It is nearly impossible to turn on the news these days with out hearing some discussion of the housing market and its impact on the overall economy. Just in the last week I have seen headlines claiming the mortgage delinquencies have hit an all time high, while existing home sales rose to their highest levels in two and half years. So, in order to help clarify the current situation let's compare the housing market to a hurricane.
This current storm “Hurricane Housing” made landfall in mid-2007 as we first began to hear of problems in the sub prime market. At the time many people thought of sub prime as a short-term problem and felt like it would pass quickly like an afternoon thunderstorm. At the start of 2008 the problem began to grow and intensify, ultimately sending everyone running for cover. As the fall of 2008 came around, many financial institutions that ignored the initial warning signs sustained major damage or became total losses. Although we did not know it at the time, we were in the height of the storm and had no choice but to hold on. As 2009 began it was hard to believe things would improve anytime soon.
Then, in March of this year the storm clouds suddenly disappeared as we reached the eye of the storm. Homeowners began to survey the damage and look to make repairs. We saw consumers begin to pay down debt, start saving, and refinance mortgages. Record low interest rates combined with stimulus programs allowed some individuals to prepare themselves for the next wave. At the same time others have not been as fortunate and have been unable to make repairs. This is evidenced by the fact that only 9% of the 2.7 million delinquent mortgages in the third quarter of this year have been modified. With 2009 drawing to a close we can’t help but notice the storm clouds reforming on the horizon.
If sub prime was the front of the storm, then I believe Option ARM’s and Alt-A mortgages will be the back. These mortgages were never intended to be long term loans as stated by Shelia Blair in October 2007, “And let’s be honest about it. Hybrid ARMs were never made based on the assumption that the borrowers would be able to make the payment once the loan reset.” Looking at the mortgage reset cycle (graph on website link above) you will see that 2007-08 were dominated by resets in the sub prime market. After a lull in resets in general we see a rise starting in early 2010 and continuing through 2011. We believe that this coming reset cycle could have serious impacts on an already fragile economy. I am concerned that homeowners who are hanging on by their finger tips may not be able to absorb the impact of higher mortgage rates. This combined with high unemployment will probably lead to additional foreclosures in the coming years. I hope that homeowners and financial institutions have used the eye of the storm in order to prepare for the second wave and I believe those who have not done so may have a little more time to make changes. If you have questions, concerns or just want to discuss how this may impact you, please don’t hesitate contact me.
