The result has been a speedier recovery of job growth than in Europe and possibly a higher productivity rate, since skilled workers are better matched to openings.

With the August employment report on Friday expected to show little improvement in the job market, America has never needed this flexibility more. Yet, at the risk of adding to the gloom, this advantage appears to be fading fast. The good news is that the United States still boasts one of the most dynamic labor markets of any rich nation. OECD rankings of its 30 wealthy member nations put the U.S. far
ahead of other large countries. (It comes second only to Denmark, which has unmatched programs to help the unemployed back to work.)

On average, around a quarter of American workers change jobs each year, compared with 15 percent in Italy and 13 percent in Greece, says Stefano Scarpetta, head of employment research at the OECD.

Yet there has been a striking decline in U.S. mobility in recent years. Since 2000, the movement of Americans across state lines has halved to just 1.6 percent of the population this year -- the lowest rate since records began in 1948. Even movement between counties is at historic lows.

(Click chart to enlarge in new window)

Americans may be becoming less adventurous because they are getting older. During the recession of the early 1980s the median age in the labor force was 35, according to the Bureau of Labor Statistics. Now it is 41.

In middle age, people are less willing to leave their home and yank their children out of a school district for anything less than a dream job. OECD figures show that workers above 45 are half as likely as those under 34 to change companies.

Another factor is at work -- the housing meltdown. Tighter lending standards and negative equity make it much harder to relocate. The willingness of people to move for a new job halves when a family is suffering from negative equity, according to research by Joseph Gyourko and Fernando Ferreira at the University of Pennsylvania.

Those who owe more on their mortgage than the property is worth face a tough choice if they are offered a job elsewhere. Either they can sell and hand over the balance of the debt to the lender -- often tens of thousands of dollars -- or walk away and suffer years of higher borrowing costs.

This is a problem that is certain to grow. Negative equity currently afflicts around 26 percent of borrowers, or 14 million properties, according to Deutsche Bank. By the time the slump is over, Deutsche expects that close to half of households will suffer from negative equity. More than a quarter of borrowers could end up owing more than 125 percent of the value of their home.

Economists believe there may be other factors chipping away at the flexibility of the workforce. Rising healthcare costs have increased the risks associated with going without insurance -- something than many dynamic startups can't afford.

When a recovery gathers pace, the frustration of being tied down to depressed areas will become ever more acute. The United States may not have the onerous labor market laws seen in much of continental Europe. But the housing market collapse combined with an aging population may end up having a similar effect.

If American companies find it harder to draw on the nation's full pool of talent or if workers can't move where they will be most productive, the prospects for a full-blooded recovery will dim.

Things in the U.S. economy are moving in the right direction, but the pace will be slow, frustrating and very likely to disappoint investors betting on a rip roaring old-fashioned recovery.

News that the Standard & Poor’s Case-Shiller 20 City house price index rose for the first time in almost three years in the three months to May was greeted with much rejoicing.
The Case-Shiller data is important and encouraging but not nearly as positive as it looks at first glance.

For one thing, house prices are supposed to rise in the spring; when looked at on a more meaningful seasonally adjusted basis prices are still falling, though at a slower rate than before.

For another, the relative improvement coincides with foreclosure moratoriums which are delaying but not eliminating the flood of repossessed houses.  One way or another these houses will need to clear the market and be a continued source of downward price pressure.

Rather than a recovery we are probably facing an extended slow descent in house prices. Compared to how things looked in February this is good news.

Inventories of unsold houses are declining, though they are still unusually high, and housing starts actually rose in June, though again from historically very low levels.
All in, it looks like a tentative recovery in housing activity, which will feel very good indeed after the past two years.

In combination with a bit of inventory restocking, after all there is some final demand in the economy, you might even call it a recovery.

But rather than springing out of bed and hurtling back to work, the U.S. economy will be like a recovering swine flu victim with little energy and very susceptible to a relapse.

“The normal cyclical dynamic in which housing, consumer durable goods purchases, and investment spending rebound in response to monetary easing is unlikely to be as powerful in this episode as during a typical economic recovery,” New York Federal Reserve President William Dudley said in a speech on Wednesday.

“There are a number of factors which suggest that the pace of recovery will be considerably slower than usual,” he said.

America is still “long” housing, its just that too many of the houses are not in the right places and too many are owned by people who’d be better off renting.

