Up to $4 Trillion Decline in U.S. Household Real Estate Value Predicted
Submitted by
CalculatedRisk on Thu, 10/25/2007 - 9:41am (92 comments)
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Aw, CR, you're gonna panic folks!
To paraphrase the late Everett Dirksen, "A trillion here, a trillion there. Pretty soon you're talking about some real money."
hmmm never a decline from 52 till the present...im sure the quants programmed the simulators to model the possibility of a decline, otherwise trillions of in leveraged derivatives would be extremely overvalued...thank goodness they are all on transparent balance sheets...otherwise we might need the treasury secretary to orchestrate a huge interbank price fixing scheme...which of course could never happen...thats in blatant violation of antitrust laws and the SEC would be all over it
And in other great news Oil just Busted $90..nothing to see here..things are looking up.
--
In CA the residential RE is already down close to $1Tr from the peak. The US is down at least $2Tr. Minimum decline would be $10Tr, i.e., all the bubble years' gains would be wiped out. Why? We have lot more excess supply than we did before the bubble began.
Those who live by the bubbles...
Jas
Based on my read of:
-- today's household debt-to-income data;
-- today's Federal debt/'obligations' data; and
-- the feel of the '20s ("Only Yesterday," "Since Yesterday," "You Can't Go Home Again") and the great similarities to today;
I think it is inevitable that we are going to see a repeat of what we experienced in the '30s: a fall in asset values -- homes, stocks -- of over 80%.
The $2-4T drop in home values is just the warm-up, CR.
This will be a good thing, to see 80% drop across the board, bring things back into perspective...then we can all get Cruise tickets on the Titanic...
DOH! my bad wrong decade.
Wasn't the total value of RE in the US at 5o trillion or so back at the peak in 2005? So only an 8% haircut? I think the number may go higher. Hi borkafatty!
losses....
ok... back to the OCC report for theory on losses
http://www.occ.treas.gov/ftp/deriv/dq406.pdf
pg 5
credit losses from derivatives contracts are nearly always quite small, if not Zero
no one losses ,ever
bring on M-lec
From eyeballing the pre-1997 trend it looks like a $5-7T loss is quite possible. That would be less than the tech bubble loss of about $9.3T, but most of the stock increases never existed anywhere but on people's 401K statements. With the real estate bubble a lot of people took out loans on the increased amount. I think that means the impact on the economy would be much greater if/when there is a big decline in real estate values.
Dean Baker's reaction to this story is worth a peak:
Beat The Press | The American Prospect
He notes that a return to long term trend would result in an $8T loss.
FDIC Letter To Stakeholders 3rd Quarter 2007
FDIC: Error 404 - Page Not Found
Looking at Yale economist Robert J. Shiller's index of home values, one would expect losses of $7 trillion to get housing back to the levels of the 1980's housing peak, and another $2 trillion would be necessary to get back to the typical index values post-WW2 of 110.
These folk are still vastly underestimating the size of the downside risk.
BoE issues warning of more trouble ahead!
UK financial system at risk from new shocks, says Bank - Times Online
Hey, isn't all this real estate "valuation" basically "mark to model" anyway? US total real estate is only worth $20trillion if someone is willing to pay for it.
A question for all you traders out there:
What happens if a stock stops trading and you have in-the-money options?
Yawn.
PPT in action today. I have lost so much in the market going short. I guess that funny part of me that believes in free markets just keeps getting kicked in the balls. I want to know how much of this money in the market is Hedgies Levered up, when the assets that are used as collateral are not marked to market. This is BS there should be massive margin calls going on.
Also from the same NYT article:
"...That would be significantly less than the losses suffered by investors in the stock market collapse earlier this decade, which erased more than $7 trillion, or about 40 percent, of market value...."
Perspective.
Sebastia
--
How about this...
October 25, 2007
Bay Area: An average loss of $5,000 per month for current listings:
Bay Area: An average los of $5,000 per month for current listings | SF Bay Area Home Price and Mortgage Insanity Blog - Burbed.com
Looks like the agent is honest in her claim based on the data that I collect.
