Prices are already dropping, sales are down to the tune of 40% in June 06 vs June 05, and inventory is rising. The bubble has popped. Nationally, it appears orderly, but in overheated markets like this, it is not orderly at all, the ship has turned and by the end of the year, the layoffs in construction and retail will really pick up, ARM adjustments will lead to more inventory….
As far as the banks, that is a wild card. I suppose they can refinance their borrowers, but ultimately they will not give away money. They are not non-profits or homeless advocates.
The only hope is that the ARM holders can find a loan they can afford. That will save the bubble a little longer.
You forgot to mention that our economy is totally dependent on rising home values to fund consumer spending. Even flat home prices will cause a recession, as consumer spending cannot continue without rising home prices from which to obtain the money that is not coming from wages. Real wages have been flat for over 10 years, so the rising home prices were used to supplement income. That gig is up.
Global banks are raising interest rates, Japan is ending the carry trade.