Home price drop means $4 trillion in lost capital
By Walden Siew
No one knows when the credit crisis will end.
But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.
That's the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.
Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc, said in an interview that Wall Street write-downs and losses totaling at least $325 billion so far may ultimately mean $3.9 trillion in tighter credit conditions.
Moreover, home prices may fall as much as 30 percent from their peak in 2006 and not hit bottom until 2010, with greater drops still in subprime mortgage debt markets, he told Reuters.
"The housing correction is in a down phase," Acciavatti said during a high-yield bond conference in New York. "We're now going through a phase of deleveraging and the pulling out of easy money."
Credit markets also will be under pressure from massive write-downs and losses stemming from consumer debt. The International Monetary Fund has estimated write-downs from global investment banks may approach $1 trillion, while J.P. Morgan forecasts the figure may climb as high as $600 billion.
A senior Fitch Ratings analyst forecast more defaults and delinquencies for U.S. home mortgages, and said the highest default rates are coming from recent mortgages originating in the last few years.
"There are a lot more mortgage defaults to come," said Glenn Costello, a Fitch Ratings managing director. "We see an ongoing high level of default."
High-yield corporate bond default rates may climb to 2.25 percent this year and jump to 6.5 percent next year, Acciavatti said in a separate interview. The default rate is now 0.75 percent, up from 0.34 percent at the start of the year, according to JP Morgan data.
Acciavatti, speaking at the New York Society of Security Analysts conference, also said junk bond spreads will push past 800 basis points and may top 900 basis points as the crisis drags out. High-yield bonds now trade at spreads of about 650 basis points over Treasuries, according to Merrill Lynch & Co data.
Tightening credit conditions, high energy prices and weaker growth prospects mean that interest in distressed debt sales and trading may be on the rise, according to Jon Kibbe, founding partner at law firm Richards Kibbe & Orbe LLP.
Other analysts pointed to opportunities in the loan market for high-yield investors looking for value in other markets.