International Homeowners Feeling U.S. Housing Pain

Although the dollar hit an all-time low against the euro in late February, Europe is having its own mortgage and real estate problems. When it comes to subprimes, mortgage meltdowns, and foreclosures, the financial headlines in Europe look pretty much the same as those in the U.S.

Credit problems are not exclusive to the U.S. Major UK banks, for example, including Barclay's and HSBC, are writing off massive loan portfolio losses. Northern Rock-considered one of the most rock solid lenders in the UK, has virtually collapsed, and other giants like Alliance and Leicester have incurred serious financial setbacks. A significant shortage of investment capital for loans now exists in the UK, and banks and mortgage companies have tightened their purse strings in an attempt to avoid greater losses. With subprime mortgages being blamed for much of the trouble, lenders have virtually eliminated these instruments.

Exporting mortgage woes

If the news sounds familiar, it's because the mortgage and real estate crisis that began in the U.S. has been exported to our European counterparts. But the damage isn't limited to the UK. Home prices in Spain more than doubled over the past decade, but the median price of a single-family home in Spain began to fall about nine months ago, around the same time that the U.S. market took a serious turn for the worse. France has just registered its first quarterly home price decline in nearly a decade, and similar results are being tallied in Ireland, a nation where real estate prices had skyrocketed in recent years. Much of the market activity reminds industry observers of the way our own red-hot California real estate bubble expanded before the big bust. And the underlying causes of the current crisis are also reminiscent of American market dynamics.

Blame it on mortgage rates

Low interest rates helped the run-up in prices across countries like Spain, which experienced one of the biggest housing booms of all. The European Central Bank kept whittling interest rates down, and sometimes they were below Spain's own annual rate of inflation. That meant that if you borrowed money from your local bank, you would make a profit, even if you just put the cash under your mattress and went into hibernation.

But easy money paired with property price inflation created a high-risk situation in terms of actual equity, and when the market slowed and rates crept upward, the profits got wiped off the map. New construction came to a screeching halt, and a wave of delinquencies and foreclosures is now sweeping throughout the European continent.

For example, UK repossession rates are expected to climb more than 45 percent this year, compared to 2007. The Guardian reported that average household debt now hovers around £56,234. And the adjustable-rate mortgage payments of 2,000,000 UK homeowners are scheduled to rise as much as 60 percent over the next 18 months.

Meanwhile homeowners in the U.S. read those alarming European headlines and think, "Been there, done that."