July 20, 2008

The Credit Crunch Could Continue Through 2010

Banks Will Lead the Recovery

The lenders will have to regain their footing before the housing markets can really recover. If the lender wont or cant lend money to a willing buyer, then regardless of demand or favorable price there will be fewer deals. I think the big banks and Fannie Mae/Freddie Mac must be recapitalize before we can see a meaningful housing recovery.

Using Citigroup as a Leading Indicator for the Housing Markets

Citigroup was one of the hardest hit of the large banks because they held so much subprime debt. Chairman Win Bischoff warns that house prices in Britain and the United States are likely to keep falling for another two years in an interview with the BBC.

For the quarter Citigroup lost 54 cents a share or 2.5 billion dollars. The stock jumped on the news and is prompting people to say that this is the early beginnings of a recovery, considering Citigroup lost 5.1 billion dollar last quarter. Confirming Citigroups indication that we will see losses through 2010, JP Morgan reports that their holdings report 30 day delinquencies have risen from about .75% to just under 4% today year over year.

The second wave

The ARMs that funded this boom will be re-setting and monthly payments will increase between 3 to 8 times. This will cause another wave of defaults unless banks are willing to renegotiate or Federal programs help people stay in their homes in a massive way, we will continue to see prices drop for two more years. The bill currently in the house, if passed as is, would likely help only about 400,000 of the estimated 3 million homeowners who may lose their homes in the next year. Add to this mix the fact that Federal Reserve can't wait for the end of the crisis to raise rates and you can see that the housing markets will be at risk for quite a while.

Thanks for Reading

Howard Bell
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