We’ve seen the homeowner vacancy rate decline, but the rental vacancy rate rise to record highs. Even if we believed that the price adjustment was over, it would be hard to underwrite a strong economic rebound on the back of housing in the current circumstances.

BALANCE SHEETS REPAIRED, CONSUMPTION IMPAIRED

The key to any recovery is consumption, which at 70 percent of the U.S economy may well be at a generational high.

Even if house prices don’t fall very far from here, they, along with stock prices, are down enough to have dealt a very serious blow to the average household’s balance sheet. Quite sensibly, if a bit surprisingly, people are attempting to fill that hole by saving.

According to U.S. Commerce Department data the savings rate rose to 6.9 percent in May, the highest since the end of 1993 and up from just over zero in early 2008. Who’s to say too that Americans don’t continue to increase their savings from here, perhaps back up to 8.0 percent or more.

Unemployment is rising and will take some time to fall and there is a growing realization that given growing life expectancy people’s pensions are woefully underfunded.

Income growth is not going to rescue consumption either.  The New York Fed’s Dudley pointed out that despite cuts in hours worked and lousy wage gains, incomes in the first half of the year were boosted by a number of one-time factors, such as falling energy prices and a one-off payment to Social Security recipients.

A higher savings rate and poor income growth add up to a really profound check on consumption spending, something that will make earnings growth for many companies difficult despite savage cost cutting.

I’d bet too that income growth recovers long before the savings rate falls. Business plans or investments strategies based on growing consumption in the U.S. are going to be losing ones for quite some time.

And of course there is commercial real estate, which is not only the single biggest landmine for banks but will be a source of further outright contraction as current projects are completed and developers, businesses and their banks shorten their sails.

Construction, once begun is carried through but who will be breaking ground on new projects?

None of this is necessarily bad, and again, is actually pretty good compared to where we were just a few short months ago. But a world in which Americans save and pay down debt and where banks lend cautiously while rebuilding balance sheets may not be one where current stock market values are validated.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

– James Saft is a Reuters columnist. The opinions expressed are his own –

Deep breath. Ok, here goes: For the first time in a very long time U.S. housing might actually be a reasonable buy on a five-year view.

As a long-time housing bear and someone who believes there is still considerable pain to come in the U.S. economy and banking system that is quite a hard thing to say.

However historically cheap long-term fixed-rate financing (less than 5 percent on a 30-year mortgage) and the prospect of some nasty inflation a year or two out, both courtesy of current Federal Reserve and government policies, make owning a real asset that is debt financed a lot more attractive than would have been the case just three or six months ago. For full coverage of the U.S. housing market click here.

What I am not doing is calling the bottom of the housing market; there are still reasonable falls to come on top of the 20 percent or so declines we have already seen nationally.

Futures show an expected decline of about 4 percent on the Case-Shiller 20 City national index between May of this year and May 2010 and a recovery to current levels only in 2012. I actually think it might get a good bit worse than that; there are still substantial repossessions that need to filter through, unemployment will surely rise from here and an economic recovery, when it comes, will likely be pretty weak. This is not an argument about the housing cycle turning and leading us, as it has so many times before, out of recession.

Having said that one very important thing seems clear: the Federal Reserve will do what it takes, and very possibly a good deal too much, to stop deflation.

Indeed, there is a reasonably high risk that inflation will get away from the Fed or that buyers of Treasuries take a pass. This inflation will be very handy for those who’ve leveraged up to buy housing.

Economist Tim Lee of Greenwich, Connecticut-based pi Economics, a long time “deflationista”, now thinks that while deflation may still have the upper hand, current policies will inevitably be inflationary.

“The amount the Fed is doing will be enough to cause inflation, and I think that’s even if economic growth is fairly poor,” Lee said in an interview last week.

Broad money supply in the U.S. is rising at a more than 14 percent annual clip, the fiscal deficit will be about 13 percent of GDP this year and the Fed’s balance sheet has ballooned.

A REASONABLE ALTERNATIVE

And while housing won’t exactly thrive in a period of high inflation and low growth, it may perform reasonably well compared to the alternatives. Government bonds will get whacked by inflation and stocks may do a bit better than bonds over the medium term though they will suffer as the quality of earnings declines.

Stock market investors now are conflating the end of the very steep declines in the economy with a return to productive investment and a sustained rebound that will drive profits. That might be an optimistic reading. Stocks do offer some protection against inflation but they are far from a perfect hedge.

