I think that most of the predictions are rather mild; I see something more along the lines of the 1929 Depression. The only loans that banks wrote back then were 5 year loans and interest only ones. After the crash, there wasn’t any need to pass legislation to restrict these loan practices; it was obvious you wouldn’t get paid back.
The big issue right now is the Fed funds rate vs. the housing interest rate. The Feds have raised rates 3 ½ points and at the same time the 30 year fixed rate has only gone up about 1 ½ points. This suggests that the Fed is a pretty small player in a global market. They are literally pushing on a string. This isn’t just a USA thing.
The second issue is the spread between long term rates and short term. Just last month the curve was still inverted the 3 year note paid more than a 30 year. This suggests that there is no fear in the bond market. To simplify what’s happening, every banker, mutual fund or what ever has “insurance” on their holding, called hedges and/or derivatives.
Somewhere along the line, fear is going to hit the bond market. Maybe it will be the collapse of Fanny Mae. A lot of Bonds will be discounted. Take a 1 million dollar bond at 6% will be discounted to 500,000 in order to sell it. The face value of the bond remains the same but you’ll notice that now the interest rate has doubled to 12%. Notice that now 5% interest is for low risk and 12% high risk.
In order to shorten the scenario lets just say in the following 3 weeks the Stock market along with all the mutual funds market tanks. The baby boomers will be walking around like they’ve just been nuked and in shock, all because of the speculative real estate market.
Now in walks a guy wanting to refi his 800,000 McMansion. The bank won’t write the loan it cannot sell the package to a third party. What he going to do now?
At this point, you would see severe dislocation of service industries, like Starbucks, nail salons, dry cleaners and restaurants. Remember 13 trillion dollars worth of hypotheticated real estate is going to have to be marked to market (maybe 3 trillion). How long will it take, is unknown. If the government steps in, probably just as long as it did in Japan. Half of all home owners won’t be affected they bought before the speculation occurred.
From here, the question of how much of a house do you want to buy? An 8 million dollar house in Beverly Hills in 1929 went for $48,000 in 1953 ( Don’t quote me on this last statement, I read it but I cannot find the source).
