Mortgage Reset Graph

If you think that the housing bubble has ended or the housing supply wagons have all but dried up, then you may want to reconsider what the graphs one and two suggests. Chart number four and chart one are sourced and credited to Bank of American Securities and the PIMCO Pimco Bonds article titled U.S. Credit Perspectives.

The center and most concerning part of the graph represents January 2008 through November of 2008. During this time frame the Sub-prime category of mortgage (labeled in light blue) resets will peak. The expectation for the markets is that this will cause an even larger wave of foreclosures than we have seen thus far. In fact, the resultant effect of this mortgage rate reset peak will take place seven to ten months after the dates labeled on the graph. The borrower represented in the graph must first default due to the rate reset and then the bank will file for foreclosure on the mortgage. This process, depending on individual state law, can take from six to twelve months. The typical duration of foreclosure proceedings in Illinois comes in around seven months from beginning to end. The foreclosure event is defined by the bank taking possession and full ownership of the property or the property ending up at a sheriffs auction for sale to the public. Either way the property typically ends up back on the market for sale and increases normal housing supply and absorption rates. The mass of increased supply at rock bottom prices continues the credit crunch cycle and forces the devaluation of other nearby properties. This graph also illustrates spikes in rate resets all the way through the first half of 2009.

Now that we have examined how the supply will find it's way onto the market place, let us determine how this will fit into the overall picture of housing supply/ demand in New Homes, Existing Homes, and Existing Condos. First, the new homes (condos) market will begin to turn the corner and decline throughout 2008 due to failed sales plans, housing prices, and overall demand at developer prices. This should remain true with the exception of localized areas for example the Streeterville neighborhood in Chicago which plans to add thousands of condos onto the market in the next 24-72 months. This supply side pressure will certainly garner the attention of buyers and sellers alike. Supply of existing condos and existing homes should skyrocket around November 2008 and continue to report high numbers through the first half of 2009 according to Chart 1 from the National Association of Realtors and U.S. Census Bureau graph above. Without making any emotional judgments, the market will have a difficult time sustaining it's legs with the continuation of supply side heavy handed blows such as the foreclosures and rate resets that has been effecting the market since the middle of 2006. For more inclusive data click here.

Do you think the housing and credit market is on the mend or still inflicting mortal wounds? Please comment.