Joint Economic Committee Estimates 2 Million Foreclosures By 2009

The Joint Economic Committee has released a report estimating 2 million foreclosures by 2009, causing $71 billion in lost housing wealth.

The report predicts that housing prices will stagnate or decline, causing more foreclosures which will depress prices further. It’s far less optimistic than the Bush administration’s estimate of 500,000 foreclosures, says the SF Chronicle.

From the Bloomberg:

“State by state, the economic costs from the subprime debacle are shockingly high,” Senator Charles Schumer, the New York Democrat who heads the committee, said at a news conference. “From New York to California, we are headed for billions in lost wealth, property values, and tax revenues.

In order for the projected 2 million foreclosures to become reality, the report said, housing prices would have to fall by about 20%.

The San Fransisco Chronicle managed to find someone even less optimistic than Schumer:

But some economists, including Jon Haveman, a former senior economist with the president’s Council of Economic Advisers, believes the committee’s findings are too optimistic.

“Things are getting exponentially worse,” said Haveman, a principal at Beacon Economics in San Rafael. Home prices “have only now started to drop. They have a ways to go.”

Haveman expects the housing slump to touch off a recession by the beginning of next year, because more than 70 percent of U.S. spending is by consumers.

“There’s been a dramatic increase in consumer spending fueled by the housing market,” he said. “Now that housing prices are going down, (consumers are) going to have to reorient their household portfolio. They’re going to have to start saving because their retirement isn’t going to come out of the house. And they have to stop consuming because there’s no more cash in their house.”

Billions in housing wealth at risk as foreclosures soar [San Francisco Chronicle]
Subprime crisis toll tabbed at $71b [Boston Globe]
(Photo:Boston Globe)

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  1. ChrisC1234 says:

    I wouldn’t so much call this “lost wealth” as the “wealth” never existed in the first place. Too many people paying too much money. I’m sorry, but the prices that people began paying for homes is ridiculous. I wouldn’t pay what my house is supposedly worth right now. And if my house is suddenly worth half of what it is now (which would put me $8000 in the red), that’s fine by me. I bought my house as a place to live long-term. If I suddenly owe more than it’s “worth”, so be it. I should’ve never signed the 30 year mortgage unless I was planning to stay there, UNDER THE TERMS OF THE MORTGAGE for the full 30 years. The value can go up or down, but that doesn’t change my housenote, so I really don’t care (and my housenote is less than rent).

  2. nweaver says:

    For reference, there are ~125M or so housing units in the US, So this is expecting that 1.5% of ALL HOMES will be foreclosed upon in the next 2-3 years! OWCH!

  3. badgeman46 says:

    Some of this is utter nonsense. Yes, values of houses come down, but to say you have lost actual wealth is a little silly, at least in the way the concept is applied in recent times. Big spending in terms of housing has come from home equity. Go put on that kitchen, go buy that plasma tv. My friends, that is just a number. That is money that you dont have, that is debt, not wealth. There is no lost wealth. If my credit card magically cuts my credit limit by ten grand, I have not lost 10 grand, because it was 10 grand I never had. You will only lose wealth if you sell. And why sell? Why not reign in on your spending! Good crap, your 5 dollar a day starbucks habit, your iphone, your ipod. Even those who did not sell in the depression made 7 percent on their investment.

  4. iamme99 says:

    One problem is that in the eyes of Wall Street and the government, value is wealth. And of course, we all know by now that government thinks all wealth should be spent, whether it is actually your wealth or the banks.

    I think the 2 million estimate is way low. Sub-prime failures can cause a cascade effect, rippling through whole regions. Too many foreclosures in a neighborhood bring down the value of the rest of the neighborhood. Even though many may not be in a sub-prime loan and may be paying your mortgage, people may still not have a lot of equity. Or you may also have drunk the kool-aid and drawn on whatever equity you did have, leaving you open to problems.

    If people’s house value goes underwater, dragged down by sub-prime foreclosures, then they may become disinclined to continue paying the mortgage, causing more cascading problems. If your business or job depends on housing and housing slows, then you may find yourself out of work. Suddenly, you can’t carry the mortgage.

    Add in the record price of oil now (over $90/barrel) and it won’t be long before we see gas prices over $4.00/gallon nationwide. That is again, going to cascade throughout the economy and put a crimp in the spending of many consumers. Many businesses are going to have to raise prices to compensate (think airlines, trucking, distribution in general). This will lead to greater inflation.

    I feel that what we are seeing now is just the tip of the iceberg.

  5. mthrndr says:

    I’m getting really sick of these apocalyptic stories. It seems to me that post-911, everyone and their f-ing mom wants to be the ones to say “I told you so” or “I predicted it” when something bad happens – a terrorist attack, a hurricane, a bunch of wildfires, a recession, a depression, high inflation, high oil, etc. So these stories constantly come out with the worst case scenario highlighted and double underlined, just in case it happens. So they can look back and say “See? WE PREDICTED IT.” I have one word for you (acronym, actually): Y2k. The reality is that if you are responsible with your money, if you have a decent fixed mortgage, not borrowing against debt like a maniac, then you’ll be fine.

