There is no hope for America's housing market. This chart explains why.
It is the subprime borrowers that dies first. For the next two years, every month, hundreds of millions of subprime mortgage debt will reset, pushing the hapless borrowers into delinquency. This has already begun to happen. Currently, 13 percent of sub prime lenders are behind in their payments. Judging by this chart, we haven't begun to see the worst of this particular financial disaster
Once that wave of default and foreclosure slips away, another equally devastating blow will hit the housing market. Servicing costs for prime ARMs, Alt-A, and option ARMs all begin to increase. By then, the average homeowner will look upon the housing bubble like an old man looks upon this first love - a sweet and distant memory.
The housing market will have no time to recover. This disaster will continue for at least another 5 years. Only then, will the market have a chance to breath again.
This chart first appeared on the OC-fliptrack blog. It is first rate source housing bubble developments Orange County housing disaster.
It is the subprime borrowers that dies first. For the next two years, every month, hundreds of millions of subprime mortgage debt will reset, pushing the hapless borrowers into delinquency. This has already begun to happen. Currently, 13 percent of sub prime lenders are behind in their payments. Judging by this chart, we haven't begun to see the worst of this particular financial disaster
Once that wave of default and foreclosure slips away, another equally devastating blow will hit the housing market. Servicing costs for prime ARMs, Alt-A, and option ARMs all begin to increase. By then, the average homeowner will look upon the housing bubble like an old man looks upon this first love - a sweet and distant memory.
The housing market will have no time to recover. This disaster will continue for at least another 5 years. Only then, will the market have a chance to breath again.
This chart first appeared on the OC-fliptrack blog. It is first rate source housing bubble developments Orange County housing disaster.
Hey! You've won a ride back to the top
2 comments:
Anonymous said...
Ponzificating
Mar 15th 2007
From The Economist print edition
Is the financial system a confidence trick?
CHARLES PONZI was a likeable man. That helped him persuade American investors in 1920 that he could deliver returns of 50% in just 45 days by exploiting a loophole in the pricing of international postal coupons. In a way, he was advertising an early version of an arbitrage fund.
In reality, the loophole could not be practically exploited. So Ponzi exploited his customers instead. He could deliver returns only by taking money from new investors to give to his early backers. But although he died in poverty, the Italian immigrant achieved immortality of a sort: fraudulent moneymaking operations are often known as Ponzi schemes.
In the world of finance, describing something as a Ponzi scheme is a standard form of abuse. This insult has been bandied around a lot of late. Financial-sector profits have grown far faster than GDP over the past 25 years; everyone has become richer by lending money to everyone else. Household debt is running at about 100% of GDP in America and higher still in Britain. Credit derivatives are soaring in value and payment-in-kind notes (which pay interest with more debt, rather than cash) are in vogue. Last month Tim Lee, a strategist at pi Economics, described the whole financial system as “the equivalent of a gigantic Ponzi scheme.”
In one sense, of course, he is right. Many elements of the system are Ponzi-like in that they depend on confidence—they would collapse if all investors demanded their stakes back—or they rely on new backers to keep them going. Pay-as-you-go pension systems, for example, depend on there being enough workers to fund promises made to retired employees.
The health of the commercial banking system depends on the assumption that, at any time, most depositors will keep their money in the bank. That allows banks to borrow short and lend long; earning higher rates on loans to business. When depositors panic and start to withdraw their money, the result is usually an economic catastrophe.
Ponzi's original scheme was fraudulent from the start. But even if he had found some exploitable anomaly in the financial system, his rationale was flawed. Because he offered such a high rate of return over such a short period, claims on the “Bank of Ponzi” would quickly have reached ridiculous levels.
So perhaps there are good and bad Ponzi schemes. Good schemes will do more than funnel money from latecomers to early takers, allowing the foremost to prosper at the expense of the hindmost. And they will not allow claims to increase too fast. That was the big mistake of John Law, the pioneer of paper money in early 18th-century France. Law's system eventually collapsed, but he did have the insight that the creation of credit might increase trade, and thus general welfare.
But how to tell when a scheme has gone too far? Hyman Minsky, an American economist, distinguished three kinds of borrowers. Hedged debtors can safely meet all debt payments from their cashflows. Speculative borrowers can meet current interest payments from cashflows but need to “roll over” their debt in order to pay back the principal. And Ponzi borrowers can pay neither interest nor principal from cashflows but rely on rising asset prices to keep going.
The American housing market seems to be suffering from the unravelling of a Ponzi-type system. Subprime loans were offered on generous terms that, implicitly or explicitly, depended on rising house prices. The banks that made these loans bundled them up and sold them in the credit markets to investors, eager for high yields. This was supposed to make the financial system more secure by dispersing risk more widely.
But look what is happening now. The buyers of these loans are asking the original mortgage-writers to buy them back. But these homelenders do not have the money to do so. The confidence that sustained their balance sheets has evaporated, leaving many in dire trouble.
Might the problem be more widespread than housing? The latest stockmarket wobbles suggest investors are asking themselves the same question. Financial-sector debt has risen from virtually zero 50 years ago to 100% of American GDP today, and Europe's financial corporations have helped to accelerate the money supply.
George Magnus, a strategist at UBS, has just written a research note entitled “Have we arrived at a Minsky moment?” His big worry is of a contraction in credit supply. As lending standards tighten, consumer demand could suffer, possibly prompting a recession in the United States. No one knows when the credit cycle will end, he says. But the pyramid is beginning to look a bit top-heavy.
Dr Housing Bubble said...
The layered approach to disaster. Of course this won't happen overnight. The Collateralized Debt Obligations will take a long time to unwind because foreclosure isn't a quick process; anywhere from six to nine months depending on how the banks decide to handle it.
You are right that it will be a domino collapse. Little by little the fraud and financial imprudence will hit the market. Sub-prime is now out. Alt-A is next. How long will it take to change delusional sellers into believing that their shack is not worth $500,000? Not sure but a $4,000 monthly payment will remind them of the true cost of owning their box.
Keep up the good work.
Dr. Housing Bubble