From John Mauldin's latest newsletter:
"Frank Veneroso noticed something unusual in the latest Federal Reserve Flow of Funds report. They changed their methodology for analyzing housing prices to a model more like the Case-Shiller index, which most believe to be more accurate. That meant they deducted another $2 trillion from household net worth than in the previous quarter. They just caught up with reality, so no big news there. But there is some big news if you look closely.
"About one-third of the homes in the US have no mortgages. Typically, these are nicer homes, as the "rich" have paid off their homes. So you can estimate that to be somewhere between 35-40% of the total value of US homes. Writes Frank:
"So now the flow of funds accounts tell us that the total value of residential real estate is $16.53 trillion. The share owned by households with a mortgage is probably $10 trillion to $11 trillion. Total mortgage household debt now stands at $10.3 trillion. In effect, for all households with a mortgage taken in the aggregate, their loan-to-value ratio is now close to 100% and perhaps close to half of them have a zero to negative equity."
"The biggest single factor in foreclosures is negative equity coupled with unemployment. That makes sense, because if you could sell your house and get some equity, you would.
"As I have written in past letters, we are going to see a significant increase in mortgage resets in 2010, which will result in even more foreclosures. There is a lot more pain to come. This is not an environment that is typical of past recessions. There is a lot of deleveraging to be done, both as banks write off bad debts on homes and as consumers walk away from mortgages badly underwater."
