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Originally from: http://www.globaleconomicanalysis.blogspot.com/
I include the containment theory argument below - Mish's rebuttal is quite good except for one major dropped stitch.
This is even more odd since he specifically talked about housing prices being set at the margins - but I guess everyone has a bad day!
Note in item 3 below: "What are the likely losses": the containment arguer notes that if the 3% of all housing is foreclosed on, then sells for $135K (from $200K), the actual loss is only around $315B. Can't quibble with this as a back of the envelope guesstimation of the actual out of pocket loss.
However, the bigger point is that if those foreclosures really sell for $135K, that means the overall housing market went down 32.5%. With the 100M households/houses as the overall number, the paper losses are $6.5T.
Sorry, but this is very much bigger than the Nasdaq collapse - and spread out further in the populace. This loss is also different in that the Nasdaq loss was largely not accompanied by a tremendous rise in debt - losing $5T in stock value of which at least $2T or $3T came from stock appreciation to begin with is completely different than losing $6.5T of which $2T or $3T came from appreciation along with taking on $2T or $3T of debt. As a quibble, I'd also note that the Nasdaq bubble involved early redirection of both investment and savings into the stock market, whereas the housing bubble redirected savings into spending and taking on debt as investment.
Note the numbers above are actually lower - there are both more houses than 100M and the average house price is over $200K.
I include the containment theory argument below - Mish's rebuttal is quite good except for one major dropped stitch.
This is even more odd since he specifically talked about housing prices being set at the margins - but I guess everyone has a bad day!
Note in item 3 below: "What are the likely losses": the containment arguer notes that if the 3% of all housing is foreclosed on, then sells for $135K (from $200K), the actual loss is only around $315B. Can't quibble with this as a back of the envelope guesstimation of the actual out of pocket loss.
However, the bigger point is that if those foreclosures really sell for $135K, that means the overall housing market went down 32.5%. With the 100M households/houses as the overall number, the paper losses are $6.5T.
Sorry, but this is very much bigger than the Nasdaq collapse - and spread out further in the populace. This loss is also different in that the Nasdaq loss was largely not accompanied by a tremendous rise in debt - losing $5T in stock value of which at least $2T or $3T came from stock appreciation to begin with is completely different than losing $6.5T of which $2T or $3T came from appreciation along with taking on $2T or $3T of debt. As a quibble, I'd also note that the Nasdaq bubble involved early redirection of both investment and savings into the stock market, whereas the housing bubble redirected savings into spending and taking on debt as investment.
Note the numbers above are actually lower - there are both more houses than 100M and the average house price is over $200K.
First of all, I'd be the last person to discount either the short-term or the lasting effects of the implosion of the sub-prime markets, here in the US, but more particularly in Great Britain and Spain, where the problem is likely at least one order of magnitude worse. The housing markets in those countries have been in a "bubble" for a number of years. But that's another story, so let's concentrate on the US market.
For a starting point, let's say that there are indeed 7 million properties (the numbers in the analysis you showed me) that have mortgages which are at risk of default. The US has, by some estimates, about 100 million households (300 million people with about 3 persons per household, on average). One would think, therefore, that approximately 7% of the households in the country are at risk of defaulting. Let's also say that it's likely that 80% of this number will default and that 50% of that number not only default but will fail to negotiate a work out and be able to stay in their homes. This represents about 3% of the nation's housing stock. The other 3% that are workouts will result in a pretty hairy financial loss by hedge funds, etc. But the total loss is unlikely to be more than 20 cents on the dollar. After all, the average banker would much rather re-negotiate the interest rate downwards and write off a portion of his investment than to go through the hassle of foreclosing and having to auction off the property at even greater losses.
Focusing on the 3% that will lead to foreclosure, I think we need to ask several questions,
1. Who owns these units?
Well, at least a material portion of them belong to "flippers" and other investers who thought that the housing market would go up forever. In many cases, they'll be forced into bankruptcy but they will re-join the workforce somewhat worse the wear.
Many of the remainder likely belong to individuals and families that should never have bought in the first place. They'll move back into rental housing where they should have been to begin with. In many instances, the cost of bankruptcy is so high that the banks will just stop chasing them.
2. What happens with the units?
The units will turn over and either get sold as rental units or sold to home-buyers at deeply discounted prices. As a result, the housing market will continue to be sluggish for 3-4 years in the parts of the country most overbuilt like CA and FL.
