Will mortgage defaults lead to a depression?

[PerryChase]

Sure, for every house sold, someone cashed out and reinvested right back into RE at a higher price. When they realize that they can’t cash out anymore, and their ARMs reset at double or triple their current payments, and they can’t refinance anymore, then you’ll see the real pain. When economic stagnation sets in and the Fed have to hike interest rates to defend the dollar then the pain will be accelerated.

I know some people in this boat. Very few households can “afford” to carry 800k houses but that’s what has been selling. Even when those houses go back to 400k, the number who can truely afford those homes would still be the same.

Wait ’til 2010 and see who’s right.

[powayseller]

Selling a house and moving up to a more expensive house is not cashing out.

Your theory that lower prices will bring in more buyers is not borne out by the facts. People are irrational, so they buy high and sell low. That’s why most investors underperform.

If sales were dependent on lower prices, then why did sales INCREASE when prices INCREASED? Under your theory, sales should decrease as prices go up.

Likewise, sales decrease as prices decrease. We are back to 2004 prices, so why aren’t our sales going UP? As a matter of fact, our sales are way down from October 2004.

In October 2004, sales were 4700. Now we are back at those same prices, but our sales are only 3200. Why aren’t all those buyers who are waiting in the wings, jumping on the chance to buy at 2004 prices?

Because the lower prices get, the more people start to think, “The prices are getting lower, so I’ll just wait a little longer and see how low they’ll go…”

So your logic/theory is violated by real world facts.

[DaCounselor]

“People will let their houses go before they cut back on their steak dinners and ice cream.”
___________________________

I couldn’t disagree more. I believe the overwhelming majority of homeowners have in the past and will again if necessary forego the extras, blow off credit card payments and student loans, etc etc just in order to save their house from the bank.

[sdduuuude]

To answer the original post – I don’t think this will lead to a depression in the US. Maybe in China, though …

[sdduuuude]

Are you saying the high prices of homes in San Diego did not cause sales to drop?

Perhaps you would adivse sellers today to raise their prices to increase sales activity.

[brian_in_la]

The 6.25% loss might not be terrible…but the weird thing is how much of this debt has been turned into derivative products created by some hedge fund math phd turned finance wizard. Alot of very smart people have created a lot of very weird financial products used by completely unregulated entities with god knows what sorts of exposure. Remember Long Term Capital Management? I think there is hedge fund exposure (based on complicated bets on the dollar, oil, mortgage debt, god knows what else) that completely dwarfs their exposure. Who knows what will happen to these hidden derivative markets in your scenario. That’s what is scary.

I don’t expect a depression (hey brother can you spare a dime sort of depression). But alot of people are going to losing their homes to foreclosure – the growth curve on the notice of default data for California is a sight to behold. It looks like housing PRICES in 2003,4,5.

[kewp]

Indeed, any one who literally cashed out will be in good shape to snap up properties after the correction. However, I suspect the number of people that actually did this in the literal sense, i.e. actually have cash, not more debt, is rather small.

Additionally, these people are shrewd and are not going to buy back into RE until the market has hit absolute rock bottom and simmered a bit. Who knows when that will be.

[sdduuuude]

powaseller – you are forgetting that factors other than home price affect sales. 2006 interest rates were higher than 2004, for example. You are looking at complicated multi-variate problem through a simple lense of price vs. sales. No wonder you are confused.

OH, and here’s a link showing there is some cash out there to be invested. Money market investment at an all time high.

Money Markets

Does all this mean I think the housing market won’t go down? No. It just means that there is a safety net down there somewhere between us and a depression.

[powayseller]

sduuude, I don’t proclaim to know what causes housing bubbles or housing price increases of any sort, but just disagreed with you that price declines will bring in more buyers. The fact is, prices are declining and so are sales. Raising prices won’t increase sales, because of “exhaustion” as Rich put it so well; basically, the momentum has turned.

[sdrealtor]

PS,
Your use of circular logic and “chicken and egg” examples makes me chuckle. You say inventory and prices are falling because sales/demand are falling. The you use the counter arguement to say “Hey look! Prices are falling but sales aren’t rising”. It’s all about demand and prices react accordingly. Of course you know thisd but sometimes I think you get caught up in the circular logic.

[powayseller]

My logic is sequential. Feedback loops exist only as bubbles build and pop, but not at turning points.

First we had a positive feedback loop as rising prices led to higher sales, as people were afraid of being priced out or anxious to ride the wave to the top.

After prices got too high for first time buyers, the cycle stalled, inventory built up, and prices came down.

This downward price movement is scaring more people off, and the negative feedback loop has begun.

So we’ve got feedback loops that work to a climax on the upside, and to a complete devastation on the downside.

[kewp]

Sdrealtor,

As an aside, how are you defining a depression?

I have mixed feelings about this, as the coming defaults are going to affect different folks in different ways. My dearly departed gran-dad lived through the ‘Great’ depression and I remember him telling me that some folks made bank during the time. For example, a friend of his that was in the repo business.

My point is that while RE-related industries will be hit hard, others may be unaffected or even feel a stimulus. For example, I work in higher education where we often see increased enrollment during recessionary periods as people stay in school longer, or return for more advanced degrees.

I’ve seen elsewhere the excellent point that should RE end up in the toilet, those that still have jobs will end up spending less on housing and pump more money into the general economy. This might make up somewhat for the shortfall created when folks can no longer use their homes as ATM’s.

[sdrealtor]

I think of a Depression as being not unlike what happened during the great depression. Massive unemployement, stock market crash, family fortunes wiped out etc. etc.

[Daniel]

“Will mortgage defaults lead to a depression?”

Answer: no.

Has anybody noticed that when the title of a topic or a paper is a question, the answer is almost always “No”? Sometimes the question is hard, and sometimes is easy. This is an easy one. Sometimes the question is truly dumb, like the one on the 9/11 topic. So dumb that it doesn’t even deserve an answer.

Oh, yeah, and since we’re talking about question-titled topics, I guess you know my answer to the “Can you say conspiracy in the housing market?” topic.

[Author]

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