How will the US authorities handle 7 million mortgage defaulters?

When will US investors return to the property market?To read some of the popular press you might assume that a recovery in the US markets is a foregone conclusion in the eyes of many experts.

Billions up billions of dollars being thrown at markets which are still in decline are sure to have some impact but there is a growing concern that they are targeting the wrong area of the market and literally millions of US citizens will default on their mortgage payments over the next couple of years.  If this is the case we could see the US property market stagnate at best for at least another couple of years but more than likely decline substantially in another downwards lurch.


The facts are that the recession in the US is the worst since the depression of the 1930s and while in theory the rescue plan put forward will make a difference, nobody actually knows how much and how quickly it will impact because we have never been down this road for decades.

It has been estimated that 7.3 millions American citizens will be in mortgage default by 2010 which will not only put massive pressure on the economy but push house prices lower and lower as demand falters and distressed sales become more common place.

According to Moody’s there will be in excess of 4.3 million homes repossessed over the next two years which will not only push property prices lower but place a massive burden on the benefits system of the US government.

Many US citizens have invested the vast majority of their savings into the stock market, the property market or a mixture of the two over the last decade.  The larger the losses which are incurred the less disposable income in the US which will hinder any serious recovery in the economy.

Historically, US citizens have rented their homes and it was only when the property market started to show a substantial increase that many started to look at purchasing their own properties.  What started as a general increase in the property sector soon began to look over cooked but investors still piled in as they chased the last drop of profit out of the sector.

The US financial sector is but a poor shadow of its former self and could take more than a decade to get back to anywhere near the size and power it once held.  Officially there are no more US Investment Banks after the sector was smashed to pieces and those remaining Investment Houses were forced to convert to standard banks in order to remain in business.

Overseas interest in the US housing market has all but dried up as many investors have their own local problems and do not actually trust the US property market at the moment.  While this will change when finance is more available, economies start to wake from their slumber and investors decide to venture out again it may be some considerable time.

The rescue package

As we hear news of a constantly changing format for the US rescue package it can be difficult to understand where the risk to tax payers begins and where it ends.  We are hearing much massive numbers that there is a general feeling around the world that it must be successful but when you consider the $750 billion mentioned and the fact US mortgage finance is in excess of $10 trillion it starts to look a little less certain.  Add in the fact that the banking system does not look too keen to take the pressure off home owners in the short term and you have a potential problem.

We have been brainwashed into assuming that the banking sector needs to be bailed out first before we can even start to build again, but many people are forgetting that the US is affectively in a recession.  In a recession banks do not hand out mortgages like sweets, they do not bend over backwards to help customers and the US authorities cannot afford to stretch the financial sector rubber band any further.

If the banks were to turn around and say they could not afford to go easy on home owners in default on their mortgages what could the government really do?

The property market

The US property market is very much in meltdown even after the decision to rubber stamp the rescue package after a very awkward stand off between the political parties.  While the sector is enormous, can you imagine the pressure which 4.3 million repossession sales will put on the market? Can you really see investors diving in to buy up any homes before the repossession sales and mortgage default figures start to fall back?

Even those that are brave enough to venture into the US property market after repossession and default numbers start to fall will not be willing to pay top dollar for a property.  This is before you even start to consider the possibility that a further 3 million repossessed homes will come online at some stage if the economy does not pick up (the difference between the estimated 7.3 million mortgage defaulters of 4.3 million repossessed homes).

Confidence in the US

We have seen consumer confidence, investor confidence and overseas confidence in the US economy smashed to pieces over the last 12 to 18 months.  Despite initial denials that the US was headed for a massive economic slowdown, repeated confidence in the banking system and talk of spending whatever it takes to refloat the global economy the trust fact between investors and the US authorities has deteriorated to a level which will take some time to build back up.

Literally millions of US consumers will be paying off their debts for years to come and it will take some time for many to even think about returning to the stock market or property market.  Negative equity will also be an issue hanging over millions for years to come and while there are investors out there with money to invest, why would they do so when they can forecast with disturbing accuracy that the US economy and property markets may never be the same for years to come.

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