2005: Homedebtor A decides to stand in line all night to score a Toll Brothers house.
$800,000 purchase price
+$100,000 upgrades
+$100,000 lot premium
____________
$1,000,000 total real cost
2006: Homedebtor B takes the bait and picks up a similar Toll Brothers shack during the firesale.
$720,000 purchase price (using yesterday's 10% price drop number)
-$100,000 free builder upgrades
+$50,000 new lower lot premium
-$50,000 cash back at closing
____________
$620,000 total real cost
Now, seller A gets divorced (his wife left him for the realtor Suzanne), has to sell. It finally sells for just a bit less than the builder price (people will always choose a new home where they get to colorize vs. a used home) - say $600,000. He pays 8% closing costs or $50,000, total proceeds after close of $550,000
You got it - $1,000,000 - $550,000 = $450,000 loss in one year. Or $1233 A DAY.
That's doin' the math, housing bubble style.
October 27, 2006
Let's do the housing bubble math
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47 comments:
But they told us you couldn't lose if you bought Phase 1!!!
How will we pay back all that OPM???
It's funny how people used to say, not too long ago, how if you don't buy a home you'll never have any equity. How is that equity looking now?
I had a realtor in NJ tell me about a month ago that he sees the slowdown lasting 5-7 years.
This moment of honesty came after he found out that my girllfriend and I already had a house, and were just in his open house to see what the houses in our neighborhood looked like.
Oh.. and he's been a broker salesperson for over 30 years. This listing we looked at is still on the market... 4 months now. No Bids. Ask $594,000.
Owners apparently are trying to rent it now because they bought a new home figuring that the old one would sell instantly... and then the floor dropped out.
A 5-7 year downturn is my guess too. The soft landing could last longer and that doesn't mean you can't find a par deal on a house. When prices reach replacement cost (cost to build) it's a fair deal. In our market, the cost of construction for an average home ranges from $90-100/sq ft., that includes the lot. Builders have more room to adjust prices than homeowners. Our area prices on new homes have recently adjusted to $120/sq.ft. for EXCELLENT construction. I might even buy one at these prices. Very beautiful homes in the best part of town.
Average-vinyl siding $80-100/sq. ft.
Above average-some brick $90-130/sq. ft.
Excellent-all brick, stone and granite/quartz counters, tile and hardwood floors, stainless steel appliances. Around to $150-200/sq ft.
Maybe real estate is local. I can't imagine someone paying $650k for 2 bedroom 900 sq. ft. 75 yr old shack in LA La land.
Can I get an interest only loan on the $1,233 per please...
How does Homedebtor B compare in the next year?
A Story from Ground Zero for Keith's Dear Readers.
HOA meeting last night.
There are 200 flipper owned units, and 100 owner occupied, with 302 total units in my building. 15% in Foreclosure.
Fannie Mae has put my building their 'Non Warrantable' list.
I am sure Fannie May Keeps Clean Books right? They are a good judge right. (note sarcasm)
I digress.
Turns out one lady "Flipper Leader Realwhore" took all of the "investors" down the garden path with "HOW TO GET RICH IN REAL ESTATE SIMINARS" and she "Controls" 100 of the 200 flipper/owners in the building. They all bought from the developer at the same time from this same lady 'Flipper Leader' Realwhore. (caculate her commission check now for 100 home sales in one day).
I made the comment, “Oh, a scam artist controls this block of owner/ investors.”
And the HOA manager quietly said, "No, it was supposed to be a two year flip, but taxes and insurance went up. The Realwhores heart was in the right place." Here is where I publicly gagged.
In conclusion, Flippers control the quorum (200 or 3/2), if we can find them. I feel like vegetables, not business people, surround me. Well except for the lady Flipper leader, she made a killing.
Have a nice day.
2/3 is a quorum, rather. Opps. I ruined the flow of the story.
Oh well.
Motivated seller $650,000. So then $520/sq. ft. is a good deal?
People with two mortgages in Detroit. 3000 sq. ft houses are so 2005, wouldn't you agree?
