Amid all the hand-wringing over the sub-prime meltdown, and the stock market volatility, seems like this is a good time for a reality check. And it comes courtesy of Jerry Bowyer, an economic advisor to Blue Vase Capital Management. On the National Review Online website, Bowyer makes these observations regarding subprime:
Currently there are about 44 million mortgages in the U.S., and less than 14 percent of them are sub-prime. And only about 13 percent of those are late on payments, with the majority of late payers working through their problems with the banks.
So, all in all, when you work through the details and get down to the number that really matters, only about 0.6 percent of U.S. mortgages are currently in foreclosure. That’s up a hair from roughly 0.5 percent last year. That’s it.
Actually, that’s not it. Things are actually better than the numbers suggest, since sub-prime-mortgage homes are less expensive than prime-mortgage homes.
This makes sense. Wealthier people, generally, can afford costlier homes than less-wealthy people. The recent sub-prime surge brought large numbers of moderate-income families into the home-ownership market, and their houses are less expensive than most. Therefore, the dollar impact of the sub-prime default is smaller than if it were a prime default.
With approximately 254,000 mortgages in foreclosure at the moment — up from roughly 219,000 last year — the sub-prime meltdown has given us an increase of 35,000 mortgage foreclosures over the last quarter. Since the average sub-prime mortgage clocks in at almost exactly $200,000, we’re looking at an approximate $7 billion increase in foreclosed value in the first quarter of this year.
How big is household net worth in the U.S.? … About $53 trillion. In other words, the recent increase in sub-prime foreclosures amounts to 0.01 percent of net U.S. household wealth.
Granted, these calculations don’t include troubles among prime loans, nor the possibility that homeowners who bought at the peak in bubble-driven markets like Southern California and south Florida – and who are now $200,000 underwater versus what they paid – opt to just mail in the keys and walk away.
And they don't include the “reverse wealth effect” – that homeowners whose houses are worth a lot less than before – simply “feel” poorer and don’t vacation or splurge on that new kitchen renovation (although economists tell me that the cutbacks from the “reverse wealth effect” isn’t as dramatic as the spending gains during boom times. And maybe more than anything, they don't include the problem that hedge funds that invested in subprime leveraged up 10 to 1, so their losses are outsized, but that's a financial problem not a mortgage problem.
But you get the point. Seemed like a good afternoon for a reality check. And here's the chart Bowyer included to illustrate his point.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.