It's the worst nightmare in the real estate business (construction, appraisal, sales, escrow, title, mortgage loans and all). The Ponzi scheme has began to crumble. People no longer believe their house will be worth more tomorrow than it is today.
In fact, they're certain it'll be worth less.
For those who have no real assets tied up in their home, those who didn't put much down or who have not "owned" for more than a few years, how can they NOT walk away when the wake up to find they owe $150k more than the house will sell for?
Momentum is beginning to build to the downside...acceleration is now certain.
A rate cut is not help this.
Prices are still rising here. Of course we’ve only had about 4% annual appreciation the last 5-6 years unlike some other locations.
I’ve said it many times, its going to get worse long before it gets better.. we are only seeing the very tip of the iceburg on this...
The scale and impact of the housing collapse is going to be much larger than anything we’ve seen since the great depression... the S&L collapse is a drop in the bucket compared to what this will wind up being.
Hopefully it will deflate slow enough that an all out depression does not occur, if however it deflates rapidly, its going to get VERY VERY ugly.
Between the housing bust and the government getting 'religion' on illegal immigrant enforcement, we got ourselves a Perfect Storm.
In fact, they’re certain it’ll be worth less.
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What happened to the guys who said I was an idiot for saying that no new REAL wealth is created in the world just because a house appraises for a lot more money than it did last year. I wonder if they believe that REAL wealth has been lost from the world when it appraises for a lot less than it did last year. Personally I don’t believe the actual REAL wealth changes in either case.
"People no longer believe their house will be worth more tomorrow than it is today"??? Which people?? The parsing of the facts is great for the "going to hell in handbasket" media but far from reality. Why? What's the worst form of lie? A direct falsehood? No, that is most often readily recognized. The worst lie is a half-truth and in the above statement, it is far, far less than even a half-truth.
Who are the vast majority of those who will be affected?
Here are the facts.
Where is the subprime "crisis"? Only about 20% of existing mortgages (nationally, as of March 2007) were in the "subprime" category. However, that fact also hides the fact that that 20% is not evenly distributed around the nation. The 10 metropolitan areas with the highest % of sub-prime loans had an average level of 22.35% of its mortgages in the sub-prime category, with the highest at 26.8% and the lowest of those ten at 20.20% [McAllen TX - 26.8%, Memphis TN - 24.0%, Sharon PA - 23.1%, Miami FL - 23.0%, Richmond VA - 22.3%, Brownsville TX - 21.6%, Merced CA - 21.6%, Sumter SC - 20.7%, Bakersfield CA - 20.2%, Jackson TN - 20.2%; Source:First American LoanPerformance].
Another thing that shows is that only three states, TX, TN and CA have six of the top ten metropolitan areas with above average levels of subprime loans. In affect, there is pockets with higher levels of subprime loans and broad stretches with much lower levels. For instance, 4.9 % of mortgages are subprime mortgages in Lawrence KS and they are 10.53 % of mortgages in Topeka KS and 10.95% in Wichita. [http://findarticles.com/p/articles/mi_qn4179/is_20070429/ai_n19050931
How many of the subprime mortgages were written on ARM terms (low initial interest rate, with higher interest rates starting in some year after the mortgage begins? About 80% of subprimes were written as ARMs [http://www.npr.org/templates/story/story.php?storyId=9085408]
So, if subprime mortgages represent 20% of all current mortgages and those with the most danger of default are subprimes written as an ARM, that's 80% of that 20%, or 16% of ALL mortgages are in the subprime-ARM category.
But, is every subprime ARM mortgage in default or even entering into default? No. While many who took subprime mortgages (because prior bad credit history or zero credit history told lenders to only offer a subprime loan) not everyone who did was, or is now, in bad financial situation, in terms of handling their mortgage. If we take the average of the ten highest subprime default rates, by metropolitan area, we'd get an average default rate of about 21.69% [http://money.cnn.com/2007/03/21/real_estate/subprime_vulnerable/index.htm. ]
If we take recent remarks by the Fed Chairman and the criticism of them we get a figure in the neighborhood of 20% to 22% [http://blogs.ocregister.com/mortgage/archives/2007/05/subprime_delinquencies_higher_1.html]. So lets say its even higher by 25%, to somewhere in the area of 25% to 28%. Even if we adjust that to a 30% delinquency rate, what are we talking about? We are talking about 30% of 16% of all mortgages, or 4.8% of all mortgages.
