Ilarqi at The Automatic Earth writes: As you may know, I have for a long time said that home prices, in the
US and many other places, will fall 80% or more from their peaks. All I
have to do now is sit back and wait for that prediction to come true.
Which it will, there are no other options available, it just takes time
for people to understand why. Very few homes would sell these days
stateside without Fannie Mae and Freddie Mac, which are nothing but
government vehicles to buy your neighbor a home with your money.
So
far, Fannie and Freddie have received some $70 billion in bail-out
checks. Today, the US Office of Management and Budget reports that they
will need at least $92.2 billion next year. But those are just the
losses that cannot be hidden, there are hundreds of billions more that
should be written down, but are not. Alt-A and OptionARM resets are
bound to raise the loss numbers manifold. How about half a trillion
this time next year? And then there will come a day when the government
will not be able to buy all mortgages, which means no more homes will
be sold to people who can’t pay cash. And the few that still can may
think twice.
Mike White, a mortgage broker in Chicago, explains in Our American Homes. They All Fall Down - Much Further
that a simple math extrapolation of the Case/Shiller index indicates
that US home prices will fall 45% more from their current prices, and
62% in total peak to trough. A broker who advises people to rent, maybe
there’s still hope.
What Mike ignores in his simple model is that even Robert Shiller himself, as I often have, has predicted that because of the huge and rapid movement in prices, they are bound to violently swing way below the bottom the index seems to point to. That is what I’ve always maintained, and it confirms my prediction of an 80%+ loss. In the past few years, there have been quite a few graphs like the one of the Case/Shiller index, with data based on historical price ranges, and it always seemed very simple to me that prices would have to come back to the trendline. And then break it downward, as least as much as it had broken it on the upside. I’m not saying that to pound my chest, but because there are still millions walking wide open eyed into a debt servitude trap, whereas this has been obvious for a long time.
And there’s more. You can look at these graphs and not see more than a 50-60% drop in home prices, if you take the high road and the sunny scenario. But what you miss, then, is that it is that 50-60% drop that will of necessity lead to an additional 20-30% drop, because it will tear apart the entire economic system. The vast majority of mortgage holders owe more than 20% on their loans, so the vast majority will be underwater. Equity will virtually disappear, and what will remain is debt; lots of it. At the end of 2009, there will probably be about 20 million Americans without a job, which makes it impossible to pay off any debts. There will be tens of millions more who do have work, but still can’t afford to pay back what they owe. (05/14/09)
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