The Economic Situation (4) - Housing Crash

The collapse in house prices has already begun. The situation is worst in the UK and the United States, but a slump in house prices is spreading round the world.

The construction industry will be quiet for the next few years. An enormous number of unwanted houses have been built. Selling this backlog of houses will take several years. Many people in the construction industry will need to find different work.

Most homeowners will not be seriously affected by the decline in house prices. Provided they remain in work and are able to pay the interest on their mortgage, they will be able to sit out the crash and wait for house prices to increase in a few years time. This might not happen soon. In previous cycles, at least five years went by before houses prices returned to the peak of the previous boom.

Those who will suffer are people with high levels of debt who have to sell their houses. This should be relatively rare, but some people who get sick or lose their jobs might be unable to maintain their mortgage payments and be forced to sell. Some will find that the price they get for their house is less than what they owe their bank. This will be very painful, because they will still owe their bank money without owning a house.

Lawyers usually do not suffer. They will earn less from conveyancing, but they will make plenty from foreclosures and sorting out the credit tangle.

Freddie Mac, Fannie Mae, Ginnie Mae and Britney Spears may all go belly up. This will be painful for shareholders in these companies, but homeowners will still have to pay their mortgages. It will leave American taxpayers in the strange position of guaranteeing their own mortgages.