Real Estate 101 you are assuming that home replacement costs will remain stable. I say these costs will go down as deflation rips through the entire sector.
Looking ahead. Much of NJ is a lot like Detroit and Cleveland. You have large portion of the population who are joining the ranks of blue-collar refugees and the goverment operates very much like a democrat-controlled state from the 1950's. 2/3 of the state is at the end of a 6 year gentrification. Indeed the main asset NJ has is its proximity to NYC.
The biggest threat to NJ is a rise in NYC unemployment and a decline in NYC real wages and salaries.
Nice math Keith. Little do the duffers know, it only takes one low priced sale in the neighborhood to take all of the comps down.
Real Estate 101, if you haven't caught the posts and articles about the timber industry getting strangled up north, you should take a look. It should be just a matter of time before the concrete folks, roofing materials, and a few others start taking a bath, which is the only reason construction costs are holding. Lumber is dead, they will follow...
I wonder how roofing, which is very petroleum based will hold up with the declining oil prices?
BTW Keith, this scenario for some strange reason turns me on.
You lost me as soon as you said the wife left him for Suzanne.
So what does Suzanne look like?
What does the wife look like?
What were we talking about again?
Mark... cool star wars thingy, is that an X-wing.
does anyone want to discuss episode 7 of star trek, the one where kirk has to decide the fate of the...
wait i dont want to threadjack into a discussion of whether kirk could beat up darth vader or not, but...
Bubba2Friday said...
Hmmm....
Who to believe...
"Economists disagree on how long the downturn will last. NAR chief economist David Lereah has proclaimed that ''the worst is behind us.'' But Yale economist Robert Shiller predicted last week at a conference in Miami that the slowdown could last years."
If you look at most real estate appreciation charts, the traditional median increase in equity moves up approximately at the rate of inflation plus around 1% -- until 2001 to 2002. Then, in many markets, house "appreciation" begins to move up at yearly rates of 20% to 100%. The only thing causing these unusual price increases is gimmicky financing and liar's loans.
Housing Panic readers already know how to accurately determine the current value of a home: They take the price of the home in 2001 and multiply it by 1.3. This means that a house that sold for $250,000 in 2001 is worth $325,000 in 2006, even though some sucker may have paid $700,000 for it in 2005. This formula can be used year after year, by adding on the rate of inflation, plus 1% for each additional year.
Now, even with 0% down, negative amortization, teaser-rate loans, there are not enough greater fools to prop up this Ponzi Scheme any longer. Crashing real estate prices will attract a few suckers who believe that they are getting a real deal when their lowball offers are reluctantly accepted by desperate sellers and banks. But, the bottom won't be reached until real estate prices return to the traditional median price.
So, the question is, how soon will this return to the median price occur? Will it be a quick drop of say, 2 years? Or, will it linger for many years, gradually dropping year by year, until it meets the traditional median price? It is a good bet that both scenarios will play out: A quick drop in the worst bubble areas and a slow decent in the moderate-bubble areas.
The predictions of the National Ass. of Realtor's chief economist, Dr. David Lereah, are surprisingly accurate, provided they are viewed properly. The key is to reverse everything Dr. Lereah says -- it's a kind of a "through the looking glass" sort of thing. I have translated a few of Dr. Lereah's stunningly-accurate predictions:
1. Why the Real Estate Boom Will Not Bust.
TRANSLATION: The Real Estate Boom WILL Bust.
2. And How You Can Profit from It.
TRANSLATION: And How Can Lose Your Ass.
3. How to Build Wealth in Today's Expanding Real Estate Market.
TRANSLATION: How to GO BROKE in Today's CONTRACTING Real Estate Market.
4. The descent in existing home prices should be a soft landing.
TRANSLATION: The descent in existing home prices WILL be a HARD LANDING.
5. The level of home sales activity is now at a sustainable level, and is likely to pick up a bit in the months ahead.
TRANSLATION: The level of home sales activity is now UNSUSTAINABLE, and WILL DROP SUBSTANTIALLY in the months ahead.
It is easy to see that Dr. Lereah is a real estate guru, once his prophesies are translated correctly.
