Societe Generale On The Three Ways Underwater Mortgages Are Halting The American Recovery

More than a quarter of all U.S. mortgages remain underwater, and that’s having a damaging impact on the U.S. consumer recovery, according to Societe Generale.

The latest CoreLogic data shows that 27.7% of mortgages are underwater. And no matter how low interest rates go, many U.S. mortgage holders with underwater mortgages are no longer eligible for refinancing, according to Societe Generale. This, along with a rise in uncertainty and reduction in mobility, is damaging the U.S. recovery.

From Societe Generale:

Negative equity by itself does not create a cash flow problem. In fact, any auto loan is “underwater” the minute the new car owner drives off the dealer’s lot. However, the problem with underwater mortgages is threefold:

First, homeowners with negative equity are more adversely impacted by income shocks, putting them at risk of foreclosure or a short sale. This creates uncertainty among homeowners, increases their risk
aversion and reduces consumption. 

Second, homeowners with negative equity are less likely to successfully complete a consumer credit card, auto loan, small business loan or any other credit application process. Since the financial crisis in 2008, the ratio of outstanding consumer credit and disposable income has already dropped from around 24% to below 21%. This, also, reduces consumers’ ability for incremental consumption.

Third, mobility is greatly reduced when the option to 3000 sell one’s house is no longer available. Labour mobility in the US has always been one of the reasons why the US labour market has been more dynamic than its European cousins, helping the US to rebound from recessions faster (see Chart 6). This is no longer the case, at least to the same degree previously observed.

The mobility factor may be one that people are underestimating. Note, compared to European countries, U.S. workers tend to take on more jobs in shorter periods of time. While this chart only shows graduates three years out of college, it does indicate that, if people can’t sell their homes, they may be incapable of moving on to better paying jobs.


Photo: Societe Generale

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