The Rude Awakening
Laguna Beach, California
Thursday, March 22, 2007 ------------------------------ - Forget tears for the subprimes…it's prime time!
- The second wave of the housing tsunami,
- Calling in the expert and the problem with those delinquents…
------------------------------ Joel Bowman, awaiting the coming housing tsunami, reports from the shores of California… Enthusiastic "Mish" fans (followers of Michael Shedlock - 20-year veteran of the finance industry and highly reputed macroeconomics analyst) are familiar with Mish's phone calls. Before each and every column he contributes to Whiskey & Gunpowder, for example, Mish calls his publisher there with some bizarre, seemingly discombobulated epiphany. "Mish called me today…," the issue will begin, before launching into one of Mish's insightful columns…a read that always serves to clear up any previous confusion. Well, we here at the Rude Awakening thought we would try things a little differently… Today, we called Mish. Mish has just released a special report detailing his prediction of a "second wave" in the housing meltdown. Every man with a doormat, and some without, is prognosticating over the decaying state of the subprime market but, according to the Mish, even the "primes" are at risk. Read on below for part one of Eric Fry's phone call with Mish… ------ Special Housing Report ------ Urgent Alert: Get Ready for the Worst Property-Led Recession of the Last 76 Years Nobody's money is safe. The "Second Wave" housing tsunami of 2007-2011 is
about to hit, and smart investors are already battening down the hatches.
Protect your savings and investments - click here ------------------------------------------ The Housing Tsunami, Part I -
A Conversation with Michael "Mish" Shedlock Eric Fry: I just wanted to check in with you about the housing market. What inning do you think we're in here on this housing debacle? Mish: I think we're in the third inning. I think that it's likely to go on for at least another five years. I'm looking for perhaps the first bottom of some kind in maybe a couple of years. I think that will be a false bottom. The final bottom might be as long as five years out, possibly even longer. But the decline between now and, say, two and a half years from now is likely to be quite steep. We'll see. Fry: You've mentioned duration. What about severity? Mish: In terms of price declines? Fry: Yeah Mish: I think, eventually, the housing market in general will give back all the gains it has made since 2000. So in some areas like California where home prices have doubled since 2000, if we go back to those levels, we're talking about a 50% haircut. Fry: I think in some areas you're talking about a number even larger than that. Mish: Well, in condos, I think you'll get into the 70% range. Possibly in some home areas, you're going to see that. Ironically, some of the worst areas might be in places where jobs are really poor. Like in Michigan. You can already see it right now. And housing prices in Michigan didn't really even RISE during the bubble. Maybe 5% or 10% or something. Yet, we're seeing house prices down maybe 30% in places like Detroit, which didn't even participate in the bubble. Florida is getting hit pretty hard right now. I would say most home prices in Florida have probably declined over 20% already. They're going to continue to decline…and rebounds are going to be slow. This is going to hurt for a long time, I think. And we're not going to see a snap-back. The question is, if it plays out longer - and it could - this thing could easily last 10 years. If it plays out over a 10-year timeframe, there's a chance - although I don't think a great one - that homes prices at some point just stop falling, but still don't rise. They just kind of stagnate for years on end. I don't see that happening, but I'm open to the possibility of it. I think the most likely scenario is a two-wave decline from here. We'll see a continuation of the current decline for a couple more years, then some sort of stabilization for a awhile, and than another decline. And the reason why I've got that timeline, actually, is because I know when mortgage rates are going to reset. [Eric's note: Many of the mortgages issued during the boom years of 2000 to 2005 offered fixed rates for three or five years, after which they would "reset" to a floating rate. Most of the pre-2005 vintage of adjustable rate mortgages (ARMs) will reset to a much higher rate of interest, thereby forcing the borrower to pay much larger monthly payments]. 
