house of cards
Two interesting pieces of housing and housing finance-related data reported today. First, 40% of houses sold nationwide last year were ’second’ homes: vacation (12%) or investment (28%). This is significant because in theory the owners of non-primary houses are more sensitive to fluctuations in market price, and more likely to cash out or at least stop buying when that price peaks.
The second piece of information sheds some light as to exactly how close to reality that theoretical prediction is. As it turns out, the bulk of profits (in one case 62%) reported by savings and loan banks in the past year is due to ‘noncash income from deferred interest.’ This is a polite way of saying that the banks are reporting profits on income that doesn’t actually exist. What they are doing is the following: Given a negatively amortizing loan, (one for which the principal balance increases over time because the minimum required monthly payment is below the amount necessary to service the interest) the banks are reporting as profit the additional deferred interest on the now increasing principal. In other words, they are claiming as income potential future payments from customers whose ability to pay is already at the absolute minimum, and whose debt obligation is steadily rising as a result. Throw in the continued upward march of interest rates (to which adjustable rate mortgages still have a couple of years to catch up) and, well…
So we’re left with banks whose income stream is primarily dependent on payments from real estate speculators who are banking on the value of their properties not just holding ground, but increasing faster than their interest can be recapitalized. Meaning if the prices don’t increase, they’ll have to foreclose to recoup their investment, and sell off the collateral at whatever price they can get.
And housing inventory is steadily rising.
tick, tock…
