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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Mike Johnston who wrote (51882)	2/1/2006 11:33:14 AM
From: GraceZ	Read Replies (1) \| Respond to of 110194

What would your estimate be of the number of households that would be on the verge of financial precipice should housing prices decline 30 % A change in net worth would certainly effect people psychologically but serious changes in cash flow are what put households in danger. In other words my house might decline 30% tomorrow but it wouldn't change my mortgage payment one penny. OTOH if my husband were to lose his job, it would have a much more devastating effect on us because our cash flow would be cut in half. Clearly some borrowers would walk away from houses where they had serious negative equity, leaving the bank with the loss, but most wouldn't. They didn't in the mid nineties and many households had negative equity (I was one of them as were most of my neighbors). One has to consider that 43% of first time homeowners put no money down last year, they are upside down immediately as the market stalls. On my first house I was underwater on the day I closed on the house because I financed some of the closing costs. A large number of buyers underwater is exactly what happened after the last cyclical peak in 1989-90. I remember many unhappy people who had to bring checkbooks to a closing in selling their houses even as late as 1996. Our rental properties fell over 50% from peak to bottom before rebounding to new highs and my own house retreated around 20% before rising back to even. It wasn't a problem for us because we could afford the payment and our incomes grew so much during that period. The mortgage payment shrank in proportion to our income so we were able to make the payments. The situation had a positive outcome in that it forced us to stay put for longer than we planned and we wound up living far below our means for much longer, as we waited for the house price to recover. And how about a possibility of a "black scenario" of a 50% drop ? One can make all kinds of scenarios about assets, but what matters more than anything is income. If people have jobs, they will continue to pay mortgages and live in houses that are underwater. In Texas after the oil bust it was the collapse of the oil economy and the contraction in jobs that made people walk away, not the collapse in the price of their houses. What consequences would that have for the lives of millions of people, many of them without understanding of the powerful economic forces that can literally wipe them out. One can't lose what one doesn't have. If 43% of the first time buyers have put nothing in, they have nothing to lose. It is the lenders who will lose if they walk away in droves.