The peak for sub-prime ARMS re-setting is going to be in November of this year. This wave of resets could cause a lot of pain for borrowers. But there's going to be almost a six-month lag between that [reset] peak and when loans actually start to go delinquent and into foreclosure. But the peak for ARMs resets is around November of this year. [The number of subprime resets] remains high for a few more months after that. That's why I'm talking about this two-year selloff. Then there's a substantial decline in the amount of ARMS that reset for a period of three or four months. So that's my possible false rebound in there. Then what happens is that there's a lot of Option-ARM resets…that start kicking in about two and a half years down the road. So there will be a second impact on the housing market. Obviously, things can change between now and two years from now, as far as what interest rates are doing etc. But these resets are still going to pose some problems to people that right now only have to make minimum payments and some spot down the road, have to start treating these things as if it were a real mortgage. So there will be a second decline at that point. Fry: You've been discussing problems in the subprime area. But delinquencies and
defaults are among the better borrowers also, like the Alt-A and prime borrowers. And
we have a large number of resets coming among these borrowers also. [Eric's note: An Alt-A loan is the category of loan between subprime and prime. The traditional definition of an Alt-A loan is one that has less than full documentation or income verification - i.e. a "low doc" or "no doc" loan. But the Alt-A category also includes loans that fall short of the prime grade because the borrower's credit score is below 680, or the borrower's personal debt ratios and loan-to-value ratios are too high.] Mish: Yeah, the rot always starts at the bottom. So the bottom was subprime. And we're seeing credit standards tighten as a result of that. They've tightened dramatically, where some lenders have stopped giving subprime loans; Period! We just saw the implosion. Over 40 subprime lenders have gone out of business now. So those marginal buyers who were supporting housing are no longer there now. That's going to create a falloff in jobs, because it will create a falloff in buying furniture, buying grass seed, carpeting…all that other stuff. That's going to spill over into trucking jobs, dining out at restaurants, and everything else. So even the prime borrower, who doesn't see any worries here, really needs to be worried about his job. And we are going to see a dramatic rise in unemployment, which is going to put pressure on a lot of prime borrowers. Already we're seeing a lot of pressure on the Alt-A borrowers. So this is why I think the Fed is wrong, and everybody else is wrong, when they're saying this thing is going to be "contained." It's not going to be contained. This mortgage crisis is going to keep rotting its way up through the better-rated loans. That's the way I see it. I don't see how it can be any different than that. In a recession we are going to lose jobs. And some people who thought they were not at risk, are at risk. A lot of people. Fry: I totally agree with that. So you're touching on another point here. It's the national pastime to try to call the bottom of the housing market. But I think a lot of the bottom-fishers are overlooking the extreme amount of leverage that's operating in the housing market, relative to past real estate cycles. Mish: Oh, absolutely. There's no question about that. The amount of leverage is high, even in the prime areas. And one of the reasons why it's high is that people kept extracting equity from their houses - this wasn't just a subprime thing - to pay for a vacation, to put in granite counter-tops, to add on to their houses, or whatever. So loan-to-value ratios have skyrocketed. Meanwhile, the size of average down payments has plunged. So you've got a lot of prime borrowers that are going to have negative equity in their house. There's going to be a temptation for some of them to just walk away, particularly if they run in to any financial difficulties. And some of them will. Fry: Right. Let's take the other side of this argument, just for sport. You've been worried about the housing market for a very long time. And, of course, you've been very right to be worried. But every bearish prognosticator runs the risk of remaining bearish for too long. What is the possible risk to your bearish scenario? In other words, what could go right…accidentally? Mish: What could go right? I don't think anything can go right here. I suppose it would take some sort of re-fueling of the bubble. But housing trends, unlike stock markets, are much more difficult to turn around. To be continued… Joel's Endnote: Of course, Mish has been warning of the subprime meltdown for some time now. By the time the mainstream press got wind of the catastrophe, the lenders were already hanging the foreclosure signs out the front of their own offices. If Mish is proven right with his assessment of the Alt-A and prime markets, there may not be much time to prepare for the second wave of the bust. We've included a link to his full housing report if you are interested in learning more. Details here: Special Housing Report: Avoid the Second Wave -------- The Resource Reserve ------- Now Open - For a Limited Time… The Resource Reserve Get all of our commodity-related publications together in one easy packageso you can effortlessly take advantage of the next leg of the massivecommodity super boom. Act fast - this offer is only available until April 1, 2007… Click Here To Learn More | 
