by Calculated Risk on 1/11/2008 04:09:00 PM

From Bloomberg: Shiller Says Bank of America May `Have Some Problems'

``There's a tendency for people to underappreciate the risk of the housing market,'' Shiller said. ``I might have a lower valuation of Countrywide than Bank of America does.''
...
``Maybe Countrywide and Bank of America are going to have some problems going forward,'' he said. ``When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''

How far will prices fall? How many homeowners will be upside down? Will it become socially acceptable for upside down homeowners to walk way from their homes? What will be the impact on Countrywide (and BofA) if house prices fall 20%? If prices fall 30%? What if 10 million homeowners default over the next few years?

Those are some of the questions I'd be asking if I was at BofA. I've tried to quantify some of these numbers, and the downside risks are huge. From the earlier post:

The following graph shows the number of homeowners with no or negative equity, using the most recent First American data, with several different price declines.

At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

By the end of 2007, the number will have risen to about 5.6 million.

If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

The last two categories are based on a 20%, and 30%, peak to trough declines. The 20% decline was suggested by MarketWatch chief economist Irwin Kellner (See How low must housing prices go?) and 30% was suggested by Paul Krugman (see What it takes).

I think Shiller is correct; the risks from housing are still underappreciated.