Here is a nice chart I purloined from Calculated Risk. I added some color to it to give it some pizazz. This graph shows the distribution of home owners with loans on the books. Statistical sources allude to the fact that 40-50 percent of all real estate is paid off, so this chart represents about half of the market.
If real estate drops 30% the red sector will be upside down. If housing prices drop 50%, then include the yellow area in the total. Figure a worse case scenario of a 50 percent drop, one fourth of all housing has the potential to become "Jingle Mail."
People in the purple band have no equity to lose. Those foreclosures were the first to affect housing prices. Now the home owners in the red region are in trouble. Bank REO's are pricing into the yellow region right now. The red and yellow areas represent cash that was in the home owner's wallet. It's slowly disappearing. Figure about 25% of home owners in the United States have a good shot at losing their down payment and paid in equity. This will affect consumer spending for many years into the future. A drop like that could take the "hurry" aspect out of any future home purchase.
50K off the price of a house in Colorado is different than 300K off of a house in Kalifornia (the pain is not evenly spread out). Examine the disappearing equity. It came from no where and is going back to no where.
Today's home owner is like a baseball player loaded up with Viagra, Ex-Lax and steroids. He doesn't know whether he's coming or going, but he's definitely going to set some records.
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