Jas
Those made-up lines on the lower graph are funny.
jg's comments of 2:34 lists several books that are superb reads on the 1920s and 1930s, especially since they were written during the 1930s. "Only Yesterday" and "Since Yesterday" were both written by Frederick Allen. Each is a fairly easy read and well worth the time for a review of what happened then. I can only assume that the third is Thomas Wolfe's but I haven't read that one. My bad.
Won't happen. Banks will panic about their losses, and so will the "homeowners." The well-connected chairmen of Wall Street will put in a call to the Fed, which will wimp out. Bailouts and low-interest rates all around. See you at 2 EUR to 1 USD.
x-man - The quants have found that the there is a notational connection between the differential colour variation of rats scurrying around Wall Street and therefore historical trends as a tone for going forward is not always the case unless it happens to happen in which case your switch to Model 2.6
Sorry. Finger quicker than the eye -- make that $2 to 1 EUR.
PPT in action today. I have lost so much in the market going short. I guess that funny part of me that believes in free markets just keeps getting kicked in the balls. I want to know how much of this money in the market is Hedgies Levered up, when the assets that are used as collateral are not marked to market. This is BS there should be massive margin calls going on.
And the Truth Shall Set You Free
On a day when the numbers didn't go our way, thank you CR for creating bad news from whole cloth.
Bork,
The mentality on the street is that dips are buying opportunities for momentum trades. It would take a 2,000-point fall in one month to shake out that mentality. Will that happen? nooooooo. The helicopter is fueled and ready every day.
oK Let us put this all into perspective...Crude just closed @ $90.46..
and the
Dollar is at 77.26 (Toilet Paper)
And the DOW just went Green..am I missing something here?
YIKES!!!look at CFC
CFC Stock Charts - China Food Company Stock Charts
CFC - the new NEW.
To calm everyone way down:
FDIC's Deposit Insurance Fund (DIF) balance increased by $482 million (0.9 percent) to a whopping $51.2 billion (to cover every insured deposit in the U.S. & Puerto Rico). The ratio of the DIF to estimated insured deposits increased by one basis point, ending the second quarter of 2007 at 1.21 percent. This is before all of NetBank's losses & gains are posted. Where is your hard earned money deposited?
Great..but umm last I checked the Typical American has no savings to even worry about.
Sorry had to
How are ya gonna have a 2k move if they keep on activating the curbs on any real downward movement?
exactly thats the thing. and in order to prevent any further damage to the economy, they will set a curb at any moment when stock go down 0,1% that way, everything will be fine
In CA the residential RE is already down close to $1Tr from the peak. The US is down at least $2Tr. Minimum decline would be $10Tr, i.e., all the bubble years' gains would be wiped out. Why? We have lot more excess supply than we did before the bubble began. - Jas Jain
Umm, no. $1T in California is near 25%. Way too soon for such declines. I figure tat between 7 and 9 trillion need to be backed out of the US residential housing valuation. Right now I'd guess 2/3rds through price declines and 1/3rd through inflation erosion. Part of your miscalculation is in assuming that the massive overbuilding that went on for near a decade won't retain any value.
FFDIC,
$50B to cover everything? That is a shockingly low number in the face of a $10T wipeout. I guess the FDIC is more part and parcel of the fractional reserve banking system - just a few actual pennies on the dollar and the rest is a sea of fictitious capital.
BTW, Jas is right and has always been right, its just taken a while for the systemic fraud to become exposed.
http://www.marketwatch.com/news/story/deteriorating-subprime-market-pummels-abx/story.aspx?guid={1FA1E12E-E07B-4F00-8979-9E2D893992D3}&siteid=yahoomy
"Deteriorating subprime market pummels ABx, bond insurers"
Though analysts are still digesting the reams of data on loan performance released by the trusts that hold loans that ultimately influence the ABX index, the preliminary readings of these remittance reports are bad.
"After seeing the remit reports, people are saying it's time to go back into bomb shelters because the war continues unabated," said Dan Nigro
Oh, the 2K drop will happen, despite the Treasury/I-bank cabal's best efforts: last Friday, we had a nice drop despite their concerted (maybe not best) efforts.
Sentiment is turning, as evidenced by the Bloomberg recession survey results, headlines on the NYT, etc.
Yes, h-d-43, I am referring to the (old) Thomas Wolfe book. His descriptions of life in NC and home flipping and non-stop talk of real estate riches for all, all going up in a plume of smoke, were a surprise peek into life in the go-go '20s (I was reading the book for enjoyment, and had no idea that it would provide a vivid snapshot of economic life in the '20s).
