Housing Market Ripples

In a previous post on the state of the housing market, I postulated that the effects of the housing market crash would ripple though the economy. What I didn’t expect was that this would happen so quickly. Recent news stories have drawn my attention, so here’s how I think it will happen:

After the sub prime lenders, you’ll see all lenders begin to feel the burn. This will self potentiate, as the lenders will tighten lending policies as the losses become apparent. This tightening will prevent buyers obtaining the high multiples, and “liar” loans that have supported the market. People with the subprime loans will be forced to tough it out through interest rate rises from fixed and ARM rates being bumped up after fixed periods, and possible monetary tightening from the central banks.

Non Sub prime Lenders:

“Although our previously disclosed restructuring activities are on track to meet our projected results, the impact of the sub-prime mortgage market meltdown has overflowed into the prime mortgage market. In particular, gain on sale margins during the quarter were significantly lower than forecasted, and we are revising our guidance.”

Companies that have an interest in the housing market will begin to feel the pinch. You’ll see quite a few surprises, especially through company pension funds invested in REITs and companies with employee home buying schemes.

GMAC losses:

“Its GMAC finance arm made a loss of $305m (£152m) in the first three months of the year because of charges taken at its housing finance unit.”

The big investors in the market are next to start encountering the red ink. Real Estate has been a great market to be in over the last 10-15 years and many investors, some of which will be big investors, will be caught out. Some will have had the common sense to get out, but many won’t have wanted to sit out while others were banking big gains.

Hedge Funds:

“Banking giant UBS is to scrap a hedge fund run by top banker John Costas after it racked up losses in the US mortgage market. The Swiss bank said it will shut the fund after SFr150m of losses and return cash to investors.”

This is just the start of the economic ripples that will be created when the scale of the housing boom and bust becomes apparent. Look for home furnishing retailers to be next, followed closely by a stagnating effect on the entire market as consumers reign in spending.

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