What if House Prices Fall by 30% Worldwide?

by Gary North

In the midst of local house-buying manias, the classic mark of the end is when buyers line up to buy a house and bid against each other. This is the best way to sell a house and the worst way to buy one.

Why do buyers do this? Because they have missed out again and again by offering less than the listed price. The buyers who offered the listed price bought the house.

[I did this in February, 2005 for my home. The other family thought that $90,000 for a 4-bedroom house was too much to pay. They were wrong.]

Then the panic escalates. Those offering the listed price get left behind. They wait too long. "Too long" means more than one day after the house comes on the market. They hesitate. He who hesitates is lost in a seller's market.

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Pushing on a String?

WHAT THE FED GIVETH, the banks taketh away.

Just days after the U.S. central bank completed its unprecedented 125-basis point easing in its key policy rates, its quarterly survey of bank lending officers showed they had become much more stringent in their extension of credit.

That's key because people and businesses don't borrow from the Federal Reserve, so how much credit the central bank provides, and at what price, affects the private economy only indirectly. It takes a banker or other lender to make that loan to pay for a house or a piece of capital equipment. Indeed, the Fed acknowledged as much when it slashed rates last week, noting that financial conditions had tightenened.

Even as the Fed has made the raw material for those loans cheaper, bank lending officers indicate a far warier attitude toward making new loans, especially -- surprise! -- "nontraditional mortgages." Some 85% of loan officers responding to the quarterly survey they tightened lending standards for this category, which includes subprime.

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FMM Comment: My post yesterday, The Big Credit Squeeze, also refers

MBIA credit rating fear

Shares in MBIA, the world's biggest bond insurer, tumbled after reporting its largest-ever quarterly loss and admitting it's considering how to raise new capital.

Late yesterday the company reported a loss of $2.3bn for the last three months of 2007. MBIA, which together with other bond insurers guarantees $2.4 trillion of debt, is scrambling to keep hold of its top credit rating. The loss of the rating would threaten the ratings of a further $652bn of securities.

Analysts reckon that fears that MBIA and Ambac will lose their ratings contributed to the volatilty in stock markets last week.

The high-profile banking analyst who triggered the resignation of Citigroup chairman Charles "Chuck" Prince is predicting investment banks will need to take further write-downs of $40bn (£20bn) to $70bn as a result of the current crisis in the bond insurance market.

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Update: MBIA shares rise; bond insurer highlights liquidity

Also note the Ripple Impact of $534 Billion Debt Downgrade