This entry may be boring for many of you, but I'll teach you how people can lie with statistics and graphs near the end. So the housing market is in free-fall; Countrywide Financial, the largest mortgage underwriter, just announced to analysts that "Home price depreciation at levels not seen since the Great Depression" and the market will be hurting till 2009. (This effects spreads across the whole market). And that is the optimistic picture. Speaking of optimism, the Fed just released a neat graph in its recent report:
So 12% of subprime (risky, to low-income people with bad credit) loans are currently being foreclosed or are 90 days without a payment. Think about that for a second. 20% of loans sold in the past two years are subprime. However the primes looks fine.
Here's the rub. Say, you have a mortgages in 2005. You get laid off (your job goes to India) and your kid needs surgery shortly after you lose your health insurance. You find a new job that doesn't pay as much, and now you have a medical payment each month. You call your bank and say you are worried about defaulting on your (prime) loan. Your agent says: "No problem, let's refinance you with a variable-rate subprime loan with great terms the first two years." You can make the payments until, of course, you can't, and you default two years later. This story is completely consistent with this graph – there's a shift of all loans away from the prime ones. For the past two years it has been impossible to default on a prime loan; you are just moved into the subprime category. Hence this skyrocketing of the default in subprime may actually reflect a collapse of prime loans.
Mutual Funds do this all the time. They collapse out their bad funds, and discontinue them, and move the money into the good funds – and just report their great returns on the good funds.
And in case you are wondering where all the foreclosures are going on, from the Big Picture (a great source for market news):
It is going to be a bumpy time.