It is also heartening that investors are returning to many of the hardest-hit real estate markets in the U.S., such as Florida. These are people who do not rely on a lot of leverage and are happy to take the very positive cash flow from rents.

Mortgage rates are at an all-time low despite the absolutely terrible performance of recent vintage mortgages. This partly reflects the very low interest rate environment, but also is a function of the Fed intervening directly into credit markets in order to drive down rates to below where they very likely would be if investors demanded the kind of premium you would expect given recent experience. It also remains true that if things become really terrible, you can always walk away from a loan in the U.S., though it is pretty unlikely that this comes into play for a borrower who puts 20 percent down now.

Remember too that stabilization in the housing market is an absolute precondition for a recovery in banking and the economy generally, and it is clear from the steps the Fed and government have taken, in driving rates down and keeping the taps of government insured loans flowing, that they understand this and will act on it.

They will likely not be successful enough to save some of our largest banks, and all too successful from the standpoint of staving off deflation, and for someone borrowing at five percent interest for 30 years to buy a house in a part of the country which is not dependent on financial services, they may be very successful indeed.

It almost certainly won’t look that way in a year, but could well in five or seven.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

]]> http://blogs.reuters.com/great-debate/2009/04/22/an-emerging-opportunity-in-us-housing/feed/ http://blogs.reuters.com/great-debate/2009/02/26/first-100-days-a-fix-for-the-housing-crisis/ http://blogs.reuters.com/great-debate/2009/02/26/first-100-days-a-fix-for-the-housing-crisis/#comments Thu, 26 Feb 2009 21:10:16 +0000 Elena Panaritis http://blogs.reuters.com/great-debate/?p=2242 – Elena Panaritis is an institutional economist. She spearheaded property rights reform while working at the World Bank, and lectures at Insead, The Wharton School and Johns Hopkins University-SAIS. A social entrepreneur, she now heads the investment advisory firm Panel Group. Her recent book is “Prosperity Unbound: Building Property Markets with Trust”. The views expressed are her own. —

In his speech to Congress, President Obama spoke of how the proper response to the economic crisis is not just a matter of immediate fixes, but also an opportunity to make investments that will serve the nation’s long-term interests. The same idea should govern the housing recovery plan. Otherwise, we get nothing more than a crutch when we need a cure.

As much as short-term help is needed to keep more people from foreclosure, there is a big opportunity to get to the end of the crisis by starting at the beginning of the problem. The conventional wisdom is that subprime mortgages represent the beginning. In fact, the beginning goes back much further. The current crisis stems from the absence of a system that provides stability to the value of properties in the United States.

Instead, real estate “value” in the United States continues to be set through speculation, and that undermines the security – that is, the underlying asset – when mortgages are traded as part of complex financial instruments. We cannot ignore a simple truth of economics: if we are going to treat mortgages as securities, then they must be secured by the tangible asset: namely, land and buildings. To do otherwise has proven to be a recipe for disaster.

The opportunity before the U.S. government with a housing recovery plan is to set up a new system that will keep us from ever getting to this crisis point again. How? The devil is in the details.

It’s no accident that other countries, even those that trade mortgages as financial instruments (such as Australia and Canada) have avoided the levels of off-the-cuff valuation of property we’ve seen in the United States. The reason is that other countries have standardized the information needed to determine the genuine value of real estate and hence mortgage valuation.

This information – actual boundaries, property transfers, claims, liens, and so on – is made available to everyone. The system is sound and transparent. And where do they keep this information? In national property registries, which maintain all the data, in a standardized format, that buyers and sellers need to undertake transactions related to real property.

The United States has a broken registry system, and instead of ever fixing it allowed a title insurance industry to arise as a substitute. Title insurance is non-transparent and (at best) inconsistently regulated, yet it is the main system through which information about property valuation flows. Plus, you have to pay for the information. This leads to all sorts of problems, and fuels speculation.

The Obama Administration’s housing recovery plan ought to look forward. Help people facing foreclosure today, yes, but also establish a national, standardized property registry responsible for the collection of all titles and all information about characteristics of property. Even statewide registries would be a tremendous improvement.

The first step is to mandate an agency to gather whatever exists in state and local registries and title insurance companies around the country, no matter how inadequate, and centralize and standardize that information. Then, establish a mechanism for making this information available to all. Further, figure out how to fill in the missing information. Finally, create a system for the registry to provide remediation in the case of errors.