3. What are the likely losses?
If the average at risk housing unit in the country is worth about $200,000 (pre-default) we can anticipate that upwards of 3 million units will land on the market over the next several years. My guess is that investors will pick them up and rent them for about $135,000 on average. After all, assuming standard fixed rate mortgage with 20% down and 7% interest rate, $5,000 in closing costs, the carrying cost is about $10,000 annually, including mortgage payments, taxes and insurance. This translates in to a rental payment of about $1,200 per month, leaving a reasonable return on investment, etc. This is well within the reach of most people who were going under trying to make $2,000 per month payments.
So, once again, we see that after it all washes out, the question remaining is how much equity is going to get washed down the drain. By my calculations it's the
total of 20% of 3 million units @$200,000 and 35% of 3 million units $200,000. The total likely loss is, therefore, about $315 billion. While this is a lot of money, you need to ask yourself the question, how much equity was lost in the stock market in 2000?
Seems to me the country can afford it and will move on after a brief but painful recession. The pain will be felt by five groups; i)the people losing their homes, ii) those trying to sell their homes into a housing price downturn, iii) people in the housing industry who lose their jobs while the market remains overbuilt. iv) investors who bought property to flip and now must unload at potentially deeply discounted prices or hold on until the market improves and v) the holders of all those securities who now must live through a period of unknown value while they lose their shirts (this is where most of the money will get lost - I'm heartbroken)
Most of us will just keep on truckin'....
For a starting point, let's say that there are indeed 7 million properties (the numbers in the analysis you showed me) that have mortgages which are at risk of default. The US has, by some estimates, about 100 million households (300 million people with about 3 persons per household, on average). One would think, therefore, that approximately 7% of the households in the country are at risk of defaulting. Let's also say that it's likely that 80% of this number will default and that 50% of that number not only default but will fail to negotiate a work out and be able to stay in their homes. This represents about 3% of the nation's housing stock. The other 3% that are workouts will result in a pretty hairy financial loss by hedge funds, etc. But the total loss is unlikely to be more than 20 cents on the dollar. After all, the average banker would much rather re-negotiate the interest rate downwards and write off a portion of his investment than to go through the hassle of foreclosing and having to auction off the property at even greater losses.
Focusing on the 3% that will lead to foreclosure, I think we need to ask several questions,
1. Who owns these units?
Well, at least a material portion of them belong to "flippers" and other investers who thought that the housing market would go up forever. In many cases, they'll be forced into bankruptcy but they will re-join the workforce somewhat worse the wear.
Many of the remainder likely belong to individuals and families that should never have bought in the first place. They'll move back into rental housing where they should have been to begin with. In many instances, the cost of bankruptcy is so high that the banks will just stop chasing them.
2. What happens with the units?
The units will turn over and either get sold as rental units or sold to home-buyers at deeply discounted prices. As a result, the housing market will continue to be sluggish for 3-4 years in the parts of the country most overbuilt like CA and FL.
3. What are the likely losses?
If the average at risk housing unit in the country is worth about $200,000 (pre-default) we can anticipate that upwards of 3 million units will land on the market over the next several years. My guess is that investors will pick them up and rent them for about $135,000 on average. After all, assuming standard fixed rate mortgage with 20% down and 7% interest rate, $5,000 in closing costs, the carrying cost is about $10,000 annually, including mortgage payments, taxes and insurance. This translates in to a rental payment of about $1,200 per month, leaving a reasonable return on investment, etc. This is well within the reach of most people who were going under trying to make $2,000 per month payments.
So, once again, we see that after it all washes out, the question remaining is how much equity is going to get washed down the drain. By my calculations it's the
total of 20% of 3 million units @$200,000 and 35% of 3 million units $200,000. The total likely loss is, therefore, about $315 billion. While this is a lot of money, you need to ask yourself the question, how much equity was lost in the stock market in 2000?
Seems to me the country can afford it and will move on after a brief but painful recession. The pain will be felt by five groups; i)the people losing their homes, ii) those trying to sell their homes into a housing price downturn, iii) people in the housing industry who lose their jobs while the market remains overbuilt. iv) investors who bought property to flip and now must unload at potentially deeply discounted prices or hold on until the market improves and v) the holders of all those securities who now must live through a period of unknown value while they lose their shirts (this is where most of the money will get lost - I'm heartbroken)
Most of us will just keep on truckin'....