Friday, October 16, 2009

High-End Homes Contributing More To Foreclosures

Persistent economic weakness and a slow and uncertain stock market recovery are creating pressure on the higher end US residential real estate markets. With nearly 10 percent of jumbo prime mortgages in delinquency and available credit scarce, some experts believe that a second wave of the housing crash is threatening. See the following post from Expected Returns for more.

For people who have become convinced that housing has bottomed, the coming 2nd wave down will come as a surprise. The odds favor more downside when unemployment is still rising and credit is contracting. Even with mortgage rates under 5% and first time homebuyer tax credits, there is little that can be done to pump up the housing market. Now comes news that the higher end markets are coming under pressure. From Reuters, for many U.S. wealthy, housing crisis still a squeeze:

Despite some signs that the worst of the U.S. residential housing crisis may be over, many wealthy homeowners are still being squeezed by the combination of weak home prices and the stock market crash.

"I think for wealthy homeowners it will get worse before it gets better," said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate

Just wait until the stock market starts heading back down once again. A whole generation of wealthy individuals have become accustomed to high stock valuations and the fallacy that stocks always go up in the "long run". This illusion of wealth allowed Americans to consume beyond their means. After stocks go down 30-50%, and remain at those levels for a decade, expect frugality to become an entrenched mindset across the American population. This means no more housing bubbles, and housing valuations below multi-generational trendlines.

Massive Supply to Hit the Market

More unwanted supply of U.S. homes at the high end may also come from foreclosures. According to data from research firm First American CoreLogic, the rate at which wealthy homeowners are falling behind on their mortgage payments is increasing.

It says 9.4 percent of those with jumbo prime mortgages -- those over $417,000 -- are 90 days or more behind on their payments. This pales next to the 33.8 percent of subprime loans that are delinquent 90 days or more. But the rate is rising.

While the subprime delinquency rate is 1.3 times higher than a year ago, the jumbo prime delinquency rate is 2.6 times higher, suggesting that wealthy homeowners overstretched themselves financially much as their poorer counterparts did.
The point that I've been trying to make the past couple of months is that there is more pain to come in the higher end markets. Higher net worth individuals can weather any economic storm better than low income individuals, since they tend to have more savings and assets to liquidate to raise cash. But, persistent economic weakness eventually results in capitulation. Have we reached the point of capitulation for wealthy individuals? Apparently, we're getting close.

This post has been republished from Moses Kim's blog, Expected Returns.

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