Hey, CR, based on Cal's find, maybe you should do a mid-week update on the ABX?
No red----EVER!!!
No losses---C'mon PPT, read that damn memo!!!
NEVER means NEVER!!!
jg,
With this Fed, good luck ... not going to happen. BB believes that the severe market decline that is possible due to to this whole acronym crisis would, if it happens, lead to the recession that dooms his legacy. Noooooo. The helicopter is fueled and ready.
Regarding the remittance reports, a recently moved Bloomberg story confirms that they look awful. Barclays analysts pointed out prepayment speeds are two-thirds less than typical, meaning people are having an impossible time refinancing.
ABX Indexes Plunge Amid Release of Monthly Delinquency Reports - Bloomberg.com
So another words interest rates could be %0 for 30 years...but does that not mean you can get the financing?
DV, I hear you.
But, the I-bank cabal is taking arrows left and right, and is having to make real writedowns, significantly eroding their capital base.
Call me foolish, but I think that I have more patience (with my SDS bet) than they have capital to burn through.
A interesting escape route from doom DuckVader I think it is highly possible....
I really appreciate your blog.
On the second graph, I think it would be interesting to add a line starting from some pre-bubble baseline in the 80s, showing where prices would be based on long-term historical trend (say inflation+1%). It would give us a sense how much mean reversion a $2-$4 trillion dollar decline yields.
"but most of the stock increases never existed anywhere but on people's 401K statements"
Clearly the housing wealth existed even more emphemerally than the 401K dot.com wealth, residing in people's imagination for a brief period. Instead of a real brokerage statement, you got comps in the newspaper.
I give most people some credit that they did not completely mark their wealth to the brief period 2004-2006. Many long term owners recognized this as a bubble and made minimal changes.
So this is probably lower magnitude than the Nasdaq bubble. Also, although fewer people own stocks, the real bubble was primarily urban coastal areas- they will be hit hard 30-40% across income levels while the non Cleveland/Detroit midwest areas and south are hit mildly ~0-10%. So the losses are also concentrated geographically rather than income wise.
I remember buying a motorcycle from a guy in April 2000. He had 7 or 8 nice cycles. He was selling 3 of them in the newspaper to meet a margin call on dot.com stocks. I gave him 10% less for a certified check the next day. The sad thing is that he was a small time rehabber/ landlord (and a nice guy). Anyway, point is that a lot of ordinary people got caught up in both bubbles and were financially ruined. In this bubble though, the dumbest loans (0% down) and biggest losses were made to people with little or nothing to lose. So like dot.com, much of this loss is concentrated in the financial system.
I can't understand why anyone would think it a tragedy (other than a politician whoring for votes) for a person who paid 0% down and lived in a place for a year or 2 w/no equity to be foreclosed on. It's like if a landlord ended your lease. Like the guy who couldn't afford to scrape together a security deposit, so he bought a house.
Don't you think the PPT could do some work at other times of the day other than 2:00 ? This is starting to creep me out, the regularity of this pattern - a severe break in one of the financial subsectors (today it was mortgage insurers & bond insurers). Take a look at the charts for MTG, PMI, RDN, TGIC, MBI, ABK, etc., all off 10-20% today.
Then at 2:00, like clockwork, BLAM, the program traders are off to the races.
But the fundamentals of oil say it should be at $60
said Tesoro, yesterday...
they say , we BUY oil everyday, and it should be cheaper...
LOL
Bet they bought some today ,too
maybe above 90
Oct. 25 (Bloomberg) -- MBIA Inc., the world's biggest bond insurer, plunged the most since the stock market crash of 1987 after the company reported its first loss, ended a share buyback and failed to quell speculation it will write down more of its mortgage portfolio.
The company today reported a $36.6 million loss after reducing the value of the securities it guarantees by $342 million. Chief Financial Officer Chuck Chaplin told investors the company will stop buying its shares because it needs to conserve capital, helping stoke concerns that more asset mark downs may be ahead.
MBIA, based in Armonk, New York, and Ambac Financial Group Inc., the world's second-largest bond insurer, both reported their first losses in the third quarter as the prices of mortgage securities they guaranteed declined. The insurers write derivative contracts promising to pay holders in the event of a default. The value of the securities plummeted after subprime defaults soared.
