Only a few months ago, analysts were still predicting a soft-landing in housing. But sales of new homes sales plunged 21.6% in July from the year earlier. Inventories of unsold homes soared and prices fell. The housing market is falling much faster than expected. Similarly, so far it has been sustained that banks' earnings would be only modestly impacted by the softening mortgage business. If there is a recession in the housing market, the banking system cannot avoid losses. In the figure you can see the Philadelphia KBW Mortgage Finance Index (MFX). Prices are just 10% below its May high. Prices should be stable in the intermediate term. So far, banks have only seen modest drops over the past few weeks. The Philadelphia Bank Index (BKX) has lost less than 2% from its early August high. Most banks are diversified to face a housing downturn. In the present housing boom, however, banks have activated new and exotic types of mortgages to buyers. The level of the banks' exposure to real estate is unprecedented, representing close to 60% of their earnings. Unprecedented is also the size and importance of real estate relative to the entire U.S. economy. Defaults of mortgage payments would force lenders to take charges for unanticipated losses or boost their reserves. Those facing the most immediate risk are mortgage lenders. Higher interest rates, record-high gasoline and energy prices is pinching overly indebted consumers. As a conclusion, markets might not have perceived yet the housing market's gravity of situation and the potential impact also on the bank sector. However, it is possible that a pause of the interest rates hike process might provide the necessary support to the mortgage sector and bank sector.
In the figures you can also see the trend conditions of 67 real estate stocks. You can also see the candlestick printed on Friday 1 September. On average the situation is not so negative with a good number of stocks (22) with their close above the 20, 50, 100, 200 moving averages.
I agree with much of your view but not the final doom & gloom.
Housing has been feeding US consumerism. Leveraging home equity has allowed average suburbanites to indulge themselves. There is a portion of the market exposed to a negative valuation, where falling prices make the debt on the property exceed the value of said property.
A slowdown in consumerism which leads to a mild recession would mainly affect those whose jobs are tightly linked to the manufactering and retail economy. These are generally people with less than white collar and professional incomes.
Historically people do not walk away from their home unless the situation is dire. That said, I see the banking risk on those lenders who cater to the sub-prime market to capture a higher return.
The key factor here is 'mild recession'. In a prolonged deep recession then all mortgage lenders are exposed.