Michael Pollak: "...am I wrong in thinking that, despite 
all this divesity in funding bases,the result of a 
palpable fall in housing prices would still be for 
the price of mortgages to rise across the board?  
Which will automatically cause the price of housing 
to fall further?  So that once housing prices get 
into the ditch, it will be hard to get out?  
So that the negative wealth effect could be lasting?"

JG: You're right - this is the likely result. But it's far 
from given, and there are a lot of other forces that 
might counteract it. If prices fall, it means that the 
value of security falls, and thus the loss given default 
rises. But unless it is accompanied by sharply rising 
interest rates (for the floating rate mortgages - not 
many in the US, I think) and/or rising unemployment, the 
probability of default will still be low, which will 
mean that mortgage lending is still profitable. And if it 
means that people have to save more to get a bigger 
deposit because 100% funding is restricted, then there 
will be a bigger pool of savings to fund mortgages. The 
factors that I mentioned in my last post will balance 
against rising costs - but that's not to say that the 
net effect will be zero.  However, I do think that a 
downward spiral is fairly likely, mainly because of the 
bubble effect. As soon as speculators stop enjoying 
double digit returns, there won't be enough buyers to 
sustain current levels. And once prices start to fall, 
people will wait until they've fallen a bit lower before 
buying.

Charles Brown: Is there no upside to housing prices falling, 
since they would be cheaper for people to buy ?  

Yes! Exactly! People who have lots of equity in their houses 
don't actually gain that much, because it's so much more 
expensive to buy a slightly bigger house. And lots of people 
have to rent because they can't afford to buy in a speculative 
bubble.  Even if people lose hundreds of thousands off the value 
of their house, they're better off in that they still have the 
use value of the home and they can buy somewhere bigger more 
cheaply.

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.
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.

CB: Wouldn't it be cheaper for renters ?

JG: Not necessarily. House prices growth has been running way 
ahead of rental growth, because people are buying to let on 
the assumption that there profit will come from capital growth.  
Supply and demand dynamics in the purchase vs rental markets are 
different, and falling prices might mean that people will sell 
the houses that they bought to let, there will be limited new 
supply of rental housing, and rents will rise.

--James