The US housing slump is not likely to end any time soon. Unlike stocks or bonds, houses do not get “marked to market” overnight. Owners drag their feet. They look for other solutions. They reject good offers, hoping prices will go back up.
So, a correction in housing takes time.
Why? Because, among other things, resetting ARMs higher takes time. Some monthly payments will go up by more than 35%. There are two million mortgages to be adjusted upward in the next few months, according to CNN and a total of US$50 billion worth of ARMs scheduled for reset in October alone.
It was two years ago that the quality of mortgage credit began to go down sharply. Lenders had made a lot of money on mortgage contracts; they didn’t want to slack off just because the pool of credit-worthy buyers was drying up. Instead, they lent to increasingly wobbly borrowers. Now, those teaser-rate loans are being reset. A typical monthly mortgage payment might be US$955, says CNN; soon, it will be US$1,331.
How many of these marginal borrowers have an extra US$400 to spend per month? We don’t know, but we think we’re going to find out.
Moody’s and S&P are downgrading subprime-backed securities. Junk rated loans, not necessarily associated with subprime, fell to their lowest prices in four years. But the whole credit structure is getting a little fidgety. And look out central Florida and Las Vegas – two areas where subprime lending ran wild in ’05 and ’06.
The Daily Reckoning Australia