The Future of the
Subprime Crisis The Chairman of the Federal Reserve testified before Congress on November the 8th, warning of a significant slowdown in economic growth during the next several months. The severe housing slump brought on by the subprime mortgage crisis, he said, has put significant pressure on both the real estate and financial markets. It has also deeply hurt consumer confidence and consumer spending – the latter makes up approximately two thirds of the economy. Oil is currently hovering around $97 dollars a barrel, the dollar is in free fall after the central banks of Britain and the EU refused to lower rates, and many economists are warning of a recession during the time that the always-optimistic Fed is predicting a slowdown. So, economists are hoping that most of the damage to the housing market from the subprime crisis has run its course and now just the ripple effects are playing out across the rest of the economy. Testifying before Congress about a year ago, the President of the Center for Responsible Lending predicted that 2.4 million homes will eventually face foreclosure from the subprime crisis. At the time, this estimate was considered by some economists to be an excessively large figure created by a consumer rights organization with an agenda. Today, Congress' Joint Economic Committee estimates that, through August of this year, 1.7 million homes were lost. Looking only as far as August of 2009, it estimates that up to another 2 million homes will be lost. So, by the most simple barometer, the real estate industry has already felt the effect of about half of the subprime woes. Of course, this is an overly simple measure of the impact of the crisis. Once recognition of the problem occured, markets began pricing in the future impact of the housing crisis. However, markets rarely are capable of accurately pricing in the macroeconomic effects of their industry. And in the case of the subprime crisis, real estate and housing are only part of the picture. The financial industry – which is to blame for the whole scandal in the first place – holds the vast majority of the debt. The financial firms believed that they could always sell the debt for a relatively small loss. Or, in the worst of scenarios, the home itself was sufficient collateral. However, as the markets recognized the depth of the subprime crisis – Citibank admitted another $11 billion dollars of losses just several days ago – few players became willing to purchase the debt. The value of the actual houses, of course, also quickly plummeted. Thus the owners of the debt were saddled with billions and billions of debt that they could not get rid of. In summation, foreclosures will continue to rattle the housing market for at least another two years. The financial industry is far from done feeling the fall out from the subprime crisis, and adequate government intervention seems a long way off. The subprime crisis, sadly, will be around for some time to come.
 Copyright © 2007 Elika Associates. All rights reserved - Print this page - Return to Top of Page |