It is critical that we correct how the value of real estate is established. By finally securing the asset, we can guarantee long-term price stability and rid the system of the speculation that has put us in this crisis. Let’s look at the current housing crisis as an opportunity to make this long-term fix.

This isn’t about setting property prices now and letting them remain static. Rather, it’s about letting a dynamic property market flourish in a way that protects Americans from having to bail out banks or themselves in the future.

The U.S. government should just get out of the way and allow the crash in U.S. housing; the market is too big, has too far to fall and Americans’ finances are too strained.

President Barack Obama’s measures, unveiled on Wednesday, are part of a $275 billion plan to try and stabilize the housing market and prevent foreclosures. It aims to encourage lenders and their agents to cut repayments for homeowners in difficulties to lower, more affordable levels as well as other steps.

The reasoning is that there is a largish group of borrowers within the U.S. real estate market who may slide into default because their loans are too big and expensive or because they have run into temporary cash flow issues.

Give them a cheaper loan and you break the circuit of foreclosures, more stock coming on to the housing market driving prices down further and giving other mortgage borrowers more incentive to simply walk away from their debts.

There may be some who are successfully modified out of their troubles, but they will be outnumbered by those who will only default again, or even worse in some ways, by those who keep paying on an asset that isn’t worth the underlying loan.

“You probably have about two to three million homes that we overbuilt, a lot of those have to be converted to rental units. We overbuilt on the high end of the market. We just don’t have enough people in this world who can afford these high-end homes,” said Paul Miller, a banking analyst at FBR Research. “Government should just get out of the way.”

While the maths often cited is that a repossession and sale can cost a lender 50 percent of the value
of the loan, that rather attractive number hides the fact that modifying loans successfully is just very difficult.

Data from the Office of the Comptroller of the Currency shows that more than 53 percent of loans modified in the first quarter of 2008 had re-defaulted again within six months. Nearly 36 percent went bad within just three months. And this was when the U.S. economy was in better shape than it is today and unemployment lower.

Now it may be that those modifications were given to the wrong people and under the wrong terms, and it may also be that the new plan makes that all right. But I doubt it.

LET’S FIND A CLEARING PRICE

The Mortgage Bankers Association did a study in 2008 http://www.mortgagebankers.org/files/Research/LoanModificationsSurvey.pdf that found 70 percent of foreclosures were on properties either not occupied by owners, were on borrowers who could not be found or did not respond, or on borrowers who had already had a modification and were defaulting again. Of the 30 percent not in those categories must surely be quite a few of tomorrow’s re-defaulters!

The housing rescue plan is in part an attempt to rescue banks, whose balance sheets will be further undermined by falls in house prices and defaults causing many more failures. The bottom line is that many Americans who now have mortgages would be better off renting.

American consumer balance sheets are incredibly stretched. The average American has perhaps 30 percent of equity in his house, but that hides the people who own outright, thus leaving a huge rump, especially at the bottom end, who have very high loans-to-value. About 28 percent of mortgage borrowers now owe more than the value of the house, according to Zelman & Associates. And with stocks down 45-50 percent their assets have shrunk more alarmingly, leaving them less good risks.

There is an absolutely credible argument that many Americans, particularly less well off ones, would be better off out of home ownership entirely. They would rid themselves of the yoke of a mortgage on an asset which, even after a principal write down, may not end up being a good investment.

“They are going to try and keep you in a home that arguably you don’t want to be in. You might be able to go up the street and rent for half the price,” said Ivy Zelman, a housing analyst who was early in identifying the issues.

A person paying rent and with the flexibility to move to where there are jobs is better off than one anchored to an underwater mortgage in a town with high unemployment, even if the lender has to go bust in the process.

Prices of housing in the U.S. were driven too high by too much leverage even as supply increased. Let’s accept that, allow prices to fall, the banks to fail and start again on a new stable footing.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, click here. –

As I calculated the investment loss since the steep decline in the markets began, and particularly since the collapse of Lehman Brothers in mid-September, some questions arose (in addition to: Will I ever be able to retire?).

--Did we in the media do our job in reporting on the run-up to the crisis?

--Now that an “official” recession has been declared in the U.S. and the depth of the crisis is becoming clearer around the world, are we in the media keeping things in perspective? Should we even be using words like “crisis” or “meltdown?”