``People began to question the viability of the business model and the tremendous credit exposure that MBIA has taken on to a wide range of structured credit risks,'' said David Einhorn, president of Greenlight Capital LLC in New York, who has short position on the stock.
The stock slumped as much as 21 percent, the biggest fall since October 1987, and was down $7.21 to $47.98 at 3:31 p.m. in New York Stock Exchange composite trading.
MBIA also said a $1.8 billion structured investment vehicle it runs is having trouble raising money and is seeking alternative funding.
The ABX indices are taking hits across the board today. I've heard it mentioned on this board that the 07-2 series are not as liquid as the earlier ones, so I've been keeping an eye on AAA and AA series from 07-1. I don't pay much attention to BBB- because AAA is,IMO, the mother of all canaries in the coal mine.
This Fed and government are focused on escaping short-term doom. The problem is BB is misreading the leading indicators for inflation. Prices in China are rising; energy is rising; transportation is rising. At some point this will feed into the system.
So American companies either pass on the cost resulting in a surprise in inflation in a quarter or two. Or they bite the bullet, in which case we get lower corporate profits. Either way, there will be pain down the road that the market is not expecting.
With the economy slowing, Bernanke won't have the room to cut rates while maintaining the credibility of the Fed's inflation policy. And I don't think the slowing economy will bring down inflation as much as old models suggest. A larger part of American consumption is of goods manufactured abroad, where inflation is alive and well. So the weak labor numbers don't mitigate inflation as much. We'll be importing that soon, especially with the weaker dollar.
Whoever wins 08 is being dealt a nasty hand.
Was that nominal values, or real values?
Was that priced in dollars, or yuan, or gold, or oil?
It's pretty easy to see their are losses to be accounted for....it's pretty difficult to know what asset class will end up taking the loss.
On a day when the numbers didn't go our way, thank you CR for creating bad news from whole cloth.
Pounder
What was the good news today, again? I still can't find it.
CFC - the new NEW.
MaxedOutMama
When did Sebastian recommend CFC
?
The Bush administration, which will go down as by far the worst in history, will do everything in their power to push as much pain past the election as possible.
Trouble for the Chimperor is, I don't think he's got that much juice left.
Regardless, the next 2-3 preseidents will have their hands full cleaning up this narcissistic imbecile's fece party.
When you think of all the derivatives and leverage tied to that 2-4 trillion loss, it is absolutely frightening. They're just talking about the loss of value of the real estate itself. When you consider how many times home values were levered up in the form of various crap paper and derivatives, my god, you're talking more like 10-20 trillion in housing related losses, and that's being conservative.
This is going to be sooooooo ugly.
The ABX hit new lows on all except three...
So who and when?
Aside from the rest of the carnage, and I know others have mentioned this before . . . it is a tragedy of epic proportions that the very best mathematical minds our society has to offer are designing CDOs and SIVs instead of microchips, vaccines, and spacecraft.
This has got to be about the worst misallocation of intellectual resources (outside of World Wars) in history.
"Note that this doesn't add in any new homes or home improvement."
That seems reasonable given the marginal value of 1 more new home.
In the Japanese asset bubble, commonly mentioned numbers for the total asset value lost are between $8 to 14 trillion, that's including stock values lost.
So, the number can be in the right ballpark.
OT, but BofA to exit wholesale lending
CNNMoney.com: 404 Page Not Found
What does this mean for Countrywide?
The rise in real estate valuation corresponds almost exactly with the divot that is the debt obligations of the household.
Final Regulation R
Exceptions and Exemptions for Banks from the Definition of "Broker"
"On October 3, 2007, the Board of Governors of the Federal Reserve System (Board) and the U.S. Securities and Exchange Commission (SEC) published the attached final rules that implement provisions of the Gramm-Leach-Bliley Act (GLBA) that except banks from the definition of "broker" under the Securities Exchange Act of 1934 when they conduct certain securities transactions. Known as "Regulation R," the rules clarify permissible bank brokerage activities that can be conducted under the GLBA exceptions. The Board and the SEC consulted with the FDIC, The Office of the Comptroller of the Currency, and the Office of Thrift Supervision in all phases of the rulemaking. Financial Institutions will have until the first day of their first fiscal year that commences after September 30,2008, to comply with the requirements of Regulation R."
