Those who think the sub-prime crisis and its attendant credit crunch are over, such as Warren Buffett, (see HERE) should take account of the methods being used by the Bush administration to contain the situation. All bets are being placed on a rebound in the price of property in the US by 2010.
If house prices were instead to fall further, then the two main organisations being required to carry the risks, Fannie Mae and Freddie Mac, already carrying multi-billion losses yet to be announced, will be under threat of collapse. There will be the need for a major Federal bailout. See HERE
It was said that people in America bought houses as a way to make money. It was a one-way bet or so it seemed. If buying houses no longer offers gains, but in fact losses, then there is no motivation for people to buy houses. The housing market continues to fall as a result.
The problem is that Americans are so heavily borrowed. Americans today own less than half the equity in their homes, according to figures given by the BBC, due the reliance on equity release borrowing in the good times. If house prices halve from the top of the market which some commentators believe to be possible, due to large numbers of unsold houses and repossessions, Americans will have almost nil equity in their homes.
I don’t mean to be overly pessimistic, but those who are saying the crunch is over, are calling the end of play a little prematurely. There are many more who could join the repossession list yet. Another 18 months of price falls could turn the market fall into a rout.
Interestingly Buffet says he is looking to buy companies outside the USA, as he fears a fall in the value of the US Dollar. Maybe he’s trying to buy time by his optimistic offerings. He must know it’s too early to call the end of the credit crunch just yet.
The BBC website – Meanwhile, the Federal Reserve says the percentage of equity Americans have in their homes has fallen below 50% for the first time since 1945.
Homeowners’ share of home equity fell to 47.9% in the in the fourth quarter of 2007.
The percentage of debt people still own on their properties now represents more than half its value.
This could be because of people taking out large mortgages on more expensive properties, of because of equity-release loans increasing in recent years.
The IMF has stated that the US will enter recession later this year, with only mild recovery in 2009. The credit crunch won’t be over until it’s over, and no one knows how long that could be. 2010 is probably on the optimistic side.