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So we're looking at a reasonable expectation of price drops of at least 50% in the more inflated areas - and possibly more.

Problem - this immediately puts many buyers into negative equity, which means the resource against which the loan is secured is now worth much less than the book value.

So even without defaults, any loan secured against property sold during the bubble is going to be worth 75% (generous) to 50% (more likely) of its nominal value.

Once people start defaulting, the negative equity value becomes the likely realisation value. Given the fire sale nature of what's happening, and the dearth of buyers (no new lending, except for those with perfect credit) the realisation value will drop still further by perhaps another 50%.

So my guess is that the actual write-off figure before leveraging is going to be around 40-50% across the entire US mortgage market, including stable older loans.

If unemployment explodes that figure could be even lower, because some of those older loans will turn into defaults too.

Of course, I could mention peak oil and food/energy inflation here, but that would just be depressing, wouldn't it?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Dec 17th, 2007 at 12:22:07 PM EST
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