The consequences of financial deregulation:
"There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That's one mortgage in four. The aggregate amount of that is some $2 trillion," said Feldstein. "If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages — mortgages with negative equity — the median loan-to-value ratio is 120 percent."
That means about 25 percent of all U.S. mortgages are exceed [sic] the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that's now 20 percent higher than the value of the home.
That's bad — but it's likely to get worse.
A recent report by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.
Together, these two categories account for 23 percent of all properties with a mortgage. Nevada led all states with 48 percent of homes with negative equity. Florida and Arizona each had 29 percent of homes with underwater mortgages, while 27 percent of mortgages in California were upside-down, the group said.
If home prices fall another 10 to 15 percent, as measured by the Case/Shiller Home Price Index, then four out of every 10 mortgages in the U.S. could be underwater, Feldstein said.
"At those levels, it's hard to see how many people are going to be willing to keep up with their mortgages," Feldstein said.
The Case-Shiller Index that Feldstein refers to is one that Calculated Risk and Paul Krugman have been talking about for some time. It indicates that house prices have to fall about another 15% to return to year 2000 levels, which is the last time they were sane. But it gets worse: Sanity is not a floor since it never was a ceiling. As Calculated Risk notes:
Of course there is nothing magical about 2000 prices, and prices could fall more or less than to 100 on the graph. I don't have much to add, but I think real prices are a better gauge than nominal prices as to how far prices will probably fall. I expect these real indices to decline for some time.
The year-over-year change in house prices as of January 2009 is predicted to be somewhere around 17%. In other words, in the period from January 2009 to January 2010 we could easily see housing prices fall more than 17%, which exceeds the upper end of the range Feldstein was talking about that would put 40% of all house mortgages underwater nationwide.
Please note from the main article that this phenomenon has a regional component. Phoenix, Las Vegas, Southern California, South Florida, and a couple of other places have it particularly bad. The effect of concentrating the problem in those states means really bad things about unemployment there. I expect net migration to those places to stop, if it hasn't already. This puts further downward pressure on house prices, which leads to more negative equity, which ... .
This is what Obama means by a "deflationary spiral."
Why did I start off by saying this was the consequence of financial deregulation? The part about mortgage-backed securities you already know about. But check out this chart from Krugman. It shows that the money that was created in the last bubble - the tech boom of the 1990s - washed into the real estate market in the 2000s. The failure on the part of people like Alan Greenspan to put restraints on what was clearly out-of-control asset price inflation not once, but twice, put us where we are today.
When does it all end? It seems we're well into the capitulation phase. Next stop: Despair.