Let's say houses were twice times too expensive on an affordability basis (that is, the ratio of house prices to incomes was twice too high) at the peak of the mania, and let's say incomes will fall on average by half. So if housing then becomes appropriately priced based on affordability, the prices will fall by 75%.
Furthermore, if people decide they want to be more frugal, as they most likely will, they will probably opt to live in smaller quarters, or share larger houses with more people. Let's say the desire for space is reduced by half. Over a rather short period then, perhaps nearly half of the housing stock will become redundant. The prices on most of those units will likely fall to zero.
The price shock will likely cause the more attractive, non-redundant units to become "cheap" relative to income, and the 75% fall mentioned above is too little. Perhaps 87% would be a good guess. In summary a house that cost $400,000 in 2006 may end up going for between $0 and $52,000.
Furthermore, if people decide they want to be more frugal, as they most likely will, they will probably opt to live in smaller quarters, or share larger houses with more people. Let's say the desire for space is reduced by half. Over a rather short period then, perhaps nearly half of the housing stock will become redundant. The prices on most of those units will likely fall to zero.
The price shock will likely cause the more attractive, non-redundant units to become "cheap" relative to income, and the 75% fall mentioned above is too little. Perhaps 87% would be a good guess. In summary a house that cost $400,000 in 2006 may end up going for between $0 and $52,000.
Given this extreme drop, just about everyone with any significant mortgage balance is going to end up 'under water,' and very tempted to 'walk away.' The implications of this are severe. The entire global banking system, including central banks such as the U.S. Federal Reserve System, will probably collapse - not that it is doing so hot at the moment.
Even if money is 'printed' with abandon, too many houses will loose too much value due to redundancy to save the value of mortgages, values upon which banks must rely to stay in business. Homeowners must be prepared for the possibility of a shocking decline in value, though if you live in a reasonably prosperous town where housing has been and continues to be affordable for most of the population, then you are probably safe from the worst.
Even if money is 'printed' with abandon, too many houses will loose too much value due to redundancy to save the value of mortgages, values upon which banks must rely to stay in business. Homeowners must be prepared for the possibility of a shocking decline in value, though if you live in a reasonably prosperous town where housing has been and continues to be affordable for most of the population, then you are probably safe from the worst.
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