From THE AUTOMATIC EARTH
[...] As longtime readers will know, my forecast for a real estate prices is for a decline of 90% on average, albeit with considerable local variation. For those who think this is not possible, you might want to look at what you can buy a house for right now in Detroit. It is considerably less than the price of a second-hand car, and in a market where the price of second-hand cars is depressed. In places where there is no work for miles around, and no access to mortgages in dying neighborhoods, the pool of buyers will be limited to those who can afford to buy a property in cash and would choose to spend what will be extremely scarce cash on that particular purchase. The price support that will convey will be minimal, to say the least.
As unemployment takes a moonshot in the coming years, purchasing power will be far more limited than most can imagine. The liquidity crunch we are moving into will cause the same kind of economic seizure as we saw in the depression, when a lack of money alone made it exceptionally difficult to connect buyers and sellers, or producers and potential consumers. Money is the lubricant in the engine of the economy in the same way that oil is the lubricant in the engine of your car. Running an engine with too little lubricant will cause it to grind to a halt.
The ‘assistance’ currently being provided in the form of down payments is only going to make the situation worse in the long run. Bailouts are never for the little guy. Offering inducements to further indebtedness is merely a trap. It will do nothing but increase the pool of future debt slaves. This is not a benefit for the people it is ostensibly aimed at. Instead it is a cynical move intended to keep our game of extend-and-pretend going a little longer. Rising unemployment will cruelly expose the fragility of buying power and the ability to service debt in the relatively near future. Defaults are likely to be shockingly high, and with them losses to Fannie and Freddie.
As John Stuart Mill observed, “Panics do not destroy capital, they merely reveal the extent to which it has already been destroyed by betrayal into hopelessly unproductive works.” The construction of much of suburbia has been a giant exercise in the creation of negative added value. It is this decades-long commitment of resources to living arrangements with fatal structural dependencies that has been destructive of value, and there is a limit to how long we can stave off the day when that will be generally recognized. That is all we are doing in supporting Fannie and Freddie.
Now that it appears the credit markets have turned again, the real economy will inevitably follow. The long rally facilitated a suspension of disbelief that was kind to policy makers while it lasted. The resumption of the downtrend will conversely strip away their credibility, making everything they do fail conspicuously and ignominiously.