FDIC: FIL-92-2007: Exceptions and Exemptions for Banks from the Definition of "Broker"
I second Gary's comments on the misallocation of intellect in the US today.
It really hit me when reading an article on the Cal Tech basketball team (yes Mildred, they have a b ball team) in the LA Times about a year or so ago. Of the 12 guys on the team, I believe half were headed for jobs on Wall Street.
I commented to my wife that this was the biggest waste of talent and education imaginable. Unfortunately, as Willie Sutton said, that's where the money is. And these guys follow the money. But it sure seems like this type of brains and talent could do a whole lot more for mankind than sit around and dream up new and imaginative ways to screw the customers.
CR we need the daily ABX post please.
"A decline of this magnitude in U.S. household real estate value seems very possible."
...and this is what the housing futures in Chicago are predicting.
FT - Buffett cautious on $75 bn superfund
"... the banks should sell 10 percent of the fund into the open market to ensure it is properly priced...."
Worrywart Warren, ain't gonna happen any time soon!
FT.com / Financials - Buffett cautious on $75bn superfund
it is a tragedy of epic proportions that the very best mathematical minds our society has to offer are designing CDOs and SIVs instead of microchips, vaccines, and spacecraft.
They are not the best mathematical minds, but merely the greediest in a set of top math minds.
The minds at CERN and NASA are better...much better. They are better people, too, putting the pursuit of the unknown above the pursuit of skewing allocated fictitious capital.
Quants are mostly slickster salesmen masquerading as math geniuses. No SIV or CXO will prove me wrong, guaranteed.
Hey Gary,
And here I am helping design spacecraft and thinking I was one of America's best mathematical mind.
Truth be told, I get the job done in spite of my less than stellar grasp of advanced mathematics. A masters level understanding goes a long way for most engineers employed in the spacecraft industry.
Cheers,
Oh, I don't know....a cure that makes you feel wonderful for a couple years, then kills you in the most painful way imaginable doesn't sound good to me. Maybe it's better they're playing with fiat money instead of real products....they don't seem to have the ethics one would want to see in product developers.
PPT in action today. I have lost so much in the market going short.
Eaglewit, I empathize with you, I have won some good ones lately but lost my share as well. CFC is killing me; I had Oct $17.50 puts that didn't go "in the money" until late last week and I sold 'em too soon at a loss.
I am pretty new to trading but hopefully these questions won't come across as too basic, just trying to help:
My attitude is that I am never going to stop learning, and someday I will get good at this. I'm not there yet.
Hey, I meant no offense to the math geniuses who care more about doing something worthwhile with their lives than just amassing a huge basin of money to swim in a la Scrooge McDuck.
I should have used a qualifier like "many" or the pernicious wiggle word "some".
And thanks hiker90 for ignoring the siren song of empty riches.
No red----EVER!!!
No losses---C'mon PPT, read that damn memo!!!
NEVER means NEVER!!!
dotcommunist | Homepage | 10.25.07 - 3:49 pm | #
Oh it will go RED.
The PPT will keep this up till they get most people used to buying on the dips. Then bang! Itll go down and up a little and then keep going down, way down. IMO I believe the big money fears having to pay bigger tax bills in 08 & 09. There will be nothing the Fed can do to stop a big sell off when its time. If your going short the market be patient and keep some powder dry.
"Men who can both be right and sit tight are uncommon."
Jesse Livermore
A tremendous waste of talent and "misallocation of intellectual resources" is a pretty apt description worldwide on so many, many fronts. It is sickening to anyone of even modest intellectual gifts to see how so much of the 60's and 70's promise in environmental and over-population awareness was totally killed off and silenced, or how much real creative and cultural talent has evaporated into "pop" trash. That's just two examples of 1,000s.
OT
Sorry if I posted this twice.
This is a good read from Nourial Robini. Most of it him giving himself a That a Boy pat on the back. Still worth reading the whole article.
