The Housing Crisis in America, as explained by Aleksandr Pritsker

The bursting of the housing bubble in the United States in the summer of 2006 triggered the global financial crisis and recession. The abrupt fall in house prices that followed caused a spectacular decline in the wealth of family units, which led to lower consumer spending and an overall decrease in GDP. To understand the numbers and the prevailing situation, we introduce you to Aleksandr Pritsker, a homegrown real estate developer. He is often called the “young prodigy”, primarily because at the age of 30, he remains one of the few developers to rake in half a million dollars a year from business. He’s stormed the headlines and considered as a top authority on the subject, which is why we take insights from Pritsker on the direst problem and a public welfare crisis in America. At this time, equity in the form of homeownership has declined by approximately 30%, equivalent to losses of more than $6 trillion in household wealth. The fall in house prices also led to a drastic increase in mortgage defaults and foreclosures, which has led to the growth of the supply of housing in the market and a further drop in prices in that sector. As a result, a third of all US homeowners already have mortgage debt that exceeds the value of their home. Pritsker says, “in a sixth of these households, the debt is 20% higher than the price of the house. Additionally, the high credit-value ratio in the United States interacts with the financial problems of the family units in a way that increases the number of defaults and foreclosures.” More specifically, the increasing unemployment rate, along with a large number of employees with involuntary part-time jobs, has increased the number of people who do not have the means to meet their monthly mortgage payments. Unlike almost any other country, residential mortgages in the United States are, in effect, "non-recourse" credits. If the owner suspends the mortgage payments, the creditor can recover the property but is not entitled to take other assets or fractions of the salary. Even in states where creditors have the legal authority to take other assets or wages, personal bankruptcy laws are so restrictive that creditors don't even try. Although it is tempting to believe that this is a purely internal problem affecting the United States, there is nothing further from reality. When homeowners default, banks lose money and uncertainty about not knowing how many default cases there will be in the future undermines banks' confidence in the capital, making it more difficult for them to raise funds and forcing them to reduce their loans to conserve your existing resources. Consequently, the recession has been deeper and longer than it otherwise would have been. The resulting weakness in the United States economy will translate into lower demand for US imports. And if the downward spiral in home prices continues, the value of mortgage-backed securities held by financial institutions around the world will continue to decline, affecting credit supply far beyond the United States. Recent data indicates that the decline in house prices may be coming to an end. The rate of decline in US home prices has decreased in the last three months for which we have data (through May), and the figures for May show that there has been basically no decline. If that pattern continues, it will prevent further erosion of family wealth and strengthen banks' capital positions. However, the recent data, while encouraging, could be the result of temporary factors rather than an indication of the end of falling house prices. Mortgage interest rates fell below 5% in March and April but have increased significantly since then. Also, the government subsidy program for first-time homebuyers may have unleashed pent-up demand. And banks were applying a voluntary moratorium on foreclosures to withhold the offer. All this may have contributed to the temporary improvement in house prices. In sum, we will have to wait for the June and July data regarding house prices to know if there has been a permanent change. The recent increase in home sales in the United States could also be misleading since a large proportion of those sales are from foreclosed properties. Indeed, properties that have been foreclosed or are about to be foreclosed now represent almost a third of total home sales. Generally, foreclosed properties are sold at auctions, guaranteeing that there will be a buyer - but prices drop. It is significant that month-on-month foreclosures increased by 7% in June, and a whopping 32% from June 2008. The Obama administration passed a law to help people struggling to meet their monthly mortgage payments because of a decrease in their income or because their mortgage interest rate has increased. For people with high mortgage payments relative to their disposable income, the US government will share with the creditor bank the cost of reducing the monthly payment to 31% of disposable income. This is a new program, and it remains to be seen how much it will help prevent future defaults. The limited experience with mortgage modifications is not encouraging. About 50% of those who modified their mortgages, in six months, fell into default. Unfortunately, there is no program that addresses defaults and foreclosures caused by the high credit-to-value ratio. Given a large number of homeowners with negative capital, there is a risk that defaults and foreclosures will continue. If so, the sale of foreclosed properties will continue to depress the price of housing, reducing the wealth of families, and damaging financial institutions. Unless home prices stop declining, the Trump administration will have to address the high credit-value ratio problem. That will help not only the American economy but also the economies of all of America's trading partners.