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The Tidal Wave is Coming

Date:March 23, 2006 | Author:Spencer Rascoff | Category:Home Mortgage

I’m usually a pretty optimistic guy, but I’ve started to see some scary things on the horizon. And I’ve gotta pass it on. Check this out: 9.4% of all mortgage borrowers now have no equity or negative equity in their home, and 29% of new mortgages last year had no equity. $800 billion worth of mortgages owe more than their homes are worth, and that’s optimistic since it assumes no reduction in home values. One study estimates that if home prices fell by 10%, the share of 2005 homebuyers with negative equity would shoot up to 48%. Yikes! What happens when all those interest only mortgages flip from their low fixed rates to a much higher variable rate? A lot of homeowners who bought houses beyond their means a few years ago via low introductory rate ARMs are suddenly going to find themselves unable to pay their new higher mortgage. And guess what? They have no equity in their house. So they’ll have to sell and/or dramatically reduce their consumption. This is a disaster waiting to happen. This analysis says it all:

Many homes were sold with Adjustable Rate Mortgages in 2003 and 2004. Now, we are seeing more than $2 trillion…of these mortgages coming up for a reset in their mortgage rates. My back of the napkin calculations suggest interest payments are going to eat up at least another $3 billion a month in consumer spending capacity over the next year. In a $12 trillion economy, this is not all that large, but it will suck almost 1/2 of 1% of consumer spending potential out of the economy.

Sorry to be such a downer, but I’m worried about the impact that this will have on housing prices and more importantly on the overall American (and global?) economy.

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Responses (13)

0 tweets 1 likes 12 comments

Phyllis Harb 3:29 PM - Mar 24,2006

Zillow – Wow! Just for fun, I plugged in the address for all of my listings and was impressed that zillow estimates are usually within 10% of my listing price. I then zillowed my escrows – and the same thing; zillow estimates are typically within 10% of the “in escrow” price. Now that the market is cooling, I tend to give more weight to active listings than recent sales. It seems that in a quickly changing market, it will be hard for zillow to keep up with data as it doesn’t appear that it is taken into account until closing (similar to an appraisal).

In the meantime, I informed my mom, who lives in Sequim about the site & boy did she have fun with it! Kudos to zillow – I am amazed, too bad the National Association of Realtors didn’t figure out how to do this first.
Tim Kane 5:37 PM - Mar 24,2006

71% of our company’s entire 2005 closed purchase transactions were 100% financed. Most were ARM’s, many with pre-payment penalties. Sobering.

From the Investors.com editorial that Spencer links to:

“So borrowers with about $800 billion in mortgages owe more than their homes are worth, says First American Real Estate Solutions.”

This is an interesting and peculiar statement.

Earlier this year (I wish I could remember the Blog it was posted on…. maybe Professor Piggingtons Econo Almanac for the Landed Poor) First American released an extensive paper on the market and one section suggesting the unlikely event that people would have problems with ARM’s.

If memory serves correctly, the idea was that many people with ARM’s would have significant equity positions due to the run-up in prices, particularly those who purchased a couple years ago. Thus,if they got into a jam financially, they could use the equity cushion and sell. So what happens when people start putting their homes on the market en masse? Moreso, what happens when buyers aren’t there. Many markets in our country are reporting sales declines.

The question we have is, how many ARM loans are the title companies closing, since they dominate the market in closed transactions? We can’t help to wonder what stats they have that are not reported. Our best guess is that many title companies would generally mimic our stats.

Legacy Escrow Service, Inc.
Everett, Wa.
M P Clark 12:18 AM - Apr 8,2006

Re the ARM’s and the question of the eventual Armageddon for marginal homeowners:
have a look at the Ohio rate of foreclosures and the rate for the past five years. This is what your fear looks like when it is reality.
I don’t know why it is that recent homebuyers assume that taking out an ARM can ever make sense. I guess they don’t know that the economy can change, interest rates can rise and that the house is not a cash machine.
Remember the late 70′s and early 80′s when loans could have a 14% or even 18% rate?
Is everyone really that young or have we developed amnesia about this ugly reality too?
Besides dealing with what “predatory lending” means and doing what it takes to weed it out of the market, we need some kind of financial literacy to be taught in schools.
kthor 11:41 PM - Apr 19,2006

Myself Iam seeing some bad sign in California about homeowners going into pre-foreclosures. hopefully the fed’s will stop the rate increase as that doesn’t benefit the largest economy in the whole nation. anyway my prediction is lot’s of foreclosures and good deals to be had by next summer.

http://www.theforeclosuresinfo.com
GOASKALICE 11:07 PM - May 13,2006

I’ve contemplated how many McMansions might end up on the foreclosure good deal list within the next couple of years..it’s obvious many consumers have overextended themselves with this “my dream home” ideal and when one resides in an area of the country where cost of living is rising dramatically compared to income and job opportunities…whoop there it is. ZILLOW is grrrrreat…ingenious. Good luck.
Pete W 12:45 PM - May 17,2006

As a professional in the mortgage industry and owner of a mortgage brokerage company in Pennsylvania, it is my opinion that the foreclosure rate will sky rocket over the next several years. I try and do my best to educate my consumers, but so many of them insist on “keeping up with the Joneses”. I would “zestimate” that 50% of the mortgages I provide, after educating and offering FIXED rate mortgages, are adjustable or interset only mortgages. Some are out of too much house and others are out of credit issues. The other point of the mortgage payment rising when the adjustment period starts, are rising property taxes(in Pennsylvania). This only will accelerate the foreclosure process. In the end, the fat will get fatter, and the middle class will suffer.
Albert NORTH 12:28 PM - May 25,2006

The 50-yr mortgage is a reality NOW!
I am a Branch Manager-in-Traning with National Lending Corporation (NLC), residing in Florida. I have been offering the 50-year mortgage for about a month now through one of our national wholesale lenders: First Franklin: website info below. https://www.ff.com/public/splash/FiftyYear/FiftyYear.html
Chuck Marunde 10:25 PM - Apr 25,2008

Good post. I think we’re a long way from seeing the end of the foreclosure nightmare across the U.S. Like a stone thrown in a pond, the little circles will reach further and further.
Sarah M 11:36 PM - Sep 19,2008

We also have to think about all the renters out there. I found this website http://www.checkmylandlord.net, where they help renters check for free to see if their landlord is paying the mortgage. Many landlords these days are “skimming” the rent and leaving renters in the dark having little or no time to move. Just a thought!
100% newmortgage 10:15 AM - Aug 30,2009

Low interest has got to be a bad move, surely?
Gabe Lopez 2:58 PM - Jul 11,2010

I was calling this sense ’03. Where have you people been? It’s inevitable. Annalists were trying to tell all of us about this for years. You people just didn’t want to hear it. I told people that it’s coming and they laughed at me. I told my stock broker that the market was going to follow. He told me that not only that the housing market would not die. But the stock market had nothing to do with it if it did. I told him sell my stock. He said how much? I said sell it all. Will that was over a mil. I would have lost over 40% if I had listened to him. People you need to pull your head out of your a–. The tidal wave that is going to happen can not be stopped. It will happen and Oboma is just making ever thing worse. By throwing all that money in the system. Our dollar is not going to be worth anything. So if your on a fixed income you’ll be really hurting. So everyone needs to band together and tell Oboma STOP. Your going to kill USA.