![]() ![]() Moreover, a government program of subsidies to first-time homebuyers may have released a backlog of pent-up demand. Mortgage interest rates fell below 5 percent in March and April, but have risen significantly since then. If that trend continues, it will prevent further erosion of household wealth and strengthen the banks' capital positions.īut the recent data, while encouraging, may be the result of temporary factors rather than an indication that the fall in house prices has actually come to an end. ![]() house prices fell in the past three months for which we have data (ending in May), and the figures for May show essentially no decline at all. Some recent data suggest that the decline in house prices may be coming to an end. And, if the downward spiral in house prices continues, the value of mortgage-backed securities held by financial institutions around the world will continue to decline, affecting the supply of credit far beyond the United States. When homeowners default, banks lose money, and uncertainty about the extent of future defaults undermines confidence in banks' capital, making it more difficult for them to raise funds and causing them to reduce their lending in order to conserve existing resources.Īs a result, the recession has been deeper and longer than it would otherwise have been. Even in those states where creditors have the legal authority to take other assets or wage income, the personal bankruptcy laws are so restrictive that creditors don't bother to try.Īlthough it is tempting to think of this as a purely domestic problem affecting the United States, nothing could be further from the truth. If a homeowner stops making mortgage payments, the creditor can take the property but cannot take other assets or a fraction of wages. residential mortgages are effectively "no recourse" loans. Unlike virtually every other country, U.S. More specifically, the rising unemployment rate, along with the large number of employees on involuntary part-time work, has increased the number of people who cannot afford their monthly mortgage payments. In addition, high loan-to-value ratios in the United States interact with household financial problems to increase the number of defaults and foreclosures. For one-sixth of these homes, the debt is 20 percent higher than the price of the house. As a result, one-third of all American homeowners with mortgages are already "underwater" - their mortgage debt exceeds the value of the house. The fall in house prices also led to a sharp rise in mortgage defaults and foreclosures, which has increased the supply of homes on the market and caused house prices to fall further. By now, wealth in the form of owner-occupied housing is down about 30 percent, equivalent to a loss of more than $6 trillion of household wealth. The sharp fall in house prices that followed caused a dramatic downturn in household wealth, leading to lower consumer spending and an overall fall in GDP. CAMBRIDGE - The bursting of America's housing bubble in the summer of 2006 triggered the global financial crisis and recession. ![]()
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