This week Countrywide draw down its credit line to finance operations, the US Federal reserve accepted mortgage backed securities as collateral in its repo agreements rather that just treasuries, and probably the most important event for the average homeowner is that Countrywide will not longer accept applications for or fund jumbo loans. Jumbo loans are loans that cannot be sold to Freddie or Fannie. Most single family homes in the Los Angeles area are over that limit. This effectively removes a huge portions of liquidity from the market.

Those with fixed rate loans, high income or reserves, or lots of equity can ride this market out just like many people did back in the early 90's. However, there are enough people with adjustable rate mortgages that are facing resets in the next year that home prices are likely to remain under pressure for another year or so. 

In returning to a theme I wrote about quite a bit last year, as long as employment stays at low then most people will not lose their homes and we will not see a repeat of the 90's. There will be isolated bargains as some will be forced to sell in this market. Most mortgages over the last 5 years are not adjustable rate mortgages, most people will stay employed, and most people will not lose their homes. Even during the Great Depression 75% of people were employed.

The severe tightening of the credit markets are making it hard on companies to finance operations and expansions. This is causing great uncertainty about the stability of employment. This uncertainty is a significant reason for the increase in stock volatility.

Real people have had real loses. If this becomes a bear equity market and inflation is not brought down, consumer spending will likely decrease. This could lead to a downward spiral where reduced consumer consumption then leads to more unemployment.

This scenario is just one of many that may occur in the months ahead. Thus far the world's central bankers have acted quickly to address the severe credit tightening . However, the probabilty of a recession has gone from unlikely to possible and that has introduced considerably uncertainty into the market. While everyone is hoping for a good outcome, a bad outcome is now more clear than previously.

It will likely be April of 2008 before all the uncertainly clears. This is due to the schedule of resets on adjustable rate mortgages. 

What should the average buyer do? Save, Save, Save! Narrow the location you are interested down to a short list. Monitor the market in case a bargain becomes available. Talk with at least 2 lenders. If that can't pass up home becomes available you want to be able to act quickly. Real bargains do not stay on the market long in any market. Of course, if you have the funds to buy now, know the location you want to live, and can get financing you are comfortable with, then buy. As long as you are buying wisely and plan on living in the home for years then it is extremely unlikely that you are making a bad move.

What should the average seller do? Price your home to sell or don't list it all. Visit all the homes for sale within 1 mile of your home that are similar. Know your competition. If you don't need to sell, don't.

At http://money.cnn.com/galleries/2007/fortune/0708/gallery.crisiscounsel.fortune/13.html you will find several views and perspectives. What Ben Stein says about the long term prospects for equity can be applied to real property as well.