The increasing number of foreclosures in the US

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While the news in the US has been very upbeat over the last few days with details of a proposed $700 billion bailout of the banking sector announced, spare a thought for those affected by the 1.5 million homes repossessed last year and the 1.2 million homes which have been reclaimed in the first 6 months of 2008. While the cavalry may have arrived, for many US home owners it has all come too late. So what does the future hold for the US housing market? Will the bailout work?

While many years ago the vast number of Americans used to rent their homes there has been a massive change in this picture over the last twenty years with many

watching the property markets move higher and higher and determined to get a slice of the action. This has seen an unprecedented boost in the amount of money invested into the US property market and a sector which continued to defy gravity for many years. Despite a number of high profile investors suggesting the rise and rise in property prices could not go on forever, we saw many in the US cashing in their savings to join the boom in the property market and the stock market. Life was easy, the money was rolling and it was a win win situation – or so many believed.

As the property market got more and more competitive, prices were pushed higher and higher, it became apparent that under traditional mortgage market conditions, many US citizens would not qualify for mortgages to buy their dream homes. However, this is where the banks stepped in, spotting a new and exciting market where margins were larger, the risk was greater, step forward the sub-prime lending market, the real reason why the US is in such a mess. Short term exuberance was storing up massive problems for the future and has quite literally put millions of people on the streets after losing their homes.

As more and more people struggled to cope with their mortgage payments the cracks started to show at the lower quality end of the market, the warning signs were there at least 12 months before the credit crunch hit home. Only when smaller mortgage players began to drop like flies did anyone sit up and take notice, but like so many things in the US investment market this was ignored because people did not want to believe it. Slowly the ‘toxic’ investments from the sub-prime market began to infect more and more companies and the balance sheets of renowned financial institutions were about to explode.

When the money markets crashed in July last year and affectively cut off the life blood of the business world, finance, the seeds had been sown for one of the sharpest economic downturns since the early 1900s. As mortgage funding dried up and house prices started to fall back it soon became apparent that many home owners had been sold mortgages which were way out of their reach, leading to more and more mortgage payment defaults and the risk of more foreclosures continued to spiral higher and higher.

It is a shocking indictment of a modern day US that has seen the emergence of ‘tent cities’ across the country as more and more people are made homeless after the banks foreclosed on their properties. Homeless numbers have been rising since the start of 2007 and more and more people are being forced to live in temporary accommodation and conditions which are often no better than the third world. So will this recently announced bailout do the trick? Have we seen foreclosures peak?

$700 trillion dollars is going to be put aside to purchase ‘toxic’ investments

The headlines of recent days have claimed that $700 trillion dollars is going to be put aside to purchase ‘toxic’ investments from the financial sector, take them off company balance sheets and allow the rebuilding of some battered company accounts. However, the US has already spent a staggering $900 billion this year prior to the new move, intervening in money markets and taking the likes of Fannie Mae and Freddie Mac in-house (these two groups between them have exposure to $6 trillion worth of US mortgages – around 50% of the whole US market). While the new rescue package awaits the approval of Congress there are concerns that we will still see millions more homes repossessed over the next 18 months forcing more and more onto the streets.

It is rumoured that the rescue package will not be compulsory and it will force banks to take a 10% hit on the cost of a property in order to gain access to the funding which will be made available. There are concerns that not all banks will participate in the scheme immediately, possibly waiting until they have bled their customers dry and have nowhere else to turn. There are also growing concerns that the situation is a win win for the banks with the US tax payer bailing them out of their ‘toxic’ investments and giving them a clean slate from which to start again.

Hope for home owners in the US

For many home owners in the US the last few days will give them hope that they may be able to keep their homes and avert financial collapse, but this may not be the case for all those struggling. The banks are still foreclosing on mortgages while the rescue package is being discussed and more people are pouring onto the streets in make shift camps. At best there will be a lag between the package being implemented and the growth in foreclosures falling, but in reality many banks may not be willing to take a 10% hit on the cost of a property, in order to gain access to the new funding arrangements, until they have no other choice.

It has also been revealed that the glut of houses up for sale in the US has reached the equivalent of one year’s supply of new homes, something which is obviously going to be a major drag on the property market for some time to come. Home foreclosures in the US may or may not have peaked yet but for many there is still the threat of being made homeless while Congress congratulates itself on what would be the biggest financial bailout in history.

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