Thursday, March 13, 2008

One Hundred Billion

$1.2 trillion of sub-prime mortgages were issued between 2005 and 2007. S&P estimates that losses on these loans will be $285 billion. They also assigned AAA credit ratings to 85% of the sub-prime CDOs. Stocks are up today on news that S&P sees an end in sight for the ‘sub-prime’ market.

S&P has someone’s agenda.

Sub-prime means nothing at this point. Real estate values nationwide dropped 8.9% last quarter on a $20 trillion asset; erasing $2 trillion in real estate wealth, probably half of which belonged to the bank. $460 billion worth of adjustable rate loans will reset this year and real estate values will continue to fall.

In my micro-world, homes that sold for $80,000 in 1998 (in a stable market) sold for $215,000 at the peak, and are now selling for $135,000. That number will probably go lower as people who need to sell their homes are forced to sell at market rates, dropping comparable prices. Builders I know are selling below cost to liquidate inventory. There were around two hundred sales per month at the peak and twenty sales per month now.

A 35% drop in home values would erase $7 trillion in real estate wealth, probably half of which used to belong to the bank. The Fed has printed $400 billion this week. The Fed is just getting started. Germany dropped the gold standard in 1914. The image is a 100 Billion Mark from 1923. It bought two beers.

Update: I missed the Doctor Evil reference in the original post.

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