The Economist has an interesting article this week on the UK market and the negative equity threat – where the cost of your mortgage is higher than the declining value of the home (homes in the UK declined 2.5% in March). This has sparked memories of the 1989 collapse where it took a decade for home prices to recover.
In the US, the same thing is happening. As this article points out, websites, blogs and services are popping up to help people decide when to simply walk away from your home. Something that the industry calls the jingling mail, when people simply mail in their keys. Consider the following service offering:
While some sites trumpet offers to buy homes from stressed-out owners, another one sells a foreclosure kit. California-based YouWalkAway.com says its kit will enable you to stay in your home "for up to eight months or more without having to pay anything to your lender!" It also says: "With our money-back guarantee, you get it all for only $995.
One could argue that this is long over due. How many people do you know who are spending their way into oblivion? It is so easy to go out and buy that $500K or $1M house because the interest rates are so low. If you could get a 4% mortgage, a $500K house becomes very affordable to many as it is $20K a year in payments – if you adjust for taxes – that is around $2200 per month in interest.
But when interest rates start to go up, the pressure starts. The graph to the right shows the change in debt ratios of the average UK citizen (One could suggest that similar ratios exist in NA, although house prices are dramatically higher in the UK, but so is base salary). In the 80s the ratio of home price to earnings was an average of 1.7 and for new home buyers around 2.8. This meant that the model that I had in my mind as a first time buyer held true (Buy 2X your earnings to be safe).
There was a trough in the mid 90s but a huge spike in the last decade. Look at the current ratios – new home buyers are at 5.2X and the average is 3.8X. That means if you are a new home buyer earning 100K you are buying a house worth 520K and in many cases carrying $500K of that as mortgage debt.
And we wonder why the financial crisis is hitting? People are in debt up to their eyeballs and it is starting to hit the market. What happens to that new home buyer when the $2200 per month interest payment goes to $3000 or $3500? The dike begins to crack.
I think the water is flowing …. Confirms what our realtor friend said, it is a buyers market.