The words of Yale economist Robert Shiller need no translation, because he is not paid to lie by the National Ass. of Realtors.
ohh... ohh... yeah.. the wife leaves the husband for the realtor suzanne... ohhh ...yeahhh... lets take this one a liitle further..
does suzanne wear those tight mini skirts and heels?
How would you like to be an FB in a half built Toll Brothers development with nothing but pipes sticking up on the other lot? I've seen it already here in NJ.
Anonymous said...
ohh... ohh... yeah.. the wife leaves the husband for the realtor suzanne... ohhh ...yeahhh... lets take this one a liitle further.."
"does suzanne wear those tight mini skirts and heels?"
Actually, Suzanne was last seen on Hollywood Blvd. wearing f_ck me pumps and a tank top.
Keith your math needs a little work. You can't add the 100,000 for upgrades to buyer A and subtract it from buyer B. You just don't add it to the basis of buyer B. You're off 100,000.
Still sucks for buyer B but just quite as bad as depicted.
wrong - buyer A paid for his options, buyer B got his free from the builder. So true price paid by A is house price plus buyer upgrades. True price for buyer B is house price LESS builder incentives (free upgrades)
comprendo?
October 27, 2006
Housing Market a Drag on Economic Growth
By THE ASSOCIATED PRESS
Filed at 10:29 a.m. ET
WASHINGTON (AP) --Economic growth slowed to a crawl in the third quarter, advancing at a pace of just 1.6 percent, the worst in more than three years.
The latest snapshot of the economy, released by the Commerce Department on Friday, showed that the slumping housing market figured prominently in the economy's dramatic loss of momentum. Investment in homebuilding was cut by the biggest amount since early 1991.
The reading on gross domestic product was weaker than the 2.1 percent pace many economists were forecasting.
''The housing bubble burst and that really knocked down growth,'' said Joel Naroff, president of Naroff Economic Advisors.
Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic standing. Friday's report provided the last GDP reading before the Nov. 7 elections.
Economic matters are expected to influence voters' choices when they go to the polls. President Bush's approval rating on the economy is at 40 percent, among all adults surveyed in an AP-Ipsos poll. That remains near his lowest ratings. Those surveyed trusted Democrats more than Republicans to handle the economy.
The Bush administration quickly sought to downplay the slowdown in economic growth.
''Everybody expected this. You have a combination of rising energy prices and also rising interest rates, and now you've seen a reverse on both,'' said White House press secretary Tony Snow.
Commerce Secretary Carlos Gutierrez said that latest GDP figures displayed the economy's resilience even as the housing market has tanked. ''I would not panic about this,'' he said in an interview with The Associated Press.
On Wall Street, though, stocks sagged. The Dow Jones industrials were off 45 points in morning trading.
The third quarter's 1.6 percent growth rate was the weakest since the first quarter of 2003, when the economy grew at a 1.2 percent annual rate.
The latest performance underscores just how much speed the economy has lost this year.
In the opening quarter, the economy grew at a brisk 5.6 percent pace, the strongest growth spurt in 2 1/2 years. But growth slowed to a 2.6 percent pace in the second quarter as consumers and businesses tightened the belt in response to the toll of rising energy prices and the impact of two-plus years of rising borrowing costs.
In the third quarter, consumers held up well, though. They boosted their spending at a rate of 3.1 percent, up from a 2.6 percent pace in the second quarter.
Businesses, meanwhile, increased spending on equipment and software at a 6.4 percent pace in the third quarter, an improvement from the 1.4 percent rate of decline in the second quarter.
Economists took heart that consumers and businesses -- outside of the residential sector-- spent solidly -- which helped to cushion some of the fallout from the housing slump.
The economy's softness in the third quarter stemmed in large part from the cool down in the once-hot housing market.
Spending on home building dropped at a rate of 17.4 percent in the third quarter. That was the biggest drop since the first quarter of 1991 when such spending was sliced at a 21.7 percent pace.
Weak inventory building by businesses and the bloated trade deficit also played roles in weighing down economic activity in the third quarter.
