Friday, September 22, 2006

Charles Schwab - "Housing: ARMed and Dangerous" (9-21-06)

"Risks to the economy, stocks and your net worth"

"As cited by many a homebuilder CEO lately, there is something very unique about this cycle: It’s the first time in American history that a severe housing downturn has been led not by rising unemployment or falling incomes, but by too much inventory and speculation. For the past century, home prices adjusted for inflation have been relatively stable, with long cyclical swings but no long-term trend. The major anomaly was the sharp spike in home prices over the last decade (up over 80% since 1997), which was totally out of line with the long-term experience. Fundamentals can’t fully explain this spike, so what can?


There are other lags still working through the system, many of which relate to the nature of lending that fueled the boom. As reported in the August 21 issue of Barron’s (“The No-Money-Down Disaster”):

• 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 (25% of all 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 homeowners with mortgages have no equity in their homes.
• $2.7 trillion in loans will adjust to higher rates in 2006 and 2007.

In addition:

• By July the ratio of house prices to incomes had risen 30% above its prior peak in the early 1980s.
• A recent Fed study shows non-prime mortgages made up nearly 25% of conventional home purchase loans in 2005, compared to 11.5% in 2004.
• Real estate as a percentage of household net worth has jumped from under 25% in 2000 to 38% today.

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