"Home prices could sink an additional 25%"

The Austrian economists have been talking about this for some time. The author quoted below even mentions the idea of a 20% drop in home values:

Housing: Too Good to be True

By Mark Thornton Posted on 6/4/2004

(snip)

Housing bubbles typically do not pop like a balloon; they don't even crash like stock markets. Rather, the air in housing bubbles tends to leak out slowly—painfully slowly—while in commercial real estate markets there is a more noticeable hiss. We really don't know the current value of our homes until we sell them. They are not traded on a daily basis, like shares of stock in Wal-Mart. Some never get exchanged in the market, but are passed on within a family from generation to generation. The market value of a home may drop 20% and the owner might never realize it.

Worse yet, when the market for real estate collapses, prices are less likely to collapse because when buyers fail to make offers houses simply don't sell. Sellers often resist cutting their prices in favor of just leaving the house on the market or taking it off the market. Traditionally the market adjustment to a collapse in real estate markets has come from the quantity side, not the price side—fewer houses are sold—while price reductions tend to come gradually. This doesn't mean that housing bubbles can't exist or that the bust is any less painful, only that it doesn't make as much noise.

(snip)

http://www.mises.org/article.aspx?Id=1533

by Darren Wolfe (7 articles, 224 quicklinks, 110 diaries, 809 comments) on Sunday, February 10, 2008 at 10:36:25 AM
 

I agree

that we are in for a long ride downhill and for Middle America it could be permanent. The U.S. has reached zenith in our Ponsi scheme economic basis.

What the government spends on what is hardly relevant to our current situation. The real root cause is an economy based on exponential growth in a finite world, a mathematically impossible scenario, but then when did Americans let math get in the way of a new SUV?

by Mike Folkerth (120 articles, 0 quicklinks, 2 diaries, 566 comments) on Sunday, February 10, 2008 at 12:56:29 PM
 

It's All Downhill From Here?

It's All Downhill From Here,     by Mike Whitney 

'On January 14, 2008 the FDIC web site began posting the rules forreimbursing depositors in the event of a bank failure:

http://www.fdic.gov/news/news/financial/2008/fil08002.html#body

 The implication is clear, the FDIC has begun the “death watch” on the many banks which are currently drowning in their own red ink.  The problem for the FDIC is that it has never supervised a bank failure which exceeded 175,000 accounts.  Today some of the larger banks have more than 50 million depositors, which will make the FDIC's job nearly impossible.    

 Good luck. 

The FDIC won't reimburse uninsured depositors if it means increasing the loss to the deposit insurance fund....As a result, uninsured depositors are protected only if a bank acquiring the failed bank will pay more for all of the deposits than it would for insured deposits only.” (MarketWatch) 

Great.  That's reassuring.  And there's more, too.  FDIC Chairman Shiela Bair warned that “as of Sept. 30, there were 65 institutions with assets of $18.5 billion on its list of "problem" institutions. 

So, what does it all mean?

It means there's going to be an unprecedented wave of bank closures in the US and that people who want to hold on to their life savings are going have to be extra vigilant as the situation continues to deteriorate.  And it is deteriorating very quickly. 

Right now, many of the country's largest investment banks are holding $500 billion in mortgage-backed securities and other structured investments that are steadily depreciating in value.  As these assets wear-away the banks' capital, the likelihood of default becomes greater.  This week, Fitch Ratings announced that it will (probably) cut ratings on the 5 main bond insurers (Ambac, MBIA, FGIC, CIFG,SCA)“regardless of their capital levels”.  This seemingly innocuous statement has roiled markets and put Wall Street in a panic.  If the bond insurers lose their AAA rating (on an estimated $2.4 trillion of bonds) then the banks could lose another $70 billion in downgraded assets.  That would increase their losses from the credit crunch--which began in August 2007---to $200 billion with no end in sight. 

The market for structured debt-instruments has evaporated overnight, leaving a massive hole in the banks' balance sheets.  The likely outcome will be a rash of defaults followed by greater consolidation of the major players.   The Fed's multi-billion bailout plan -- the “Temporary Auction Facility” (TAF) -- is a quick-fix, but not a permanent solution.  The real problem is insolvency, not liquidity. 

The smaller banks are dire straights, too.  They're bogged down with commercial and residential loans that are defaulting faster than anytime since the Great Depression. 

Surprisingly, there's an even bigger threat to the financial system than these staggering losses at the banks.  A default by one of the big bond insurers could trigger a meltdown in the Credit-Default Swaps market, which could lead to the implosion of trillions of dollars in derivatives bets.  The inability of the under-capitalized monolines (bond insurers) to “make good” on their coverage is likely to set the first domino in motion by  increasing the number of downgrades on bond issues and intensifying the credit-paralysis which already is spreading throughout the system. 

MSN Money's financial analyst Jim Jubak:

 "The total value of all CDS (credit-default swap) contracts is something like $450trillion.....  Some studies have put the real credit risk at just 6% of the total, or about $27 trillion.  That puts the CDS market at somewhere between two and six times the size of the U.S.  economy." 

 All it will take in the CDS market is enough buyers and sellers deciding they can't rely on this insurance anymore for junk-bond prices to tumble and for companies to find it very expensive or impossible to raise money in this market."

by Richard Clark (26 articles, 0 quicklinks, 0 diaries, 92 comments) on Sunday, February 10, 2008 at 1:28:56 PM
 

Re: It's All Downhill From Here?

I'm reminded of the banking crisis in Venezuela in the mid 90's. I lived there from '93 to '00. In '94 they bailed out many of the major banks by printing a lot of money. By '96 inflation was at 105% & GDP growth was negative from '94 thru '96. All this mess is what unfortunately brought Chavez to power.

Let's hope it doesn't get so bad here.

by Darren Wolfe (7 articles, 224 quicklinks, 110 diaries, 809 comments) on Sunday, February 10, 2008 at 6:45:37 PM
 

inflation

is given. Hyperinflation may be more correct. Most of the terrible effect of this purposely induced inflation will come in 2009.

It's time to get your money into something tangible. As real estate cranks down in value today, it will go up with inflation tomorrow. As will machinery, building materials, food, fuel, water, and any other tangible and necessary element to life.

by Mike Folkerth (120 articles, 0 quicklinks, 2 diaries, 566 comments) on Monday, February 11, 2008 at 8:27:48 AM
 

Can a a Systemic Financial Meltdown be avoided?

Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown?  Most Likely Not.

 by Nouriel Roubini 

Since in the previous article I described a 12 steps scenarios towards a financial meltdown and a deep recession the crucial policy question is whether the Fed and other policy officials can prevent such a scenario of a systemic financial crisis.   I will present in this article the eight reasons why I am skepticalthat such a systemic risk scenario can be avoided…

 http://www.rgemonitor.com/blog/roubini/242906/

by Richard Clark (26 articles, 0 quicklinks, 0 diaries, 92 comments) on Monday, February 11, 2008 at 1:57:07 PM