A question about Greek bonds

Odd question… One question that has come up a few times recently is whether European banks and worries about Greek debts are affecting housing.  The quick answer is another question: “housing here in America or in Europe?”

But on reflection the original question makes sense.  How Europe resolves the worries over Greek debts and fears of  losses among some European banks does affect American housing and home buyers.   The first worry for home buyers is mortgages.  Banks, mostly but probably not exclusively in Europe, hold Greek government bonds.  These bonds have already experienced sharp price declines and many fear that there will have to be some kind of restructuring or other forced adjustment which will further reduce the value of the bonds.  Banks and others owning these bonds could suffer further losses.  There are at least two possible ways for this to affect the availability of mortgages in the US. If banks writing mortgages for American home buyers are among those suffering losses, they may be forced to curtail their lending activities as they work to repair their balance sheets.  Second,  if there are wide spread or widely publicized losses among some banks it is likely that many unaffected banks will also react to the general increase in nervousness and limit their lending.

This points to the larger impact of  Europe’s economy:  it has raised fear and pessimism back to levels last seen in 2008-2009.  This is clearest in the stock market where prices gyrate up or down one or two percent a day. VIX, the “fear gauge” which measures how much volatility option traders expect is back to levels last seen briefly in June 2010 and before that around the market bottom in March 2009.  Anyone who glances at a chart of the S&P 500 in recent weeks recognizes the extreme nervousness among investors.

The worries that manifest themselves in the stock market run deeper – economic forecasts are being revised downward and virtually no one is arguing that we are approaching a good time to buy a house.  Consumer confidence reflects the same fears and deters people from the idea of borrowing money, committing to a 30 year schedule of loan repayments and making one the biggest financial decisions they will ever make: buying a house.  So, yes those worries over European debts do dampen American housing prospects.

There is one other angle worth a brief mention, though it is not clear if this is positive or negative.  In a few big cities including New York there are increasing news reports about foreign buyers wanting a second (or third or fourth?) home in the US.  When there are good times around the world’s economies and the wealthy feel even wealthier there is a lot of activity buying homes in a few US cities.  This same thing can happen in bad economic times, driven more by fear than by excess cash.  This last effect is seen mostly in the very high end of the housing market and  in news articles; it doesn’t make a large difference to the prices of most homes.


The posts on this blog are opinions, not advice.
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One Comment

  1. Sharelord Review says:

    After reading your blog i think that the people, who are living in Europe can solve their problem about buy home.

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