Ready for a second wave of home price declines and defaults?

[cieldumort]

While the first round of massive house price declines and defaults stemmed largely from the bursting of the real estate bubble and has mostly been limited to sub-prime loans and low to medium-priced homes, a possible coming next wave may also include a harsh downdraft from the recession. Coupled with tightening lending standards from the credit

Comments

[theheretic]

I think we're in a home price death spiral, however I'm not experienced enough to know for sure. Call it a hunch and take my position with a grain of salt. See, I think prices fall thanks to foreclosure and ARMs in a falling market, hurting banks and making credit more expensive, causing another wave of foreclosures and yet more expensive ARM mortgages, which will kick in their interest rate changes in a couple more years with the new owners yet again, unable to pay. This cycle repeats, driving down home prices and up the cost of credit until very few people can afford either a mortgage or a house unless than can buy with their savings, outright. This means that home prices are going to drop to roughly twice the cost of a luxury car, or around $60-80K. Less in crappy areas. Roughly 30 years ago, a house cost around $17K, used, small, needing no significant work, just a house. That was the cost of a luxury car at the time. Then the crazy 1970's inflation happened and people started buying into the idea that a house should be huge, new

[cieldumort]

I tend to agree with you - I think that there is a very high risk of your scenario playing out...

what remains to be seen is the impact of it

Two very plausible outcomes, as I see it:

1)Deflationary trap. Japan, or worse.

or

2)The return to kind of common-sense housing values actually has a net positive effect, over all, on consumers and eventually back into the economy. I mean.. I'll gladly pay $10 a gallon for gas, if I can buy today's already lower $300,000 home for $100,000, or even less.

[theheretic]

There is a BIG downside to the house devaluation. The Baby Boomers have placed the majority of their wealth into their homes, thus a collapse in house values also means a collapse in the value of their retirement funds.

[cieldumort]

Unrealized retirement funds... and besides, most weren't going to sell their homes to "Let's Go RV'ing!" anyway.

I think most bbs will stay in their homes, and just continue to make their payments for as long as they can. Not going to be tapping the equity ATM that isn't, tho.