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Us House Price Falls Would Wreak More Havoc For Banks

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Us House Price Falls Would Wreak More Havoc for Banks

A couple of weeks ago I visited West Virginia, USA, where some friends of mine run a small real estate business. As we sat in their yard on a balmy summer evening, I heard how realtors in this pretty, small town had been devastated by the housing crash.

So far my own friends have dodged the worst with canny financial footwork. And they cheerfully insist that the town can survive the wider damage, as long as prices stabilise or rise. "But if prices fall further, it will be terrible," one realtor declared - before insisting "we really don't think that's likely. Nothing can keep going down for that long."

Is that assumption justified? .......................

........................For not only does the health of the US consumer - and thus economy - remain tied to housing, but western bank balance sheets are tightly tangled up with property too. Most notably, America's largest banks, such as Bank of America, JPMorgan and Citi, continue to hold vast quantities of residential and commercial property loans on their books, in addition to all those loans that they previously repackaged as bonds, and sold on. So do numerous small banks.

And while the prices of mortgage-linked bonds have already slumped to reflect house price falls, the value of many tangible loans have not been fully marked down, because they are lodged in hold-to-maturity books - and the banks do not believe that prices will continue to fall. Indeed, in the town that I visited in West Virginia, some local bankers are refusing to sell foreclosed properties, because they think prices will soon rise. Thus, if prices fall instead, it can only mean one thing: yet more bank pain.

So will US property prices stabilise? Not if you believe a startling presentation I saw this week from a large, global financial group. This particular bunch of analysts - who have done a remarkably good job at predicting the credit crisis during the past four years - are currently warning their clients to expect a peak-to-trough fall in US residential prices of more than 40 per cent in this cycle.

The good news is that in some US regions, prices have already fallen so sharply - often by more 30 per cent - that property is already very affordable, relative to incomes and on a historical basis.

But the bad news is that houses are not yet cheap enough to prevent more price falls. On the contrary, this particular team of analysts thinks that when the problems of excess house inventory and rising unemployment are added into the model, average US house prices will still fall by another 14 per cent in the next few years - on top of the declines seen so far................

..............it is clear it will be difficult for the Obama administration to stave off any looming price falls, given the variegated nature of the mortgage market and rising debt. That, in turn, leaves me feeling it is too early to believe "green shoots" could presage a full blown recovery anytime soon - either in the verdant pastures of West Virginia, or anywhere else linked to the US mortgage world.

Thought this was worth linking to:

Why Us House Prices Will Keep Crashing

Banks Sitting on an Inventory Time Bomb

I can't remember the % figure for the US property bubble, but I am sure it was something like 75% the US market increased in comparision to the UK :

Taking the Nationwide’s figures, the 1997 to 2007 boom saw prices rise by 147 per cent in real terms.

Recently a Citywire article took at look at the:

Negative Equity Threat to the UK Market

Those with an interest in the future for UK house prices would do well to read yesterday’s Fitch Ratings' special report on negative equity among prime borrowers.

The report, Underwater - Exposure to Negative Equity in UK Prime Residential Mortgage-Backed Securities (RMBS), paints a very different picture to that currently being spun by estate agents and mortgage brokers, and suggests much more pain is on the way for the UK housing market.

Fitch focuses its attention on the leading 12 ‘master RMBS trusts’ - those securitised off-balance sheet vehicles which allowed the banks and building societies to increase their mortgage lending exponentially at the height of the housing boom.

These include Granite, the controversial offshore trust used by Northern Rock to sell its range of high loan to value mortgages, and Aire Valley, owned by Bradford & Bingley. Overall these 12 trusts represent around 2.7 million loans worth some £263 billion.

Crucially, Fitch focuses its attention on the ‘prime’ borrowers within these trusts, rather than the subprime borrowers that have previously attracted most critical attention.

Fitch’s surprising and rather disturbing finding is that around 10% of prime borrowers – representing around 15% of loans by value – are now in negative equity. This in turn will rise to 23% of prime borrowers - or 32% of loans by value – if house prices fall by 30% peak-to-trough, as Fitch expects.

A 40% fall in house prices, meanwhile, would see 52% of loans by value enter negative equity.

As expected, it is the trusts of the former building societies that are the most affected, reflecting their key role in pumping up the housing market by taking on the highest risk loans (typically those with the highest LTVs). ................

.................the report appears to counter the oft-repeated argument that this time it is different, that negative equity is nowhere near on the scale that it was in the early 90s. The present numbers are already comparable to anything seen during the last housing bust.

And this is at current prices; many commentators see further price falls on the horizon as unemployment increases. In that scenario the negative equity problem is set to become even more widespread, as the report clearly shows.

Finally though, there is the central question of how much any of this matters in the long term, and on this key issue Fitch has some important things to say.....................

As the FT points out this morning, all these people stuck in their homes are creating a ‘glut of hidden property’, which in turn is likely to depress house prices further. Even a short term rise in prices, Fitch argues, is likely to make things worse in the longer term, by encouraging trapped sellers to put their homes in the market, which in turn will push prices down again. It sounds like a vicious circle with no way out, for the immediate future at least.

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"Us House Price Falls Would Wreak More Havoc For Banks"

For the likes of Goldman Sachs, this is the whole point. Wealth transfer and competitor annihilation with any incidental losses bailed out by dumb-ass tax-payers.

Edited by Dave Spart
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Banks have been bust for ages, well, at least since the first fractional reserve bank came into being.

Now it is all out of control and there is no solution within the confines of our current system.

One has to ask, what is the one thing that can easily be changed in the big equation to resolve this problem, without risking anarchy?

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Banks have been bust for ages, well, at least since the first fractional reserve bank came into being.

Now it is all out of control and there is no solution within the confines of our current system.

One has to ask, what is the one thing that can easily be changed in the big equation to resolve this problem, without risking anarchy?

Sounds good AND?

Its a HUGE space outside the box, its what is so exciting about living in non-linear times .....but its hard to think beyond that which has predictably gone before ...

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  • 420 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
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      • Even
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      • up 5%

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