Article in The Economist says that
- hot housing markets will be hit hardest. No surprise there.
- The US is in a better position than a lot of people because our definition of "fixed" is usually for the term of the loan, but elsewhere "fixed" means more what we would call ARM. So when you look at percentage of "fixed" mortgages by country, there is a completely different definition. In most places "fixed" means 2, 4 or 5 years, then floating. This came up earlier with respect to the UK:
https://www.nerdwallet.com/uk/mortgages/fixed-rate-mortgage/- we probably will not see bank failures like we did in 2008-2009, because increasingly the mortgage market in the US is separate from the large, pillar commercial banks that keep the economy running. So they are, at least in theory, much more insulated than in the past.
- it will hit younger people the hardest - they are more likely to find themselves underwater if their house loses 20% of value and they have more principal left. For older people, they've (uh... we I guess) both had more time to see their property appreciate, so in nominal dollars, a 20% shave is still likely well above the purchase price, and two, if they are the rare person over 65 with a floating mortgage, in most cases the principal is small so changes in interest rates don't hurt them as much.
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Other observation that I haven't really heard talked about. This will crater geographic mobility in the US.
If there is a long-term drop in home prices, it puts a lot of people underwater. It isn't rational to make decisions based on sunk costs, but people do. So many people will have a floor on what they are willing to sell at. Some people will have a true financial constraint, sunk costs aside. If they sell, but still have a mortgage payment for the balance, they may not be able to afford a new house somewhere else.
And finally, for people who see their home as an investment/wealth-building instrument, they will want to hold on until it recovers value, even if it means staying in a shitty job in the interim. So even without the sunk cost problem, if I bought my house for $100,000 and a year ago the same house was selling for $200,000 last year but now is only selling for $150,000, if I keep my crappy job for two more years and the housing market rebounds, I've gotten a $25K/yr bonus. Scale that up 3x to 20x for various real estate markets.
I saw recently that American mobility is the lowest in history. We used to be a people that moved. That is no longer true (it may be true compared to other countries, but not according to our history). The percentage of people currently living in the state they were born in is something like double or triple what it was 100 years ago.
Anyway... this will exacerbate that trend. That has impacts on labor markets and economic recovery. In past times, Americans willingly migrated to where the jobs were. Not so much anymore. I think housing is a huge factor in that.
