I blogged in my post How Big Are Sub Prime Losses? that the official estimate being repeated on news bulletins that the sub-prime mortgage crisis will be valued at around $400 billion dollars could be on the optimistic side. There were 2,000,000 foreclosures in 2007. Lehman Bros forecast that this would fall to about 1,000,000 for 2008 and 2009. It is therefore not a good sign that 2008 has begun with a 57% increase in foreclosure notices, and a 90% increase in actual foreclosures.
From the BBC website today - "Dollar Falls To Record Low" HERE
US foreclosures up 57% in January
The number of homes receiving a notice was up in 30 states
The number of homes facing foreclosure in the US rose 57% in January compared with the same month of 2007.
Exactly 233,001 homes received at least one notice about overdue payments last month, compared with 148,425 in January 2007, US property site RealtyTrac said.
There was a 90% increase in the number of houses being repossessed by banks compared with January 2007.
The forecasts made that sub-prime mortgage losses going to be limited to a manageable $400 billion are based on the Lehman Bros estimate of 4,000,000 houses being foreclosed total. If the price of houses continues to fall back from around 12 times average earnings to nearer the usual level of 6 times average earnings, there will be at least 15 million homes with negative equity. It would not be impossible for nearer 10 million homes to be foreclosed when all is said and done, triggering losses of $1 trillion.
If 2008 sees a 50% increase rather than a 50% decrease in foreclosures to 3,000,000 from 2,000,000 homes in 2007, the actual losses will be up to $500 billion by the end of 2008 alone.
The only way losses on this scale can be absorbed by the world's financial system, is if the Sovereign Wealth Funds from China, Japan and the Middle East continue to buy share issues from the bankers who hold these losses such as Citibank, Merrill Lynch, UBS and so on. (UBS has already declared $20 billion in write-offs, but has another $88 billion in exposures to sub-prime risky assets).
They have funds well in excess of the $1 trillion required. If they continue to shore up the world's banking system, as is essential if the world is to avoid a banking crisis to follow the mortgage crisis, the world will be a very different place by 2012 with Asian and Middle Eastern government owned funds controlling many of the largest financial organisations in the western world, which will owe their very survival to them.
There is every indication that such owners will be more hands-on than the previous pension fund owners of these banker's shares. Sovereign Wealth Funds will be less interested in running hazardous levels of risk-taking. The world's money will move from unfettered speculation on property and so on, in the west (at least) and more towards longer-term growth, lower risk, more sensible deployment. It will be good for share prices worldwide that people working, thinking and planning longterm will be better rewarded than the quick buck hedge fund speculators who made the running in the last decade.
Politicians too are talking of a return to a more strategic approach to the future. Blair and Clinton rode on the property and consumer booms claiming the credit. Obama says he wants to end the wastefulness and ensure that resources are more efficiently used. It would not be difficult to raise the standard of effectiveness, that is for sure., and the Sovereign Wealth Funds are likely to be one of the key agents that achieve this cultural shift.
The West will benefit from the mentality of Sovereign Funds as well as the actual money being crucial for their bankers' economic survival. Cameron in the EUK could start usefully talking about a more efficient deployment of resources than has been achieved by Labour since 1997. The basis of future competitiveness is today's planning, just as today's losses are the result of a lack of planning by those in control before, like Britain's Northern Rock debacle, for example.
We don't know if Obama's as good a manager as he claims he is (although he does seem to have more of a business brain than he's being given credit for judging by his taxation measures promoting employment and investment), but at least he's getting the message right. That's a good start. America cannot afford to keep losing too many $1 trillion.
UPDATE - From IHT 26th Feb 2008 - house prices falling at 20% per annum in the USA
A leading index of home prices in 20 U.S. cities fell 9.1 percent in December from a year earlier. Using a three-month moving average, the index, the Standard & Poor's/Case-Shiller, is falling at an annual pace of more than 20 percent. The index tracks repeat sales of single-family homes; it does not include condominiums. It fell 8.9 percent in the final quarter of 2007, the steepest drop in its 20-year history.
And Bank Of England Fears Largest Ever Peacetime Liquidity Crisis HERE (Daily Telegraph 27th February 2008)