US house price falls would wreak more havoc for banks

Gillian Tett:

A couple of weeks ago I visited West Virginia, USA, where some friends of mine run a small real estate business. As we sat in their yard on a balmy summer evening, I heard how realtors in this pretty, small town had been devastated by the housing crash.

So far my own friends have dodged the worst with canny financial footwork. And they cheerfully insist that the town can survive the wider damage, as long as prices stabilise or rise. "But if prices fall further, it will be terrible," one realtor declared - before insisting "we really don't think that's likely. Nothing can keep going down for that long."

Is that assumption justified? That is the $6,000bn dollar question, not just for West Virginia, but the wider financial system. After all, it was a turn in the US real estate market that triggered the financial crisis. And while many other financial disasters have since followed, the state of the US real estate market remains crucial to the banking world as a whole.

For not only does the health of the US consumer - and thus economy - remain tied to housing, but western bank balance sheets are tightly tangled up with property too. Most notably, America's largest banks, such as Bank of America, JPMorgan and Citi, continue to hold vast quantities of residential and commercial property loans on their books, in addition to all those loans that they previously repackaged as bonds, and sold on. So do numerous small banks.