The Mother of All Housing Bubbles

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Spain had its own housing bubble, in most ways worse than that of the US. In 2006, theGuardian wrote that 50% of new EU jobs had been created in Spain during the previous five years. But in 2011 housing starts were down by 94% and new mortgages by 81% (IMF, 2011). The IMF notes that “The stock of unsold units may take around another four years to clear. The lowest estimates of the stock of unsold units are at close to 700,000 units, with considerable regional variations but with a downward adjustment that has only started at the end of 2010. These only include newly completed units, and do not fully include units repossessed by financial institutions, unsold secondary market houses, or unfinished units.”

The Wall Street Journal suggests the number may be more than double that:

“Some 1.5 million unfinished, unsold or unwanted residential units stand scattered across the country, products of a still-deflating housing bubble that threatens to undermine Spain’s broader economy for years to come. It is the hangover after an epic fiesta, a period Spaniards now refer to as “cuando pensábamos que éramos ricos”—’when we thought we were rich.'”

Let’s put that in context. The US has about 6.5 times more people than Spain. There are 2.43 million existing homes for sale plus shadow inventory in the US, estimates of which vary. Using the WSJ number, this would suggest Spain has the equivalent of 15 million-plus homes for sale. That in a country where unemployment is more than double ours and where population growth and household formation is certainly slower than in the US. Only Ireland can rival Spain for the largest housing bubble.

The number of homes being foreclosed on is estimated to triple in Spain. About 120 evictions take place every day. Those who default on their mortgages cannot walk away from the debt, as in the US. A story is out tonight about one resident who lost her job and is being foreclosed on. She will still owe over about half her debt, or more than €100,000, plus court costs and penalties. From the Huffington Post:

“If the bank manages to sell a foreclosed home, that amount is struck off the remaining debt. But the norm these days is that the property is put up for auction and nobody bids. That has meant the bank then takes over the house for just half its originally assessed value, and wipes the amount off the remaining debt – leaving the borrower still owing a bundle. The legislation passed last week raises the proportion the bank has to effectively pay in the event of non-sale to 60 percent.”

Home prices have fallen just 10-20%, as banks cannot afford to write down mortgages (more on that later). Realistic estimates assume a 40-50% total drop is more likely, and anecdotal evidence suggests it could be even more if the economy does not recover soon. And as we will see, that is going to be tough.

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