Friday, June 20, 2003

Reuters reports today that
U.S. mortgages in foreclosure climbed to a record high in the first three months of 2003 as job losses and personal bankruptcies forced more people out of their homes, a mortgage industry group said on Friday.
So now we begin to hear that more and more Americans are unable to service even their ultra-low rate mortgates.

On Wednesday, Teddy at "It's Still the Economy, Stupid" had a good discussion about the housing bubble in the US, in short saying that the housing market can bubble along indefinitely with low and continually falling interest rates. It all hits the fan when interest rates can no longer fall; zero after all the nominal interest rate floor, and if the US economy catches a touch of deflation, real interest rates will actually start rising.

But the sluggish economy and the worst jobs picture since the 1930s may be far more consequential than any possibilities of bottomed out interest rates or deflation. As Teddy notes,
As soon as lenders change their view on the profitability of making low interest rate loans on homes rising faster than the incomes of increasingly unemployed and financially strapped homeowners, their perceptions will change too. Then we will find out how much of housing demand is fundamental and sustainable.

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