How is this "good" for the economy? "It’s a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again." That’s right, bankrupt is the new rich in the USA as the 4.8M homes that are at lest 3 months behind on their mortgages (see map) are "saving" $5Bn a month in mortgage payments.
Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that’s roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s. Even the rich are playing the default game now. More and more Americans are realizing there is no sense in paying a $7,000 monthly mortgage on a $1M mortgage with $100,000 in equity when they can walk away and buy a similar home for $500,000. We’re talking about saving $3,500 a month for 30 years or $1.26M.
As more and more people see their friends and neighbors "get rich" by walking away from bad home investments, this trend is likely to accellerate, not abate, unless housing prices rally back fast. A recent study found that four out of five people believe defaulting on a mortgage is morally wrong if one can afford to pay it, but they also found that the people become 82% more likely to say they’ll default if they know someone else who defaulted. Meanwhile, there is a massive game of chicken being played by the 4.8M people who have simply stopped payinig their mortgages and the banks who have no desire to take a huge loss to their books by actually taking over and selling the homes in this terrible market.
Investors meanwhile, can’t be bothered with abstract market undercurrents and the above chart shows that there haven’t been so few bears in the market since right before we began to crash in 2007 – Excellent! What’s really funny is that, as the market has topped out the past…