Myth: Decoupling; Busted, for Now
Asia ex Japan Strategy Markus Rosgen, Elaine Chu, Chris W Leung
October 24, 2007
evidence - Correlations between Asian export growth & US/ G3 non-oil
have risen 2.1x over the last 20 years to 0.7. The same series using
intra-regional exports has shown a six-fold jump to 0.6.
recessions - The 2001 downturn did not lead to a recession, yet ROE in
Asia ex fell by 280 bps vs. an average of 150 bps in the prior three
recessions. Hardest hit in the post-1990 recessions: tech, other
financials, materials &industrials. ROEs actually rose for the
utilities, telecoms and banks.
have found that India, Korea and Taiwan have elasticities of less than 1
to US GDP growth, whilst ASEAN ranges from 1.3 to 1.7. Yet investors are
overweight ASEAN on the belief that they are buying domestic
consumption.
have risen - The ratio of consumption to GDP has fallen over the last
five years to 59%. At the same time, the contribution of net exports to
GDP growth is higher today than in the last 15 years. Nor have Asian
consumers ever behaved counter-cyclically.
years have market correlations been negative nor been as high as now,
between Asia & the USA & Europe. Correlation coeff of 0.6 and above
doesn't make for decoupling.
So much for decoupling. And the anti-decoupling arguments made by Citi for Asia hold even more strongly for Europe, Latin America and other emerging market economies.
RGE - Nouriel Roubini's Global EconoMonitor
A question for all you traders out there:
What happens if a stock stops trading and you have in-the-money options?
malabar | 10.25.07 - 2:52 pm | #
IF the stock is halted then the options are halted as well BUT there typically are no restrictions on exercise and assignment. So if you were long say the 80 strike puts and the stock was trading around 40 when it got halted you could instruct your broker to exercise your puts and sell stock at 80/share. If you didn't own the stock before exercising the puts you would end up being short the stock at the strike price of the put. By all means call your broker and check out The Options Clearing Corporation (OCC) - OCC will publish info memo's, especially if it looks like the stock may be halted through expiration.
bfatz: Glad the stock market still believes in Countrywide. How about the guys who really do their homework -- you know, the bondholders?
"A tremendous waste of talent and "misallocation of intellectual resources" is a pretty apt description worldwide"
Yup. Just wait till you're diagnosed with a chronic, incurable disease no one gives a **** about. You'll aquire a whole new appreciation for brilliant minds that created useful things like CT and MRI scanners....and targeted therapies.
The professor has been spot on- so if he pats himself on the back -good for him, however I did'nt read it that way. If ever there was a modern day Paul Revere.... The professor has been trying to save us from ourselves for quite a while. This is getting tiresome, listening to the banter back and forth. We are going to have a hard landing so the real question is: what happens post hard landing? Lets get on with that discussion.
I've asked this before on the blog CR, but please please could you do a post that explores the issue of WHAT HAPPENED IN 1997??
These charts paint the picture so clearly that 1997 was THE inflection point of this housing boom/bubble. (Most of us didn't notice what was happening until at least 2002-2003...)
So, what were the combination of events in 1997 that started home prices to increase at a dramatic rate compared to the past few decades?
Was there a new mortgage product (ARM IO/Option-Arm, etc?) that had not really been marketed in the mainstream until this point?
Or was it, as some have said, a tax treatment regarding capital gains that was changed?
I'd love to hear what people think
Alex, You can't have a bubble w/o the help of uncle sam. This is a discussion from Itulip.com on why we will not have a bubble in Gold which addresses part of your question. What happended in 1997 + or - is that uncle sam decided to cannonize the fire lobby/industy.
So why not a gold bubble? Can you imagine the day when you can go to the bank and borrow a few hundred thousand dollars to buy gold and write the interest on that loan off against your income every year as you can with your home? How about a $500,000 tax free capital gains give-away on gold you and your wife own for more than two years as is available to home owners? Imagine what would happen to the price of gold if it was re-classified from a "collectible" with a short term capital gains tax rate of 35% to, say, an asset class that benefits from the 15% rate that hedge fund managers pay on their annual 2% carry on invested funds? The gold price would jump from $750 to over $1,000 practically overnight
CR:
If these projections prove right, let's assume for example that $4T decline in the total value, what happens to the percentage of household equity?
At this point real estate is quite highly leveraged investment, compared to stocks for example. With high leverage level the losses amplify.
