The following article courtesy of Cannacord Capital Research was brought to my attention this morning.
The influential Barrons magazine featured the most horrifying housing crisis article I’ve ever read. Written by a money manager,The No-Money-Down Disaster outlines a pending housing crisis that is, according to the author, the biggest threat to the health of the stock market.
The median price of new homes in the U.S. has dropped 3% since January, new-home inventories hit a record in April and are only slightly off those all-time highs, existing home inventories are 39% higher than a year ago while sales are down over 10%.
Yet, most experts continue to predict a 2-6% rise in housing prices this year. Other statistics of interest: 32.6% of new mortgages and home-equity loans in 2005 were interest-only, up from 0.6% in 2000; 43% of first-time home buyers in 2005 put no money down; 15.2% of 2005 buyers owe at least 10% more than their home is worth; 10% of all home owners with mortgages have no equity in their homes; $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.
An example of the bank Washington Mutual (WM) was used to illustrate the growing problem of ARMS, where the payments were not covering interest charges (so the shortfall is added to the principal). At the end of 2003, 1% of WM’s ARMS
were in this predicament. At the end of 2004, the number jumped to 21% while in 2005, the figure leaped to 47%. If you are thinking about taking out a loan against your home, it is best to get good advice because taking out loans and credit based on your home can be risky. You might want to let the Thrifty Scot guide you on the best course of action.
The article concludes, If we have the courage to take the right medicine right away, the effect of a market collapse could be very sharp and painful, but relatively short-lived. If, like Japan [in the 1990s], we fail to act, the coming decade could be very bleak indeed.
May I be the first to say “YIKES”!