  6. iamme99 says:

    Sorry to have to tell you MTHRNDR, but even if you are not extended, if you brought your house recently and put 20% down, or if your life is somehow tied to consumer purchases and the housing market, you could get caught in the undertow and suffer collateral damage, as I illustrated above.

    But if all you want is good news, you should check out:
    [www.happynews.com]

  7. Smackdown says:

    @mthrndr: I so agree. I say this, having a 30-year-fixed, no HELOC or anything, and pretty financially secure for the long run, and confident of our ability to weather any nearterm storm.

    It seems like especially on the internet, there is this almost conspiracy-theory-like levels of “THE END IS NIGH” coming from a certain sect that is getting tired.

    Was nobody around during the .com bust in 2000? Reflecting on past recessions, didn’t Americans make it through? Sure, it’s going to take a while to recover, but it’s hardly the Death of the Economy.

    And man, I hate being put in this position because I tend to be a pretty pessimistic person, but it just seems like all perspective or rationality is getting thrown out with the bathwater.

    I occasionally think there is a sliver of jealousy – I understand it – I have the fortune of not living in an exorbitantly-high-priced housing market, but I can only imagine that those who make middle-class incomes and have been priced out of the housing markets are rubbing their hands together in schadenfreudian glee, waiting until the day they can snap up those properties at a discount and become part of the problem they were decrying only a couple years prior.

  8. Techguy1138 says:

    @badgeman46: Some people do actually own their homes. It is an asset with worth that contributes to your net worth. If I owned a home that was worth 200k last year and this year it’s 100k my total net worth is less. It’s no different than if you had an investment account. If your retirement account lost half it’s value from year to year you have less net worth.

    Just like a retirement account it doesn’t matter if the values is up or down until you cash or or borrow against it.

    @iamme99:

    Thanks for the happynews link. I’ve been looking for a site like that.

    I’m pretty sure that there would need to be a very large housing market loss for people who otherwise can pay, to not pay on their mortgages. People pay off their car loans even though the asset has lost a significant portion of it’s value well before the loan expires.

  9. Techguy1138 says:

    @Smackdown: “I can only imagine that those who make middle-class incomes and have been priced out of the housing markets are rubbing their hands together in schadenfreudian glee, waiting until the day they can snap up those properties at a discount and become part of the problem they were decrying only a couple years prior.”

    You forgot the sinister laughter. Actually those who waited should not be part of the problem because they are waiting for home prices to fall to levels that they can afford, and hopefully lock in.

  10. Dinion says:

    Seems from the general gist of the comments so far that alot of people are assuming that the lost wealth statement applies to the homeowners…yet that would indicate that the median value of those 2 million homes is about $35,000, seems pretty low since the figures I always see thrown around are in the 1-2 hundred thousand dollars ranges, if not higher. But, consider this if that $35,000 is the banks expected profit per house then there really is a potential 71 billion on the line in lost wealth when those 2 million houses forclose…I think that is the actual point being made.

  11. kwsdurango says:

    If people are going to treat your houses like stocks and borrow against the value, effectively on margin, then they should be liable for margin calls – just like anyone in stocks would be – to the tune of losing your shirt (stock account, house, etc.). “Value” unrealized (unsold) is only paper. It’s not a gain until it’s taken, otherwise it’s vulnerable to the vagaries of the market.

  12. CompletionBackwards says:

    Absolutely correct. The terms of the note don’t change.That’s why there’s a mortgage and a note. This provides for the eventuality that there is no tacit guarantee for the loan investor or the mortgagor. You don’t pay, the party that lent you the money gets to try to recuperate by selling the collateral. If the house was worth more instead of less would that really give you more income to pay the note? Only if you sold it.

  13. dantsea says:

    @Smackdown: Yup. Spot on. One thing you’ve got to remember is that a HUGE portion of active Internet forum participants are 18 – 30 years old, somewhat suburban and privileged to one extent or another. They’re sheltered and limited in their experiences and worldview and have never lived through a real recession. Any talk of a downturn is equated with the Great Depression from the early half of the last century (since that’s really the only one they’ve ever heard of), and that leads to panic and doomsday predictions. And then there are the have-nots, but they’re easy to spot.

    Not that a recession is a cakewalk, of course, but everyone seems to survive. If anything, there is a positive aspect to recessions in resetting consumer spending habits, a little injection of reality, if you will.

  14. ThePopOversAreDone says:

    I’ve always loved giraffes.

  15. mthrndr says:

    Just getting back to this, if anyone is still reading…my point is that while news has always been sensationalized, from the days of yellow journalism on, the instantaneous nature of the web means that the smallest alarmist statements get blown way out of proportion. Cascade effects result. Unless you lose your job (always a possibility, sure) if you are financially responsible you are not in danger of losing your house in this current ‘credit crisis.’ Sorry, you’re just not. THIS IS NOT THE GREAT DEPRESSION PEOPLE.