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Sunday, May 22, 2011

Housing Going To Zero: Foreclosure Tsunami Approaches

A report in Monday's New York Times details how our nation's banks are sitting on a mountain of residential real estate from foreclosures. 

This largesse, combined with foreclosures in the pipeline or reasonably anticipated, is almost sure to depress housing prices -- if it does not spark a renewed plunge.

Anticipated foreclosure-caused price declines should not be viewed in isolation, however; other factors such as sharp increases in mortgage rates (currently at or near historic lows) and continued requirements for large (20% or more) downpayments should also depress would-be buyers' purchasing power (which, crucially, is measured as the ability to afford a particular level of monthly payment, adding in increasing property taxes and homeowners' insurance).

The article does not address one other issue: what effect does this wave of foreclosures threaten to have on banks' balance sheets?  At some point banks will realize losses on their real estate and this will cause their balance sheet assets to shrink.  There may be serious effects on banks' stock prices, if this analysis is correct.

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