America’s House Price Time Bomb
July 30th, 2008Via: BBC:
With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is expected to sign into law a massive new government intervention designed to slow the slide.
The intervention would come as a little known quirk of US law threatens to drive down house prices even faster.
Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.
…
Professor Wachter believes that, to date, most people have had their homes repossessed because they could not manage the repayments.
The trend of people now positively choosing to walk away because it makes financial sense to do so is a worrying new development.
“The dangers are extraordinary,” Professor Wachter says.
“If all that is needed is that the house value is less than the mortgage value, there is a large number of homeowners in the United States who are in that situation”.
…
It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.
But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.
“This is becoming a tsunami of voluntary defaults,” Professor Roubini says.
“The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.
“You could have most of the US banking system wiped out, so this is a total disaster.”
Which is why it is not just US policymakers who are hoping America’s new, multi-billion dollar initiative to stabilise the housing market will succeed in its aims and thus make walking away less attractive.
Because if it fails, the economic fallout could be felt far beyond America’s shores.
If you’ve ever visited Roubini’s blog, you know he is predictintg that the ENTIRE U.S. banking industry is going to collapse, and that as many as 50% of home mortgages may go into default. Just another hyperbolic doomsayer? Unfortunately, Roubin is one of the few economists with a track record of being dead-on in predicting coming economic trends.
http://www.rgemonitor.com/blog/roubini/
I sure hope dumpster-diving doesn’t get as tedious as they say it is.
Banking system collapse seems unlikely with unlimited money printing available. Dollar purchasing power collapse, maybe. Also, all those mortgages are asset-backed – by houses. So there’s an underlying value to the mortgages and bank positions that would seem to make it unlikely that “most of the US banking system [would be] wiped out”.
Another possibility is that all those Chinese, Japanese, and Arab owned US dollars will come flooding back to our shores, buying up US residential real estate. This will buoy prices – all those newly created, and exported US dollars have to go somewhere…