Wednesday, August 12, 2009

Deutsche Bank Makes Dire Housing Projections

In June, Deutsche Bank forecast that home prices – covering 100 U.S. metropolitan areas – will decline an additional 14% from the first quarter of this year through the first quarter of 2011, for a total drop of 41.7%.

In March, it had projected that the total decline would be 39.6%.

By this measure, we are at least a year-and-a-half away from the end of this housing recession/crisis.

But that isn't the worst of the bank's predictions.

According to Deutsche Bank, 48% percent (or nearly half) of all US mortgages will be underwater by early 2011. This is a stunning, and dire, prediction that would affect some 25 million homes.

Deutsche Bank also predicts that 41% of all prime conforming mortgages will be underwater by early 2011. For prime "jumbo" mortgages (principal values larger than the conforming maximum), the underwater condition is projected to rise to 46%.

"Underwater" defines the condition of the mortgage balance outstanding being larger than the market value of the house. Prime mortgages are those issued to borrowers with the highest credit ratings. Conforming mortgages are those that come within the size limits prescribed for Fannie Mae and Freddie Mac underwriting. Prime conforming mortgages are considered the least risky of all mortgages.

As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the bank analysts said.

If the employment picture were to improve, the number of underwater mortgagees staying in their homes would be greater than it will be if unemployment doesn't peak for another 1-2 years, which was the situation after the last recession in 2001.

The Deutsche bank projections imply that it does not see an improved employment picture developing.

Some of the millions of currently unemployed are going to become future defaults, unless the unlikely event of increased employment occurs in the coming months.

At present, the average California foreclosure has a total loan balance of $425,134 on a home that is now worth $236,739 — meaning the average foreclosure is 45% underwater.

And the fallout may get worse; 72% of foreclosures aren't being put on the market because lenders are waiting to see how much additional loan modification assistance will be provided by the federal government.

However, being that our government is massively in debt — to the tune of $13 trillion — it may have reached the limit in bailouts and assistance that it can provide.

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