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December 30, 2007

Today's Housing Bubble Post - Next Year, Not Just Subprime

-- by Dave Johnson

So far we have been hearing about a "problem" with "subprime" mortgages that went to people with bad credit. Then we heard about problems with "adjustable" mortgages where the payments go up after a period of time and mortgages with no down payments and mortgages where the borrower didn't have to verify how much income they really had. You can readily see where there could be problems with all of those.

My prediction for next year is that the problem will spread to regular mortgages given to regular people with good credit. The reason I think this will happen is that I think housing prices are going to fall quite a bit. If prices go to where they should be according to historical norms, or according to the historic ratio between rents and prices,or according to what always happens when bubbles pop, then they are going to fall as much as 40-50%. Maybe even more. (And never mind that the "boomers" are starting to retire and will not need the houses many of them have further increasing inventory and decreasing demand...)

So next year we're going to see a LOT of regular people with regular mortgages go "underwater" -- meaning they will owe a lot more than the current market price of their houses. In many states the regulations allow people to get out of their mortgages by giving the house to the lender and not have to make up the difference if the mortgage is for more than the house can sell for. And many will do exactly that. (Which will even further increase inventory and put pressure on prices.)

So next year I predict the credit crisis is going to get a LOT worse.

Posted by Dave Johnson at December 30, 2007 1:19 PM

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Comments

You're not the only person. See the article below:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml

I spoke about this with one of my friends who deals with a lot of people in the financial world, and he said that a hedge fund manager, one of the smartest people he knows (and this guy is the smartest guy *I* know), said it wouldn't be a bad idea to take a certain portion of his portfolio and turn it into gold bars, stashed around the house. Not that the worst was likely to happen, but it is within the realm of the possible.

Posted by: Thomas Leavitt [TypeKey Profile Page] at December 30, 2007 4:47 PM

You're not the only person. See the article below:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml

I spoke about this with one of my friends who deals with a lot of people in the financial world, and he said that a hedge fund manager, one of the smartest people he knows (and this guy is the smartest guy *I* know), said it wouldn't be a bad idea to take a certain portion of his portfolio and turn it into gold bars, stashed around the house. Not that the worst was likely to happen, but it is within the realm of the possible.

Posted by: Thomas Leavitt [TypeKey Profile Page] at December 30, 2007 4:50 PM

You're not the only person. See the article below:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml

I spoke about this with one of my friends who deals with a lot of people in the financial world, and he said that a hedge fund manager, one of the smartest people he knows (and this guy is the smartest guy *I* know), said it wouldn't be a bad idea to take a certain portion of his portfolio and turn it into gold bars, stashed around the house. Not that the worst was likely to happen, but it is within the realm of the possible.

Posted by: Thomas Leavitt [TypeKey Profile Page] at December 30, 2007 5:05 PM

Gold bars don't leave the bank vault but gold coins do. Just sayin'
Curious what happens to all those Robt Waggner Reverse Mortgage (holders)
I'm guessing you're high on the percentage but no question about the decline. Maybe it's the denialist in me, but I'm hoping more in the lines of 30%.

Posted by: mainsailset [TypeKey Profile Page] at December 30, 2007 6:53 PM

Grr... sorry about the multiple submits, kept on getting error messages from mt.cgi.

Posted by: Thomas Leavitt [TypeKey Profile Page] at December 30, 2007 11:12 PM

It seems to me that "underwater" mortgages only matter to the home owner if they're trying to sell, tap into equity, or refinance. I have a 30 year fixed rate mortgage, and frankly I could care less what the market value of my house is because I have none of the situations mentioned above occurring. Also, an economic downturn makes people less interested in selling, more interested in tapping into equity, and with refinancing fees probably about neutral there. A wash. So I think using "underwater" as a way to state there is another meltdown looming is a bit alarmist. People will not want out of their "underwater" mortgages simply because they’re "underwater", even if they have a get out clause from their state. It costs time/effort/money to move, and that has to offset whatever the detriment is to being "underwater". For most people there is no detriment at all.

Posted by: yeahwhatever [TypeKey Profile Page] at January 1, 2008 7:20 AM

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