Posted At : June 2, 2009 10:13 AM
The subprime crisis was the first to hit the banks hard. Now, prime loan defaults are approaching those of subprime loans. Commercial real estate failures, credit card defaults, and business bankruptcies all will increase over time as unemployment rises, which will be higher than the government wants to admit, closer to 12-15%. Ultimately, defaults on prime loans will be much higher than defaults on subprime loans have been, because many people bought homes at greatly inflated rates between 2003 and 2007. More homes will be worth less than the mortgages on them and more households will either demand that the mortgages be restructured or simply walk away from their home, especially if they become unemployed. Fitch ratings recently estimated that up to 75 percent of the modifications now being done through the administration’s Making Home Affordable program will re-default in six months to a year. I’m not talking about the old modifications, which were largely repayment plans that could actually raise monthly payments. I’m talking about the new mods, which lower monthly payments to 31 percent of a person’s income. Not really a surprise. Many of these loans never should have been made in the first place and he banks are simply trying get whatever they can out of them.
We built something like an extra 3 million homes over trend growth, and those homes are going to have to be absorbed in the normal way, through growth of population and the economy. We “need” about 1 million new homes a year to take care of population growth and demand. Further, we have cut off home availability to buyers who are in the subprime category, whereas during the boom you simply had to have a pulse, even a lying pulse, to get a home for which you did not have a chance of actually paying the mortgage. Real Estate is likely headed to pre-boom levels, so expect prices from 1998 – 2000, still 30-40% lower.
Regards – Keith Springer