When housing markets crash, they do it in slow motion. It is not like the stock market. Housing market disasters take years, sometime decades to mature. However, along the way, certain events mark out the path to collapse.
Today, the housing market put down another marker on the path towards financial meltdown: the sale of sales of bonds backed by subprime mortgages are tumbling. Investors and bankers have suddenly discovered rising delinquency rates and now they are pulling back from what had been one of Wall Street's fastest growing businesses.
So far this year, the stock of subprime mortgage backed securities is down around 37 percent compared to last year. This comes as around 13 percent of sub prime mortgages are now experiencing some kind of payments related problem.
As investors run fearfully from the sub prime mortgage backed securities, sub prime lenders will no longer be able to bundle up their crappy loans and take them off their wobbly, default prone balance sheets. Inevitably, these lenders will start to reduce the number of loans they issue. As people with poor credit find it increasingly difficult to get financing, housing demand will decline. With declining demand comes falling prices.
However, the recent problems in the sub prime market should be seen only as an intermediate step towards the deeper market catastrophe. Just wait until the Alt-A market starts to sink. It will not just be the poor, the minorities and the vulnerable who will be crying on their doorstep as they lose their house to foreclosures. Many ordinary middle class Americans will also be fast-tracked to homelessness.
REALonomics has been previewing and tracking most of the industry comments regarding the sub-prime debacle going back about 12 months. The facinating observation is how the language has moved from one of "no big thing, the market is still going to be strong through 2007" to "this could be bad stuff and take us through 2008."
ReplyDeleteThis blog is on target. Well stated. REALonomics.