Housing market/ banking industry. What's going to happen?

[Greywolf]

Housing prices plummetted. Banks have loans on these houses. Banks invest people's payments in other things or loan that money out for other purposes. Banks rely on payments that haven't happened yet.

When more people start defaulting on their payments and banks can't comply with their obligations, what happens? Who is affected?

[Mark H]

Housing in overinflated markets will go down probably 20-30% but it will take a few years; these are illiquid assets, so the prices don't adjust until people are forced to leave/sell

The banking industry has had a lot of extra income streams due to easy credit the past few years, some of those will dissapear, others will shrink. Earnings expectations will be slashed in the near term but it won't kill the banking industry, just push it back to the size it was say around 2004.

Banks reserve X% of their portfolio of loans assuming some % will not pay and default - they will have to increase this %, and its a hit to earnings but part of their business.

[William]

well check out the sub prime crisis right now Generally the price of your house going up or down is not as important to the bank as you continuing to make your payment timely. The big issue was with the housing boom in terms of prices, a lot of the sub-prime lenders, who lend to people with poor credit got catch when they defaulted. The banks expected the market to continue up and knew they would have defaults but didn't care. Now that they are having the defaults, they are in trouble since the market value is less than the loan.