Arm resets are coming. The most popular ARM mortgage in 2003-2004 was a 5/1. Those STARTED resetting last year. And while some reset lower, those resetting now are not so fortunate and the ones that reset lower will reset again higher at the next reset.
Add a few months while savings are depleted and credit card bills are racked up and then add the typical 13 months from the first missed payment to the date of the foreclosure sale and you can see why the resets haven’t yet become the tidal wave that they inevitably have to be. The very earliest have not yet hit 5 years plus 4-5 months of trying plus 13 months to hit foreclosure.
And not all of them need to walk away to cause major damage. 10% of them will do so easily, and that will cause prices to fall making it harder for the others to refinance out of the rising interest rates. That’s when they get squeezed out of the market and sell if they can or walk if they have to.
That doesn’t even START for a few months and prices are down 15% this year. Call me in a year and we’ll talk about how well we did or did not weather this storm. It hasn’t even hit yet, but it will.
What you are seeing now are the effects of the 3/1s. There weren’t as many of those, and many of those were able to get out but it was enough to knock the market down to 2004 prices. That was the equilibrium point that the market HAD to fall to because it was there that the sellers suffering began. All the 2003/2004 sellers could easily just bail by lowering prices to 2003/2004 prices at which they bought. So that’s why prices fell almost immediately to that level and paused. And 3/1s were more popular in SOMA because people were buying for investment there so they wanted the absolute cheapest total cost. That’s why Soma started getting clobbered last year. More 2003/2004 3/1s in that area.
Next year D7 and any other area that was above the median will get hit just as hard with the 5/1s and then the start of the option arm disaster. S&P is downgrading mortgage backed securities like mad: I wonder why!
The easy part is ending. Next comes the pain. It’s so predictable, you can pretty much set your watch by it. Anyone in the above-the-median parts of SF should get out now, or plan on staying a decade or more just to get back to today’s prices.
Posted by: tipster at May 31, 2009 11:56 AM
