The Oil Drum

the ability of Americans to service their mortgage debt was lower than thought, and continues to decline. Until that trend reverses, the level of home ownership will have to fall. Home prices will have to fall.

1) Current house prices are at approximately 5x incomes. Prior long run average was approximately 3x incomes. This argues for a 20 to 30% decline in house prices. But this figure may be optimistic due to:

2) US economy has been supported by consumer purchases sustained by increased mortgage debt. This source of funds will no longer be available.

3) Since wages represent 70% of corporate expenses, a downturn in the economy will result in increased unemployment, and an increasing debt service problem.

4) Labour mobilty has been the key response to a declining local economy. Relocating homeowners will be forced to sell into a declining market and this will further pressure prices.

5) The "oil crash" of the late 1980's was confined to that sector. Those outside the oil sector had no understanding of what took place (and still don't). The dot.com bust was a California problem and a telecom sector problem. Those outside these sectors were not exposed. The housing problem is very different in that 70% of the population is exposed and, apart from a few local markets, all will have concerns. Such concerns will likely lead to a retrenchment of consumer spending. This in turn reinforces 1) above and we go through the cycle again.

6) At some point the path presented above will become clear to the equities markets and these will sell off. The consequence of this is that neither one's house nor one's 401k are likely to hold value. This will occur at a time when a significant proportion of the population will be nearing retirement. This will shape the domestic political environment. With regards the US, I think there is the possibility of significant internal conflict.

7) The international system has basically hinged on US strength as a major global investor and as a safe and secure investment location. Given the above scenario this sentiment is bound to change. Within the US, I suspect rising anger over the fact of a government focus on life in Iraq while paying no attention to domestic issues impacting the citizenry.

8) I don't know how this plays out with respect to PO. I expect the price of oil to rise in US dollar terms and this will deepen the interlinked problems presented above. AGW will also exacerbate this problem set and make a postiive response to this challenge less likely.

I do not see any means for the Fed to undertake a meaningful intervention. This will not be a liquidity crisis so much as a crisis of confidence, a Minsky Moment that results in a reconceptualiztion of personal, domestic, and international relationships.

Comments and critique welcome.

Cheers!