CHESSNOID

I think I started reading housing bubble blogs in 2006 and even though they made sense in their argument, the event seemed far away never too happen. Now we are living in the unfolding housing bust. We have been hit with the first wave. Then the federal government did some crazy things in a panic and made the recession worse. They lowered interest rates and hurt the value of our dollar to try to save the collapsing housing bust which was actually just going through the business cycle. This triggered the crazy commodities and energy prices we are experiencing now.

The federal government has shot itself in the foot and we are paying for it. Bush, Bernanke, and Paulson have managed to muck up one of the most powerful economies. Even I blogged about what they were doing was wrong when they did the 7 rate cuts in 7 months. You only need to have a basic economics background to understand that they were throwing gasoline on the fire.

Well, the housing bust is still unfolding. We have record number of foreclosures now but the worse is yet to come.According to BusinessWeek:

With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset. About a million borrowers have option ARMs, but only a fraction have already fallen due.

That was the catch to option ARMs; borrowers were offered low initial payments that would recast higher after several years. Many home buyers thought they could resell their homes before their payments increased. But instead, many of them got trapped. According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said.

Among the states expected to be worst-hit is already battered California. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse. Option ARMs were especially popular in the state, where they were heavily marketed during the boom by such companies as Countrywide Financial (CFC) in Calabasas, Calif.; Washington Mutual (WM) in Seattle; and Wachovia (WB) in Charlotte, N.C. Moreover, on top of their ARMs, many homeowners also refinanced their homes, driving themselves even deeper into a debt they thought they could escape by flipping their homes.

But California won’t be alone. Homeowners are also frighteningly vulnerable in states such as Arizona, Florida, New Jersey, and others.

The Mortgage Bankers Assn. said on June 5 that the option ARM problem is growing. The group reported that the national rate of foreclosure starts for prime ARMs, including option ARMs, increased to 1.55% in the first quarter, up from 0.53% a year earlier. In California the foreclosure start rate in the first quarter was 2%, vs. 0.5% a year earlier. In Florida, the rate was 2.57%, compared with 0.5% in the first quarter of 2007. “California, Florida, Arizona and Nevada combined…represent 62% of all foreclosures started on prime ARM loans, and 84% of the increase in prime ARM foreclosures,” the group said.

With the way prices are falling now in housing prices and the cost of just gasoline at the pump close to $5 a gallon in California, we will experience the worse of the economic tsunami. The bubble peaked in 2006 and the bust is still unfolding. The economists before the wave were originally forecasting maybe a flattening of sales or price appreciation, but now we are falling backwards by double digits.

“The housing correction is in a down phase,” Peter Acciavatti, credit analyst and managing director at JP Morgan Securities Inc, said during a a high-yield bond conference in New York. “We’re now going through a phase of deleveraging and the pulling out of easy money.”

Home prices may fall 25 percent to 30 percent from their peak in 2006 and not hit bottom until 2010, with greater drops still in subprime mortgage debt markets, he said.

One of the earliest bubble blogs I read was “The Housing Bubble Bust”. On his home page, he has the dates and prices of his prediction:

Year 2002 : $300K —–> Year 2005 : $600K —–> Year 2010 : $200K

Mind you, he had this up in 2005 or earlier before the bust. In 2006, it seemed silly to think that prices would come back that low or even lower than 2002. Now in 2008, it seems like he is ahead of schedule of his Nostradamus like predictions. Again, I am in California and that is what it is actually starting to look like here in housing prices. In Northern California, our state capital of Sacramento seems to be fairing worse than us. There is a blog with just Sacramento houses already down 50% off their previous sales closing prices. Now that hurts. If you click on this link to Sacramento Area Flippers In Trouble, it will seem like a never ending list of losses in that city.

I almost bought a condo a couple of months ago, but the bank that owned the foreclosure wouldn’t negotiate a fair price with me, so the deal fell through. I am glad it did now because if what seems to be unfolding comes to fruition, I should be able to get a truly slamming deal. I couldn’t understand why the bank didn’t take my offer since they had owned the vacant condo for 8 months and had no payments for 6 months prior to that date. They owned the property for over a year with no payments. The property is still for sale with a few more condos in that same structure for sale, so I know it will continue to just sit there for awhile. I believe it will eventually sell but for less than my offer.