The total mortgage debt in the US is $9.1 trillion (2005).
10% of all mortgages will reset in 2007.
“The Federal Reserve estimates that 20% of outstanding mortgages have variable rates. Half of those are set to change interest rates this year, Fed Chairman Ben Bernanke told lawmakers earlier this year.”
$9.1 trillion x 6.25% = $ 568 billion in losses, assuming you can sell the house at a 25% average loss. In the last downturn, just one bank in LA had 560 houses on its books that it could not sell, because there were not enough buyers. My friend was a realtor in LA at the time, and she managed those properties and rented them out. Then over time, as the market picked up, they started selling small groups of those homes. These were nice homes, in Laguna Niguel, in Pacific Palisades, on the beach. There were no buyers at the bottom of the market. Some homes were just boarded up until the market turned around. So we can’t assume the bank will get back 75%. They may end up holding the house for *years*.
Also, let’s add the unearned interest income that is on the books of the “stupid banks”, the ones that did not offload the risk to the MBS (mortgage backed securities) market. Washington Mutual has, by my estimates, $ 1 billion of unearned interest income that is will not get, not ever get in my opinion. When they take that $ 1billion or greater loss in the next few years, I shudder to think of the fallout. Think back to the 1980s S&L bailout and multiply by 10 or more.
However, the biggest problem from the housing bust will be the rising unemployment as we lose 1/3 of all jobs created since 2000 (since they are real estate related), the ripple effect to corporations and the stock market. Think about Home Depot, Shaw Carpet, Pacific Kitchen Sales, all those lumber yards, copper and other commodities, stock market, credit card companies… they are all going to take big losses.
The rising unemployment rate will put extra burden on the government for social assistance at a time their own revenue from property taxes and sales taxes is shrinking. The Voice of San Diego just had an Opinion piece this morning about Chula Vista’s unreasonable promises, based on a forecast of ever rising property taxes flowing to their coffers. Even Jerry Sanders needs property taxes for SD to grow at 2% annually to meet his stripped down budget. How will San Diego handle 10% annual declines to its budget?
Oh, and another stock market collape, at it loses 30% of its value by next summer, will wipe out even more savings.
What I don’t know is the effect of our reducing housing prices on foreigners’ willingness to keep lending us money. If they stop, how will that affect our interest rates?
Did I leave anything out?
sdr, nice thread. I’d like to know your opinion on something. How long do you think we Americans can consume more than we produce, why can’t we be more productive, and how will our lives change when we are forced to create that balance?