2007 promises to be an interesting year for housing. The tide has definitely turned in many of the more bubblicious markets like Southern California, Las Vegas, parts of Florida, etc. The Housing Bubble Blog is a great place to check up on all of the agony people in other parts of the country are suffering thanks to our good friends at the Federal Reserve, who are responsible for the asset bubble that housing has become over the last few years.
For a good overview of where things may be heading, check out Mike Whitney’s article, “The Fed’s Role in the Housing Crash of ’07,” which does a great job of outlining both the history of where we’ve been, and where we likely are going. Home construction has made up a larger part of the US economy in the past few years (just look at how many realtors and loan officers there are in parts of the country), and Americans have kept their spending up by constantly pulling out more and more equity from their homes, helped in part by interest-only ARMs, “125%” loans, and other traps. If the foreclosure rate jumps later this year as it projected when the first wave of ARM’s starts resetting, the ripple effect could be huge, and it could leave a number of people owing more on a house than they can sell it for. Over $1 trillion worth of ARM’s are due to reset in the next year. Even one percent of those ARM’s resulting in foreclosure will create havoc in the housing market. Thanks, Mr. Greenspan.
Several subprime mortgage originators have closed up shop in recent weeks, and the graph of the ABE.XE index is pointing towards more bad news coming soon.
One interesting idea I saw recently was that people who are paying no-money-down, interest-only mortgages in essence have a ‘put’ option on their house. Since they are basically paying rent as it is, if the housing market goes belly-up, what’s to stop them from simply moving their stuff out, mailing their house keys to the bank and simply walking away? If my choices were struggling for a year or more to pay the mortage and then either declaring bankruptcy or letting the bank foreclose on the house or simply skipping the year’s worth of payments and going right to foreclosure, I’d take the latter. My credit is ruined either way, and at least I’d have an extra year to try and put my financial life back togther.
I think we’ll be seeing more families wrestling with problems like this as the year progresses. If the situation gets bad enough, I think it will be hard if not impossible to ‘contain’ the damage to specific regions of the country and/or economy.