The NYT today fronts a big state-of-the-meltdown
story, keyed off Merrill Lynch’s losses yesterday. It doesn’t quite come out
and say that we’re going to have a recession (David
Wessel does that, in the WSJ), but it doesn’t shy from throwing around some
really big numbers.
At this juncture, economists say the troubles in the mortgage market could,
all told, cost financial firms and investors up to $400 billion.
That is far more than the roughly $240 billion cost, adjusted for inflation,
of the savings and loan crisis of the early 1990s, according to estimates
of the combined financial toll of that crisis on both the federal government
and private sector. The loss in total real estate wealth is expected to range
from $2 trillion to $4 trillion, depending on how far home prices fall, according
to several economists.
That would be significantly less than the losses suffered by investors in
the stock market collapse earlier this decade, which erased more than $7 trillion,
or about 40 percent, of market value.
This is well-phrased, since there are losses, and there are losses. If a stock
goes up and then goes down, you can talk, as the NYT does, of market value being
"erased" – but the only people who actually lose money are those
who buy high and sell low. Similarly, unless and until your house is sold in
foreclosure proceedings, you haven’t really lost money, you just have fluctuating
equity in your house.
Which isn’t to say that people don’t monetize their equity in other ways: there
was the famous "wealth effect" during the dot-com boom, when people
spent more because they were wealthier because their stocks went up. And in
the case of housing the link is even clearer: many people have bigger mortgages
now than they did when they first bought their house, because they’ve been refinancing
at higher valuations, using the proceeds for anything from paying down credit
cards to going on vacation.
So some significant but unknown portion of the drop in real-estate values will
end up causing real pain to people who spent equity they now don’t have. But
the $400 billion number is much more concrete. If you buy $10 million of a security
at 100 cents on the dollar and you mark it to market daily and it’s now only
worth 50 cents on the dollar, you’ve lost $5 million, and that’s a real loss
of real money.
Of course, all these numbers are estimates, with enormous error bars attached.
$400 billion? It could end up being half that, or double. And the real-estate
numbers are fuzzier still: are we aggregating the drop in value of all properties
which have dropped in value? How do you determine how much a property was worth
at the peak of the market? And if all that new construction drops in value because
it’s not new any more, does that get included too? (McMansions have always dropped
in value the minute somebody moves in, although that drop in value can be erased
by more generalized house-price appreciation.)
Direct losses in the housing market are much smaller than the trillions of
dollars of value being erased:
The Joint Economic Committee estimates that the lost of real estate wealth
just from foreclosures on subprime loans will be about $71 billion.
But even so, it does seem as though cash losses in this meltdown might well
exceed those during the dot-com bust, not that either number is really calculable.