Even with the feeble third-quarter showing, analysts didn't believe the economy was in danger of sliding into recession.
An inflation gauge tied to the GDP report showed that core prices -- excluding food and energy -- advanced at a rate of 2.3 percent in the third quarter, which was down from 2.7 percent in the second quarter.
Over the last 12 months, however, this inflation measure rose by 2.4 percent, the largest annual increase since 1995.
Energy prices, which had surged in the summer, have since calmed down.
Gas prices are now hovering around $2.23 a gallon nationwide, compared with more than $3 a gallon in early summer. Oil prices are now just over $61 a barrel, down from $77.03, a record high close in mid-July.
That is supposed to help ease inflation and lead to better economic activity.
Lower energy prices leave people and companies with more money to spend on other things. If they spend and invest, that adds to economic growth. Many economists believe the economy will do better in the current October-to-December quarter, perhaps clocking in close to 3 percent.
The Federal Reserve held interest rates steady on Wednesday for the third meeting in a row. The Fed had hoisted rates 17 times since June 2004 to fend off inflation. The Fed's goal is to slow the economy sufficiently to thwart inflation but not so much that it tips into recession.
Home
World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Job Market Real Estate Automobiles Back to Top
Copyright 2006 The Associated Press
Keith, if you are going to be condescending to people, at least don't look like an ass when you do it. Comprendo? means "Do I understand?". You meant to write Comprendes?
Retard...
Is that a place to live or a place to pretend that you're a rich homosexual Republican against gun controll and abortion? What kind of a fudgepaker even wants that piece of crap? How can you have pets neighbors or garbage cans with politicans living next door? Where the hell is Suzzane? We cant do this.
"(his wife left him for the realtor Suzanne), has to sell"
I was RIGHT! It is a vast wingmen/women conspiracy! This is all the fault of gay marriage!
I wear miniskirts and high heels.
hehehe
"Keith your math needs a little work. You can't add the 100,000 for upgrades to buyer A and subtract it from buyer B. You just don't add it to the basis of buyer B. You're off 100,000."
"Still sucks for buyer B but just quite as bad as depicted."
--------------------------------
Keith, I have to agree with the other Annon.
Buyer A paid the $million you suggest, but buyer B paid $100K more than the $620K you worked out. The $100K in "free" upgrades that buyer B gets we assume are the same $100K in upgrades that buyer A paid for or some fairly reasonable equivalent. So buyer B simply doesn't add $100K to the purchase price when those upgrades are included, but the purchase price doesn't come down by that $100K. That is unless the builders are even more desperate than even we think:
Builder: That's right. The house is going to cost you $720K, but if you are willing to allow us to add granite counter tops throughout, an inground pool in the back yard, hardwood floors throughout, etc, etc, then we'll take an additonal $100K off the price and sell it to you for $620K.
FB: Wow!!! That's $480K less than the comps from last year!!! Where do I sign!!! I'll have $480K in equity as soon as the deal closes, and with 20-30% appreciation yoy I'll make close to one million dollars profit when I sell the house in two years!!!
Builder: Yeah, that's right. You're a pretty savy guy. Maybe you're interested in some other highly desirable properties we have in the same developement. In fact you can have your pick.
Sounds like Voodoo economics sto me. Where did you drag this fantasy scenario out of? Could happen? Yes, of course. In some markets? Very Plausible. Happening as we speak? Not yet or if there are a few cases they are not the norm. Just because some people get cancer from smoking cigarettes doesn't mean all will.
Home prices a problem? Yes in a lot of places but not all places. Current down-trend good? Most definitely. Good for America as it positions us to better compete in the global economy. Better now than later as they say since we haven't gotten to the extremes of Europe or other bubble markets. Disaster? Hardly. Because car builders build more cars than they can sell doesn't mean people are not buying cars.
NY times shows a house-sold list and most sell at listing (if reasonable in the first place or in a desired area) and the others sell for a slight discount, less than 10% at the extreme end with most around 3-5% discount and after five years of double digit increases in some markets that isn't a collapse.
