In a classic credit crunch the weakest borrowers are hit first. I think we have seen that wave in the last year and the subprime/ALT-A credits will continue to unwind and result in an increasing pace of foreclosures over the next two years. The larger concern would be the wave of ALT-A and prime loans resetting to market rates over the next few years. Millions of homeowners purchased or refinanced with 5Y interest only ARMs between 01-04. These loans were at rates of 4-6%. Depending on loan to value, credit, etc. Their first reset if they don't refinance or sell will be 2% higher. Most luxury homeowners can stand a reset but would want to consider getting another ARM or a fixed rate. Of greatest concern is the middle income homeowner who can't afford a mortgage at today's market rates. Remember the creative exotic financing is gone for all but the lowest loan to value scenarios. These folks are looking at regular loan structures and likely because of loan to value will be forced to prove their income and reserves. Remember in a survey over the summer brokers said 57% of clients couldn't refinance, loan to value and insufficient income were the primary reasons.
I believe we will continue to see downward price pressures on residential real estate in areas where the incomes don't support traditional mortgages. The loose money is long gone and with it the candy land values. What are your thoughts? Post your comments. We still have free speech when I last checked.