On the first question, I can’t help thinking of Claude Rains’ “Casablanca” character Captain Renault, who was “shocked, shocked to find that gambling is going on” in Rick’s club. In hindsight, given the current state of the financial markets, wasn’t it obvious a problem was brewing?

Not necessarily. And it probably wouldn’t have been obvious to anyone reading online or print coverage or watching television news in the United States.

A look at a study by the Pew Center’s Project for Excellence in Journalism indicates that, in the United States, coverage of the economy was pretty much drowned out by coverage of the presidential election—at least until the two stories converged in mid-September. Indeed, as the Pew material shows, in the month preceding the week of Sept. 15, which saw the Lehman bankruptcy, the Merrill Lynch sale, the AIG bailout and large drops in share prices, the proportion of the news hole devoted to the economy reached a low for the year, filling only 4.8 percent of the time on television and radio and space in the print and online media. Since then, that focus has shifted, as the presidential campaign narrative became, again, “it’s the economy, stupid,” and as the presidential transition has focused on U.S. economic problems.

Reuters News Editor-in-Chief David Schlesinger is skeptical that financial journalists could have done much more to predict the depth of the crisis.

“Journalists do best when reporting what's happening and giving the news context and analysis,” he said. “We also do well when we look backwards and discuss past events from the perspective of the present. We do least well when we prognosticate. While our reporting and commentary did discuss potential weak points in the economy, we did not -- and nor frankly could we -- accurately predict the calamitous events of this year.”

Schlesinger worries, though, that there was a certain inevitability to the crisis and that the media played a role.

“I do worry about the narrative lines of reporting that contributed to the crisis,” he said. “To take just one example, much of the crisis was caused by banks taking on excess risks in the pursuit of higher profits. Yet had a major bank president stepped back from that fray and declined to participate, the ‘grammar’ of our results reporting would surely have compared that bank's results negatively against expectations and against its peers.

“That brave bank president would surely have lost at least his bonus and probably his job. The very fear of that kind of negative comparison helped spur things on -- as Citibank's ex-CEO Charles Prince said (while still in his job), ‘As long as the music is playing, you’ve got to get up and dance.’

“We in the media help play that music, probably exacerbating the highs on the way up and the lows on the way down.”

So did our reporting help change the tune that was being played? Did it raise questions about the factors that contributed to the crisis, including complex financial instruments, subprime mortgage lending and excessive risk?

To fully answer that would require a deeper analysis than we have room for in this space, but there is evidence that questioning notes were sounded.

As early as Aug. 18, 2003, a Reuters story quoted Fed governor Edward Gramlich citing the dangers of “predatory lending” in extending subprime credit. By 2006, the pace had accelerated. A Factiva search of Reuters News found 128 stories that mentioned the phrase “subprime mortgage” that year, including a number in which analysts predicted a deterioration in credit quality. The crescendo came in 2007, when there were more than 10,000 stories that referenced subprime mortgages and when Reuters.com built a special section to house material on the issue. That section developed into the current Crisis in Credit and Housing Market sections.

Still, the overall “music” was loud and infectious and it’s easy to understand why so many couldn’t stay off the dance floor.

Now that the crisis is here, some are accusing the media of deepening the problems. Richard Lambert, director general of the CBI, a U.K. employers group and a former editor of the Financial Times, said “careless headlines or injudicious reporting risk becoming self-fulfilling prophecies of a very serious nature.” He urged journalists to be especially vigilant in their fact-checking and called on the press to avoid such words as “panic,” “fear” and “chaos.”

He also suggested that journalists should cut bankers, regulators and politicians a little slack, since “precious few journalists gave any hint at all of what was about to come.”

The FT’s Lex column (Note: subscription required) accused Lambert of shooting the messenger and lamented that some would “seek to clamp down on the fourth estate…, hoping regulation will recreate a golden age when the business press was a tamer, more deferential beast” that “could be hushed up in times of financial turbulence.”

But those days are gone, as Lex put it. “The digital revolution, by lowering entry barriers and intensifying competition, has put paid to all that. It will not return.”

And good riddance. As a card-carrying lover of the First Amendment and the digital revolution, I’m happy those days are gone. But with our freedom comes a sometimes frightening responsibility, especially in troubled economic waters.

As Schlesinger says, “We have a responsibility to be careful, and most of our reporting has been very careful. But we too have played some discordant notes and we need to learn from that.”

