The implosion of the subprime and the Alt-A portions of the mortgage market will have negative impact on the housing market this year. While the media has reported on the bankruptcies of some of the big lenders in this area, and the losses incurred by some of the major actors in the secondary market, they have not focused much on the impact that this will have on the housing market.
It can be substantial. Reuters quotes an analyst from Bears Stearns who estimates that the cutback in credit in these market segments will reduce the number of homebuyers by 1.1 million this year.
I won't vouch for the accuracy of this estimate (it doesn't seem ridiculous on its face), but even if the impact is just half this size, it would still imply a substantial drop in house prices. Of course further declines in house prices will lead to more delinquencies, more losses in the mortgage industry, and a further tightening of credit. BTP readers know where this one goes.
Any macroeconomist who didn't see this one coming should be forced to turn in his/her license immediately.
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