It looks like the worst is far from over for the real estate market. The most recent issue of Business Week cited a study published by Banc of America Securities that states that $700 billion worth of adjustable rate mortgages will be resetting between now and December 2008. Compare that to the total of $263 billion of ARMs that reset between January and August of this year. If you believe these numbers the real estate market is about to get a whole lot nastier.
As those ARMs reset and their teaser rates expire, home buyers will be facing higher interest rates and higher monthly payments. It is clear as day that many of them will not be able to handle these higher payments. What's more, if the tightening in credit standards continues, many of these home owners will not be able to refinance their loans and may face foreclosure.
I am guessing that this potential wave of foreclosures is going to add to an already large inventory of houses on the market. In my opinion this means that a substantial decline in house prices is in the cards for 2008. It seems like the truth is even starting to penetrate the fog and haze surrounding the National Association of Realtors. Here is a quote from an article published by the organization on September 5th:
"Pending home sales, a forward-looking indicator, shows existing-home sales are likely to decline in coming months as mortgage disruptions work their way through the housing market, according to the National Association of Realtors.
The Pending Home Sales Index*, based on contracts signed in July, fell 12.2 percent to a reading of 89.9 in July from the June index of 102.4, and was 16.1 percent lower than July 2006 when it stood at 107.1.
Lawrence Yun, NAR senior economist, said abnormal factors are clouding the horizon. “It’s difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren’t closing because mortgage commitments have been falling through at the last moment,” he said."
But wait, there is more. In a separate study published by the National Association of Realtors, they also admit that Realtor's Confidence Index was down to 39% in August from 45.1% in July and 51.3% a year earlier. The report also contains the following sentence:
"...practitioners see more traffic from potential home sellers than from prospective buyers."
In economics 101 they taught me that when there are more sellers than buyers prices tend to drop. Incidentally, the confidence index for the West was lowest in the country, at 37.3%. Another couple of interesting insights from the report: according to realtors, 20.3% of their most recent clients wanted to sell their house because "the cost of ownership has become burdensome"... in addition, 40.6% of realtors expect prices in their area to decline in the coming year. Yup, seems like that drug induced euphoria is starting to dissipate...
There is no question in my mind that the housing market has a long way to fall before hitting bottom. The only question is whether it will drag the rest of the economy with it into recession. Sadly, I think that the answer to that question may be "yes".