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Yes, another "Bubble" comment

by sfishome on August 28, 2006

Each time I read another article, I can’t help but add my two cents. There are so many “Bubble Blogs” out there with 100% certainty that we’re about to have a major crash just like the dot-com crash or the early 1990s when home prices took a dive. Unfortunatly for them (fortunately for us homeowners) the comparisons are way off. One big one is that job losses and unemployment caused so much of the duress in the 1990’s when Seller’s had to sell, and there were few buyers. Now, job reports are all positive, and Seller’s are not under duress. Another is that there was an 18 month supply of homes in the early 90’s, now it’s about 6 months which is dividing line between a Buyer’s market and a Seller’s market. We’ve got a LONG way to go to 18 months supply.

The reason bubble pundits are so positive is that in 2007 about 12% of the nation’s mortgage debt will switch to adjustable payments. But is this 12% of all homes? Not likely. About 8% of all homes change hands each year. With about 40% of loans being the risky ARMs the bubble pundits are so worried about in the last couple of years, that means about 3.2% of homes are at risk each year for the 2 or 3 year period that ARM’s were so prominent. These ARM’s also varied in length, generally from 3 to 10 years which spreads it out even further.

But let’s say that 3.2% of homes are at risk each year. First off, 8% of homes change hands each year. That leaves nearly 5% not at risk, who don’t need to sell. Plus, don’t you think ARM holding homeowners know their rates are going to adjust? Don’t you think they realized that they needed to Sell or refinance before their ARM’s adjusted? If they got a 5 year ARM, maybe they realized that 3 to 5 years is the average length of time many homeowners stay in their homes? How many of these homeowners will really be at risk? My guess is a very few will not act proactively and end up in Foreclosure or in a rush sale. Definitely not enough to “crash” the market. Additionally, banks HATE foreclosure. And with money supply so massive, it’s likely that Banks will do what they can to alleviate the situation, including offering great refinance programs. Banks are used to a very brisk mortgage business, and are doing what they can to keep that business high. So the so-called bad debt is likely to be sold, or rolled into a new mortgage. Yes, foreclosures will rise, and yes the media will jump all over thos new numbers. Personally, that just means it will be a GREAT time to invest in real estate to pick up cheap properties in an overall strong real estate market.

Finally, many of those whose ARM’s are going to adjust are in the money – they’re homes have appreciated quite nicely, so they can refinance and either keep their payments low, or cash out. Or they can sell comfortably without being upside down and having to do a Short Sale. The bottom line…. the bubble pundits need to look a little harder at the facts they use to justify their predictions. 3 trillion in adjustable debt coming due in 2007 sounds horrible at first glance, but upon closer inspection, it’s likely to be a minor blip on the housing market radar.

sources:
http://www.nytimes.com/2005/06/16/realestate/16arm.html?ei=5088&en=d4ea9a4dd01af4d5&ex=1276574400&partner=rssnyt&emc=rss&pagewanted=print
http://www.financialservicesfacts.org/financial2/mortgage/homeown/

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