Real Estate/Forclosure Crisis Update

Two pieces in the news on the current real estate foreclosure crisis… 

First from USA Today on Freddie Mac: 

Freddie Mac expects deeper losses

Stunning Wall Street with a $2 billion quarterly loss, Freddie Mac (FRE) on Tuesday warned that the worst is yet to come: It said its mortgage losses will deepen through 2009, and it’s considering slashing its dividend in half and issuing a “large” amount of preferred stock to raise cash.

Among Freddie Mac’s darkest projections is that up to 5% of the loans it holds or guarantees could go into default. It says losses could hit nearly $17 billion, and it expects the worst hit to come in 2009.

Next… AP News reports… Homes sales fall and prices dip:

Third-quarter home sales fall in 46 states; overall price dips

Sales of existing homes fell in 46 states during the July-September quarter as the housing market’s slump worsened, a real estate trade group reported Wednesday. The third-quarter figures from the National Association of Realtors underscore the severity of the housing market’s slump, which has economists increasingly pessimistic about the economic outlook. The median existing single-family home price dropped 2% to $220,800 from a year ago.

The Freddie Mac recapitalization spoken of consists of selling $6 billion of preferred stock. That is a major news event. So is housing sales declining in 46 states, and the national median home price declining.  But to then have Freddie say that, as bad as things are now, they predict matters getting gradually worse for more than another year should be the major news story of the day. Instead, this crisis has built up over a long enough period of time that reports like these are taken to be commonplace, just because they’ve become common.

The numbers that I’ve been running across are truly impressive. One commentator whose opinion I value says that loses to financial institutions, realized and projected for the short term, are already of sufficient size because of a reverse leveraging effect to reduce lending capacity by a cumulative Two trillion dollars.  And two trillion is a popular number because another commentator (who I believe to be wrong on the low side) is estimating that we are in the process of erasing that cumulative amount from the equity of American home owners.

That would put the over all effect on the economy at four trillion dollars, and counting. And if Freddie Mac is correct, the counting won’t be finished for some time to come.

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