From your earlier post this summer:
Calculated Risk: Percentage of Household Equity Falls to Record Low
Household equity is at an all time low of 52,7%. If we substract $4T, assuming no change in mortgage level (which could go even higher despite the decline in values, but let's assume it's stays the same), this percentage would go rapidly lower.
People wouldn't own even half of the total real estate market anymore. Since 1/3 has 100% equity, although on the average the value of those homes is lower, it would mean that a lot of people would suddenly have negative equity.
To Sebastian:
Yes, the decline in the stock market early this decade would be larger. But consider two facts as well:
1) Real estate is higher leveraged than stocks. True losses amplify more than in less leveraged investments.
2) Real estate has been used as an ATM. Won't work after this, if the projected price decline occurs.
3) Real estate makes 32,5% of people's net worth, while public stocks and mutual funds (which contain also bonds) make only 15% combined. Real estate is more than twice more important than stocks regarding net worth.
In 1999 it was different, back then real estate made 23,6% of total net worth and public listed stocks and mutual funds combined accounted for 26,6% of total net worth.
A crash in real estate would be much more severe today than in 1999 and vice versa, a crash in stock market of the same size today would be less severe. Times have changed. (Source: Fed's flow of funds)
A small correction to earlier post:
I was talking about net worth, but I meant total value of assets owned by private people and what percentages real estate and stocks account of that.
Net worth is less, because liabilities is then subtracted from assets. Of the liabilities, mortgages account for about 73%.
Page 102, "B.100 Balance Sheet of Households and nonprofit organizations" in Fed's flow of funds.
"Real Estate Value" - isn't it just made up numbers anyway until it is bought or sold?
What is going to be a real killer, IMHO, is when Joe Ultra-Light 6-Pack wakes up and realizes that he has to live only on his salary - a salary that has not been keeping up with inflation, assuming he even still has a job after all the outsourcing and insourcing of decent jobs in this nation.
Good thing our executives and hedge fund managers make zillions of dollars per year since they'll have to keep the economy afloat after JUL6P is reduced to working 2 jobs at Wal-Mart and McD's so he can afford to buy dogfood to eat and $4 a gallon gas. Nice!
CR,
Curious about the graph where you project out the 10% & 20% correction-
If I look back at post 1977 and post 1987, I do not see that the red line has noticeably corrected? Were the losses in those two RE corrections inflated away- say prices were down, but due to overall demand volume- Net Net was not down? If the answer to that question is yes then as Mish says today this correction is not cyclical BUT secular.....look out below if this is the case, if the answer is No, how do I interpret?
Dart to Bork said: The mentality on the street is that dips are buying opportunities for momentum trades
That dude on the floor of the NYSE, the guy who wears the Elvis Costello glasses, kinda pudgy, said on CNBC yesterday (he's a regular lately) ...the instittions are buying on the dips. said from a pespective of it will eventually stop (implied?)
take a look at the XHB (home builders with some sherwin Williams thrown in ETF...
Before market gapped up trade up til 10am and then abruptly did an about face for 1/2 hour, seems to have bottomed at 10:30...
is the xhb the tail or the dog.
these days its the dog... follow the money... nothing you can do over night about the gap up howeverr except leave some in the hopper so you could have shorted more at 10
Pondering the mess...
I would say no , I do not know the real numbers here per se BUT:
300 million people in us 70 % homeownership
210 million in owned homes
2.2 people per home
100 million homes
median price of home around 250k
20 plus trillion +/-
Alex Norman,
I see it slightly forward from 1997. 1997 was IMO a normal cyclical up swing, where it should have reversed in 2001 it keep going....
the 2001 event was fed funds of 1%, which spawned speculation, cofi loans, flippers, crazy arms etc.
Can I nominate Jim Cramer and Angelo Mozilo as the new David Lereah siamese twins?
OK, I'll be the negative one. Let's see, take the curve showing the growth of real estate from 1973 to 1997 and extrapolate that to today and you'll arrive at a 12T value without the bubble, so around a 9 T drop. Then figure banks with a capital ratio of 10 percent would need to shrink it's balance sheet by $10 for every $1 in credit losses (Economist: $2 trillion lending crunch may be ahead - Nov. 16, 2007
) and they would need to reduce their lending by 90T. You see, no problem! No problem at all. Now let me just fill the bathtub with some nice hot water and go swimming with my toaster.