Author: Cameron Black

A recent study carried out at the University of Virginia has cast doubt on the wildly held belief that the whole of he USA is in a housing meltdown. The findings of the study makes good reading, and quite frankly makes sense. As we all know humans love to over-react – whether it is to a boom or a bust and it would seem that this is the case here.

Here are the first 3 paragraphs of the report that provides the core findings of the study:

“National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession. Most foreclosures have been concentrated in California, Florida, Nevada, and Arizona, and a modest number of metropolitan counties in other states. In fact, 66 percent of potential housing losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada, and Arizona, for a total of 87 percent of national declines in these four states.

California had only 10 percent of the nation’s housing units, but it had 34 percent of the foreclosures in 2008. California was vulnerable to foreclosures, because the median value of owner-occupied housing in 2007 was 8.3 times median family income, while the 2007 national average was only  3.2, and in 2000 it was lower still at 2.4. Another vulnerability to foreclosures was seen in the Los Angeles metropolitan area, where more than 20 percent of mortgage holders in each county were paying at least 50 percent of their income in housing related costs.

But even in California, enormous variations existed among jurisdictions, such as in the San Francisco metropolitan area, where Solano County had 3.69 percent of housing units in foreclosure in November 2008, while only 0.24 percent of housing units were in foreclosure in the City of San Francisco, a 15 to 1 difference.

Potential housing value losses from 2008 foreclosures  in 50 states, if values decline to year 2000 levels, were less than one-third of the $350 billion that has been provided to banks and insurance companies to cope with losses in mortgage backed securities. “

This last paragraph is what really grabbed me however. If this is correct, and I don’t have a basis for disputing the figures at this time, the bailout of the banks is not underwritten by their property portfolios. I believe that we have all been under the  belief that the money lent to the banks through the stimulus packages was at least secured in some way by the underlying assets, namely the property portfolio’s. I certainly have assumed that perhaps the devaluation may have been as much as 30% on these assets. So in other words – worst case scenario that the banks go bust, the tax payer would get 70c in the dollar back.

However on these figures, the taxpayer would only get 33c in the dollar back. Not a very smart investment decision is it. None of us would ever make this investment by ourselves – and yet the US taxpayer is (by virtue of their Government) and they don’t have a choice in the matter.

Here is the link to the full report – http://www.virginia.edu/uvatoday/newsRelease.php?id=7838

It is very interesting and worth a read if you have an interest in economics. I particularly found the relationship they draw between foreclosures rates and housing affordability interesting, which is something I will write about further in the near future.