Home builders? Here in Austin when I bought in 2005 they were coming out of their five year slump. Incentives? Yes but if they were offered they were no more than 5% of price and they usually involved items that really didn't reflect a true discount (upgrades for which they always charge at least double for which means that 5% of incentives cost the builder maybe 2%). Austin 2006? Banner year. All the homes in my small community have been bought and moved into by homeowners. None are for rent. Currently builders are offering incentives, which didn't change from their slump, of around 3% but the prices of these homes has risen at least 20% on the low end since 2005 so really, no increase in cost to builder and their profit margain is higher than 2005.
Just returned from Phoenix and the few new homes I visited, the builders were not offering any smoking deals in my opinion and even with their discounts the homes were still higher (after discounts) than I could have bought the house for when I lived there in 2004, so again, no bargains and since most builders projects came on line at least three years ago before the first house was even built, they can still afford to drop the price to 2004 levels and make money.
But back to the numbers, you can't really trust them as numbers alone can be twisted to mean anything you want. Let's see, 100 people out of 100 on death row ate carrots as children therefore carrots caused these people to murder and be on death row....I bought a car from a man divorcing his wife, a two year old Mercedes for $20 therefore the auto industry is collapsing and so are car prices. (actual story as my wife worked at a law firm where one of their clients sold the car for $20 and gave his wife $10 since he was ordered to give her half of his assets but she sued for half of the true value). Point? Just because desperate sellers, those in foreclosure, etc sell at an extreme discount doesn't mean that all those assets are worth less than value, they just sold for less. So if you are going to play the numbers game, don't manipulate them to say what you want.
Keith, No matter what language you speak the your math is still wrong. If buyer B buys the exact same house as buyer A. Buyer A pays 1,000,000 and buyer B pays 720,00. the difference is 380,000. The 100,000 is in the reduced cost.
Nice Post foxwood,
You don't seem to mention the impact on the job market due to the slowdown in building and the loss of Mortgage Equity Withdrawl and all it bought and all whom it employed over the last 3 years. What happens when that goes away?
Also you don't mention those who have exotics and need to sell or refi in an underwater market. Imagine the 2000-1 stock collapse if everyone bought on margin. (and invested over 5x annual income).
Any thoughts on those issues?
Nice Post foxwood,
You don't seem to mention the impact on the job market due to the slowdown in building and the loss of Mortgage Equity Withdrawl and all it bought and all whom it employed over the last 3 years. What happens when that goes away?
Also you don't mention those who have exotics and need to sell or refi in an underwater market. Imagine the 2000-1 stock collapse if everyone bought on margin. (and invested over 5x annual income).
Any thoughts on those issues?
Not a threadjack, responding to anon's questions only:
Mark... cool star wars thingy, is that an X-wing.
Yeah, with a smilie at the controls. Bloggers unite!
i dont want to threadjack into a discussion of whether kirk could beat up darth vader or not, but...
Kirk couldn't beat up Darth Vader, but Spock could. That mind control stuff wouldn't work on Spock. Also, the Enterprise was more powerful than Darth's ship, but not more powerful than the Death Star. {/threadjack}
Foxwood you are using the same faulty logic to justify your argument that you accuse others of using.
Just because the NY times publishes homes that SAY they were sold at asking price is misleading (does it say who paid the RE commission or closing costs?
Just because you went into 2 houses in Phoenix and did not see any incredible deals does not mean they are not out there.
"Real Estate 101, if you haven't caught the posts and articles about the timber industry getting strangled up north, you should take a look. It should be just a matter of time before the concrete folks, roofing materials, and a few others start taking a bath, which is the only reason construction costs are holding. Lumber is dead, they will follow..."
Actually it all started when our Canadian dollar fell to 63 cents and your housing market got out of control.
Since the US NEEDED forest products to fuel the bubble, your leaders decided to call us on dumping (more like low prices due to low currency). So you put up tariffs and restrictions. We went to court and won but the US still refuses to pay back. Now the US is not happy that we're putting up a fuss so they've decided to negotiate with the Russians for their forest products just to piss us off some more.