What do you think? Did we in the media do our job in reporting on the financial crisis, both before the market collapse in September and since? Are we being careful enough not to sow panic and make things worse? How can our reporting help you weather the storm?

Please post your comments here.

I’ll be using this space regularly to explore issues arising from Reuters and other media coverage of the world and to have a discussion with you. Among the topics I plan to look at: the dangers and rewards of covering religion; the use of anonymous sources; the debate over shield laws for journalists, and much more. I’ll also be providing lots of space for you to have your say.

In the meantime, I’ll be watching that retirement account.

Dean Wright, Global Editor, Ethics, Innovation and News Standards

Britain needs to reflate its mortgage markets to save its economy and its banks. Problem is, few want to borrow and there is precious little money to lend.

British property prices are down about 15 percent in a year and mortgage approvals are down 52 percent. Given the freeze in the securitization market and the scarcity of savings in Britain, new net mortgage lending may even fall below zero in 2009, according to James Crosby, former head of UK mortgage bank HBOS, who authored a government report on the mortgage market.

While the Crosby report rightly points out the damage that such an unprecedented fall would do to employment and the economy, it is also worth pointing out that it would be dire indeed for another segment — the banks, which ultimately will suffer the losses as borrowers fall into negative equity and default or lose their jobs and default.

Britons simply don’t save enough to supply their banks with enough to lend to fund the debt requirement implied by their housing prices. That circle was squared in the old days by borrowing money from abroad, either through banks borrowing and re-lending or via securitization.

The solution to this advocated by Britain, as laid out in the Crosby Report and endorsed by finance minister Alistair Darling, is to plaster a government guarantee on up to 100 billion pounds of mortgage securities.

The securities would only contain house purchase loans and would be highly rated by, you guessed it, the same agencies that rated the old, now discredited stuff. The securities would also exclude nasty high loan-to-value loans, or loans made to people who have already demonstrated they are not that good at paying back money.

The theory is that investors may not want to buy mortgage backed securities, which look a bit dubious given the expected fall in house prices, or lend to British banks, which look a bit dubious for the same reason and several others, but will be very happy to buy bonds that while backed by the British government  pay a fair whack more than government debt.

OH LORD, MAKE US SAVERS BUT NOT YET

There are, I think, some problems to this approach.

“I’m all in favor of finding ways of encouraging a sustainable rate of mortgage lending but I’m not entirely confident that the best way to do this is to resurrect a form of lending that for rather good reason has fallen out of favor,” Bank of England governor Mervyn King told parliament this week.

And even if we all agree to forget recent experience with securitization, there is the issue of who, exactly, is going to buy these guaranteed bonds, and who will buy all the houses these loans will fund.

The idea that there are real money or central bank investors out there who will pay a great price for these bonds is not supported by the evidence. Look at the United States, where the government has been slapping government guarantees, or wink, wink “implicit” guarantees on all sorts of financial paper.

Goldman Sachs, which used to borrow on its own name, this week sold $5 billion of bonds under a Federal Deposit Insurance Corp guarantee. The bonds paid about 200 basis points over equivalent government bonds.

That’s crazy, I hear you say. To paraphrase Keynes, the markets can stay crazy longer than you can stay solvent.

Or look at paper issued by Fannie Mae and Freddie Mac, which are under government conservatorship and enjoy an “implicit” guarantee. Their bonds have done so stunningly badly in recent weeks, as foreign central banks deserted them in droves, that the U.S. government was forced to go in and buy them up themselves.

My best guess is that, even with a fat premium, the world will have all it can handle of sterling denominated British government risk in the coming years.

On the other side of the equation, you have to wonder which buy-to-let investor or potential house buyer is out there who is a) a good risk, b) possessed of a 20 percent down payment and, c) willing to buy an asset that is losing two percent of its value a month.

So, it’s looking like the fall in British house prices will be deeper than expected, and probably deeper than deserved. If you look at the U.S. experience where a higher percentage of loans were securitized and thus tended to end up not on bank balance sheets, that is bad news for the banks.

Ask yourself what would happen to Britain’s banks under similar circumstances. It might only be as bad as the 1990s, but it could be worse.

Bank liabilities in the United States are about 20 percent of the size of the economy. In Britain, the figure is 285 percent.

Ask yourself then what might happen to Britain itself.

–  At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –