Exactly right hydroblunt. I lived in Grand Junction CO in the 80's and when the oil shale boom went bust there were cases of new low income housing selling for 25 cents on the dollar after forclosure. Great investment opportunity if one had the money and could afford to sit on them for a while.
If i am not mistaken, some dallas area & oklahoma RE has still not recovered its pre-oil bust values. SoCal & Boston took roughly seven years to recover to 1990 values. this things seem to take at least a business cycle to recover once they burst. Those periods, however, did not have the same amount of leverage and creative financing that we are seeing now. The 80s & 90s mini-bubles were very localized. We are seeing something much larger now. RE on both coasts and chicago are at silly valuations with no equity (paid in). There will be a national stop out in housing for the investor (10% of home sales in the last 3 years) that has the IO ARM. I understand that the last national boom (1920s) was the last time the IO ARM was a very popular product. That ended well. Wave two of easy money will come afterward, as Big Ben believes the depression could have been avoided with looser monetary policy. I don't think it will work this time, as people will be weary of the the home ATM, and regulators (OCC) will keep banks from making easy loans. Result, Argentine style stagflation. 1970s on steroids. At the same time baby boomers will be in full retirement mode. The printing press in washington will be running fast and furious. With our democratic friends taking over in 2008, count on 50% tax rate for the highest bracket (which will be 200K). What does this mean? Look for stocks to get crushed, and stay down for a decade or more. This explains the run up in Gold. All the time, government measures of inflation will be fairly tame, mean while, a hedonically adjusted Big Mac will be $20. (Immigration policy, xenophobia, minimum wage laws, etc. will see to that.) None of this matters for traders. Timing is everything. This may not be tomorrow's trade. But it is on the horizon. Will be your next best friend (trend=friend).
It seems to me the real issue is the number of borrowers on a variable interest rate....also compare this to the accelerated appreciations seen in various markets across the US. It seems that the Banks practices have not changed in evaluating the risk they are taking on in regards to the upcoming defaults possible. As long as the Equity to Value meets their criteria and the CURRENT ability to repay pencils out, they make the loan! It would be easy for them to project out their risk in various interest rate scenarios...but they don't. I wonder if the security for the loans will ever be an issue in the event of a correction to housing prices? Will banks call the loans in this event?...or would they carry the increased risk on their books hoping the borrowers do not default? It seems to me the banks would be uncovered and vulnerable. Michael B. P.S. I am waiting for the lawsuits to set a precedent for how a bank raises its interest rate verses its choice to call the loan...it will be very interesting when the hard times come...I can imagine the Bank could be accused of raising their interest rates causing the default....or even more....calling the loan when there is not sufficient security...they got you by the balls eventually and own this country. hey how is the Wal-Mart banking deal going anyways
Interesting thought. Especially if you look in some of the more strategically viable aging, or minority, communities across the country. It would make regentrifying a community rather easy, and profitable.
Yes, and they are mostly profit motivated. And we all can agree that to some extent that is a factor that drives some of the more shall we say, adventurous, to make moves.
Howard, Interesting thoughts. What would be some good ways to financially prepare for something like this happening? Sell all your RE, buy gold, short stocks, buy energy...?
I'm quite familiar with mortgages (at least in Canada), so I have a few answers for you (and things to consider). Regarding exposure to mortgage default, there are a few things that may protect banks to some degree: - One factor is mortgage insurance. Lenders up here in Canada are hypothetically covered from losses due to default, so long as the mortgage is insured by CMHC or Genworth. - Many mortgages are sold (and/or securitized) to other parties. So the "bag holders" will likely be those that are holding investments in MBS (mortgage backed security) pools. - Lenders will tend not to call loans based on the justification that mortgagors hold mortgages that are worth more than the secured property (i.e. they won't call the loan due to negative equity). The main reason for this is that the lender wants the mortgagor to continue to pay the mortgage. Default only becomes an issue when the mortgagors need to sell their properties, become financially distressed, or just walk away from their properties.