It's called US protectionism 101.
buyer A bought a car for $10,000 and $2000 in upgrades for $12,000 total cost
buyer B buys the exact same car, same options, but dealer throws in the $2000 in upgrades to get the sale
They're both driving cars "worth" $12,000. One paid $12,000, one paid $10,000. the true market value that day buyer B bought is $10,000, period. the market value of that car with options has fallen $2,000
I think Keith's point is well taken. Rather than trying to go through the math, you need to look at the bigger picture.
Here in Sacramento the builders have dropped their prices. In fact the exact same model Condo I sold last year for $383K is available in the same complex for $319K.
In addition some homes are being sold by the builders for $100K less than last year and this is for a home that is priced around $400K (an almost 25 percent reduction).
The deals are out there, you just won't find them advertised on the web or anywhere, you can pretty much name your price is what I hear when you go to a new community that is being built.
Here's some math for you:
Considering the homes that are being built in Sacramento are cheap construction perhaps at the most $100/sq feet in construction costs, and considering a 1700 Sq foot home was selling for over $400K, you can see that the builders will still make a profit if they sell it for anything over 170K.
So the builders still have a lot of room to drop prices and they will continue to do so, since they are a business and have to show quarterly sales and profits.
Keith said
buyer B buys the exact same car, same options, but dealer throws in the $2000 in upgrades to get the sale
They're both driving cars "worth" $12,000. One paid $12,000, one paid $10,000. the true market value that day buyer B bought is $10,000, period. the market value of that car with options has fallen $2,000
-----
Exactly! Your original math had the home valued at 620,000. If you apply your original math to the car scenario buyer B's car would be worth 8,000. Apply your logic above to the home scenario and it's worth 720,000.
Nothing is more powerful than the Deathstar, but Darth v would kick spocks a$$.
trekie threadjack
Naw, Spock would use the Vulcan mind meld on him, either that or blast him with a phaser. Of course he would probably try to use logic on D.V. first, that might be his undoing.
Actually, this is all academic, isn't Vader from a galaxy far, far, away and a long time ago? Spock is from the future. Spock would have to travel across time and vast distances to confront Vader, an effort I seriously doubt he would undertake, it wouldn't be "logical".
We forgot one thing. They are both old, so it might be an even match.
LOL
from a fellow x wing/SciFI lover
ps,
When I bought my condo from a FB there was a giant Lego X Wing Fighter, staged as if it was in a museum on one of the built ins. I made the Low Ball offer and asked the Realwhore to include the X Wing Fighter in the purchase. The Kool X Wing was in listed in my Real Estate Purchase Offer Contract and included in the sale of said home. I win.
Sorry Keith, could not help my self and I haven't been bad in a while.
Definitely old Darth Vader could kick old Spock's a$$. Darth's powers got stronger as he got older. Spock, not so much.
Okay, threadjack finito.
k
Bubba2Friday said... Well done Trailer Trash! David Learah is a contrary indicator...
A Contrary Indicatior!
That's Dr. Lereah, alright.
It's cool Keith,
Buyer A paid $1M, Buyer B paid $720K, same house (including upgrades).
Either way, your fictional anecdote is a realist scenario.
May I offer another very realistic scenario:
Since GWB became president, existing home median sale prices at the end of 2005 were up 7% over inflation, yr over yr, on average for the 5 years (40% real total). All other presidential terms (since Tricky Dick I believe) saw +/- 1.5% (12.6% over 8yrs).
As of Jan. 1 2006, I figured we needed 0% for 2006, -5% for 2007 and -15% for 2008 to get back to that average. (Assuming acceleration of downward trend prior to reaching at least historical norms)
Currently, we are ahead of that rate of decline at -2.2% for Sept. If we stay there through Dec., we now will need only -5% for 2007 and -12.5% for 2008.
Definitely acheivable.
Its amazing how ALL of the numbers that come out are confirming or surpassing even our own bubble-head
expectations, yet we are still the very few that continue to know how bad its really going to get (plus Roubini, Shiller, Hussman).
