 2006 saw a net loss in excess of 50%. A couple more years of that, and even the noteholder will walk away.
I think I understand...
Dan, it has been, and will remain my position (until the data suggest I would lose money remaining in the position) that housing and automobiles will, in the U.S., experience price deflation, while commodities experience price inflation. My position is always subject to change overnight (or in a second), but I am with Mish Shedlock on his "Peak Credit" theory in the U.S.
If one were to take the Argentine example, one would borrow oooodddles of money and leverage into residential real estate. After all, you would pay back the mortgage with worthless dollars and be able to raise the rents exponentially. I would, at this moment, be willing to take the OTHER side of that trade.
Thanks for your comments and thanks to Fallout for his help, sometimes I am a little slow!
Glad to be of some help.
Some Argentinians did exactly what you mention, Mr. Jeffers, thus providing themselves with said needed income.
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