Today on Calculated Risk (see link to his website in the sidebar), CR placed a post about expected rising foreclosures -- which is expected to rise to 4% of mortgaged homes, an unprecedented high.
What I think is not commonly discussed in the coming real estate crash and ensuing mass foreclosures is how many people counted on their home being paid off during their retirement years. Now many more Americans (how ever many it ends up being) will feel disenfranchised again. In the macro sense, this will only add to the sense that, in America, you now cannot make it as a success (financially, anyway) in life unless you already start with capital (born into wealth) or find some way to steal it (as in the accounting industry and law practice "all great wealth starts with a crime"). This is not good for the country.
Now that many ordinary middle class and lower middle class Americans have been sold on the fraudulent idea that housing always goes up in value and everyone can afford a home, the ensuing bust will lead to a sense of despair and depression in the same population. The psychological effect on these people will be much more severe than simply losing money in the stock market, and it will impact more than just those who lose their homes. The idea of losing your home will have, I think, a much more severe and long-lasting impact than the stock market crash did in 2000.
And don't forget the new bankruptcy law that makes it much harder -- and much more expensive -- to file for bankruptcy. That many more people will be priced out of the bankruptcy market and will not be able to have the "fresh start" that bankruptcy is supposed to afford. The threat of bankruptcy was supposed to put the risk on the lender, rather than the consumer, to make only loans that have a high likelyhood of being paid back. Traditionally, real estate loans were among the least risky of all loans. That is why the interest rate was so low. Owning a home was supposed to be a sign of stability.
This is just another example where the "risk of loss" has been shifted from the educated and wealthy to the ignorant and poor. Again, traditionally, we have moved away from the concept of caveat emptor ("let the buyer beware") to one where the seller accepts more of the risk of loss. The reason for this is that the seller, being a merchant in goods of a kind, was in a better position to know the product and the risks that could be suffered by the user or consumer. Therefore, we required the seller to make the product safe for the consumer, and, in the case of products liability, strict liability was imposed on the seller as a means of insuring that products were tested to be safe for the ultimate user or consumer of the product. We now seem to be shifting the risk of loss of debt to the consumer.
Another way that the risk of loss has been shifted away from the lenders is through the use of "tranching." Why bother making safe loans when you can merely sell the loan to someone else? Which leads to another axiom of great wealth creation: always play with OPM -- other people's money. That is exactly what the lenders are doing. They are playing with our money. Therefore the risk of loss has shifted from those who should be taking the risk -- those who best understand the risk and consequences, the seller -- to those who are least able to afford or understand the consequences: the consumer.
More on this later...