On Wed, 2 Feb 2005 Charles Brown wrote:
> Charles Brown: Is there no upside to housing prices falling,
> since they would be cheaper for people to buy ?
Unless the fall in house prices is primarily the result of a rise in mortgage costs. Then the monthly payments could conceivably stay around the same and it might not necessarily be any cheaper to buy.
On the same day james at communistbanker.com wrote:
> The only losers will be:
> 1) Speculators (ha! ha!)
> 2) People with negative equity. It sucks for them because it's
> hard to move, but only people who bought right at the top of
> the market will be seriously affected.
Honest question -- doesn't large scale use of HELC mean the number of people who would end up with negative equity in such a situation would be larger than that -- that it wouldn't be limited to people who bought at the top but would also include some of those who borrowed at it?
> 3) People borrowing against their home equity. They will have
> to pay a bit more for borrowing, but it won't be crippling
> for most of them.
> 4) Maybe, just maybe, the rest of us if the result of (3) is
> a sharp fall in consumption and the economy is screwed. But
> this is far from a necessary consequence of falling prices.
Aren't you leaving out the wealth effect here, James? If all home-owners feel poorer because of a palpable drop in the value of their assets, then in the (enormous) aggregate, they will spend less and save more. And while in itself that's kind of virtuous, a large scale movement like that would definately put a damper on the economy. The only question would be how long and how deep. No?
Michael