So, the article even tells you the low-degree of impact this "major crises" has, in the numbers, but it presents the numbers in a meaningless fashion, so that you can't see it.
It tells you: "Nevada led all the other states in the rate of August foreclosure filings: one for every 165 households for a total of 6,197. Other hard-hit, Sun Belt states were California (one in 224), Florida (one in 243), Georgia (one in 271), Arizona (one in 289), Colorado (one in 312) and Texas (one in 532)......Rust Belt states in the top 10 included Ohio (one in 281), Michigan (one in 288) and Indiana (one in 544).
And what do those doom and gloom numbers (1/165, 1/244, etc., etc. tell you? They tell you that the people affected by foreclosures in each of the reported areas are: Nevada 0.6061%, California 0.4464%, Florida 0.4115%, Georgia 0.3690%, Arizona 0.3460%, Colorado 0.3205%, Texas 0.1812%, Ohio 0.3559%, Michigan 0.3472%, Indiana 0.1838%. They tell you that even if mortgage foreclosure rates doubled (not likely) in those areas, then in all but Nevada they would represent less than 1% of the people and all of 1.2% in Nevada.
How does that translate into the value of your home, mortgages in general and even subprime mortgages equaling the financial crisis of the century?? It doesn't.
The real crisis is in the doom and gloom hype in reporting the facts. In addition to the above scare tactics with "facts", try these on:
"Subprime Mortgages Creating High Default Rates"......"In San Diego, homeowners are defaulting on their loans at an increasing rate. At the moment the default rate is 3.3 homes per thousand. The increasing default rate is a nationwide phenomenon and there are cities and regions that are doing much worse. San Diego's default rate, for instance, pales in comparison to Cleveland's rate of 25 homes per thousand.[http://www.kpbs.org/radio/these_days;id=7848]
And those "high" rates amount to 3.3/1000 = 0.33%, 25/1000 = 2.5%.
"Rise forecast in company default rates"......[speculative grade bonds]..."...."Company default rates are forecast to rise nearly 300 per cent as the credit squeeze hits the wider economy and raises the prospect of a global recession."............"Moody’s predicts that the global speculative-grade default rate will rise from 1.4 per cent – meaning only 1.4 per cent of the companies rated have defaulted in the past year – to 4.1 per cent in a year’s time and 5.1 per in two years’ time.".........."Moody’s said Wednesday’s figure of 1.4 per cent was a 20-year low and showed that companies had so far stood up well to the recent volatility.[http://www.ft.com/cms/s/0/7092e8c0-6097-11dc-8ec0-0000779fd2ac.html]
So the headline reports: "Rise forecast in company default rates"...does not say, off the bat, rise in default rates for speculative grade bonds. Then it hypes more with that rise reported as a whopping 300% (enough to scare anyone to death). But, finally (knowing 80% read only the headline, and less than 1/5 of the remainder read more than the first paragraph (the 300%), they had to tell you the actual facts. Defaults on speculative grade bonds could rise from 1.4% last year to 4.1% and even 5.1% in two years. They could have reported that, even in the present crisis, 95% of speculative grade corporate debt is likely to still be secure over the next two years. At least they had the decency to tell you that the current rate of 1.4% was a 20-year low. What does that say? It says the normal long-term rate of defaults on speculative grade corporate debt is closer to what it will return to over the next two years. Is that a crisis?
The entire subprime, liquidity, real estate "crisis" reporting is rife with the parsing of facts to hide their true meaning and hype the degree of crisis they represent. The vast, very vast majority of homeowners and mortgage holders are not headed to default or seeing their equity turned to dust. Most of those that do, a small fraction of all homeowners and buyers, will go back to renting, start saving again, and return to the house marker sometime down the road. I suggest you turn off the TV and quit reading the mainstream news. Neither is designed to provide accurate information.