A Lot of Destruction

Five million homes have been foreclosed on in the last year and a half. That's five percent of the estimated 110.7 million US homes. Most of those homes are rotting in neighborhoods near you, never to be occupied again. The foreclosure rate is steady or increasing as 20 percent of US homes are worth less than their mortgage.

Let's do some math. In September 2008 the nominal value of the US real estate market was $20T with $10T in mortgages. So half the market was mortgages. If houses have lost 30% of their value then the 2010 value is ~$14T. Ok.  So $7T worth of real estate  is mortgaged for $10T. If 5% of mortgages were foreclosed then $500B vanished as banks wrote off the loss. Now we have $7T worth of real estate with mortgages of $9.5T.

If 20% of home values are less than their mortgage then $1.9T worth of mortgages may be worthless (as well as the real estate). The math works out pretty well then.

So here we are with about 27 million homes worth nothing and $2T in potential mortgage losses. Add in $6T in equity losses and now you're talking some serious deflation. Poof! $8T vanished. That's a lot of destruction!