Fortune: By year-end, 15 million Americans could have mortgages worth more than the value of their homes. What happens then?
Krugman: Actually, I think home prices will fall enough for us to produce about 20 million people with negative equity. That’s almost a quarter of U.S. homes. If home prices are rising, or if there’s positive equity, you can refinance or sell. But if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away. We’re probably heading for $6 trillion or $7 trillion in capital losses in housing.
Krugman goes on to say:
So that’s about a 25% decline in overall home prices. Only a fraction of that’s happened so far. Of course, it varies a lot. In places like Houston or Atlanta, where home prices have not risen much compared with underlying rents, the decline will be relatively small. In places like Miami or Los Angeles, you could be looking at 40% or 50% declines.
File this one away for 2 years. I’ll predict that the stastement that almost a quarter of US homes will have negative equity will never be reached.
The reason is the middle of the country where excesses have not occurred. There’s a lot home there.