With this inverted yield curve it's completely plausible that some ARM's borrowers will see there costs reduced.........
Yup... Best argument that explains the priced in future easing that we are seeing in the shorter end of the treasurys' curve. People can putter along, wounded, but not insolvent under that scenario. The extra time provided allows for redistribution of failed speculation, and absorption of excess inventory. Prices decline slightly everywhere, more in places where there was speculative excess, and then stay flat for an extended period of time. Asset prices have been targeted, and have been hit. Gee, where have we seen that before? Although it really hurts me to think that the long bond yield of 5.30 was the top for the forseeable next few years... that's just painful to consider. Get ready for the next round of refi's at 5%? Wouldn't have believed it a year ago, but now it doesn't seem too implausible in a year or two's time.
Uh, guys. Those ARM's can reset well before their stated date. Lets take a 5 year Option ARM. If the borrower elects to take the lowest possible payment, he will have a deficit added back into his loan balance. In other words he has a negative amortization. The borrower mistakenly thinks he can make these low payments for 5 years, right? WRONG! Once the balance on his loan reaches a certain point, his ARM will "Reset" to a higher payment. Here's a link to a good article on this.......... http://biz.yahoo.com/weekend/mortgagepain_1.html
Hi guys, The Nat. Assn home builders index and the S&P have become increasingly correlated in the past few years reflected the increasing contribution of building and related to the overall economy. Someone posted on the IBD forum a graph of the S&P overlayed on the NAHB index which i no longer have access to. If i recall correctly the source of the graph was a Merril Lynch Economist. The NAHB index leads the S&P by 12 months. I have attached the graph as a .JPG file. The chicken scratchings are from my notes and measurements the best i could do with a pair of dividers. If the correlation holds we should see a fairly precipitous drop in the S&P beginning any time now. I estmate the drop to be between 200 and 600 points by June 2007. We should see about 1/3 of the total drop by December 23 + or minus 2 weeks. I hope you can see the graph. It is pretty scary. I have tight collar on my one long positions and moved my IRA's to T-Bills and am otherwise short and hedged in my margin account.
I just checked out the graph i attached. Unfortunately the right hand axis labels are missing. Those are supposed to be the value of the S&P500 index. From where the orange line ends (S&P) to where the blue line ends (NAHB index) is roughly 600 points. Of course this graph was prepared by my calculation on June 23rd. So that NAHB index drop probably has a ways to go yet so we could see an even greater drop in the S&P. It all depends on how well the correlation holds going forward.
I saw a chart the other day that for the first time in over a decade mortgages are being refinanced into mortgages with higher rates. Has been that way for the last two quarters .... that can only hurt. I think it came from Fannie Mae ...
Thanks, Blue. I know that some are saying the real estate crash will not be severe because there will simply be a slowdown with extensive refinancing. But as you point out it is unusual to refinance at higher rather than lower rates! I suppose some are going to move from ARM's to fixed rates at higher rates. What is really a concern however is the prediction that prices can drop by 30% or more in the most inflated markets. That will cause loans to go upside down,i.e., the principle owed is greater than the value of the collateral. Then you've got a real problem! I'm of the opinion that this housing bust is going to be not just a little problem, but a big one.