Home > Classic Prechter
Deflation in Action: People Walk Away from Homes
Banks Walk Away from Office Buildings
 |
 |
By Susan C. Walker
Tue, 22 Dec 2009 12:30:00 ET |
|
|
A growing number of people are deciding not to pay their mortgages when the value of the house they purchased falls below the amount of the mortgage they are paying. And they aren't the only ones who are walking away from bad real estate deals. Bloomberg reported the week of December 14, 2009, that Morgan Stanley has decided to “return to lender” five office buildings in San Francisco that it purchased in 2007 from Blackstone Group -- because that very same commercial real estate may have lost as much 50% of its value, according to one estimate. Talk about taking a bath!
In his latest Elliott Wave Theorist, Bob Prechter explains why this walk-away behavior among (former) homeowners is deflationary for the economy. Imagine how much more deflationary it will be as banks and other corporations walk away from their business deals.
* * * * *
Excerpted from The Elliott Wave Theorist, November 19, 2009
People Are Walking away from Their Homes and Mortgages
Great numbers of people are ceasing to pay their mortgages, even if they have the money to pay them. When people walk away from their mortgages, they are reneging on a promise to pay the interest on the loan. This means the money that your friends and relatives (no Elliott Wave Theorist subscriber should have any significant amount of money in a typical bank) have deposited in (i.e. lent to) their respective banks is becoming increasingly tied up in mortgages that are earning nothing at all.
Normally, a bank can go after mortgage defaulters’ other assets, because, after all, a loan is a loan. That is, unless some government says it isn’t. A number of state governments have been willing to sell their banks’—and therefore their depositors’—health down the river for votes. In these states, banks can lend someone $500,000, but they can’t tap the borrower’s assets to collect all the money owed to them; all they can do is take possession of the home that the borrower bought with the money, even if doing so does not cover the value of the loan. The so-called “non-recourse-loan” states are as follows: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.
Homeowners in these states can cheat their banks, with a pat on the head from the legislature. Do not keep even your everyday spending money in any bank in these states unless its balance sheet shows a far lesser percentage of mortgages on its books than has the average bank. (The new edition of Conquer the Crash has an updated list of the safest banks per state.)
Refusal to pay interest is deflationary. When banks can’t collect fully on their loan principal, as is the case by law in the above-named states, it is deflationary. Even in states where banks can go after other assets held by borrowers, default is still deflationary if the borrowers are broke. The reason is that, in all these cases, the value of the loan contract falls to the marketable value of the collateral, and a contraction in the value of debt is deflation.
Some people who walk away from their mortgages purposely damage the homes when they leave. New businesses have sprung up to take on the job of cleaning up the houses that former occupants trashed as they left. Angry defaulters are stripping coils out of stoves, pulling electrical wiring out of walls, ripping fixtures out of bathrooms, yanking seats off of toilets, punching holes in walls and leaving rotting food in the fridge. (AP, 8/9) Such actions, and the threat of more such actions, lower the value of the collateral behind mortgage debts, thereby lowering the value of mortgages, which is deflationary.
Find Out How the U.S. Government's Actions are Contributing to the Deflationary Picture. Bob Prechter's latest Elliott Wave Theorist, published December 18, 2009, reviews the markets for the year and then launches into Part 2 of "Continuing -- and Looming -- Deflationary Forces." This time, he focuses on the government's unwitting role in ensuring that deflation will rule the U.S. economy. Find out more about the new issue here.
Tags: deflation, commercial real estate