Home Repossessions Threaten Economy

The boom and bust in the US housing market has been well documented - Why Roof fell in on US property market

But, although this year prices have shown signs of stabilising, there is a real problem of more repossessions still undermining the market.

Data from the Mortgage Bankers Association show that almost 5% of all American homeowners are already in the process of having their properties repossessed, while another 4.5% are at least 90 days in arrears with their mortgage repayments. In total, that means more than 9% – almost one in eleven homeowners are in imminent danger of having their home repossessed. (source:)

This threat of repossesion is occuring despite interest rates of 0.5%. If the Federal Reserve was to raise interest rates due to recovery, many more homeowners would be threatened with rising repayments they can't meet.

Why Repossessions are Still Rising

Three years after house prices are falling, repossession rates are still very high because:

• Many homeowners had a temporary introductory term of low interest payments. When this introductory period ended, they faced a sharp rise in repayments. Though these kind of mortgage deals have mostly ended, there are still a lot working there way through the system.
• Rise in unemployment has made mortgages unaffordable. With a flexible labour market, the US economy has seen one of the sharpest rises in unemployment. Unemployment rate in US is currently 10.2% (faster rise than in Europe)

How Repossessions Will Undermine Economic Recovery

The prospect of more home repossessions is bad news for the US economy.

• It will continue to depress the housing market. Prices could remain stagnant or even fall further. This will depress consumer spending and make recovery weak.
• Banks will have to absorb more losses from failed mortgage repossessions. More bank losses will lead to lower bank lending and the potential for more bank bailouts.

In the UK, the repossession rate has been lower than expected this year, due to low interest rates and efforts by banks to avoid repossession. Although, the UK does not have the same problem from NINJA mortgages (no income, no job) there is still a potential problem from rising repossessions.