The Next Real Estate Bust

Now that Roger Lowenstein has published an article in the NYT Magazine headlined “Walk Away From Your Mortgage!”, I think we can safely stay that what started as a controversial and minority stance has at this point become thoroughly mainstream. (The corollary is that arguments in favor of paying one’s debts are now contrarian.) It’s a credit to Mark Gimein that his blog entry from 14 months ago, entitled “Morally Conflicted About Walking Away? Don’t Be“, was not only one of the first places to make this point, but still stands out as one of the best expressions of the argument.

Similarly, I felt decidedly contrarian when I started arguing against homeownership in September 2007; that view now seems to be moving into conventional wisdom as well.

I’m not actually convinced that real Americans, as opposed to the chattering classes, have moved so far so fast. But it’s clear which way the wind is blowing — and it’s blowing in the direction of continued house-price declines. Houses are still more expensive to buy than to rent, in most of the country, and of course financing is all but impossible to come by, except for that provided by the government, which means that if and when the government prop is taken away, prices are liable to plunge. If that happens, expect a lot more walking away into cheaper rentals than we’re seeing right now, and a whole new vicious cycle of price declines and foreclosures.

Noam Scheiber has been waxing lyrical about the success of the stress tests, but it’s worth remembering that banks’ balance sheets haven’t been subjected to a really tough test since then — and also that those balance sheets are still full to bursting with toxic mortgage-backed assets, as all government attempts (TARP, PPIP) to relieve the banks of those assets have failed to do so.

There are lots of ways in which the US economy could see another sickening downward lurch, and residential real estate is probably not even the most likely. But it’s a nasty possibility, all the same, and one worth being alive to.