Negative Equity in US at ridiculously high levels

Negative Equity is a term used to describe a state in which the outstanding balance on a loan is more than the actual value of the asset. For example, if you have a housing loan with outstanding balance of $500,000, but the price of the house has fallen say to about $400,000.

According to estimates in this article, as mentioned by CR, currently the negative equity is estimated to be around 12 million. !! The population of US is around 300 million. Lets say we have an average of 3 to 4 people per house. So we actually have about 80 million to 100 million families in the US. and 12 million homes, i.e. about 12% to 15% of the families are now facing the situation where the price of their house is less than their mortgage. This just gives us a glimpse of how deep and serious the housing problem in the US is, and although bailing out banks may have been the right move, how far it is from actually providing a healing touch to the US economy.

In UK, negative equity is expected to reach 2 million. The pouplation of UK is about 60 million, which means about 15 million to 20 million families. Thus housing in UK is also in a mess with around 10% to 15% families with more mortgage than their home values.

Would have loved to see numbers in India.

Oct 19, 2008


Santhana ganesan October 19, 2008 at 12:32 PM  

My opinion about the value of home is different. The value is of use only if you are to sell a house or to buy a house. Once a house is bought,its value lies in the satisfaction of owning a house. But if one tries to make money due to the forecast that the house value would rise, then it is a trade. Once it is a trade loss or profit has 50:50 chance. For example if I buy a pant and shirt at credit the value of these clothing will vanish once I start wearing it. But if I sell these clothing immediately after wearing, then its value will always come down drastically. But at the same time I have to pay the to the bank which has lent me an amount to buy these clothings. According to the theory of negative equity this is also a negative equity. So the problem not in the value of house but due to the fact that the value of house is traded on speculation

Vetri Pandit October 19, 2008 at 1:20 PM  

Time to start buying again!

Searching for direction in the market? This article is for you!

The fall in the Indian Equity Market is due to systemic global risk that is common to entire market and not specific to Indian Market. This has happened due to financial system instability caused or exacerbated by idiosyncratic events or conditions in financial intermediaries elsewhere (read US and Europe). Now that the growth in these developed economies have tappered greatly, the Emerging Markets will feel only ripple effects, which will however be compensated by domestic demand. Therefore, if both developed and emerging markets have fallen propotionately, the emerging markets, with their relatively higher growth rate, should send buy signals much sooner.

Out of these Emerging Markets India has reached the point where one can press BUY button and GO LONG. Now, I will elucidate the reasons. Indian GDP rate “may” fall marginally, but it will still remain the second fastest growing major economy. The dollar rise will make exports competitive once again. The negative effects of dollar rise will be adjusted by the falling crude price. As I mentioned earlier, the fall globally has been initiated by the over ambitious finacial players. The Indian finacial system is one of the most robust in the world. The government and RBI have shown commendable speed and sense of responsibility by taking timely monetary and fiscal measures like CRR cut etc. (If sources are to be believed, more are on cards – something like a mini budget). The pay commisssion and loan waiver will further fuel demand.

I would say, for India, it has been a bear market within a long term bull run (extending till 2040) caused by external factors beyond its control. This is definitely reason for Indian investor to be cheerful and look for buying opportunities, whenever they apear.

I consider that Indian market is at its bottom or very close to it. At this point I would like to bring in a fact which bring out that India is already over sold. We all know that the US market is close to recession. But legendary investor Warren Buffet has called BUY in the US equities. These are some of his famous words which he uttered on 17th october 2008. "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.But fears regarding the long-term prosperity of the nation's many sound companies make no sense," he said. Buffett said major companies would suffer earnings hiccups, but added they "will be setting new profit records five, 10 and 20 years from now."

If it is so for the US economy how much more true for an economy which is the emerging growth engine of the world?

It is time for us to stop looking at global indices for cues and start picking up equities from Indian bourses. The universe of stocks has become large. But I would recommend investors to buy large cap stocks with strong fundamentals. The following are my recommendations:-

Reliance Industries
Infosys Tech
Reliance Com

Short term investors can look for 20% return (7-15 days). If you can hold it till December, expect close to 40% returns. This level I believe is close to true value. If you hold for 8-12 months, then you are likely to get returns close to 100%

True value of sensex is close to 14000. I used to talk about growth premium, which India truly deserves. If you consider this then the value is 17000. This level may be achieved in 8-12 months. But I strongly feel that sensex will very soon revert to 12000 levels. There will be very strong resistance at 10000 in downside(similar to the one we had on the upside).

It is rumored that a US based billionaire investor has heavily initiated long postions. If you (Indian Retail Investors) have not sold your stocks so far, please do not make the mistake of selling them now. If you have cash, start accumulating and building your portfolio in a gradual manner. 3-4 years down the line we may see levels of 30,000.

Happy Investing Folks! Cheers, finally bottom is in sight!!

Realty Rider October 20, 2008 at 2:22 PM  

Lehman Brothers is not more. Merrill Lynch has gone down the Bank of America jaw. AIG too could go belly up. With a doubt, these developments in America are the most shocking events to have hit global financial markets. So where did it all begin? And what does it mean for the Indian stock markets? Find out. . .

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