Vol. 73/No. 48      December 14, 2009

Home prices in the third quarter of 2009 were down nearly 9 percent from the same quarter a year earlier, according to Standard and Poor’s Case-Shiller Home Price Index released November 24. In the second quarter the year-to-year decline was 14.7 percent, and for the first quarter prices dropped 19 percent. Though the rate of decline has slowed somewhat, in 20 metropolitan areas prices are down nearly 30 percent from where they were in 2006.

While new home sales were up more than 5 percent from a year ago, they’re down 69 percent from their peak in July 2005, reported the Washington Post.

“Real estate, which has traditionally brought the economy out of recession, seems increasingly likely this time to hold it back,” stated the New York Times. “The housing market’s epic boom early this decade has turned into an epic bust whose effects may take years to shake off.”

According to a report issued by First American CoreLogic, nearly a quarter of all mortgage holders are “underwater,” meaning they owe more on their mortgage balances than their houses are worth.

Working people renting apartments are feeling the impact of the crisis as well, with wealthy owners of apartment buildings defaulting on their loans. In the Bronx, New York, for example, the real estate investment company Ocelot Capital Group bought about two dozen buildings in 2006 and 2007. Ten of them the following year were on the city’s list of most dilapidated rental properties. With the owner defaulting on loan payments last winter, living conditions there have gone from bad to unbearable.

Alfredo Martinez, 35, a truck driver who lives in one of these buildings, “has stretched a garden hose from his kitchen to bring water to flush the toilet; plastered his disintegrated walls, adding metal screens to stop mice from chewing through; and repaired the ceiling twice after a leak caused it to cave in,” the Post reported.

The number of New York apartment units “in buildings at risk of default because of upside down loans—in which the property is worth less than is owed on the loan—could range from 50,000 to 100,000,” according to the Post.  
 
Dubai can’t meet debt payments
In another development, the government of Dubai announced November 25 that it needed a six-month deferment on interest payments on the $59 billion debt owed by the government-owned investment company Dubai World and its real estate subsidiary Nakheel. On December 14, $3.5 billion in Nakheel bonds will come due. The announcement sent shock waves through capitalist markets worldwide.

Dubai World is one of the world’s largest investment groups. The tens of billions of dollars it borrowed in a four-year construction boom were aimed at transforming the city-state into one of the world’s financial centers. Its flashy projects included not just building office towers and hotels, but an indoor ski slope and a man-made island shaped like a palm tree.

Among the largest lenders to Dubai are banks in the United Kingdom. The Royal Bank of Scotland, Standard Chartered, Barclays, and HSBC are owed more than $30 billion, according to a J.P. Morgan report. The largest lender from the United States is Citigroup, with a debt estimated at $1.9 billion.

The threat of default goes beyond Dubai. “The Greek government is grappling with a fiscal crisis, and several Eastern European governments increasingly appear in perilous financial shape, including Hungary, Poland, and the Baltic states,” noted the Post. “Western European banks have lent heavily in those nations, meaning any collapse could send tremors across the continent.”  
 
Rising interest payments on U.S. debt
Meanwhile, interest payments on U.S. debt to wealthy bondholders are projected to rise rapidly. With the national debt now topping $12 trillion, interest payments will exceed $700 billion a year in 2019, up from $202 billion this year, according to White House estimates.

A forecast by the Congressional Budget Office says that total interest payments over the next decade will come to $4.8 trillion, more than half of the projected $9 trillion in debt the government is expected to build up over the next decade.

As debts become due the government rolls them over, borrowing additional funds—most likely at higher interest rates to pay back lenders. A Treasury borrowing advisory committee reported in early November that “approximately 40 percent of the debt will need to be refinanced in less than one year,” reported CNNMoney.com.  
 
 
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