Saturday, December 31, 2005

A "Perfect Economic Storm"

According to this opinion piece, we are seeing the formation of the "perfect economic storm" and we are heading straight for it:
...I have met many people who are renting here in the Palm Springs area, many are young couples who have bemoaned the fact that they have been unable to afford anything here in our city and despair that they never will.

There is hope on the horizon. I have urged those folks to save their money and maintain good credit, because 2007 will be the year of the "perfect economic storm."

It is the year that $1 trillion of adjustable rate mortgages and interest only mortgage loans come due for conversion to fixed rate mortgages.

The victims will be those who could not have managed to make monthly loan payments on fixed rate loans so they opted for lower rate loans.

How many will be able to afford a loan payment when their interest goes from a 2.7 percent ARM to a 7 percent fixed?

Consider this:

There never has been a number like the $1 trillion to hit our banking system. Never - not even close.

Personal savings are at the lowest rate since the Great Depression. Most people have no backup for emergencies.

During the past five years, 42 percent of the loans in the Coachella Valley have been ARMs or interest only loans. In Orange County, the number is 78 percent.

So when these people attempt to sell those "getaway" places they bought here, the market will be inundated with "For Sale" signs.

Add those whose primary residence is here and who are unable to make their new, higher payments, and prices will fall precipitously. There will be foreclosures and, yes, bank-ruptcy sales. There then will be a lot of affordable housing ("Valley Insights: Affordable Housing," Dec. 11).

This will present a major opportunity for those who "missed the boat," and like the real estate recession of the early 1990s, this will prevail for several years.

The bad news for the banking system is that, unlike the collapse of the savings and loans, and the massive government bailout in the name of the Resolution Trust Corporation, there will be no "bailout" this time. The budget deficits have ensured that.

So, yes, be patient and prudent, and an affordable home will be yours.


Blogger fredtobik said...

Just wanted to say I like your images, very ominous.

Dec 31, 2005, 4:11:00 PM  
Blogger curious girl said...

I posted the following on other blogs:

Important events occurring in spring, 2006:

1. New Fed Chairman
2. Disappearance of M-3 report (M-3 report, main staple of money supply measurement since 1913)
3. Iran would trade its oil in Petro-Euros instead of US Dollar.

Dec 31, 2005, 5:05:00 PM  
Anonymous Anonymous said...

Oh Marinite, you just don't get it, do you? For god's sake, where else can you wear shorts on the golf course in January AND drive to world class skiing in 4-6 hours?

A home in a place like this justifies ANY price you need to pay for it, no matter how absurd it may seem, and no matter how big a POS it is.


Dec 31, 2005, 5:54:00 PM  
Blogger fredtobik said...

I was being serious.

I think you should turn off anon posting again.

Dec 31, 2005, 8:17:00 PM  
Anonymous Anonymous said...

I agree with the bubble bursting part but I'm not sure how much tha banking system will suffer. Credit spreads are so low that they've probably been able to securitize a huge amount of the risky loans. These loans are probably on investors books as CDOs and MBSs... insirance companies, pension funds, mutual funds, etc.

Jan 1, 2006, 7:29:00 AM  
Blogger SCProfessor said...

I too question whether this will have an adverse impact on the banking system. Truth is most of the originating lenders sell their loans on the secondary market. That is why they are so willing to make loans in an uncautionary manner. Make the loan, generate origination income, sell the loan, loan the money out again. Gone are the days lenders exercised prudence because they needed to protect their depositors. Why? Because they don't keep those loans in their portfolio.

Jan 1, 2006, 10:38:00 AM  
Blogger moonvalley said...

I feel like I've been wearing hip boots and a slicker for a couple of years now, finally clouds on the horizon.

Jan 1, 2006, 5:33:00 PM  

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