We’ve often suggested that psychologically and emotionally, residential real estate values are extremely important to households. As you’ll see in the paragraph and graph below, home values appear more important to household net worth than are equities by a factor of nearly two to one. But based on the picture above, just how do you think the banks feel about real estate values? At the moment, their real estate exposure is approaching three times their loan exposure to commercial and industrial loans. The exposure of banks to consumer loans is less than one quarter of their exposure to real estate. In summation, to suggest that the market value of real estate is important to the US economy as a whole is a wild understatement. It’s just a good thing that the new age structured finance markets are leading the charge in terms of helping to inflate real estate values from sea to shining sea. We’re absolutely dead sure that if any mishaps in the structured finance market were to appear, holders of MBS and ABS securities would sit tight as long term investors, right? No jumping off the side of the ship if the opposite side of the leverage sword begins to cut. After all, somebody has to support those real estate values collateralizing the bulk of bank lending and portfolio investment in this country, no?
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Tulips, anyone?
Ulp.
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