Hello guys, if you want to see what declining prices could do in Australia I suggest you read this article from Bloomberg today. The rot sets into the banks and will do here this is the danger.
A couple of bits from the article: “Bank of America Corp., whose home- equity mortgage portfolio exceeds its stock market value, probably will say about $2 billion of junior loans are bad assets tomorrow even as some borrowers are still paying on time.
That’s what Barclays Capital estimates the bank will report in its first-quarter results, following decisions by JPMorgan Chase & Co., Wells Fargo & Co. (WFC) and Citigroup Inc. (C) to reclassify $4.1 billion of junior liens as nonperforming.
Regulators are pressing for the change on concern that falling home prices have wiped out collateral on many second mortgages, leaving them as unsecured debt. About 20 percent of the nation’s $845 billion of home-equity loans exceed the value of the properties when combined with primary mortgages, according to CoreLogic Inc., and about 36 percent of Bank of America’s were at least partly “underwater” at the end of last year, according to regulatory filings.
And… The risk of home-equity loan defaults will increase if real estate prices continue to decline, analysts and economists said. Home values have tumbled by a third since reaching a peak in mid-2006, according to the S&P/Case-Shiller home price index. Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago, estimates home prices will retreat another 3.9 percent this year, which would strip $706 billion from home values.
And… “We’re seeing the lingering effects of the housing market bust,” Swonk said in an interview. Guidance from regulators “is the reality of making sure banks are sound and secure while we work through the ripple effects of the financial crisis.” **********
This is the long lingering effect of a declining economy and a credit crisis. This is also related to the need for QE3 which I predict will come in the form of Fed purchases of mortgage bonds. The article above shows the need to strengthen the banks in the USA so the system remains solid for the status quo.
The foreign buyers have been holding up this market to some extend by adding demand - without which a stressed Australian banking system would have struggled even more to keep the music playing.
bassyabbie picked out hobo-jo's line perfectly - it is the crux of the current danger / risk.