There are still only a handful of people anyone should be listening to. Keith & Co. and the rest of the Bubble-Heads, Dean Baker and Shiller on Housing (HP nailed the top and Baker and Shiller were way ahead in their warnings). Roubini and Hussman on the economy (Roubini was spot on regaring Sept. payrolls and Q3 GDP. Hussman's predictions are usually further out, so we'll see, but his history of managing during bubbles speaks for itself).
Those are among the few people who warned of the 2000 stock bubble, the 2005 housing bubble and are now warning about the 2006 derivative, hedge fund, private equity, and once again stock bubble.
So interesting how 2 weeks b/f the elections, both Paulson and Greenspan were among the people spouting that housing is probably bottoming. Ever since Lereah began blaming HP and the media for accelerating the crash, the big guns are coming out touting the stabilizing inventory and other easily explained away figures in a much larger negative picture.
Why doesn't the media stop asking them about the numbers and come ask here, or calculated risk, or Roubini or Shiller more often. They are the only ones who have been right. Why even ask the ones who have been wrong each and every step and who are obviously beginning to get very worried.
btw,
my dad's friend owns a RE brokerage in Miami. The owner went to a strip club last week and saw 2 of his brokers stripping there.
Too bad where I live all the brokers are generally old, fat and ugly.
ou don't seem to mention the impact on the job market due to the slowdown in building and the loss of Mortgage Equity Withdrawl and all it bought and all whom it employed over the last 3 years. What happens when that goes away?
Also you don't mention those who have exotics and need to sell or refi in an underwater market. Imagine the 2000-1 stock collapse if everyone bought on margin. (and invested over 5x annual income).
Any thoughts on those issues?
The same thing will happen that happend in 1980-82, 1989-1992, unemployement will go up, people will move to new cities looking for work, people will go bankrupt, builders will go bankrupt, maybe an RTC style absorption of all those foreclosed homes, property liquidated, sometimes for as low as ten cents on the dollar, taxpayer will probably get stuck with part of the bill (though with so many mortgages sold to China...with any luck).
Did America collapse in 1980? 1990? Did we collapse with the dot.com meltdown in 2001?
Some areas wil prosper. Others will stagnate. Some with suffer. Same as with the Rust belt. Jobs lost, values go down, people suffer, people move to other areas looking for a new life. Those areas that people move to grow, build, create jobs. Markets, economic activity, poulations shift. America has a more dynamic and fluid ability to absorb these kind of disruptions without mass riots or burning cars in the street or mass demonstrations say like th FRENCH.
Japan didn't implode from their dual bubble meltdown. It didn't stop Japanese from buying, selling, traveling overseas or having spoiled kids. Discount stores opened, many Japanese stopped paying $1,000 for a pair of designer jeans or $50 for a pampered watermelon (for those who can't remember how the Japanese will pay for an apple that is wrapped in a protective bubble while it is growing on the tree so that it is perfect and then packaged like it was made out of gold and sold for a price like it was).
Phoenix in my life-time had a real estate meltdown twice. What did I see? Not much. Like the saying, you have a job it is a recession, you don't, it's a depression. Builders dropped their prices on average 20% below what people previously paid. People who HAD to sell usually either lost their homes, walked away, or paid to get rid of them. Others stayed in their homes or rented them out. Some AF friends of mine got transfered, couldn't sell without a $30,000 loss from what they owed so wife stayed in Phoenix with kids why dad took the transfer for four years. House is now a rental and almost paid off (owned for 25 years now).
Keating went bust, his land sold for nothing (mostly to lawyers with money who bought to sit on the land-Estrella ranch). Building didn't completely halt, people didn't stop moving into Phoenix. The same was true in California and Boston.
That is what will most likely happen. As for exotic loans? The lenders will loose but at the moment I see a lot of people being offered good rates to lock in their rates. Lenders know that taking 90 cents on the dollar is better than 50 cents on the dollar so will work with debt-laden owners to keep them in their over-valued loans.
I see Countrywide offering to roll your first, second, and all your car loans into one super loan at a low rate that will "save you hundereds each month" as the ad goes. This will be the trend.
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