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01 October 2008

Housing Prices Ugly In Some Markets

Denver is barely scathed. It has already taken its housing price bath and is on the way back. But, markets like San Diego, Las Angeles, San Francisco, Las Vegas, Phoenix, Detroit, Tampa and Miami have seen huge one year declines in housing values.

Why does this matter?

Because mortgage defaults only produce big losses for mortgage lenders when housing prices have fallen significantly. A large percentage of homeowners in affected markets have lost all, or almost all of their home equity.

The housing bubble collapse has done far more harm to Main Street than rising default rates in portfolios of securitized mortgages that followed.

The chicken and egg question is whether loose credit is responsible for the housing bubble, by making it possible to pay for expensive homes, or whether rising home values made loose mortgage credit seem sensible because rising home values quickly created equity.

This isn't to say that falling home prices are exclusively bad. These markets have grown unreasonably unaffordable. Those who got in before the bust, and haven't borrowed against paper price increases, have had an easy come, easy go loss. New buyers are squeezed out. Those who bought or borrowed when housing values were high and have seen housing prices fall, however, are clearly burned.

More deeply, our system still have no much of a clue about how to prevent bubbles from forming in the first place, so that they don't pop latter. The problem is several hundred years old, but we still haven't licked it.

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