Friday, February 29, 2008

Big Trouble

We all know there's a "housing crisis". But do you really know just how big it is?

Goldman Sachs economists estimate that as much as $3 trillion in mortgages could be underwater by the end of the year, leaving 30% of the country's outstanding mortgages in negative equity. Since there is roughly $1 trillion in subprime mortgages outstanding, that means a large amount of better-quality mortgages, such as prime and Alt-A -- a category between prime and subprime -- will be attached to negative equity.
As equity goes negative, more and more people are simply walking away from their houses. There used to be a stigma to abandoning a house/loan and bankruptcy. But when many of your neighbors are doing it, why not just join the crowd?

Bush/Paulson et. al. continue to claim that they'll let the "market" work out the problems (while they quietly support the big boys with Fed policy), but eventually they'll have to act. When something like this situation gains momentum, it can snowball into a very serious depression, i.e. the more people that walk away, the more housing inventory, the lower houses are worth, the more people have to walk away.

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