Friday, August 19, 2016

The U.S. housing market and credit risk

The August 20th issue of "The Economist"has a cover with the title "Nightmare on Main Street". That lead editorial and the following first article in the issue, "Comradely capitalism", discuss the risks that remain in the U.S. housing market.  While noting that the capital of the banks is much stronger, that risky and funky derivative risk has been reined in compared to 2008 and 2009, and multiple new regulations exist to avoid a repeat of that period's crisis, there is still an issue with this massive market.  A chart titled "A state business" shows that the government is now the explicit funding source for anywhere from 75% to over 80% of all mortgages since 2008, as compared to less than 10% be before 2008.

What was meant as a way to staunch a crisis has become permanent.  While this insulates private investors and corporations from much of the direct risk, the risk does not go away.  It now belongs to the U.S. taxpayer.  With both campaigns now pointing to the decline in the U.S. home ownership rates since 2008 as a big problem, their suggestion of a solution implies that the U.S. taxpayer in general will be a participant in rebuilding greater risk, even if intended to be well managed.  "With a fifth of all mortgage loans granted since 2012 having loan to value ratios of 95%", less than reassuring lending still goes on.

While there does not appear to be any crisis on the horizon, the candidates' lofty thoughts  about infrastructure spending will come to naught if by chance there is a financial or political or global risk event that triggers a decline in the home mortgage market.  The supposed value of houses in this area, based on selling prices in the first half of 2016, is approaching record levels.  After what we have just been through, it makes one think...

That means thinking about maintaining the liquidity necessary for any unexpected downturn, selling one's house now, or maybe even buying a house now before interest rates rise as well as prices. Personal situations vary.


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